LuM&A - The Art of Bright M&A | Part 2 - Optimizing Value
LUM&A IS A FORTNIGHTLY SERIES WHERE WE SHARE OUR EXPERIENCES OF THE KEY ISSUES OWNERS FACE WHEN CONSIDERING SELLING THEIR BUSINESSES.
IN PART 2, WE DESCRIBE HOW TO OPTIMIZE VALUE
IN PART 3, WE ANALYSE THE VALUATION CONCEPT BASED ON "PROFORMA ADJUSTED EARNINGS"
IN PART 4, WE IDENTIFY THE KEY ISSUES THAT DETERMINE VALUATION MULTIPLES
PART 2: OPTIMIZING VALUE
When it comes to selling your business, the prevailing buyer pool is professional and likely to consist of private equity groups and/or large businesses in your sector that are looking for growth opportunities. They will expect you to be well-prepared and for the business to have been groomed for sale. We take a look at the key value drivers that will not only generate buyer interest, but speed up the sale process and ultimately maximize the purchase price.
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1- STRONG FINANCIAL SYSTEMS AND AUDITED REPORTS
Other than inspiring confidence, having a reliable process-driven accounting system that is audited on a yearly basis will help the business withstand the exhaustive due diligence process that the buyer will undertake and spare you months of data collection and information gathering. In addition, detailed forecasts and monitoring of performance against targets is key.
2- KEEPING PERSONAL AND BUSINESS DEALINGS SEPARATE:
Although often tempting to entrepreneurs to view the business as an extension of themselves, it is imperative that business and personal dealings are kept at arms-length both operationally and financially.
3- KEY MAN RISK
A fundamental risk consideration for buyers is the degree the business depends on you. De-risking your business by having a strong second-tier management in place will transfer value from you to the business. Along the same lines, documented methodologies, processes decision making and authority frameworks make the business self-sustaining in the absence of the key man.
4- REVENUE DIVERSIFICATION
Another risk consideration for buyers is how dependent the business is on a handful of clients, projects, or a particular supplier. The more your source of revenue is diversified the less risk and the more valuable the business is.
5- A SUSTAINED TRACK RECORD OF REVENUE GROWTH AND STABLE MARGINS
Future earnings visibility is the greatest value driver and the first aspect any buyer will consider. While past earnings do not necessarily guarantee future earnings post acquisition, they will underpin the buyer’s projections and be priced in the offered multiple. Regarding growth, a business will be more appealing to a buyer before the full growth cycle has been captured. We have addressed this aspect of the sale process in our previous post Why and when should I consider selling my business.
6- FOCUSED GROWTH VERSUS JUST GROWTH
A business is appealing to a buyer for its specialty. If you have many revenue streams that are unconnected to this specialty they will be taken at a discount. This is not to be confused with the diversification of revenue streams within the specialty. For example, a healthcare business that generates revenue from different specialties will be sold at a premium to a business that also operates a healthy-food chain and a gym.
Lumina adds value to owners seeking to grow or exit their business by providing external guidance on decisions that matter.To find out more about Lumina’s Transaction Advisory services offering, click here.
By Jessica Estefane, CFA
Director | Lumina Advisers
Jessica has been working with the firm for the last 3 years playing an integral role in closing a number of deals in the Education, Healthcare and Food and Beverage sectors, before joining full-time in October 2016. Jessica continues to play a vital role on all key mandates in the Transaction Advisory and Funding Solutions divisions.Jessica is an experienced transaction advisory professional with 10 years of experience in the UAE. A former sell side Equity Research analyst with SHUAA Capital, Jessica ranked among the top analysts in the Middle East region for equity research in the telecommunication, energy and utilities sectors for four consecutive years by Euromoney Middle East until 2012.