Successful Wealthpreneurs view their business from the perspective of an investor. As the owner of your business, you are a current investor! Think of prospective buyers as future investors.
Not all investors see a business the same way. Financial buyers and strategic buyers might have differing opinions. How might future investors look at your business? And more importantly, how should current investors see it?
Smile for the snapshot
The balance sheet for your business shows its financial position at a point in time. Although these numbers are important, prospective buyers will look deeper. Remember to consider what a potential investor’s first impression of your business might look like.
Invasion of the Buyers
- Plan for visits from prospective buyers who want to get a “feel” for how the business looks and operates.
- Prepare to answer questions about your office, distribution facility, manufacturing facility, and equipment. Buyers may also ask about concentration of customers, products, and suppliers.
- In presentations, include information on your use of current technology and your operating and financial systems.
Wealthpreneur Lesson
The Value of Scarcity
According to Forbes magazine, the average NFL team is now worth a record $5.1 billion. The Washington Commanders were recently sold at 11 times revenue for $6.05 billion to a group led by billionaire Josh Harris.
The Dallas Cowboys remain the most valuable team in the league at a record $9 billion. The Cowboys generate the most revenue ($1.1 billion) and operating income ($500 million) in the NFL. Jerry Jones purchased the Cowboys for $150 million in 1989.
Out of the 32 NFL team franchises, ownership of only 3 teams has been transferred in the last 10 years. The purchase price of an NFL team is definitely impacted by the scarcity of acquisition opportunities.
Long before you plan to transition your business, consider other perspectives that could favorably impact your business valuation.
What does the data say?
The starting point for a business valuation is typically an analysis of financial performance. This examines the finances of the business over a period of several years. Wealthpreneurs who think like investors monitor trends in key financial metrics to prepare their businesses for future investors.
Mine Your Data for Insights
- Quantify and evaluate trends in key financial performance metrics such as revenue, pretax profit margins, inventory levels, and working capital.
- Analyze historical sales to your top 10 or 20 customers.
- Create a presentation on the performance of top products and services.
- Document your efforts to develop new products and services.
- Scan your balance sheet for possible excess or shortfalls in leverage, assets, and your core capital target.
- Assess trends in accounts receivable and payable.
Check out the competition
Wealthpreneurs who think like investors compare the relative performance of their companies to other peers. This analysis shows you how to sustain a competitive advantage and helps you reverse adverse performance trends. Future investors will be interested in peer comparison, so why not start improving your position now?
Close the Profit Gap
- Leverage financial tools to compare your pretax profit margins with your peers.
- Determine how trends in your business margins compare to your competition.
- Evaluate your margins for sustainability and minimize the potential for reversion to the mean over time.
- Implement management strategies and competitive advantages that improve your margin performance.
On plan or on budget?
Most successful businesses have an operating budget or plan. These plans are often prepared annually and updated quarterly based on actual performance. Monitoring performance versus plan can yield operational insights and opportunities for improvement.
Plan to Succeed
- Prepare for prospective buyers to inquire about your historical performance versus plan.
- Identify causes of above-plan or below-plan performance.
- Position yourself to “sell the story” of future growth plan opportunities.
Find your secret sauce
Although your company may not seem one-of-a-kind, it likely has desirable differentiators. For example, two original flavors of the Big Mac sauce were created by a McDonald’s franchise owner named Jim Delligatti. These original flavors were later combined into one sauce by McDonald’s CEO Ray Kroc. This created a literal “secret sauce” that was unique to McDonald’s!
Dressing Your Big Mac
- Identify your unique brand or competitive advantage.
- Leverage these advantages to increase pretax profit margins, improve transferable value, and maximize your invisible advantage.
- Highlight these advantages in presentations to potential buyers. Buyers will pay more for a company with a “secret sauce”.
Fishing for a buyer
Savvy Wealthpreneurs are always considering the future of their businesses. Remember that an ownership transition may involve either an internal or an external transaction. If you are seeking to maximize your financial gain upon exit, seek offers from strategic buyers.
Reel in a Kingfish
- Anticipate and estimate the benefits your business might provide to a strategic buyer.
- Quantify cost benefits to a buyer from purchasing advantages.
- Consider the benefits to the buyer of consolidating your operations into a larger business unit.
- Highlight the cash flow difference to the buyer. When negotiating a sale price, seek to capture a portion of that benefit for you and other selling investors.
Can you tell the future?
Future investors will likely view your business from one or more of these perspectives. To capture the most financial benefit from your business, I recommend you do the same.
