By David A. Brackenbury, CFBS, Brackenbury & Associates
Value drivers, the intrinsic characteristics of an organization that buyers look for when deciding which company to buy, play a large part in the salability of a business, as well as its purchase price. Consequently, to increase the value of a business, the owner must create and nurture these key value drivers:
- A stable and motivated management team
- Operating systems that improve the sustainability of cash flows
- A solid, diversified customer base
- A realistic growth strategy
- Effective financial controls
- Stable and improving cash flow
In a strong M&A market, buyers compare the relative strength of your value drivers to those of your competitors. Buyers want companies that possess all the characteristics of a well-run business. Additionally, tighter credit can force buyers to use more of their own capital to buy businesses, so they look for acquisitions that carry minimal business risk. Companies with strong value drivers in place carry less risk. Companies lacking one or more value drivers simply will not attract interested buyers. This harsh reality means most owners have a lot of work ahead.
Regardless of the economic forecast, owners must make time to install and energize their value drivers. Doing so gives owners time to demonstrate the sustainability of the value drivers they create over several years. Buyers want to know that the success or growth charted in one year can be sustained over many years to come. They bank on (and pay for) your company’s potential to grow under their ownership, so they look very carefully at how long your company’s value drivers have yielded positive results.
Experienced owners know that change takes time, but very experienced owners know that positive results from those changes take even longer than expected.
Whether they’re interested in selling soon or not, it makes eminently good sense for owners to concentrate on the elements of their businesses that create more cash flow, more sustainability, and more future value.
Working on value drivers also has the benefit of increasing an owner’s flexibility. With value drivers in place, an owner can respond quickly if “things” change. “Things” include the health of the M&A market or the health of the owner, the sudden appearance of a deep-pocketed buyer, or underlying conditions in the current marketplace.
Increasing flexibility also applies to exit planning. With a more valuable company, owners increase their successor options. More valuable companies are attractive to third-party buyers, such as private equity groups, and can often attract recapitalization funds.
Finally, when an owner focuses on raising the value of the company by concentrating on improving value drivers, he/she often explores strategies and avenues for growth that the business ignored in the past. For example, many owners who thought that acquiring another company involved too much effort, take a new look at growth through acquisition when their future financial well-being is at stake.
Focusing on value drivers is the best thing you can do to strengthen your business and set the course for a more prosperous future but remember – doing so takes time.
About the Author
David A. Brackenbury (CFBS, Brackenbury & Associates) has been working with the owners of new car dealerships for over 35 years. Every dealer will exit his or her dealership planned or unplanned, developing an exit plan is critical to protect family, business, and ownership.