Many business owners consider succession planning as they age, change life objectives, or decide to move on from their business to something else in their life. Many baby-boomers are contemplating the sale or transfer of the company they’ve spent their lives building, and they want to maximize the value they receive in the transfer. These transfers can include an outright sale to either a financial buyer or a strategic buyer, or transfers to the management team, family members, a trust, an ESOP, or others. Regardless, the objective is to maximize value so the owner’s wealth is also maximized.
A rule of thumb for establishing a company’s value is a multiplier times EBITDA (earnings before interest, taxes, depreciation and amortization). For manufacturers and distributors, that multiplier is usually between 5 and 7, but that can vary with industry and buyer. Sometimes the value is significantly different due to the buyer’s strategic objectives. An example is when Krave sold their jerky operations to Hershey for almost 10 times revenue, a number so high that it disrupted industry valuations in the snack meat industry. Why was the value so high?
Strategic Buyers Sees Billion Dollar Market Potential
Krave was an innovative company that changed the nature of the meat snack industry. Most people think of beef jerky as the tough-as-shoe-leather snacks eaten by outdoorsmen when camping, hunting or fishing. Krave rebranded jerky as a protein rich snack that helps the body recover after exercise. They added new flavors and improved their packaging.
Hershey was a strategic buyer looking to increase their presence in the snack food market. They recognized that the potential for meat snacks was north of five billion dollars, and Krave’s innovative approach to the market was attractive to them, so they paid a premium to acquire the means to enter that market.
Future Value for a Private Equity Group
Supra products, a family owned business and manufacturer of lock boxes for real estate, was sold a number of years ago to a group of family trusts that operated much like a private equity firm. When the firm was doing their due diligence, they extensively explored Supra’s revenue growth, profit growth, and cash flow. While Supra’s track record was interesting to them, the future was where their money would be made, so they looked at five-year projections and the assumptions behind them to help put a value on the company.
Supra had been implementing World Class Manufacturing for several years, which at the time was an innovative approach to improving company performance. The impressive results included high margins, high inventory turns, and strong profitability and cash flow. In addition, the management team was strong and was willing to stay with the company after the acquisition. In the end, after a number of years, the trust group sold Supra for a high multiple on their investment.
What To Consider for Your Company
If you want to quickly boost the value of your company there are five elements you should consider. The first three are often used by private equity firms and others to help determine value:
- Profit growth
- Revenue growth
- Free cash flow
The next two are used by both private equity and strategic buyers:
- Strength of the management team
All five are elements you can improve to maximize your wealth (whether you end up selling your company or not).
To improve these elements, you need:
- A business strategy that will lead to growth and profitability
- An operations strategy that supports and energizes the business strategy
- A vision for the next 2 to 3 years that aligns your managers and employees and lets them know where the company is going
- A framework that lays out the plan for achieving the strategy you select
Then look at the executive command center to see how you are doing and learn where you can improve.
There are opportunities in every company to quickly improve value and attractiveness to potential buyers. It could really move the needle in a positive way for your personal wealth.
The Take Away
If you want to maximize the value of your company, whether to transfer it or just increase your personal wealth, take a look at revenue growth, profit growth, cash flow, your management team and innovation in your company.
If you would like an assessment of how rapidly you can increase your company’s value, give me a call.
© 2016 – Rick Pay – All Rights Reserved