by Ryan Gould, Vice President of Strategy and Marketing Services at Elevation Marketing
As an entrepreneur, when you started your business, you most likely had dreams of rocket-speed growth and a multi-million dollar exit to a huge conglomerate, like Google or Facebook or Amazon. You nailed the first part — lightning-fast growth — but you’re struggling on the profitable exit.
Fact is, you just don’t know whether your business is ready to sell. How do you find the balance between not too small to prove itself but not too big to have an off-putting valuation?
This plan will help you with that. You’ll learn an easy five-step plan to evaluate just how sellable and valuable your business is, along with practical tips to ensure that your company is up to the mark when it comes pitching time.
1. Evaluate Current Financials.
The most apparent yet crucial variable in your business’s performance assessment would be the income statement. This the first and foremost way to begin evaluating the sellability of your company. Few buyers will get excited about a company currently operating at a loss. You’ll find exceptions to this rule, like Snapchat, which was operating at a loss at its IPO, when it experienced high initial trading prices due to its huge popularity and untapped monetization capabilities. But if your brand isn’t as well-recognized as Snapchat (which it probably isn’t), then buyers will find it harder to overlook a negative income sheet.
The price point for many company purchases, especially for smaller-scale businesses, will be primarily determined by taking a multiple of the pretax profits of the previous year. An average multiple could be between 3-5 times the annual profit.
Of course, several factors affect the size of the multiple (which we’ll get into later on in the post). However, an excellent way to make sure you’d get the most money for your efforts is to have a high profit already. Minimizing losses in the year before you begin shopping around for buyers will increase profit and help you get that higher valuation.
2. Gauge Growth Potential.
One of the most significant factors that will affect the determination of the multiple is growth potential. Buyers love to see a company already performing moderately well— one where a few changes to operations could take itself to the next level.
In other words, if there exists low hanging fruit for your company to expand, sometimes leaving that fruit alone before you sell will help you entice a higher multiple, resulting in your net benefit.
To assess whether your business is ready to sell, there needs to be some level of growth potential that the buyer can grasp onto. Of course, growth potential will vary from industry to industry (it’s usually much easier to grow if you’re in tech, for instance, rather than if you’ve got a brick-and-mortar business).
Ask yourself: If a more prominent company purchased your business—what might they do to help it grow that you couldn’t (given your limited resources)? How could you position your company in the sales pitch to make the growth potential visible and appealing to prospective buyers?
3. Profile Your Customer Base.
Another element that affects a business’s sellability is the state of its customer base. After all, your clientele is what brings in the revenue and sets up the expenses, so they remain one of the most important elements of your company.
More sellable companies will typically have ‘better’ customers than ones that need a little more time to mature into a company that’s ready to change ownership. Of course, the term ‘better’ is relative to the type of business and the industry in which it operates, but there are a couple of basic metrics that generally apply to customers in all fields.
First up is the size of the customer base itself, especially in relation to the size of the market. A more numerous customer base, of course, means higher revenues and a bigger market presence, but it also says there’s less room within the market for the company to expand.
Another important metric is churn. Customer churn happens when a customer ceases to purchase from your company, choosing instead to turn to a competitor or leave the industry altogether. Naturally, you aim to show prospective buyers of your company that you have ‘good’ customers who are loyal to your brand and happy enough with your product/service to remain a part of your clientele.
4. Track Media Perception & Presence.
Perhaps one of the most important factors on this list, media perception can affect the sellability of your business in multiple ways. For example, when news of United Airlines’ forced passenger removal hit the media, the fall-out from incident caused United stock to drop $1.4 billion within a week.
Media perception also radically affects whether or not buyers will want to be associated with your company. If you’ve recently made headlines for a negative occurrence, like a harassment lawsuit or ethical violations, conglomerates will hesitate to even approach you no matter how healthy your profits, due to the potential for negative publicity.
Take an in-depth look at your marketing analytics to assess how favorable public opinion is toward your brand.
5. Develop a Plan to Separate You From the Business.
Last but not least, you need to have a plan developed to ensure a smooth transition to new ownership as you exit the daily operations of the company.
Founders that have a unique skill set and essential network might set themselves up for failure upon exiting. There are some cases where owners end up staying on as employees, but those situations are rare. Buyers will be looking for a business whose operations will be largely unaffected by the founders’ departure.
If you are still an integral part of your business, you need to start the process of removing yourself from the daily operations. That way, you can show prospective buyers that everything is fully ready for them to take over the wheel without any hitches.
For all the entrepreneurs who’ve made it this far, congratulations. You’ve done all the hard work of actually growing the business and getting it off the ground, and you’re now at a point where it’s time to start thinking about an exit strategy.
Using this five-step plan, you’ll know exactly whether or not you’re ready to start approaching potential purchasers, and how to ensure that your company pitch is appealing as possible.
Ryan Gould is the Vice President of Strategy and Marketing Services at Elevation Marketing, a B2B marketing agency. Ryan helps medium and large brands improve sales and market share by developing integrated marketing experiences distinguished by research, storytelling, engagement and conversion.