Where to focus your efforts if you’re selling in the next 1–3 years
Every entrepreneur eventually finds out that, while we can do almost anything, we can’t do everything.
It’s as true in selling a business as it is in everyday operations. And as you take an objective look at areas of risk and opportunity before a sale, it can be tough to identify where to focus your energy to make the largest possible impact on valuation. These decisions are especially difficult if you’re three years or fewer away from an exit.
So what can you do to ensure the best possible business valuation in the M&A market? You can use Class VI’s proven framework, the Value Creation Formula, to help reduce common risks like concentration in different areas of your business.
In this article, I’ll share a few of the most important shifts you can make if you’re in the “selling soon” window. For a more comprehensive breakdown, you can get a free copy of our Elevate Your Valuation report here.
The core of value building: intentional preparation
In guiding more than 100 deals that have earned more than $4B for entrepreneurs, we’ve discovered that there’s no no substitute for systematic, disciplined preparation.
Being intentional with preparation, especially in four key areas, has helped our clients achieve the life-changing results from their M&A transactions. We created our Elevate Your Valuation report in part to prove the point that preparation really does pay dividends. You’ll see the data included showing that well-prepared sellers can truly harvest millions of dollars of added value from their sale.
Whatever your time horizon before selling, you can use the Formula’s four powerful principles—a high-functioning team, operational excellence, strong financials and a credible growth story—to improve your company’s valuation.
Here are the areas, one for each of the four parts, that I believe can be the most effective when you’re looking to build your valuation over the next few years.
Shift responsibilities to your team
One of the top risks we see is reliance on the business owner to perform too many functions, also known as key-person risk. It’s simply too much critical work concentrated in one person, and buyers need to believe that the business won’t fall apart once you’re out of the picture.
The first step to fixing this problem is to identify it. Map out functions you perform every day, week, and month, then honestly assess which would break if you weren’t personally involved.
Then take concrete steps, such as hiring or delegation, to distribute these dependencies. A capable team in the C-suite is the best way to ensure the work is spread across executives who can leave you free to focus on strategic functions. There are upfront costs to filling these roles, but we’ve known CEOs who were grateful they took the temporary hit. Even if it takes about a year before the team’s work starts to pay off, the confidence this step gives buyers usually makes it worthwhile in the end.
Document your processes
Concentrating key processes in a few people’s heads is a recipe for disaster should any of them leave the company. Institutional memory is a great thing for employees to have, but documented institutional knowledge is even better—and more comforting to investors.
Extract your 5–10 most critical operational processes from key people’s heads and shape them into written standard operating procedures (SOPs). Keep a rule of one document per process rather than bundling them together, be specific about which roles perform which actions, and keep formatting consistent across records.
Writing these SOPs will help reduce the perception of risk to an investor and also demonstrate scalability. After all, relying on specific team members to remember procedures is another form of key-person risk!
Break up customer concentration
Just as companies have key-person risk, they might also have key-customer risk. Buyers see a big waving red flag if one or two customers account for a disproportionately large percentage of your revenue.
It’s worth the effort to spend your pre-market time actively diversifying your customer base or at least securing longer term contracts with top clients to reduce perceived risk. While you’re at it, make sure the new customer relationships don’t rely on your charisma alone; keep owner dependency low by making another leader the key point of contact.
Point to the future
Business buyers want to hear where you’ve been, but they aren’t going to shell out for your greatest hits. They’re really paying for the promise of excellent future performance.
That’s why you should build a forward-looking revenue model to help you tell your story. This model should tie your sales pipeline, pricing, and customer trends together into a cohesive, credible story about how your company will continue to grow revenues after the sale.
But here’s where some owners make a type of concentration error: they only give the rosiest possible view of their financials to potential buyers. You should be upfront about any assumptions you make and prepare to defend them during due diligence—be assured that your potential buyer will thoroughly stress-test your model.
It may help to present three scenarios—a base case, an upside case, and a more pessimistic downside case—to prove you’ve thought through potential risks and aren’t just presenting the view that makes you look best.
Achieving an ideal exit
Anything can happen in an M&A process: policy disruptions, performance dips that affect valuation estimates, health crises. But as the Elevate Your Valuation report makes clear, it’s possible to increase your chances of a successful outcome by intentionally preparing for a transaction well before a letter of intent is ever signed.
There are many more actions you can take than the four above, but these four guidelines tend to be some of the most impactful when you go to market. I know how hard it can be to just keep your business thriving without having to think about your valuation when exiting, so I hope these tips can help you start to think about the process differently—and maybe even relieve some of the stress!