Planning to sell your company? How you can increase shareholder value

Max Perry, associate director at HURST Corporate Finance, explores some of the factors which will help to determine how much your business is worth, and key steps you can take to drive value in the run-up to a sale…

It may seem obvious, but your company’s financial performance and growth trajectory will underpin any valuation. You would be surprised to discover how many owner-managers focus on developing what they believe are top-drawer, all-singing and all-dancing services or products – then end up making a loss.

Where enterprise value is derived from calculating underlying pre-tax earnings (EBITDA) times an arbitrary multiple, ensuring that both sides of that equation are as large as possible will obviously yield a more desirable outcome for shareholders. Demonstrable progress over prior years will have an impact on the multiple, as will growth prospects and visibility of future profits.

Potential buyers will be more attracted to a business whose product or service has proven quality, alongside innovation and development.

Intellectual property can be something of a ‘golden ticket’ in this respect. It all goes hand-in-hand with creating an offering that is difficult to replicate, which customers have to come to you for or suffer a drop in quality if they go elsewhere.

Importance of the management team

Another important point when it comes to increasing shareholder value is the quality of the management team, and the role of the business owner.

Your management team needs to be capable, respected, autonomous, and be able to cover all bases. That includes future strategy and business opportunities.

This leads into the owner’s role. My message is simple – essentially, you have to make yourself redundant. Your business should function well without you and shouldn’t need you anymore.

The last thing an acquirer wants to see is a business that loses its drive, market intelligence and sales pipeline as soon as the departing owner heads for the beach.

It that is the case, then their risk level increases, and the multiple will fall. It will also impact how the consideration is divided, between the amount payable on day one and any deferred sum.

How resilient is your business?

Nowadays, and especially in the aftermath of the pandemic, acquirers seeking to mitigate risk will want to know that your business was either unaffected by lockdowns, has been able to rebound in the wake of the disruption or has successfully pivoted and developed more resilient revenue streams.

Having revenues under contract rather than being project-based will provide great comfort to a buyer.

This will show your business has a reliable, highly-regarded product or service, to which customers are willing to commit to using over an extended period of time.

However, it is important to note that many customer contracts will include change of ownership clauses, although these are rarely implemented. The very presence of contracts in the first place is what drives value and helps an acquirer to address their risk.

To help maximise value, you should also consider the robustness of your supply chain relationships.

Should your main supplier to pull out of the market, where would it leave you? Would it leave a gap in your ability to manufacture or to supply your clients while you undertake a procurement process?

You should have contingency plans in place to ensure that disruption in these circumstances would be minimal.

Other factors to take into account in terms of the resilience of your company include your brand and market position, and your infrastructure. Make sure your IT systems can handle your growth, and determine whether your current premises will be adequate in the short-to-medium term as the business expands.

Some downsides – what can adversely affect the value of your business?

Too much reliance on a small number of customers or suppliers can drag down the value of your company.

Having one large, blue-chip customer might appear to be a feather in your cap, but the reality is rather different.

You need to think about the risks to your revenue stream if one customer is responsible for a large proportion of it. They may exert pressure on your terms or, if the worst happens and they decide take their business elsewhere, the company will suffer a significant loss of income.

It may be difficult to scale up. Would it require significant capital investment to achieve growth, and would it be difficult to increase revenues without your costs also going up?

Finally, look at your offering. Is it something that could be considered a luxury? This is the other side of the coin when it comes to resilience. In difficult economic circumstances, consumers tend to move away from spending on luxury items in the first instance.

If you're planning to sell your business and would like some insight, please contact Max Perry at max.perry@hurst.co.uk to get started with our expert corporate finance team.