Buyer be aware: positioning the company for maximum exit value.

• Author: Blees, Chris
• Position: PRIVATE COMPANIES

What color car would a buyer prefer? Based on personal preference, the answer could affect how much he is willing to pay for a car identical in all other aspects. What does that have to do with the market value of a business?

Simply put, traditional valuation techniques generally ignore one important factor in their calculation--the buyer. While these valuations certainly have their uses, they usually assume a willing buyer doesn't have any personal preferences outside the normal industry standards.

Assuming a dealer has two identical used cars, except that one is blue and the other silver, they will almost certainly be priced exactly the same. If the preference is for blue, the buyer would no doubt buy that car. In fact, the dealer would have to discount the silver model for it to be considered as an option. As a result, preference has effectively determined a higher value for the blue car over the silver one, despite the market suggesting they are both worth the same.

If the owner of a business is considering selling at some point in the future, the buyer--along with his or her preferences--is likely unknown. So how should the company position itself to maximize value from an exit?

There are two main buyer groups, each with very different views of what is important to them: financial and strategic buyers. Financial buyers generally are individuals or groups of individuals looking to invest in a business, whereas a strategic buyer is normally a company looking to add to its existing operations.

As an example, assume that after some initial research it is determined that the most likely buyer type is a strategic buyer. It is then determined that, based on other acquisitions in the industry, the primary focus of most buyers is the quality of the customer base being acquired, rather than, say, the management team, which will most likely be surplus to requirements after the deal.

Thus, if the last five years have been spent investing and training a good management team, these efforts could be ignored by the buyer who might well discount them. But if those efforts had been channeled into increasing and maintaining quality customers, the buyer would most likely pay a higher price for the business.

This highlights the impact of focusing attention on the right sales factors or value drivers that make a business attractive to potential buyers. Value drivers can include, among other things: customer base, management team, products and services...