You plan to sell your business to get that big pot of gold that will allow you to retire at sunset. In your mind, that’s a great exit strategy. Now the big question is: will your business attract buyers?
When positioning your business for sale, don’t make the mistake of focusing solely on your financials. Sure, profit is important, but focusing on EBITDA (earnings before interest, taxes, depreciation, and amortization) and industry multiples isn’t always a winning strategy. Your off-balance sheet assets also matter.
According to Ocean Tomo 2021 Intangible Assets Data, 90% of the value of S&P 500 companies is made up of intangible assets. This trend has nearly tripled over the past 35 years as our economy shifted from manufacturing to service industry. This statistic also applies to private companies, not just large public companies.
Every business has intangible assets
Intangible assets are not physical and do not appear on your balance sheet. They can include intellectual property, such as patents, trademarks and copyrights. Or your company’s brand recognition. Of course, not all companies own intellectual property or brand recognition, but all companies own intangible assets that offer great value.
The three main intangible assets that generate value are:
1. Human capital. The quality and depth of your teams of employees are key drivers of your company’s value. This includes leaders who have a vision for growth and the skills to execute your strategic plan. Employees whose skills, certifications, and experience exceed those of your competitors also add tremendous value. The same goes for a positive company culture that creates high employee retention.
When assessing the value of your team, an investor will want to understand your strategy for identifying and attracting new talent, your ongoing employee development plan, and how you retain them.
Employees are so critical to a company’s success that there are “acquisition-hire” deals in which a buyer is primarily motivated to buy a company for its talent rather than its product. This employee acquisition strategy has dominated the tech industry; as our labor market continues to tighten, this motivation has spread to other sectors.
A valuable organization has the right people in the right place at the right time, with the right skills at the right price!
2. Customers. A well-diversified customer base, with a high retention rate that provides recurring revenue, will always be the gold standard of value generators.
Maintaining customer diversification is often the Achilles heel of private business growth. While it’s always fun to go after a client’s big whale, most investors will call a business “too risky” if more than 15% of revenue comes from a single client.
High customer retention rates are the result of impeccable customer service protocols, and every investor will analyze your data as part of their evaluation process.
Keep in mind that not all client income is equal in the eyes of an investor. A business model that generates recurring revenue through auto-renewing subscriptions, service contracts, or firm contracts will always be more attractive to investors than transactional or project-based revenue.
3. Suppliers. A strong and reliable supply chain is essential to the success of any business. Investors will dive deep into your supply chain strategy and management to confirm that it protects the flow of information, resources, and materials your business needs to produce its products or services.
As we’ve seen during the pandemic, healthy supplier relationships that avoid disruption can represent millions of dollars in value. Your business really is only as good as your supply chain.
Suppliers are your allies and can be the secret sauce that maintains your competitive edge if you take care of them. For example, if your company has an exclusive agreement with a supplier, you will most likely have better prices and delivery times than your competitors, which will make your company more attractive to investors.
The bottom line
These three main intangible assets (human capital, customers and suppliers) are interdependent. Strong supplier management, developed and managed by high-level employees, supports customer expansion and retention. You can boost the value and market value of your business tremendously by focusing on these three intangible assets.
Be strategic and develop your intangible assets; document and defend them. They are counting.