This is a key question to ask well in advance of selling your business
We often hear private company owners and CEOs talk about finishing a year and they refer to whether they grew their revenues or not. And although this is important, it’s not indicating whether their company actually increased in value or not.
In prior posts, we’ve shared that private company sellers are often surprised to learn that 80% of the valuation a third party will place on their company one day will be driven by the intangibles of their company and 20% on the tangibles. The tangibles are your financials (revenue, profit, cash flow) so whether you strengthen these year over year is certainly important but not the majority basis for what the acquirer will be willing to pay you for your company.
The intangibles, or 80% of what they will base their offer on are things like:
- How strong is your culture (team/organization)? And how strong is your organization without you as the owner or CEO if you’re not remaining after sale?
- What is the future growth trajectory for your company and how exciting is that trajectory?
- How predictable are your revenues? Do you have great visibility to future revenues?
- How scalable is your business? Are your systems and infrastructure able to support growth or will large investments be required?
- How unique is your product or service offering versus competition?
- How efficient is your company at producing your product/service?
- Has your company created any valuable intellectual property?
As we are now closing out 2023, ask yourself, did my company create greater value in the year? If you grew revenue and profits over 2022 then you improved the 20% of your business that an acquirer will assess. But ask yourself about the intangibles, the 80% they will base their offer on, did you strengthen these?
Good exit optimization planning begins with understanding what intangibles a future acquirer will want to see with your particular business. Use time as a friend, especially in getting ready for a new year, to identify which intangibles are going to drive your future payout and ensure you are taking steps to improve these areas and get you on your way to a future euphoric exit.
