4 Ways Mid-Market Business Owners Can Maximize Company Value for a Sale

More mid-market company owners and CEOs are considering exit strategies these days, especially with U.S. markets improving and so many business leaders in the boomer generation coming into retirement age.

External developments and factors generally outside their control obviously will have a great deal of effect the valuation of their company and even the timing of a sale, noted Peter Lehrman, CEO of Axial, an online platform for private-company M&A activity.

Yet “indogenous” factors that chiefs can control or influence can be just as important and, among other things, can offset negative “exogenous” factors if handled correctly, he noted.

Here are 4 important levers mid-market chiefs can use to maximize the value of their company to buyers.

“If a founder wants to retire, it really impacts the way the buyer thinks about the value of the business.”

1. Prove that the company can run without its owner. Thousands of mid-market firms started and grew almost entirely because of the foresight, savvy and drive of its founder and chief. That was great for building the enterprise, but it can be problematic when the owner’s goal pivots to extracting maximum value for the company—because he or she no longer will be around to make unique contributions to the future of the enterprise.

“If that person wants to retire, it really impacts the way the buyer thinks about the value of the business,” Lehrman said. “The owner needs to be able to demonstrate, for example, that there is a sales team that can make sales without the CEO leading the charge each time, and that there is someone else in the organization with the ability to innovate new products over the next three to five years. He needs to be able to show a certain amount of management-team depth and a succession plan.”

2. Make sure the company’s financial house is in order. This can be “a huge area of vulnerability” for a mid-market owner, Lehrman said, because they may not have applied the same rigor to creating a true financial picture of a privately-held company over the years compared with a publicly-held one. They may not be recognizing revenue properly, for instance. Or personal and business expenses may be comingled.

Sellers should address those weaknesses by having the books audited by a credible accountant “so they can survive due diligence by a professional buyer,” Lehrman said.

3. Be sensitive to profit “tipping points”. Lehrman said that buyers harbor tipping points of profitability for which they reward sellers, seemingly for psychological as well as business reasons. Profits of $1 million, $5 million and $10 million each comprise “a big milestone of EBITDA” that pays off in higher compensation.

“As a business gets bigger, the reality is that the multiple awarded to that business rises,” Lehrman explained. It’s “like buying a diamond ring: The difference you might pay for one that’s 3.10 carats versus 2.99 carats can be a lot, because everyone loves to be able to say they bought a three-carat diamond.”

Thus, he concluded, “One thing for business owners to be thinking about is: Can I make some acquisitions before selling the company that move me up, even slightly, into a different overall level of profits and, therefore, value perceptions by potential buyers?

4. Put together a good team to make a deal. Don’t hire a generalist attorney for selling the company, Lehrman advised; hire an M&A specialist. Hire an M&A financial advisor as well, and “don’t do it at the last minute. It should be someone you trust and have known for at least a couple of years and who has demonstrated that they’re sufficiently intimate with your market and industry to run the sales process efficiently.”

He said that some business owners resist the idea of hiring an M&A team “and giving two or three percent of the purchase price to them. But it’s hard to run your business, and sell it without help, at the same time.”

Selling the company might be the second most important business decision you make in your lifetime, after founding your business in the first place. Following advice like this, it could be your best decision too.


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