Matt Gilbert
May 19, 2023
Selling a privately-held business is a complex process, particularly when it comes to determining and defending its fair market value. The ultimate goals are to receive the highest possible price with favorable terms and to transact with a buyer that will honor the seller’s legacy once in new hands. These goals are most likely to be achieved when the business clearly demonstrates its transferable value to the acquirer in real time throughout the sale process.
Historically, a vital input to assessing a company's value has been past performance. A potential buyer would look at financial statements including revenue, profits, and cash flow to gauge past performance. However, while past performance serves as a benchmark for the future, past success does not guarantee future success.
Future potential is another important input when determining a business's value. Future potential is the ability of a company to generate future profits and cash flow. However, it is not as critical as current value in the minds of today’s cash-flow-focused buyers. In addition, predicting a company's future growth potential and stability is challenging as these are based on assumptions and projections that may or may not come to fruition.
Therefore, focusing on a company's current value – along with some assessment of its future potential – is paramount, especially in a competitive market like we have today.
Below are several ways to showcase a company's current value and future potential.
One effective way to demonstrate a company's current value is to highlight its strengths such as competitive advantages, intellectual property, customer base, and talent pool. Showcasing strength in these areas provides potential buyers an understanding of what makes the business unique and therefore why it commands a higher value.
Determining the full potential of a company is about illuminating the boundless possibilities that lie on the horizon. One compelling approach to demonstrating untapped potential is to unveil growth prospects. Like using a treasure map, buyers can see a clear path to expansion including the launching of new products or services and/or venturing into new geographies. By seeing this forward glimpse, potential buyers can envision the company's future value. Armed with this insight, they can recognize the incredible worth of the company and the justification for a higher value.
Understanding industry trends, challenges, and opportunities – including a thorough analysis of the competition – can help potential buyers understand a company's value. It is important to highlight the company's position in the industry, such as its market share or market position. Having a good grasp of these factors can help potential buyers broadly understand the company's value as compared to its peers.
When it comes to showcasing a company's worth, the financial landscape takes center stage. It's like revealing the beating heart of the business, the tangible evidence of its current value. This treasure trove of information – including revenue, profits, and cash flow – empowers potential buyers to determine the company's financial health. By delving into this detail, a vivid picture emerges of the company's performance, its triumphs, and even lessons learned along the way. With this comprehensive view, potential buyers can discover not just the present value but also potential that lies within.
Determining a company’s value is a continuous process that requires diligent ongoing effort. Therefore, it is necessary to maintain a transparent and comprehensive record of all business activities. Think of it as a vibrant mosaic composed of financial records, employee profiles, customer/vendor contracts, and the like – all illustrating the ups and downs of the company's journey. These records not only serve as a testament to the company's integrity but also provide a reliable roadmap for potential buyers to navigate and truly grasp the essence of company operations. Providing detailed and transparent records can forge a bond of trust and understanding, enabling potential buyers to fully comprehend the present value of a business along with future possibilities.
Last, but certainly not least, we must shine a light on the incredible importance of a company’s management team when assessing its present value. The caliber of these individuals can be an absolute game changer. Their unwavering dedication and outstanding achievements can turn a good company into something extraordinary. A good management team is like having a secret weapon, capable of catapulting the company to new heights. We are not just talking about highlighting their impressive resumés and accolades. It's about revealing the true essence of their leadership prowess – their ability to ignite passion, steer the ship with unwavering determination, and chart a course towards future triumphs. When potential buyers witness this level of leadership, they can't help but recognize why a company is worthy of a higher price tag.
To put it simply, revealing the true worth of a company goes beyond numbers and spreadsheets. It's about revealing the heart and soul of the business – the things that make it shine. This includes uncovering its unique strengths, highlighting untapped possibilities for growth, doing a deep dive into the industry landscape, providing a clear picture of financial well-being, demonstrating meticulous recordkeeping, and showcasing the caliber of the management team. By bringing these issues into focus, a passionate business owner can paint a vivid picture of their company's value, making a compelling case to potential buyers as to why it's worth every penny of a higher price.
If any of this resonates with you, we encourage you to take our M&A Discovery Questionnaire and talk with us to see if your business makes the cut as one who can still command a great exit in this M&A environment. We will be in touch quickly to discuss the results. Click here to take the assessment.
Gilbert & Pardue Transaction Advisors (GaP) is a Houston-based business advisory firm serving lower middle market and middle market business owners from coast to coast through representation for Mergers & Acquisitions (M&A).
Matt Gilbert and Bret Pardue established GaP to provide owners of lower middle market and middle market businesses – those businesses generally enjoying annual revenue of $10-$80 million – with the quality of M&A representation and value-enhancement services previously only available to upper middle and large businesses. GaP brings highly experienced executives, sophisticated financial and marketing products, proven-effective processes, and fully-integrated expertise to every engagement. No other M&A firm serving the lower middle and middle markets provides the quality of representation and transactional expertise that we do.
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