Acq 8: Introduction

“The intellect is always fooled by the heart.”

– François de La Rochefoucauld, French Writer

In a recent survey, Consumer Reports found that a “modern and updated kitchen” still rules when it comes to features favored by home buyers. And just as there are any number of factors that can affect the value of a house – a finished basement, for instance, or freshly painted high-traffic areas – there are many factors that can affect the value of your business. In this chapter, I’ll discuss the top ones. 

To be sure, the more profitable your business is, the more valuable it is. But there are many other factors at play, chiefly the buyer’s perception of risk and return.

Risk vs. Return

The primary reason a buyer may be willing to pay a premium price for your business centers on their perception of risk and return. Any factor that reduces the perceived risk associated with owning your business or that enhances the prospect that your business will generate significant returns will improve its value. Buyers will compare the risk and return of buying your business with the risk and return involved in alternative investments or other corporate development opportunities. As you review the factors outlined in this chapter, consider how they impact the buyer’s perception of the potential risk or returns associated with your business.

Collection of Factors

Many so-called experts believe the attractiveness of a business can be boiled down to 9 or 10 simple components, but the reality is much more complicated. In fact, many buyers consider dozens of factors when assessing a business and later focus on just a handful that represent the greatest risks or the opportunity for outsized returns. 

Despite the complexity of individual businesses, I’ve compiled a list of major factors that can affect the value of any business. While this list is by no means all-inclusive – in reality, there are hundreds of factors that can impact the value of your business – it’s representative of that larger detail. It’s unlikely that every factor below will be relevant to your company. But reviewing these items will help you see where your business is strongest and assist you in identifying those areas for improvement that represent the greatest opportunity for value creation. Familiarizing yourself with these considerations will help you understand and prioritize the universe of variables that may come into play when preparing to successfully exit your business.

Prioritizing Factors

Even if your business is otherwise pristine, all it takes is just one major deal killer – such as high customer concentration or the lack of a management team – to turn off a potential buyer. When considering all the factors that can potentially affect the value of your business, first scan all the possibilities and then zero in on the few elements that can have the greatest impact. An experienced M&A advisor will understand the type of buyer most likely to acquire your business and the handful of factors that category of buyer will focus on the most.

Absent their input, the considerations presented here are a valuable starting point.

What Can Impact Value vs. What You Can Do About It

Not all of the factors I cover here are actionable. For example, while interest rates can affect the value of your business, there’s nothing you can do about them. Likewise, while the industry you operate in can affect the multiple you receive, there’s little you can do to influence the dynamics of your sector as a whole. 

In this chapter, I explain the factors that can impact the value of your business but stop short of telling you what you can do about them. In the next chapter, I will walk you through many of these same factors and lay out specific actions you can take to enhance value, such as creating a strong management team or mitigating the effects of close personal relationships with key customers. But first, let’s examine the variables that can impact the value of your business, organized into the following major subjects: 

• Industry
• Competition
• Products and Services
• Customers
• Operations
• Staff
• Finance
• Legal
• Economic Factors
• Negotiating Skills
• Timing

The primary reason a buyer may be willing to pay a premium price for your business centers on their perception of risk and return.