Driving Value For Private Companies


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Most business owners who are preparing for a future sale event should have an intuitive understanding of their company’s key value drivers as well as considerations toward the optimal timing for a sale. Sellers will benefit by aligning the timing of a transaction with strong overall M&A markets, healthy trends in their industry, and solid company performance. Certain business attributes are also typically rewarded in the market in the form of increased valuations, including recurring revenue streams, capital light business models (or robust historical capital investment), strong growth opportunities, customer diversification, a strong management team, etc. These are all common truths in the market, but many of these factors might not be changeable in the time period preceding the planned sale of a company. However, advanced planning and preparation during this time can directly impact the nature of a transaction process and valuation outcomes.

Financial Data Needed to Support a Transaction

Historical Statements – Third party prepared financial statements (whether audited, reviewed or compiled) are definitely helpful to providing a baseline for reported revenue and profits. However, internal financial systems are often capable of delivering a significantly greater depth of information with respect to the sources of revenue and profitability (e.g. by customer, by contract, by part, etc.). While the specifics will vary, virtually all acquirers want to understand the historical trends regarding how and where a company makes money, and a data-driven answer to that question will go much further than an anecdotal one.

Projections – A detailed and defensible set of financial projections is also typically a critical element of a transaction process. Buyers do not customarily give credit to “hockey stick” projections without well-documented support. While the appropriate level of detail for forecasted revenue and profitability will vary significantly by company, those who can draw well-organized connections between historical trends and future projections have the opportunity to capture a significant value premium.

While some management teams are already accustomed to producing and reviewing this type of financial information, many do not typically go into this level of detail in the normal course of business. To optimize valuation, sellers need to present materials and analyses that drive financial credibility. The opportunity exists to become prepared in this area in advance of a transaction.

Balance Sheet Considerations

Many business owners believe they have surplus working capital. Excess inventory is usually at the top of the list – whether carried to insure against supplier shortages, to take advantage of price or volume discounts, or any other reason. While working capital levels are usually part of the overall transaction negotiation process, it is very difficult to justify big working capital changes or achieve large price adjustments in this area. It is typically advisable to manage the business with a normalized level of working capital in the year preceding a proposed transaction to maximize seller returns.

Capital investment is another area which is often questioned in the time period leading up to a potential sale. Many sellers rationalize that they should avoid making pre-sale capital investments since a buyer would receive the future benefit. However, the reverse is also true, as any signs of under-investment could be met with resistance from buyers. While there could be millions of dollars at stake in making capital expenditure decisions leading up to a sale, prospective sellers are wise to continue investing into growth and running the business assuming they are doing so for the long-term benefit of the company.

The Value of an Experienced Advisor

The areas discussed above are by no means exhaustive and much has been written elsewhere from a legal and tax perspective (in short, don’t wait until it’s too late to get your ducks in a row). An experienced M&A advisor will bring insight across numerous areas in advance of a sale, and when the time is right, be available to position a company favorably in the market, execute a customized transaction strategy and negotiate an outcome that matches a seller’s objectives.

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