Challenges, problems, and triumphs
-- from a manufacturer's perspective.
Beyond Market Multiples: Increasing the Value
of Your Company Before the Sale
How to create a company with greater appeal to
by Kenneth H. Marks (Mar.7, 2011)
(Note: Kenneth H. Marks is the founder
and a Managing Partner of High Rock Partners, providing
growth-transition leadership, advisory and investment. He is the
lead author of the Handbook of Financing Growth published by
John Wiley & Sons
Great news! After a long drought of M and A
activity, the market for private companies is showing signs of life
and recovery. If you own, operate, or advise a middle-market company
($5 million to $500 million in revenue), what does this mean for you
and your clients when thinking about shareholder liquidity or
selling the business? And how can you improve the odds of getting a
From a private equity perspective, the dollars invested in
middle-market companies more than doubled from 2009 to 2010.
Publicly traded strategic buyers like the S&P 500 companies have
historical levels of cash, and are seeking to deploy part of this
hoard to generate significant revenue through external growth
initiatives like acquisitions, which can provide access to new
customers, higher margin product lines, new technologies, and
entrepreneurial talent. The same concept applies to what private
equity refers to as tuck-in or bolt-on acquisitions for larger
existing portfolio companies.
While the number of transactions is increasing and appears to be
rebounding, the character of the market and deals is different from
that of the pre-great-recession vintage. In the period of 2004 to
early 2008, there was significantly less scrutiny in underwriting
and financing transactions. Today, the performance bar has been
raised high with a flight to quality. Transactions are being done
with only the very best industry players within a market; and these
companies are able to garner valuation multiples at nearly 2008
levels. However, the average and lower performing businesses will
likely find greatly depressed multiples, or worse, no interest from
buyers or investors at all.
Thus the quandary: what is the typical middle-market company to do
to create a partial or complete exit for its owners? Here is an
approach that has proven successful in increasing the value of a
company before the sale and enhancing the likelihood that a
transaction will occur:
1. Start the process by clarifying the objectives and desires
of the owners. The game plan for creating an exit needs to be
aligned with the ambitions of the shareholders. For example, are any
of the shareholders active in the business, and if so, do they want
to continue with the company? An important part of this step is to
align the expectations of the shareholders by gaining a realistic
understanding of the current value of the business based on the
reset-rules of the economy and the company’s recent performance.
2. Determine how the company really compares to the industry
in terms of financial performance (i.e. profit margins, sales growth
rates, productivity, etc.), competitive position, growth strategy,
customer base and concentration, and talent. In effect, conduct what
a buyer may call “strategic due diligence” on your business and
grade your performance.
3. Shore-up the fundamentals. Why sell your company and leave
untapped value for the buyer? Value that you can realize by making
some of the predictable improvements that a buyer will make, but do
it before you sell. Develop and implement initiatives to address
the gaps and weaknesses uncovered by the diligence mentioned above.
This step, by itself, can create a significant premium in value for
the average business. Keep in mind that making performance
improvements takes time it may take from a few months to over a year
to complete; so plan a head.
4. Think about your business from the buyer’s perspective.
Your company is an investment. What is the growth opportunity and
strategic value beyond today’s numbers? Even with your house
in-order and a strong foundation, what investments could be made by
management if more capital was made available to further increase
the value of your business? What actions can the business take to
validate this new investment opportunity and to reduce the
associated risk? Being prepared to answer these questions, having
pre-thought the outcome and taking steps to make it real, can allow
the shareholders to sell the business not just on the value of
today, but to capture and participate in the value creation moving
The overall objective in positioning for an eventual sale,
recapitalization, or ownership transition is to address the low
hanging fruit, in terms of operational performance and strategic
position, and shore-up the critical value drivers, fundamentally
making the business stronger. And, in the process identifying the
longer-term investment opportunities for the business, the break-out
strategies; and the initiatives that will allow for geometric
increase in value if the company has access to additional capital.
This then allows you to lead the sale process with a robust
investment opportunity beyond the foundation that exits today.
(Note: To contact him, email