When you are a business owner, one of the key objectives is to maximize company value before selling your business. HafeziCapital’s research has found that small and medium businesses leave an average of 15.7% on the table when selling, because they do not resolve the key elements that affect corporate valuations prior to the sales process. This means that on average for every $1M of valuation a company looses over $157,000.00 in take home value. Organizations must actively work on cleaning the problems that affect valuation and develop tactics to maximize company value.
Showcasing to Sell
As a business owner selling your business is very similar to selling a house. You would like to showcase the house in the best light possible and make it attractive to potential buyers. However, many business owners do not treat the selling process the same way and thus do not actively work on showcasing their businesses in the best light possible. Business owners do not generally understand what drives corporation valuation and thus they engage in activities that they “THINK” drivers corporate valuation but sadly decreases the value of the organization. Often business owners take actions that increases the risk(s) associated with their business or engage in the band-aid approach. Business owners do not understand what activities they have to engage in to effectively maximize company value.
Why “cleaning” matters?
Very similarly to selling a house, the Cleaning process looks at the foundations of the business. HafeziCapital looks at both the Internal structural issues that affect valuations (things within the walls) and the External cosmetic issues (the things everyone sees). HafeziCapital’s analysis also reviews the competitive landscape of your specific industry and compares your organization to your competitors. This allows the management to see what drives value and what activities they have to engage in to increase the valuation of the company.
One key element in the valuations process is the customer base and the longevity of the contracts. The valuation and the multiples can increase dramatically based on the structure of the contracts. Different industries and corporations have differing multiples, and understanding that early on is key in driving a successful exit that meets the requirements of the seller. Furthermore understanding how the valuation process works is critical to the exit planning process.
Your should always be “clean”
As entrepreneurs we believe that everything in life is going to be constant and that health, divorce, or other issues will not infringe on our daily business activities. However, HafeziCapital’s experience has been that organizations should continuously have a “clean” organization, because you never know when you may have to sell.
Lost to death
In the past decade in working with clients, we have been exposed to circumstances were the widow of the business owner was forced to sell the business after the death of the owner. The widow attempted to manage the government contracting business but lacked the necessary skills necessary to manage a multi-million dollar company. Had the widower contacted us within the first 30 days, the valuation of the firm would have been $4,850,000. The widower in a brave attempt to maintain the legacy of the partner alive tried to manage the business but decreased the value in less than 16 month. Eventually the widower was forced to sell the company for just $455,000, a small fraction of the companies original value. Organization value can decrease exponentially if the organization is mismanaged, thus having a exit strategy in play is critical for a family that depends on the business for survival.
Spin-off to zero
In another circumstance a business owner wanted to sell a portion of his SaaS business that was no longer key to its business activities (spin-off). Rather than bringing HafeziCapital on early to maximize company value, he brought us in late in the process where he was starting to let customers go, because he had an intent of closing the business and selling the tangible technological assets. The valuations dropped from somewhere in the $1,900,000 range to less than $90,000 in a matter of 16 months. Understanding what drives value to others and what makes a buyer comfortable buying your company is critical to making prudent decisions prior and during the sales process.
The company was trying to save about $86,000 a year in infrastructure costs, but ended up devaluating the company by more than $1,860,000 in less than 19 months. Furthermore, it made the company less desirable to buyers and increased the perceived risk for a buyer. These are just two examples of how organizations systematically lost their value in a matter of a few quarters.
Maximize Company Value
When HafeziCapital undertakes the analysis for exit planning, we undertake a top to bottom review of the organization. We undertake an Internal and an External analysis of the organization, and based on the dataset that we have extracted from the analysis define a current valuation for the company. Having a current valuation of the company on file is important because in cases of emergency where you have to sell quickly, the value of the company has been defined and you know what price to sell it for. In cases where the key operators health or death becomes an issue, selling quickly will maximize company value (most cases).
Maximize Company value by benchmarking
HafeziCapital’s analysis process via the review of Internal and External factors allows for a full snapshot of the company. One of the key aspects that our clients appreciate is the benchmark that we develop for each organization against other similar organizations. This will allow the business owner to understand where it is in relation to other organizations. This also further drives the strategy by allowing each owner to understand where they can drive investments to increase value within their specific sector. Owner often tell us that they achieve a lot of clarity and understand what resources they need, what investments they need to make after the analysis. They have clarity in action and understand their goals on a quarterly basis.
The Exit Planning process allows HafeziCapital to develop an exit strategy that gives the company enough time to make the necessary changes to maximize company value. For every organization the exit process differs based on circumstances around their respective organization. That is why, developing a unique strategy that the Organization can implement (strategic fit) is critical for Exit Planning success. Understand your needs and your individual circumstances is critical to your exit planning model. Allowing HafeziCapital to customize an exit strategy for you that gives you the necessarily time and structure to implement, gives you clarity of strategy and purpose in achieving your exit goals.