Building a company is a journey with the goal of creating and maximizing enterprise value. And when an owner decides to sell, the hope is that they have positioned their business to realize that value. Here are eight steps to help drive that eventual outcome.
1. Know your motivations
Before you go to market, ask yourself: Why am I considering selling the business? And if I sell it, what do I hope to accomplish? It’s important to clarify your motivations before you spend all the time, resources and opportunity costs required for a successful sale process.
How important is legacy to you? The answer to this question will help determine the type of buyer you should target and the type of transaction structure to consider. You might be compelled to transfer a minority interest to family, sell to a management group backed by a sponsor, or utilize a tax-efficient (ESOP) structure. Conversely, if legacy is not a priority, you might do better selling 100 percent to a strategic buyer or private equity-backed company.
2. Understand value drivers
Building a business entails increasing its value from year to year while mitigating risk factors. To do that, you must understand what drives premium valuations in your industry and continuously incorporate those drivers into your company’s growth strategy.
From day one of your business, it’s essential to develop a strategic plan focused on the most critical value creation drivers and how you will implement them during the business’s life cycle—including things like corporate culture, scalability of business model, recurring revenue streams, digital channels, the “stickiness” of customer relationships, organic versus M&A growth, and intellectual property development.
3. Diversify the revenue base
Your goal should be to diversify your revenue stream in all respects—including product, customers, and geography. For instance, in most cases, it’s not advisable to allow a single product to make up the vast majority of your sales. If anything occurs to diminish that product, you could experience a disproportionately negative impact on your business and its profitability. Additionally, having customer concentration of greater than 15 percent will often result in a materially discounted valuation or, in extreme cases, make the business unsalable.
4. Grow market share