David Mansfield, professor and founder of The Drive Partnership, looks at unlocking value in your business before you sell.
Every company owner who wants to sell would like a top price and there are many ways of valuing a business. So how do you ensure your financial model is attractive? And what can you do to improve your chances of a successful sale at the right price?
Sometimes you have to accept that what you have is not really good enough. Despite prudently controlling costs and generating revenues, the financial characteristics are such that you’ll never realise a high price.
Yet it’s possible that within your current business there are opportunities to build something new. A product or service where the financial structure and possibility to scale would attract keen buyers and a high valuation. All you have to do is find it.
Often it’s as simple as rearranging or re-purposing what you’re already doing. Perhaps by revamping your business model, moving from one off payments to recurring revenues for example. Or sometimes by doing something more extreme as happened to this company…
George ran a business that generated sales leads for clients through telesales marketing. As a salesman himself he’d built the business with two friends, from scratch. The early years were hard and with little funding the company lived hand to mouth trying to pay their small number of staff. But as time went on the business began to grow, client numbers increased and they had to hire more people to service the customers. As the revenue grew so did the costs. But that was OK, the profit margin was pretty good and they could pay themselves a reasonable salary.
They outgrew their offices and moved to larger premises. By now the company was turning over several million and employed over 300 staff. The cost base continued to go up but that was fine because so did the revenue. Then one day, out of the blue, they were asked if they wanted to sell the company.
They met with the prospective buyer but came away disappointed.
Although the business had grown quickly and made reasonable profits it was much less valuable than George and his fellow founders thought it should be.
Why would that be ?
The simple answer was the short term nature of their sales. Clients required a campaign that would last a few days or weeks, but no longer. So the company needed a fat pipeline of opportunities to ensure they could pay the bills and grow the business. Of course some clients returned but it was mostly impossible to predict.
So when asked to forecast revenues for the next year or two it was pure speculation, based on history, because more than 6 months out there were no confirmed orders. This is why their business was worth less than they thought; the quality of their revenues was relatively poor in that there was no future certainty. Furthermore, if the revenues grew as they had in the past this would require more people, so with little scalability the margins would remain static.
However it wasn’t all bad news. Buried in their tech department was a new product which would transform the business. Phil, the IT director, an ideas kind of a guy, recognised the issue and convinced his colleagues to provide a small development budget.
It was a simple product which told companies how people had used their website, the parts they’d dwelt on and the parts they’d ignored. Although you couldn’t identify the person, in many instances you could identify the company. This information allowed companies to improve their online presence and target particular sectors and organisations. It also provided insight into what people were really interested in, so that new products could be developed accordingly.
George decided they could be onto a winner. They did a test selling the software on the basis of a month’s free trial and then a low cost subscription. They retrained part of their existing sales team and sold it over the phone and online.
The associated cost was development, sales and account management. A highly scaleable product with predictable subscription revenues. Over time it was easy to forecast the customer drop-off rate, which meant even if they didn’t sell a single further subscription revenue was predictable for several years.
George was no fool. He understood that the company now had two related businesses. In order to create the most value for him and his colleagues he needed to take one more important step. He separated the two companies entirely. Not just by separate accounts and board structure but physically too by moving into another building. And then into the USA.
The original lead generation business was sold and the funds were ploughed into their highly scalable tech company, which was generating significant margins. They built further related products and the subscription revenues continued to flow.
Not surprisingly with a high margin, scalable business and strong predictable revenues, buyers soon came looking.
I’m convinced that nearly every business can revamp, discover or create a scalable business if they really want to. You don’t have to wait for a disappointing low ball offer to get going.
By David Mansfield, founder of The Drive Partnership and visiting professor at Cass Business School