Last week, important issues such as global warming, the threat of international terrorism and whether or not Malaysia Airlines flight 370 is actually in an underground bunker in Kazakhstan, took a back seat to a more urgent and pressing question: is the dress white and gold, or blue and black? The debate practically broke the internet (whatever that means), and made me glad there was no internet back when we were all trying to figure out how they got the caramilk in the caramilk bar.
In this case, the explanation for the ambiguous dress colors was fairly simple: different people perceive things differently. The same applies to business value. Each prospective purchaser will value your business differently, based on how they perceive the risks and rewards of ownership. For most owners, the objective when selling their business is to find the prospective purchaser(s) who perceive its value as the greatest. Accordingly, a critical component of the value enhancement process is to evaluate and identify those potential purchasers early, and to implement strategies that further enhance value in their eyes.
For example, take the case of Ed Furness, the owner of Furness Heating Ltd., a mechanical contracting business in Vancouver, BC. Furness has been established for 40 years, has 30 employees, and supplies and installs HVAC systems in commercial and high rise residential buildings. Ed Furness is a “hands-on” owner, heavily involved in the day-to-day operations of his company. While the business has a few key employees, none are interested or able to purchase the business from Ed.
As usual, the first step in the Value Enhancement and Exit Readiness (VEER) assessment is to identify Ed’s objectives. In this case, Ed wants to sell the business within 3 years for the greatest proceeds possible, minimize vendor financing, and be fully retired within a year of the sale. With those objectives in mind, we eventually get to step 4 of the VEER assessment: Exit Options Analysis. After reviewing the 8 possible types of purchasers (See January 2015 Newsletter – “Who Will Buy Your Business?”), we identify 3 potential purchaser profiles: (1) Private Equity Groups; (2) Special/Industry Purchasers; and (3) Lifestyle Business Purchasers.
Next we put ourselves in the shoes of these purchasers, and try to understand how they will perceive the value of Furness, recognizing the value factors that mean the most to them. Private Equity Group’s tend to value strong, experienced management teams that are not too reliant on the selling owner. If we identify this group as a strong potential purchaser, we had better start working fast to build Furness’ management team. If this purchaser needs to hire a new management team, they may perceive more risk in the acquisition, which will reduce their perception of value.
Special purchasers in this case are existing mechanical contractors who now focus on industrial or residential buildings, but would like to expand and diversify their business into the commercial sector. These purchasers may not be as concerned about the management team, since they have their own management team in place. But critical value factors to them may be the likelihood of retaining Furness customers after an acquisition, and the magnitude of overlap that exists between Furness projects and their own. To enhance value in the eyes of these special purchasers, Furness should take steps to strengthen relationships with their customers, and refine its product lines to avoid competing with its potential suitors.
Third party “lifestyle” purchasers want to step into Ed’s shoes, to become an owner-manager running the business. They tend to have less cash available than the other two purchaser types, so Ed may have to soften his stance on vendor financing. A critical value factor to this purchaser will be the likelihood he/she will be able to successfully run the business when Ed has retired. To enhance this value factor, Ed should standardize and document procedures within the business, strengthen the business’ brand so that it remains prominent to customers throughout the transition process, and strengthen his management team so that the purchaser is well supported after the transaction.
For businesses, just like dresses, beauty is in the eye of the beholder. By identifying the most likely “beholders” of your business, and understanding what they find “beautiful”, we can identify and implement strategies to enhance the beauty and value of your business in their eyes.
To learn more about the six step “Value Enhancement and Exit Readiness” (VEER) program offered by A-R Partners. LEARN MORE