h) Acquired Rights
The business may be able to show it has potential revenue and profit growth through the recent purchase, or option to buy, new rights which have yet to be utilised or exploited. These could be based on patents, copyright, mining or forestry rights, or regulated licenses. Rights are especially attractive if restricted in supply or unique. The business would need to be able to show the revenue and profit potential of such rights and show it had the management, operational expertise and capacity to exploit them. Revenue and profit potential may be able to be demonstrated by prior activity, activity of similar businesses or guarantees associated with the rights.
i) Scalable Activity
A business may be constrained by a resource such as management, funding, plant and equipment or personnel. Expansion might require the buyer to resolve the constraint in order to take advantage of the potential. If it is simply funding, then the business owner should seek out a buyer who can inject new funds. If it is management capacity or other aspects of the business, the seller might wish to seek out someone within their own industry who could readily provide the assets or competencies to resolve the constraint. In all cases, the seller would need to show that the rest of the business would be able to meet the potential growth requirements once the constraint was removed and that the customer demand and profit potential could readily be achieved as a result.
j) Debt Leverage
The business might have the capacity to service additional debt but the current owners may not have taken advantage of that capacity. If the business can show increased profit generation through the use of debt, such as providing funding for expansion, acquisition, overcoming constraints or implementing process improvements, the profit potential could be estimated. The business would have to demonstrate that it could manage the increased level of activity.
k) Underutilised Assets
The business may have spare capacity in assets which it has not utilised. A plan could be developed to show how the unused capacity could be put to work. The business owner would need to show the business had the capacity and capability to use the released resource productively.
Claiming value in the sale price from potential business is difficult and requires the current business owners to produce evidence to validate the revenue and profit potential. Given that the acquirer is effectively paying in advance for business yet to be achieved, the quality and reliability of the evidence needs to be very high indeed. However, there are a number of techniques which can be used to demonstrate the validity of the projection.
a) Contracts or Agreements in Place
Where possible, a probable outcome should be turned into an established fact. Thus an actual contract or agreement which clearly ties up the potential of an activity carries considerable weight. Examples might include:
b) Available Capacity
The ability to generate future revenue may require additional capacity from a supplier, manufacturing, distribution, sales or management resource.
Where spare capacity can be identified and shown to be relevant to the activity being planned, this will provide additional evidence to the acquirer. Supplier capacity might be shown by requesting available capacity or possible shipment dates from the supplier. Internal capacity might be demonstrated by showing utilisation rates.
c) Process Impact
A new process could be internally developed or acquired. If internally generated, it would need to show the potential impact through trials or a partial implementation. Thus a new customer relations management system designed to increase account penetration might be trialed with a sample of customers to estimate overall impact.
An acquired process may be able to use case study examples from the supplier backed up with testimonials or references from similar businesses. The business would need to show it had the capability to introduce and support the new process.
d) Prior Experience
Replication of a prior activity which has been demonstrated to be successful can be evidence of a potential improvement. Thus a business which has successfully grown by opening new offices might be able to show a plan of expansion with clearly targeted locations. Each location would need to show how it conformed to a set of attributes which in the past had been shown to be successful. At the same time, the business would need to show it was able to staff the locations with skilled employees and that it could handle the integration and administrative issues arising from the additional growth.
e) Market Analysis
Market research can be used to show that new products or services will be positively received into the market. However, a good deal of skepticism exists with respect to market projections as many have not proven to be very reliable in the past. The business may be able to show past market studies which have proved to be reliable, similar studies of other businesses in distant locations which prove market demand or in depth customer case studies which provide convincing evidence of meeting a clearly defined customer need.
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