Did you know that valuation is in part based on attractiveness and readiness?
While these two terms may sound similar, they’re quite different.
Attractiveness is how outsiders view your company based on public perception. Brand recognition and a track record of revenue growth are examples of qualities that make a business attractive.
Readiness is an internal view of how prepared the business and its owner are. In other words, it is a measure of how transferable the business is.
Statistics show that only about 20% of privately held businesses that go to market actually transact. This dismal outlook can often be traced directly back to the issue of readiness. A business that looks attractive on the surface may gain interest when it first goes to market, but its true readiness will be revealed when it comes time for due diligence.
Creditors, investors and buyers all have one thing in common. They determine whether or not to lend, invest or purchase based on their opinion of the real and perceived risks within your business. Due diligence is the means through which they make their determination.
This is a critical concept to understand, regardless if or when you plan to exit your business. After all, you will move on from your business at some point, whether by choice or not.
So how can you position yourself and your business to be transferable when the time comes?
Shift your perspective to one of value and integrate it directly in your strategy and daily operations.
For example, fine tune your strategy to shift from a focus on a single revenue growth goal (i.e. 20% year-over-year growth) to one that also focuses on the quality and sustainability of those sales. Double-digit growth is an excellent (and attractive) goal, but it doesn’t contribute much to value if 80% of your total revenue comes from one customer. Make sure you are building recurring and predictable revenue streams and diversifying your customer base.
There are a number of other issues we come across when working with clients, but these should provide a starting point to focus on improving your readiness, transferability, and therefore increase the value of your company.
- No contingency or succession plan
- Dated buy-sell agreement
- Lack of tax and estate planning
- High customer concentration
- No key employee retention plan
- Credibility of information (lack of reviewed or audited financial statements)
- Owner dependence
- Lack of transferable systems and processes (no documented processes)
If you’re just getting started with exit planning, check out 3 Steps to Get Started on an Exit Plan.