What makes an attractive business?
Apart from size, what makes a business more attractive to potential buyers, decreases the perceived risk of the purchase and thus results in a higher multiple being paid? Clio Thompson, from the Ensors Corporate Finance team, looks at seven different ideas which can lead to higher multiples.
1. Recurring Revenues
If you’re buying a business with recurring revenues (such as a subscription model) as long as you keep things ticking along and keep providing the required service, you’ve got really good visibility of the monies coming in for potentially an extended period of time. When comparing a recurring revenue business to, say, a project by project based business, such as consultancy services, the level of risk decreases as the level of revenue visibility increases.
2. A Solid Customer Base
If you’ve got a large, diverse customer base, this likely to increase the attractiveness of your business to a buyer. A customer base where the top 10 customers make up 20% to 30% of the company’s revenue is going to be seen as significantly less risky than having one customer that generates 50% of the businesses revenue for example. A more diverse customer bases reduces the key in the instance that a key customer is lost as the overall impact on the company’s revenue is greatly reduced.
3. A Second Tier Management Team
This is the biggest obstacle to sale that we see within businesses with EBITDA of less than a million pounds. If you haven’t got a second tier management team, this will increase the buyers concerns that the trade might walk out the door with the seller and will materially affect the business. It can increase the buyers risk significantly and can therefore reduce business sale value.
4. Low Working Capital Lockup
If you have a business that’s making, say, half a million or a million pounds of EBITDA, and you do really well and say double the EBITDA, what will happen to this additional profit? Will it turn into cash quite quickly that you can take out of the business and invest elsewhere, or is it going to be that as a result of the growth of the business you’ve got more cash locked up in stock and debtors? In both of these scenarios you’ve got the profit on paper, but in the second scenario the actual cash takes a lot longer to filter through. So, if you’ve got a business where you can grow the margins, grow the profit and get the money in your pocket straight away, that’s going to be very attractive to a buyer.
5. Scalability
If you have a business that’s regional but it’s in a nice niche – maybe it’s making half a million pounds in the East of England and there’s scope to replicate the model and roll it out over the rest of the UK – then that is also going to be a very key attractive selling point. In this instance you are not only selling a business with a history of making profits, but you are also selling the idea of the business model that can be replicated by a buyer in another party of the UK to hopefully further profits.
6. Market Leader
If you own a business that is a market leader in its field and you’ve got very little competition, as long as the business continues to function and perform its required service/product effectively, customers are going to have to use you as there are a limited number of other options. For a buyer this decreases risk of customer loss due to anticipated customer retention and thus potentially increases a business’s value.
7. Strong Margins
If you buy a business that’s got quite skinny margins then it doesn’t leave you with as many options in terms of restructuring and cost cutting to make it more profitable. You can work on reducing overheads, but that’s only going to take you so far. Whereas if you’ve got a business with strong margins there’s more room and flexibility in the product and service and increased reward if you get the overheads under control.
So, whilst overall business size is a key driver of business value, the examples given here are the kind of things buyers would be looking for when pricing a potential purchase. Each deal would be different and each buyer has different things that they want to look at, but if you can start to think about each of these components you are going to increases your changes of achieving a higher exit value.