How To Maximize Your Valuation
Think Long Term On The Impact Of Day-To-Day Decisions
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In managing their company, business owners should not focus solely on the day-to-day operations, but should always consider the long-term strategic impact of today's decisions on the future value of the company. Thus when analyzing any business decision, one must consider issues beyond the scope of the company's immediate financial performance, and remain cognizant of the implications the decision will have on the valuation of the company upon exiting.
Issues to Consider When Making Business Decisions
Customer Concentration
Small to medium sized businesses ("SMBs") typically derive the majority of their revenues from a limited number of customers. Although these customers generally comprise highly profitable, long-standing relationships that are key to the success of the company, owners should not become complacent. The loss of one of these key customers could financially cripple a company. Although owners should pay special attention and even give preferential terms to retain their key customers, they should also proactively develop relationships with new customers.
Customer concentration often becomes a point of contention when valuing SMBs. Many acquirers, especially financial buyers, shy away from companies that derive a majority of their revenues from a handful of select customers. The loss of one of these important customers may result in the acquired company posting drastically lower revenue and profit figures. Due to this risk, acquirers will generally apply valuation discounts to companies with a high degree of customer concentration. Although some strategic acquirers may hold a company in a higher regard if it possesses a strong relationship with a particular client, this is the exception rather than the rule.
Strong Partnerships Finding suppliers who can serve as the "one-stop shop" solution for companies has grown in popularity over the years, however, companies should still develop and maintain key strategic relationships with other suppliers involved in similar or complementary products and/or services. Developing a broad partnership network may play an important role in the success of your company. For example, the bidding process for a large contract may require skills and staff that your company does not possess. In this case, your company's only chance to place a competitive bid would be to leverage your partnership network to assist in delivering the project. Conversely, your industry partners may require your help on their projects, thus producing an inflow of business.
A partner network may be even more crucial during your exit process, as a partner could become your acquirer. There are a number of reasons this scenario could occur. First, the relationship may be so crucial to a partner's operations that they may fear that a change in ownership will result in a shift in your business focus and disrupt the nature of their relationship with you. Second, partners providing similar product and/or services may be looking to expand. The acquisition of your company could expedite increasing their customer base, capacity, and revenue growth. Lastly, partners with complementary products or services may develop an interest in your company which could enable their in-house operations to service a larger percentage of their customers' needs.
Develop A Strong Management Team / Successor Some business owners in the SMB space control every aspect of their day-to-day operations. If the owner plans to exit the company, this autocratic structure might become problematic. Although strategic acquirers should have no problems with this issue (because of their existing industry skills), financial buyers may find this management structure to be problematic if the current owner's exit causes paralysis at the company. Thus, a manager of equal or greater capabilities will need to be brought in to run the acquired business
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