If you have an eye toward a sale of your business, of course continue to do what you can to boost your company’s EBITDA. But also consider adopting the following six strategies to strengthen your company’s business prospects, reduce uncertainty and generally position your company for a very attractive multiple of EBITDA. The common thread among these strategies is that they address areas of management that owners of closely-held businesses can frequently improve upon.
1 – STRENGTHEN THE SUCCESSION MANAGEMENT TEAM – Unless there is a next layer of management in place, carefully groomed and with all of the skill, knowledge and experience that is required to manage the company’s business without missing a beat, a buyer will rightfully conclude that there is a very significant material management risk in the transaction, substantially reducing the valuation multiple that he is willing to pay.
To preserve both enterprise value and the freedom to move on, the owners of a closely-held business should focus on a succession strategy well in advance of a desired sale. A buyer won’t be satisfied with assurances that the Identified managers are capable of assuming the management mantle. It will want to see a proven track record.
2 – Addressing the Customer Concentration Problem – A Prospective buyer will quickly recognize the customer concentration risk, where a crisis in the customer’s business or a disruption in the relationship could spell disaster for your own company. It makes sense to more actively pursue focused sales efforts with potential new customers in the same industry or area, or to recruit experienced sales people with desirable customer relationships or to make an acquisition or to find new geographic markets, or to develop product or service extensions to open new markets.
You may also consider:
- Seek Long-Term Sales Agreements with Key Customers
- Bring other staff members into the Key Client Relationships
3 – PROTECTING INTELLECTUAL PROPERTY – Studies have found a direct relationship between well-protected intellectual property and an increased enterprise value. Some important policies are:
A – Make sure employees and contractors sign appropriate Intellectual Property Agreements
B – Establish Procedures and Culture for Patenting Inventions
C – Use Copyright Notices and Seek Copyright registration as Appropriate
4 – LIMITING DEFECTION OF KEY EMPLOYEES – A potential buyer wants to know that the key employees responsible for the company’s earnings, whether in management or operations, will be around after the sale. There are two principal ways to reduce the risk of untimely departures by key personnel. Think of them as carrot and stick.
A – Golden Handcuffs – A variety of qualified and non-qualified incentive programs can be put in place to align the employee’s interests with the company’s interests. In many cases, these programs assure that key employees would leave some significant value on the table if they voluntarily terminate employment for reasons other than retirement. Examples of such programs include such as profit-sharing or pension plans, stock option plans, deferred compensation arrangements, and others.
B – Restrictive Covenants – Requiring employees to sign restrictive covenants, limiting their ability to depart from the company and immediately engage in competition or solicit away its customers or employees.
5 – MANAGING THE CONTRACTING PROCESS – The customer contracting process, in particular, provides opportunities to impose contract terms that will be beneficial to your company and attractive to a purchaser, including terms that will reduce the company’s risk of liability to customers and remove barriers to assignability Perhaps the most important contract term is the “limitation of liability” provision that establishes a maximum amount of liability for breach of contract, and to eliminate certain categories of such liability entirely. Train your personnel in the contracting process to improve your chance that your form agreement will be executed.
6 – FOLLOWING OTHER GOOD BUSINESS PRACTICES – Among other desirable practices are:
A – Reduce employment litigation risks by establishing appropriate policies and setting them out in an employee handbook.
B – Implement a thoughtful insurance program
C – Adopt and test a disaster recovery and business continuity plan to maximize chances of surviving a natural disaster, fire, death of a key executive.
Many characteristics of a business will determine the valuation multiple that is applied to its EBITDA to arrive at a purchase price for a business. Embracing the strategies presented here can have a strong impact
On your company’s EBITDA valuation multiple and thus on the price paid by a purchaser of your business.
Bruce A. Fox, Neal-Gerber-Eisenberg, Chicago 312-269-8078
HOW TO ENHANCE YOUR COMPANY’S VALUATION MULTIPLE