If you are a value investor, one of the many things you try to do is to value the business and if the shares are trading less than the entire business, and the company does not have a problem, you would buy the shares and wait until the market agreed with you.
If you are the owner of a small or medium sized business looking to sell, similar to using staging to sell a home, in a recent article Tracey McVicar of CAI Capital Partners wrote tips how to increase the amount you are offered for your business.
Improve Your Cash-Flow Margin
In order to generate $5 million in cash flow, the following are equal a $500 million revenue at 1% margin or a $33 million at 15% margin. They both equal $5 million cash flow. Which company would you rather own? Which one has more potential? Likely the $33 million company.
Owners also have to think about how much capital investment is required to sustain their business. A good rule of thumb is no more than 20% of EBITDA (earnings before interest, depreciation, and amortization) on capital maintenance.
Reduce Customer Concentation
As a small company, you sign an agreement with a big box retailer, quickly they become 40% of your business. Is this good? it is long term? If they want it for less next year, what happens? It is good to keep your customer base diversified.
Pursue Level One Growth Opportunities
This is your basic organic growth. Can you and do you want to do more? All things equal a bigger business is worth more money if you sell.
Strong Management, Professional Processes
As the owner, you do many things, but who backs you up. What happens if you could not be at the business for a couple of months? What teams are in place? Do they have the skill sets to know the numbers, not just estimates? If you watch Shark Tank, the investors are about if you know the numbers not its about?
Emphasize Recurring Revenue
Who does not like money coming in on a regular basis? Companies that sign multiyear contracts with customers are more attractive to the buyer.
Identify Level Two Growth Opportunities
These are opportunities that are outside the founders or owner’s comfort zone. Often times founders do not want to use debt. If you did what opportunities could you move to – complementary or new?
Linking to dividend paying stocks, the companies whose shares you are buying are large organizations they should have all the above and years of experience doing all the above. As an investor, you should be able to see all of the above for they are basic to staying in business for many years. The number of zeros change, the principles do not.
There are more questions than answers, till the next time – to raising questions.