After owning a successful company for years, it’s easy for an entrepreneur to overlook the various ‘issues’ that could detract from their business’ value. Fortunately, with some strategic planning, there are steps an owner can take to increase business value without having to increase profits.
“Many companies we work with have consistently strong operating profits but when it comes time to sell, some businesses are able to sell at a higher overall price even though their earnings are similar,” observes Derek Strong, a Vancouver-based Regional Director of Roynat Capital, a Scotiabank subsidiary that provides transition and acquisition capital to mid-market companies. “A business owner should reflect on what creates additional goodwill that a purchaser will be willing to pay for, which isn’t necessarily driven by profits.”
“It’s not simply like staging your home to increase its sale price,” adds Michael Derai, a Roynat Capital Regional Director in Montréal. He explains that these business fixes require more effort than painting the front door or adding potted plants, but they are worth it.
“It’s about increasing valuation multiples beyond just showing the highest possible profits, and making strategic enhancements to make the company more desirable for prospective buyers.”
Derai and Strong are seasoned at spotting value since they help clients acquire companies, by providing advice on capital structures.
"With our expertise in providing transition and acquisition financing, we look at the same factors a savvy buyer does, to understand what are the ‘value drivers’ of the company and conversely what are the risks that could diminish value.” adds Strong.
Their Scotiabank colleague Amina Valli-Hasham, Director, Commercial Banking in Vancouver, agrees: “As lenders, we perform similar due diligence that a buyer would; we have a keen eye for those same items and can offer helpful advice.” She adds that the pandemic indirectly highlighted which companies were resilient, able to pivot quickly and in general hold their value during a difficult period.
"Buyers take note of companies that stayed relevant during COVID-19, applied innovation and had the right business model to at least maintain their earnings”.
Build-out your management team
While COVID-19 highlighted the cream among companies as outlined above, Derai, Strong and Valli-Hasham point out other ways to strengthen business value, starting with broadening company leadership.
“A buyer will pay materially less for a business that depends on one person,” says Derai. He notes that a company can become reliant on one owner/operator who grew the business over the years, and now holds all the knowledge and key relationships. There’s real risk that once the owner is gone the goodwill is gone with them.
“It’s important to bring on additional management and transfer operational responsibilities and know-how to them, so the business is not solely reliant on the owners,” he notes. Also, part of successfully transferring knowledge is to establish company-wide policies, SOPs and job descriptions to give a potential buyer confidence that the business they are acquiring has inherent structure to it, along with an established management team who are not leaving when the business is sold, but will ensure continuity”.
What’s your secret sauce?
An owner should have strong awareness of the key value drivers of their business, including intangible value, like their brand or customer relationships.
“You must ask yourself, what is my ‘secret sauce’ and how do I protect it?” says Derai. “Even if the company is not for sale, the owner should always be thinking about those things a buyer will eventually pay for, and then make day-to-day business decisions protect those things.”
Strengthen your information and reporting
The Roynat and Scotiabank experts also urge business owners to improve the timeliness, accuracy and quality of their financial and management information and reporting systems.
“If you’re thinking of selling your business, you should arrange with your external accountant a couple of years before to prepare at least Review Engagement financial statements, so there is a level of assurance around the accuracy of the information being provided, which helps the buyer get comfortable with the numbers” says Strong.
“These are investments in which some owners may not see the immediate value, but they will help enhance management decision-making, while also giving potential buyers more comfort that the right controls are in place,” adds Valli-Hasham. “It is always impressive to see a company provide timely and accurate month-end reports, within a day or two, or provide a dashboard of Key Performance Indicators in a business.”
Clean-out your closet
Just as a realtor would tell you to tidy up before an open house, the Roynat and Scotiabank advisors recommend that a business owner ‘clean up’ outstanding business issues.
For example, separate personal expenses and assets from the business.
“In particular, don’t treat your business like your personal bank account,” advises Strong. “Do pay yourself a salary or a bonus, but don’t run your personal expenses through the business because those items dilute profitability and will create noise in the buyer’s assessment of your business.”
Similarly, Derai notes how entrepreneurs often make operating and financial reporting decisions based on tax minimization: “There’s nothing necessarily wrong with these common techniques, but if you are planning to sell your company, you need to wind those things down to give the prospective buyer a more accurate portrait of your business’ profitability.” He also recommends cleaning up unnecessarily complex corporate structures, which may have been created through years of tax planning but serve no current purpose. This includes winding up inactive subsidiaries and separating non-core/non-operating assets.
Advice brings higher multiples
The team points out that owners should seek solid advice on the steps described above, long before they consider selling their company. Derai recalls how they assisted a distribution company in increasing value, and transitioning ownership, over several years. Roynat helped the sole owner find new partners with diverse management skills, to better leverage the company’s strategic assets. The founder continued doing what he did best – sales and client relationships – while the new management improved administration, ultimately enabling all the owners to sell the company to a major competitor at a significant premium. “It didn’t happen overnight, but this is a great story of value creation and, eventually, monetization of that value,” says Derai.
“These things take time, so owners need to consider their longer-term plans and prepare well in advance,” says Valli-Hasham. “Our clients are fortunate; Roynat is a significant differentiator for Scotiabank compared to other banks. Roynat focuses on transition and acquisition financing, and they have the knowledge, experience and local market connections. When our Commercial Bankers bring in that Roynat expertise at the right time, it’s a seamless, one-stop shop for our clients.”
Concludes Strong, “We are transition and acquisition financing experts, so we have the mindset of a buyer, and we can help clients create additional value in their business by following some of the key steps above.”