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Generally businesses that operate in the same industry are sold with a multiple range akin to other similar sized businesses in that industry. This article will discuss some of the differentiating factors between the businesses that are sold for a lower multiple compared to those in their industry that sell for a higher multiple and how you can ensure your business receives the highest possible multiple for its size and industry.
Evidence of scalability
A scalable business is one that can maintain or improve profit margins whilst sales volumes increase, often through expanding into new markets or introducing products. Scalable businesses are priced at a premium as it offers the potential for significantly higher revenues and profits in the future. A business can demonstrate a level of scalability through entering new markets, or successfully introducing new products to existing customers. Scalability can also be derived from a strong brand name, exclusive licensing and intellectual property. Given the value of scalability, prior to selling a company it is crucial to address these areas and other areas that may be of value to a potential acquirer looking to scale your business.
Gross profit margin and margin trends
Gross profit margin is one of many financial metrics used to measure a company’s financial health. A stable and ideally growing gross profit margin demonstrates a company is becoming more efficient, may be facing reduced competition and has more money to spend on operating expenses and other areas that can improve the business. The benefits of a growing gross profit margin makes a business more attractive to prospective buyers and means that buyers will likely pay more for that business than a similar business with stable or declining gross profit margins.
Predictability of cash flows
Predictable cash flows with minimal variation over a number of years can significantly boost the value of a business. Predictable cash flows demonstrate loyal customers, relatively inelastic demand, and give a perception of reduced risk. This perception of reduced risk and regular cash flow also increases the ability to take out loans and expand. These factors combine to attract both more strategic buyers and also financial buyers who can use consistent cash flows to leverage the business, meaning they will likely pay more for your business than they would for similar businesses with poor cash flow.
Efficient use of assets
If two companies produce the same amount of profit in one year (e.g $4m), but company A has $3m in assets but company B has $2m in assets, company B has a far greater return on assets than company A and is most likely a better business. If company A continues to invest in assets to grow the business it is likely not to have as significant return as company B, as the assets are not used as efficiently to generate profit.
When selling a company, it is important to analyse which assets provide the greatest amount of value, and consider divesting inefficient assets, or implementing strategies to increase underutilised assets value and efficiency.
There are countless ways to ensure your company receives a high multiple when being sold. Early preparation can ensure these strategies are implemented early enough to ensure you receive the highest value for your company sale.