How Is Your Business Viewed?
What Buyers of Businesses Are Looking for in Today’s Market
The marketplace of buyers for your business changes, so in what type of businesses are today’s buyers interested? Knowing this can help you think through your plans for an exit or transaction allowing you to align with the traits being sought.
It’s A Robust Seller’s Market
Today’s interest rate environment and abundance of equity and debt capital makes this a ‘seller’s market’. What this means is that there is a larger supply of capital then there are companies willing to take that capital into their businesses. As basic economics tells us, when there are more buyers than sellers, the market is in favor of the sellers. So, when a good company comes ‘to market’ there is a high likelihood that the business will be met with strong levels of interest, which – all things being equal – can create a competitive bidding environment and, drive up the value.
A ‘good company’ in today’s market has the following attributes: solid products/services, competitive pricing and margins, empowered leadership teams, organized financials, proper capitalization, thoughtful strategic direction with demonstrated ability to execute, solid integration of good people and appropriate systems, low levels of risk / high barriers to entry for competitors, and growth
Growth Trumps all Other Categories Today
Of all the attributes, the strongest in today’s marketplace is ‘growth’. Growth includes the ability to demonstrate the market acceptance of your product (revenue growth) with sustained/growing margins (profit growth) as well as a continued ability to deliver into the market (operational improvements). Put together, growth is what is attracting the greatest capital today and the attribute that buyers will pay the most for.
One way to view growth is to look at overall revenue and profit / EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) trends. One recent study from GF Data defined an ‘above average company’ as one with +10% Trailing Twelve Months (“TTM”) revenue growth and a +10% EBITDA margin. This means that the current 12 months of revenue is at least 10% higher than the twelve months preceding this measuring period. And, the company consistently exhibits a 10% net / EBITDA margin.
Premiums being Paid for Above Average Companies
For businesses that exhibit this measure of above average financial performance, recent data indicates that buyers are willing to pay a premium for these businesses – we see this trend in trading multiples. A trading multiple is your company’s cash flow (or EBITDA) times a certain number. For example, if a company sold for ‘5 times EBITDA’ this means that a company with cash flow/EBITDA of $2million sold for $10million (5 times the $2mm EBITDA).
Companies that are above average in the GF data set demonstrate recent average selling multiples of 7.2x EBITDA versus the less than above average companies that trade at an average of 5.7x EBITDA.
To illustrate this point, we will use our previous example and assume that Company A is demonstrating revenue growth of +10% with a +10% EBITDA margin, generating $2mm in EBITDA. This business will sell – all things being equal - in today’s market for $14.4million. Whereas Company B, that has slower growth, will sell for closer to $11.4mm. This difference of $3million represents a 26% premium that the market is paying today for growth.
How to Prepare to Meet these Buyers
So, knowing that growth is a key driver of value in today’s marketplace, an owner can focus on sales initiatives that continue to drive profit to the bottom line but don’t overly complicate the business. If owners can show visibility into that continued growth into the future, then the marketplace will react favorably to this data – this is best demonstrated in a detailed financial forecast that accompanies a well-thought-out strategic plan.
Consider discussing the importance of growth with a credentialed exit planner to know what potential buyers are looking for so you can make decisions today that are aligned with achieving a successful outcome, especially if getting the highest value for the sale of your business is one of your goals.
But, if a transfer to family or a management buyout is more important than getting the highest price, then a different approach may be in order.
Developing a coherent exit plan involves many aspects, like knowing all exit options available to you. Contact us for more information to determine if an exit plan is suitable for you.
Article provided courtesy of Pinnacle Equity Solutions © 2017, not an affiliate of Lincoln Financial Advisors
Member – The Business Intelligence Institute*
*Business Intelligence Institute is a group associated within Lincoln Financial Advisors Corp. that focuses on business succession strategies.
Jeff Janes is a registered representative of Lincoln Financial Advisors Corp.
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