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Business Enhancement Diagnostic Test
Fri, Jan 1st, 2010
The value of a business is largely driven by a company's pre-tax EBITDA (Earnings before interest, taxes, depreciation and amortization), also known as adjusted earnings. However, there are many intangibles that also play a large part in determining business value.
If a business owner recognizes and enhances these intangible factors in advance, he or she can maximize the value of the company. Although every business is unique, buyers tend to evaluate potential acquisitions in a similar manner. Drawing upon our experience in the marketplace, Sun Mergers & Acquisitions has developed a diagnostic questionnaire to enable business owners to identify potential areas to improve in advance of selling their company. This analysis focuses on management, human relations, sales and marketing, operations and finance. There are 22 diagnostic questions and related action items that will help a business owner to recognize deficiencies and take pro-active steps to enhance value.
Factors Affecting Valuation - Diagnostic
Management / Human Resources
Depth of Management:
Will the business operate if the owner departs?
- Buyers prefer having people other than the owner(s) and/or systems in place that handle day-to-day operations.
- Companies with strong management teams minimize transitional risk
Owner Dependency:
Are key customer and/or vendor relationships dependent on the Owner?
- Buyers want to see transferable relationships, that won't be overly vulnerable to competitors once the owner departs.
Employee Dependency:
Are employees cross-trained in multiple areas of the business?
- This minimizes the negatives effects of employee defections pre or post sale.
Action Items:
- Create current organizational chart with roles & responsibilities
- Develop Employee Manual
- CEO Succession plan
Sales & Marketing
Sales Trends:
Have sales been increasing, decreasing or flat over the past several years? If sales have declined, what were the reasons?
- It is important to clearly identify the business factors behind revenue performance.
Customer Concentration:
How will the loss of one or two customers affect the bottom line?
- Less concentrated sales revenue is less risky and often more valuable.
Market Dependency:
Are sales tied to a single industry or geographic market?
- If so, be prepared to defend why a potential buyer should not be concerned.
Customer Relationships:
Are there contracts in place with customers that provide recurring revenues? Are there exit costs to clients if they switch vendors?
- Presenting a better case for likely customer retention will lead to a higher perceived valuation
Predictability of Revenues / Repeat Revenue:
Are sales generated from repeat or contracted customers, or does the company need to "re-sell" every time?
- Given that businesses are valued in part by their revenue streams, it is more desirable to have a recurring, predictable, core sales volume from an established customer base.
Commodity vs. Proprietary:
How does the firm differentiate itself from competing companies?
- Firms that set themselves apart through proprietary products, processes or superior service have more value than those that compete on price alone.
Company Niche:
How is your product or service unique? What prevents others from copying your approach?
- Be prepared to discuss your target market and explain why this niche is superior to other firms.
Expansion Opportunities:
Assuming capital availability is not a limiting factor, what immediate and longer-term expansion opportunities are available?
- Buyers generally want to buy an established business that has opportunities for continued profit expansion.
Action Items:
- Develop written Marketing Plan ( including budgeting )
- List 10 largest customers as % of sales
- Review Sales Systems and Strategies
- List company niche and primary factors separating company from others in the industry
- List the 5 best expansion opportunities that would be available to the firm assuming capital availability is not a limiting factor
Operations
Documented Systems:
Is there written information available relating to employee policies, job descriptions, software packages, sales and marketing programs, etc?
- These provide a road map for new buyers to assimilate into the business. It is preferable if the bulk of the company knowledge and history does not reside solely in the Owner’s head.
Barriers to Entry:
What prevents another firm from re-creating your business and competing with you head to head? These factors could be geography, relationships, sourcing advantages, proprietary systems, exclusive contracts, brand name, quality, etc ...
- Buyers want to know that it is not easy to re-create what you have built.
Vendors Dependency:
Are replacement vendors available if key vendors go out of business or change distribution methods?
- Contingencies should be in place if possible.
External Threats:
General: Are their any lawsuits, environmental issues or pending regulatory changes that may affect the company?
- If so, these issues should be clearly defined or resolved prior to initiating a business sale process.
Industry: Any pending risk factors or obsolescence of products or services? Any territorial encroachments by competitors?
- An acquirer will typically conduct research into both of these areas so you must be prepared in advance to address them.
Aesthetics:
Is the business aesthetically presentable?
- Cleanliness and organization can have a considerable effect on the psyche of a buyer. Take the time to make the business as presentable as possible. Clean out old equipment or other debris that is no longer needed, and, if necessary, straighten-up and / or paint the location.
Excess Assets:
Central to your presale positioning should be the identification of assets a buyer would not want or pay for.
- Examples would be excess inventory or equipment that could be sold to a 3rd party prior to a sale
- These assets should be identified and, if material you will need to get them out of the company with the least adverse tax impact.
Action Items:
- Develop Manual detailing all business processes in a step by step format to facilitate a smooth transition in the event of an ownership transition
- Identify vendor alternatives for all products
- List any excess assets and develop a plan to sell them
Finance
Financial Information:
Is the current and prior (3 years minimum) financial information ready for inspection by outside accountants?
- It is critical to put all of the relevant information in a clean and presentable format before going to market. These will be the documents that support the valuation of the business.
- Upgrade you financial reporting systems. If your financial statements have been compiled or reviewed, consider obtaining audited statements.
Profit Trends:
Have profit margins increased, decreased or stayed flat over the last several periods? Do profits shrink as volume grows?
- It is important to discuss the relationship between sales and profits, and to enhance the profitability of the firm, if possible, as you bring it to market. Be able to logically explain the trends and what you anticipate going forward.
Accounting Controls:
Are there checks and balances in the system to effectively track revenue and expenses?
- Buyers prefer to see controls in place that can quickly and accurately provide a snapshot of current financial position.
Scaleable Business Model:
Could sales be doubled without doubling overhead?
- Buyers often look for expansion opportunities (either locally or in new markets) that can leverage off of existing infrastructure ( warehouse space, back office employees, delivery capabilities, etc. ), without severely impacting fixed expenses.
Diversity of Offering:
Does the company have multiple products, services or revenue centers?
- Diversified companies are often better protected from downturns in any one sector.
Action Items:
- Meet with accountant & banker and review relationships
- Create one-year projections for P&L and cash flow
- Consider audited statement
If you would like to receive the Business Enhancement Diagnostic Test, please email sg@sunmerger.com.
