By Jay Carter, Founder and CEO, MarketView
M&A activity is at an all-time high. The number of transactions is high, valuations are high. Some business owners are approached on a daily basis by eager buyers, hoping their timing is right and the owner is willing to sell their business. With all of this activity comes a lot a confusion-especially for the business owners.
Business owners are business owners. They build and operate businesses. They do not typically buy and sell businesses. So, even though M&A activity is at an all-time high, it’s not for most business owners. Most have still never bought or sold a business and when approached by potential buyers, they are, understandably, uncertain about what to do.
Today, we’re covering Step 2 (“Improvement”) in the sale of a business. This is the second of our four part series discussing the Four Steps to selling a business. In last week’s column, we identified the four steps to selling a business as:
1. Assessment
2. Improvement
3. Promotion
4. Closing
As a reminder, Step 1 is Assessment. This is all about understanding what you have to sell and what your goals are for selling it. Amazingly, a lot of business owners skip Step 1, assuming that all of this will come to light during Step 3, the Promotion or marketing phase of the sale process. And they are not wrong—they will definitely learn what they have, and they may gain more clarity on their goals for a successful transaction, but they have waited too late! Business owners who skip Step 1 (and Step 2, since Step 2 is dependent on Step 1) are at a huge disadvantage in the marketplace and rarely end up closing a sale transaction that they are satisfied with.
In fact, more than 50% of these transactions never close. Either the seller or the buyer, or both, become frustrated and disenchanted with the other and the deal never closes. This is unfortunate because it is a huge waste of time and money for everyone involved—and It can be avoided.
Once you have completed Step 1, you are ready to begin Step 2 of the business sale process.
Step 2: Improvement
This involves taking specific steps to increase the value and salability of your business.
From Step 1, you now have a lot of very valuable information that will help you achieve your objectives for selling your business. The most common goal we hear from business owners is 1) increase the value of my business, and a second and correlated goal is 2) increase the salability (the market appeal) of my business. Every owner planning to sell hopes that their business will be highly sought after and coveted by potential owners.
Armed with the information you obtained in Step 1, you have a good understanding of where you are heading and the obstacles you may encounter. Now is the time to take strategic steps to increase the value and salability of your business between now and the time you decide to advance to Step 3 of the business sale process.
Step 2 (“Improvement”) involves reviewing the value opportunities that were identified in Step 1 and determining which ones you want to pursue between now and the time you plan to offer your business for sale. Your exit advisor should have made suggestions for prioritizing your value drivers, but it is up to you which ones you choose to tackle. For most business owners, these decisions are based on two factors: 1) when they plan to sell the business (which determines how much time they have to implement and realize the Improvements, and 2) how costly in terms of man power and out-of-pocket expenses the effort will be.
Unlike Step 1, much of the work involved in Step 2 can and should be handled internally. There may be instances, like with accounting or legal issues, where the input and guidance of a professional is necessary, but Step 2 should be within the capabilities of the company’s management team. If this is not the case in your businesses, it is recommended that you take a hard look at your team and identify where your gaps are and fill them. Your business will be more valuable to a buyer if your team is capable of driving continuous Improvement.
To aid in the prioritization process, we use a simple tool called “The Value Opportunity Prioritizer”, naturally. A graphic representation of this tool is on the following page and can be used to assist in decision-making.
Using the Value Opportunity Prioritizer, we evaluate Value Opportunity identified in Step 1 and first determine if it is Internally Influenced or Externally Influenced, and High Impact or Low Impact on the company’s value and salability. Want to focus our attention on those opportunities that are in QI of the graph: Internally Influenced and High Impact. change.
Next we look at the level of difficulty we perceive implementing this Value Opportunity will be and the relative Cost of implementing it. Of the four sub- quadrants of QI, we want to focus our attention and energy on those Value Opportunities that are in QI-A: Low Cost and Easy to implement. After that, we look at the Value Opportunities that fall in QI-B,QI-C and QI-D
Once the Value Opportunities are prioritized, the next step is to assign responsibilities and timelines to each of the Value Opportunities targeted, ensuring sufficient time for these Improvements to be fully implemented and their impact to be measurable and defensible. If you don’t have enough time to implement all of the Value Opportunities, just being aware of them is still valuable. Identifying untapped Value Opportunities to buyers can serve to increase the value the buyer places on the business today. They may not pay for the potential value but it definitely could make the business more attractive to the buyer.
In the next issue, I’ll be covering Step 3 of the four-step sale process: Promotion
Using The Value Opportunity Prioritizer:
1. List all of the Value Opportunities Identified in Step 1 (“Assessment”) of the business sale process
2. Select those Value Opportunities that are Internally Influenced (these will be our focus)
3. Of the Internally Influenced Value Opportunities, determine which have the potential for High Impact on the value and salability of the business (Quadrant I Value Opportunities)
4. Of the Quadrant I Value Opportunities, determine if they are relatively High Cost (time and money), or Low Cost, and further if they are relatively Easy or Difficult to implement and plot them in the appropriate sub-quadrant.
5. This is your task list, starting with Quadrant I-A. Depending on time and resources available, you may want to proceed to Quadrant I-D or Quadrant I-B next, and I-C (Difficult and High Cost) last.
For more information about the four steps of a business sale, please feel free to contact me.
Jay Carter
Founder and CEO
MarketView
704-904-7543
jcarter@market-view.com
