To identify the strategic value in any business, ask yourself one question:
Who can make more money from this business than you can?
This may be a company who can utilise your client list to a greater extent than you can, it may be a company that could take your products and introduce them to their larger client base, or it could be a company that can leverage your IP on a larger scale.
If you can identify strong strategic value within your business, this will drive the valuation you achieve beyond the usual multiples achieved by private businesses.
Many small businesses can have inconsistent cashflows. Investors will call this “lumpy cashflow”.
This represents risk to a potential buyer because if there are times where cashflow is particularly low, the business is not insulated from any unforeseen risks.
Many businesses, with a small adjustment in the model, can achieve much smoother cashflow. An example of this is a magazine I work with, whose cashflow would spike the week before their monthly deadline.
Advertisers would have no reason to sign on the dotted line until deadline week. This posed a problem because wages and overheads are consistent, yet revenue would only lift once a month.
This same magazine introduced a weekly email newsletter. Each advertiser that comes on that week gets prominent position in the weekly newsletter meaning they are now incentivised to come on board straight away.
Whereas before they were only seeing the spike once a month, now every week is deadline week.
Where in your business can you introduce a new way of doing things to smooth your cashflow?
When it comes time to sell the worst thing you can have as a seller is an empty dance floor, talking only to one potential buyer who feels no urgency and realises they have greater negotiating power.
In the lead up to the Skype sale to Microsoft, Skype was in discussions with Google, Facebook and Microsoft. With talks originally circulating around a price tag of $3-4 billion, the resulting sale price of $8.5 billion represented both the strategic value Skype can offer Microsoft and the competitive tension created in the lead up.
In the six-month period in the lead up to exit, develop a target list of potential buyers that may be interested in acquiring your business.
Before signing anything to go down the path with any one buyer, you should have presented the opportunity to at least six other companies or individuals.
Having many potential buyers at the table (metaphorically speaking), is no different to having several active bidders at an auction. It creates urgency, gives the seller negotiating power, and drives the price significantly higher.
How many companies do you know that could benefit from acquiring your business?
The exit from any business is a period of excitement and nervousness on the part of the entrepreneur. It is important to not let emotion get in the way.
As for the sale price of your next venture? Add another zero.
Jack Delosa is a corporate advisor and Executive Director of MBE Education. In the past 12 months Jack’s team have executed over $24 million in capital raisings and exits on behalf of clients. jackd@the-entourage.com.au
