Welcome to our world, where we focus on maximizing value.
Private company value, particularly in transactions that result in the
transfer of control (e.g., gifting, inter-generational sale, ownership dis-
tribution, recapitalization, outright sale of ownership) is not a single
number, nor is it static outcome. Actually, it is a dynamic series of per-
ceptions, a state of mind that can be transformed into money in the
Assigning value is a complex process that is influenced by myriad,
concurrent influences. Positioning, presentation, preparation, compe-
tition, techniques and knowledge all contribute to the equation. In the
sale of control, the two biggest and most controllable variables of all
determine most of the outcome: (i) how the process is handled and (ii)
the stage in the business cycle at which the selling dialog matures.
These two factors alone will either cost you substantial wealth, or pro-
duce incremental value far greater than any other single thing you
might attempt to do, setting the stage.
Here are fifteen of the most universal key factors that you, the entre-
preneur, can manage and implement to impact the value of your busi-
ness. Are there others? Sure, but those tend to be specific to an in-
dustry, region or temporary market circumstances. If you work these
fifteen factors properly, your business will be worth more, when you
decide to borrow money, sell, or transfer control in other ways.
These 15 Key Factors (also called value drivers) represent the inside
story on what generally affects the purchase price of businesses.
Based on real-world transactions, these factors come directly from
skillful business buyers. Make no mistake about it, in a professionally
run selling process, it is those informed and carefully positioned buy-
ers (motivated by greed, fear of loss, ego and whatever else) who are
the true arbiters of value.
With a wealth of experience acquired by funding and/or investing $1.25
billion in 68 businesses; buying and selling 130 businesses for about
$400 million; starting two businesses; and turning around another for
sale to a Fortune 25 company, GroGroup professionals are in a unique
position to provide these insights. In the process of representing busi-
ness owners, we have interacted with thousands of business buyers,
ranging from multi-billion dollar strategic companies to million-dollar in-
This guide was prepared to assist you, the business owner, in planning
and directing your efforts so that, when the time comes to benefit from
your enormous investment of money, time, emotion and effort, every-
thing will be properly positioned to command the best possible value.
So, go ahead. Try it out. Make it grow. Call us when you are ready to
set things into motion. Until then, take good care of your baby, the
marvelous family money tree that you have created and nurtured.
PO Box 12356, Charlotte, North Carolina 28220-2356
tel (980) 275-4340 fax (919) 869-1866
Key Factor #1
Develop Proprietary Products
Selling products that are proprietary (by reason of technology, design,
branding, or even packaging) will mean both (i) higher profits along the
way, and (ii) be a major plus in the eyes of a buyer. Proprietary prod-
ucts protect you from competition and also enable you to elevate your
selling/value proposition to something beyond price. Contrast this with
commodity products and job shops, where the company does not con-
trol the product value; in fact, the marketplace dictates it.
Cash flow realities may obligate you to deal in commodity-type products
in the near term, but efforts to build equity value should eventually be
rewarded if you infuse product/service lines with branding and other
proprietary content. Interestingly, this higher-margin model even may
reduce incremental working capital needed to support growth.
One client company fabricated items from advanced materials, gener-
ally in a job shop industry. Yet, through investment in people, equip-
ment and R&D, the company developed unique products with excep-
tional profit margins. As they accelerated their movement away from
commodity products, the value growth actually accelerated because of
two things: (i) the level of profitability on each dollar of sales revenue
spiraled upward, and (ii) the purchase price multiple achievable jumped,
Another client took a different, but equally successful approach. A dis-
tributor, they didn t actually make anything, but repackaged (or private-
labeled) over 80% of all products they shipped. Even things as basic as
simple wood screws carried their logo, trade dress and packaging style.
Margins were well over 50% because their products appeared to be
Key Factor #4
Build an Organization
Buyers really don t like a one-man band. A business that depends on
only one or two people carries an incredibly high risk in the eyes of a
buyer, and therefore is perceived to be of low value.
To build a deeper, stronger management team means that you must
relinquish some control to others; it also in-
creases costs and involves some risk, particu-
larly if you ve hired the wrong people, or not
trained them either to make decisions or work
independently. The payoff, however, is better
operating results, lower stress and a higher
We ve been fortunate to have had many cli-
ents who recognized the importance of build-
ing a strong organization. One owner hired a
senior executive from a major company, who
professionalized the company, developed a
marketing strategy and grew both sales and
profits. At the time of sale, this strong organization commanded a pre-
mium value and also enabled the seller to hand over the keys at clos-
ing and retire the buyer trusted the professional team to handle the
transition without the seller s continued involvement.
NOTE: Our experience shows that an owner s ability to manage a team
is greatly enhanced by two closely related things:
1.a bottom-up, participatory budgeting process; and
2.a very responsive financial reporting system that can quickly flag to
you (and them) how they are performing, relative to budget (i.e., what
they committed that they would do).
Key Factor #5
Beware of Size, a Double-Edged Sword
Larger businesses are often stronger than smaller ones. Among the
benefits they can offer are better market share, broader product lines,
multiple locations, more assets, deeper management and greater ca-
pabilities. Recognizing this, buyers often set minimum sales size as
a criterion for screening acquisition candidates. Because the notion
of critical mass is both accepted and comfortable, everything else
being equal, big companies pay high multiples for large targets.
For example, we represented the owners of two very popular toy
companies a few years ago; one had revenues under $10 million, the
other was closer to $60 million. Each was a dominant player in its
own niche, and both were aggressively pursued by prospective stra-
tegic buyers. Each commanded a handsome premium valuation.
However, the larger entity s final value came in at a multiple nearly
40% greater than that awarded the smaller player, in no small meas-
ure because the larger entity attracted every major global strategic
buyer in the boy toy segment of the market. They all bought into in
the idea that our client would have an immediate, accretive impact on
combined reported results.
Size can hurt, however. When the goal is market share, or simply
size, profits often suffer. The resulting high working capital demands
can lead to strained finances. Also, more debt means increased risk.
Larger businesses can be more complex and harder to manage. Is a
business that earns 10% pretax on $10 million of revenue worth more
or less than a business earning 3.4% on $30 million? It depends on
other factors, such as this: if both have the same book value, but the
$30 million company is carrying $8 million more in debt, it s very likely
the smaller business will be worth more to a buyer.
A prospective client had more than 100 hundred fast food stores.
The company was losing money and deeply in debt, but the owner s
response was to grow even faster, and he added another 35 stores.
His compulsion to grow put his business in jeopardy, so we coun-
seled him to re-think his strategy, rather than sell.
Key Factor #6
Produce Credible Financial Statements
Financial statements provide a record of the financial results of a
company s operations, as well as statements of assets and liabilities
and the sources and uses of cash. Many buyers are turned off by fi-
nancials they deem to be untrustworthy. Buyers lose faith in the
seller s credibility if the financial reports look different , or lack clarity
and specificity. It should be obvious that unsupported tax returns
rarely pass muster.
Professional acquirers are accustomed to seeing monthly, quarterly
and annual financial statements, usually reviewed by an outside ac-
countant. The gold standard
is to have your financial re-
ports audited and certified.
Financing sources need such
statements to approve a
buyer s loan request, and au-
dited financials are a basic
requirement for going public,
or for being a significant ac-
quisition for a smaller public
Because buyers like to see unbroken, sustained trend lines, you
should have credible financial statements available for at least three
years. In cases where outside accountants have not participated in
preparing the financials, we ask our clients to have them reviewed
If your traditional accountant isn t comfortable with this task, we can
recommend capable accountants to assist him. Frequently, clients
prepare their own financials. We advise them to hire a CPA to review
and re-issue the statements, going back 3-to-5 years. By taking this
simple preparatory step, we are then able to approach professional
buyers; often achieving better deals for our sellers.
Key Factor #7
Develop a Broad Customer Base
Perceived risks play a major factor in every buyer s internal purchase
price deliberations. A business with many independent customers is
generally believed to be more predictable and represents a lower risk
than a similar business that depends heavily on a handful of major
An acquirer will be very concerned if a uniquely personal or familial
relationship exists between the sellers and a key customer.
Many good businesses are unsalable at reasonable valuations for
just this reason one or two customers dominate the seller s reve-
nues. Whether the owner is wiling to admit it, his business actually
functions as subcontractor to those key customers.
While it is easy to fall into the trap of customer concentration, the
value and deal structure consequences can be severe, because buy-
ers are always concerned that the key customer could take those
large orders elsewhere.
Note: The same issue may exist in the way you source raw materials,
components, and other supplies. Specifically, if you are dependent
upon a single vendor for a critical item, it would be wise to develop
alternative sources of supply.
Key Factor #8
Formulate and Follow a Strategy
A good business with a clearly-articulated strategy usually com-
mands a premium.
One client did an extraordinary job in the printing industry by target-
ing only one type of customer and one product. They focused on
short runs, quick turn-around, and bought specialized used equip-
ment that they re-engineered to accommodate rapid changeover of
By carefully refusing to make any
other printed products, the company
became so proficient in its specialty
niche that the selling price of the
business far exceeded expectations.
In contrast to the high price com-
manded by the printing company with
its clearly defined business strategy,
we often see businesses selling at a
discount because they are actually
agglomerations of unrelated busi-
nesses. One client was in several
markets and even had two joint ven-
tures interwoven into the business,
severely limiting the universe of pos-
The more different businesses a company is in, the more difficult it
becomes to find a single buyer who will pay the best price for each
and every one.
Key Factor #9
Steadily Increase Sales and Profits
Buyers make many judgments when reviewing prospective acquisi-
tions, including how much they can expect to earn from each specific
investment. Forecasts are key to this exercise, but forecasting the
outlook of a company replete with ups and downs in sales and profit is
difficult, so buyers tend to dismiss these deals, or value them far lower
than those with more reliable-looking histories.
When we first evaluate whether or not to accept a seller as a new cli-
ent, we naturally emphasize steady trend lines absent those, there
must be a very solid story behind the choppy history.
In one instance, the prospective seller s revenues and profit dollars
fluctuated greatly because they were in a commodity-driven business.
So, looking for other attributes, we noticed that the operating profit
margin (operating profits divided by net sales) remained constant, with
even a slight upward tilt over time. That told us that they were proc-
essing orders skillfully and managing the business well; and that at-
tribute became our featured selling tag line in presentations to buy-
ers. Why? Our experience demonstrates that major players often ac-
quire others primarily as a means to capture solid management teams
and/or well-trained additions to their work force.
Targeting specific niches in growth areas of your industry will help cre-
ate and protect your sales trend lines, and will tend to attract strategic
buyers who pay a premium for quality acquisitions.
Key Factor #10
Low Debt + High Book Value = Higher Price
Debt outstanding at the time of sale usually is retired by the seller out
of the proceeds of sale, reducing the net price received. We have
seen too many businesses that were impossible to sell for a net price
satisfactory to the sellers because the debt they had accumulated ex-
ceeded the gross value of the business.
How can this happen? Any of a number of things can produce this
imbalance, including: a pattern of excessive distributions to owners;
high growth consumes too much working capital, thereby outstripping
the ordinary cash flow s ability to sustain the balance sheet; the na-
ture of the business requires an unusually high investment in fixed
assets; cost of a recent expansion hasn t been recovered; a recent
acquisition was supported by debt that hasn t yet been prepaid; or, as
we see in too many businesses, it is simply under-capitalized.
HINT: Higher book value of stockholders equity is a positive in the
buyer s assessment of value and price, and can even provide an illu-
sory floor for pricing negotiations. When we sell a business, we re-
view the assets to see which have higher market values than stated
on the books, and recast the balance sheet to reflect these other-
wise hidden values. We want our client to receive full benefit of the
higher value, not the buyer.
Key Factor #11
Be a Player in a Major Industry
To attract the big buyers who pay the big prices, you need to be a big
shot too. The company with a proprietary product in a tiny or shrink-
ing industry sector is unlikely to be in high demand to acquirers who
pay higher prices. Why? Because they look for (and expect to real-
ize) the benefits of synergy commonly thought to be available when
overlapping companies are merged.
One of our label manufacturers generated a very high level of interest
from two major industries: label manufacturing (naturally) and busi-
ness forms manufacturing. The latter came about because we no-
ticed the client used the same distribution network as the business
forms manufacturers. So, using semantic differentiation, we accu-
rately made them a part of that larger, rapidly consolidating industry.
Once we were in the door, we captured the attention of the big boys.
A $600 million public business forms company bought our much
smaller client, and at a substantial premium because of the syner-
gies they expected to harvest.
Key Factor #12
Mom was right first impressions DO matter.
Appearances, no matter how trivial the individual items may seem, all
become part of the fabric of the buyer s initial opinion of the quality of
management and, therefore, the value of the business. Mow the
grass and plant flowers. Get rid of the clutter in the factory, ware-
house and out back. Paint the building, inside and out. Pave the
parking lot and re-paint the lines.
...and yes, clean up your office and pitch all of that stuff you ve accu-
Most importantly, address all environmental issues NOW. Hazardous
waste record keeping and procedures should be up-to-date and com-
plete. Have your attorney engage an environmental engineer do a
Phase 1 audit, walk the property, and determine if a Phase 2 is rec-
ommended. Fix all deficiencies. Remediate. Waste, unused barrels
and all chemicals should be removed or properly stored; otherwise,
the buyer will ask questions and/or demand further testing.
Environmental issues, whether real or imagined, kill deals.
Key Factor #13
Use a Merger & Acquisition Professional
to Sell Your Business
Engaging the services of a good M&A professional will give you a significantly bet-
ter chance of selling your business to a quality buyer, for a better price, on a
timely basis, and on better terms. Consider this:
· Most business owners will never sell even one business; the best buyers
purchase several companies every year. You will be outgunned if you chose
to save the fee and go it alone, and that will be a painful and very expensive
· It takes 700 to 1,000 hours of preparation and meetings to do a deal. Can
you afford to neglect your business for ½ of a year at the very moment
when operating results matter most? You should focus your efforts on running
the business, and let your M&A professional conduct the extensive analysis,
preparation, sales and marketing efforts
· The best results are achieved by marketing the deal quietly, but broadly
to many qualified buyers. When we market a business, we start with a rigor-
ous search for public companies, both here and abroad, because these entities
consistently pay the highest prices and offer the most solid deal structures. We
also know who, among the thousands of mercurial financial buyers, actually
close deals without a lot of fuss
· Don t put a price tag on your business. In any negotiation, the first person to
name a number loses. Our highly perfected selling technique is crafted to bring
multiple buyers to the table simultaneously. This creates a fear of loss in their
minds, causing them to pay more than they might otherwise offer. Our credibil-
ity with these quality buyers induces them to participate. It all comes down to
another basic rule: One buyer is no buyer. These alternatives give our sellers
the comfort to push buyers hard to achieve the best possible deal
· A professional, credible presentation of your company s strengths and
opportunities is key to marketing it properly. The buyer is purchasing the
future, but will try to pay you for the past. Unrepresented business owners hand
over tax returns and old marketing pieces, but none of that speaks to the future.
For buyers to pay up, they need to believe in the company, management team,
work force, products, competitive positions, barriers to entry, capacity for ex-
pansion, market potential and market share, and a host of other variables.
Your selling presentation is your silent salesman make sure it tells the story
properly to all of the unseen decision-makers on the buyer s side of the table.
Key Factor #13, continued...
· To maximize perceptions of value, hidden earning power and assets should
be properly understood. Your financial statements should be recast to re-
flect these attributes, and the recasting should be credible
· If you want to be paid for a bright future, credible projections need to be
developed. They should be based on well-articulated supporting evidence,
including relevant market research and data
· Unqualified buyers are time-wasters, should be identified in advance
and excluded from the process. Our thousands of buyer contacts prepare
us to screen out these pests quickly. Becoming involved in the dealing
dance with an unqualified buyer is a waste of time and money; it may drive
away legitimate buyers; and it could actually cost you the opportunity to sell
· Hiring a professional who has completed many visible and noteworthy sale
transactions establishes the seller s credibility, not only with regard to seri-
ous intent to sell, but also in the information given to buyers
· Be aware that the complex terms of sale are every bit as important as
the agreed purchase price. You should have the advice of someone famil-
iar with the many financial aspects of selling a business. Reps and warran-
tees, subordination, earn outs, royalties, holdbacks, escrows and employment
agreements are but a few of the items that can be part of your deal.
· Your M&A professional will be the quarterback of your deal team, so
chose him carefully. Other members of this deal team include an industry
expert (you), a legal expert (probably special M&A counsel hired by your tra-
ditional attorney to handle the highly complex nature of M&A documents and
risks), a tax expert (either your accountant, or lawyer, or special counsel), and
a wealth strategist.
The bottom line is this you ll probably only sell your company once. It is likely
to be the greatest part of your fortune and personal legacy. Huge portions of po-
tential value are made or lost in this carefully choreographed contest of skills. A
true professional will improve your deal by many times the fee you will pay
him to handle this process.
Key Factor #14
There are many tax-minimizing things that you can do now, in prepara-
tion for the eventual sale/transfer. For example, if you are taxed as a C
Corp, consider an S Corp election. That simple step could eliminate
double taxation on earnings as well as on distributions of sale pro-
Real estate should be held away from the company for a few reasons,
including that it allows you to accumulate wealth in a safe haven away
from the risks inherent in the business model. It also facilitates gifting
and estate planning. Many buyers prefer not to purchase real estate;
rather, they lease it for a period of time, with options to extend or pur-
chase at a future date at prevailing market values. Were the property
held inside the business, these actions create a burdensome double-
tax for you. Also, real estate is best sold separately to a real estate fo-
cused entity, usually on better terms than corporate buyers pay.
If intellectual property is key to the business, it too is best held sepa-
rately by the owner isolating it from the risks of the business (and al-
lowing the owner to receive royalties as another way to remove cash
flow from the company). Upon sale, the buyer would acquire this IP
concurrently, circumstances permitting. Then, a substantial portion of
the total purchase price could be allocated to the IP, producing signifi-
cant tax benefits to the buyer.
These quickly sketched ideas are intended to provoke a far-reaching
discussion among you and your professional tax advisor naturally,
you should act only after they have advised you of likely outcomes and
other particulars. Also, keep in mind that each situation is different, as
are the complex, ever-shifting state tax rules.
The important thing is that you speak to your advisors NOW
about that day in the future when you might possibly decide to
transfer or sell control. Ask them what they can do to TODAY to
maximize your tax advantages. This is important.
Key Factor #15
Time the Sale Correctly
The best time to sell is when the market is ready. However, if you
have been running your business to maximize value, then you will be
Consider this: We ve been working with and talking to owners of a
large IT consultancy since 2005. When we first met, they were recov-
ering steadily from the recession that followed the tragedy of Sept. 11.
By early 2008, things were perking along very nicely: sales were up,
profits were up, and the business was poised to grow another 15%.
His wife (no longer active in the business, but still a 50% owner and
anxious to relax, travel and enjoy their grandchildren) said Let s sell
now. The founder, now 63 and getting ready to pack it in, uttered
those famous last words, One more good year, and then I ll sell.
Sound familiar? ARG!
The business grew as predicted and now he wants to sell, but the mar-
ket is down 60%. Instead of adding 10%+ to the sale value, he actu-
ally LOST ONE HALF of his perceived worth. When will he be able to
reach his goal and retire now? 2012? 2013? Later?
Can you avoid that all-too-familiar trap? Sure. Run your business with
the first 14 Key Factors in mind and then you will be ready to take ad-
vantage of market peaks when they occur every 5 or 10 years. Also, if
you are doing a particularly astute job implementing some/all of Keys
1, 2, 7, 11 or 12, you will attract the attention of strategic buyers, no
matter what the market conditions.
Throughout the first half of the 20th Century, a fin-
ancier named Bernard Baruch was one of the
wealthiest and influential men in America.
A reporter from the NY Times once asked the se-
cret of his success. Without hesitation he said,
I always sold too soon.