By Jason Fraler, managing principal, Anchor Peabody, LLC
We are recovering, but things are still slow. Many of you are starting to replenish your teams — holes created from the deep cuts you needed to make to survive, while waiting for the market to come back. Lots of you are talking up market share gains, gross profit increases and efficiency gains. A few of you are even getting back to expanding your business by opening a new location or via the selective acquisition target.
All very commendable activities, but how about: Beginning with the end in mind.
Many business owners in our industry are up in age and missed the opportunity to sell during the boom times. Then the bottom dropped out. Six years later, business is not great and it may be awhile until the market recovers to a point where owners will consider selling their business again.
As we put the pieces back together, in our opinion, one of the best things an executive or owner can be doing now to enhance shareholder value is to work on areas that can improve the value of the business later. As business gets better, it will become harder and harder to work on this, as all of our waking moments and energy are focused on executing within the operation. Why not now?
Here’s a partial list of areas where you can focus your efforts to improve valuation:
• A business with significantly positive EBITDA: Businesses with cash flow beyond “razor-thin” positive are valuable, as acquirers know that there will always be hiccups. Additionally, businesses with large cash flow increase the amount of debt a buyer can use to purchase the business — increasing their potential ROI and, in turn, your valuation.
• Size matters: Deals that require more than $10 million in equity will get the attention of financial buyers, increasing the competition for your transaction (higher demand). Also, larger businesses command a greater multiple of EBITDA because there are fewer of them (less supply) and, right or wrong, buyers consider larger companies to be less risky.
• Timing: Remember, bears and bulls do fine, and pigs get slaughtered. As the market recovers, those of you holding on only to sell later need assure history doesn’t repeat itself. Leave buyers with some potential “runway” in the market by selling before the market gets overheated again. Doing so will create more competition for the deal and ensure buyers won’t pull out for fear the market will contract. Also, keep in mind it can take six months or more to sell a business. Leave yourself some time.
Potential deal killers and areas that hurt valuation
• A business with negative EBITDA: There aren’t many, outside of the turnaround firms, that want to acquire a problem. We’re amidst the fifth or sixth year of a downturn, and the housing market is bouncing along the bottom. At this point, the consensus view is that barring some extraordinary circumstance (i.e. legacy lease expense), operators should have right-sized their business. Many hold the view that turnarounds rarely turn around; do what you need to do to stop the bleeding or you’ll pay for it.
• Poor management team or an owner who “is the business:” A business is its people, first and foremost. Examples of poor situations: Untrustworthy people, a team with a poor track record or the whole management team is leaving post-transaction — and taking the customer relationships with them out the door. Transition those customer relationships early and think about building the management team “bench” depth.
• Large customer concentrations: The most typical example here is a business that sells to the national builders. Some dealers have built their business around these customers only to walk into the annual vendor meeting one year and lose the account. Buyers like to sleep at night. Any customer representing more than 20% of sales is a potential deal-killer; diversify away from them if possible.