22 · S A N TA C L A R I TA VA L L E Y B U S I N E S S J O U R N A L
A P R I L 2022
What’s the Value of Your Business? BY PAUL RAGGIO
SCVBJ Contributing Writer
I
sat through several meetings as the interested buyer with owners wanting to sell their companies to my corporation. I was a business unit president, and one of my growth strategies was to acquire companies that could shore up a gap in our core competencies, open new or expand upon current markets, or capture more market share in our existing market. The concept is relatively simple to understand. However, the process of closing a deal is arduous. The difficulty centers on determining the value of the seller’s company and the buyer’s risk sensitivity in achieving their return on investment. Over time I came to realize owners often overvalue their companies. I certainly understand why. They put a lot of sweat equity into their business, and they have a loyal customer base and sellable products or services. They spent years building their businesses, have pride in what they’ve grown, and are emotionally attached to the organization and its people. A buyer’s interest, though, is minimizing risk and maximizing return. With a high degree of confidence, they want to know how long it will take for them to earn back the money they invest and what the future return will bring. Imagine buying a used car. The outside looks beautiful. No dents and scratches appear, and it has a remarkable, dazzling sheen. The prudent, prospective buyer will always check under the hood and assess how well the car runs and many more lifetime miles. The more faultless, the higher the value. The same is valid for acquiring a business. A prudent, prospective buyer will want to check under your company’s hood and assess how well the business is running and for how long, and the growth potential. Like the used car, the more pristine the business, the higher the value.
Of course, the first thing a buyer will check is the company’s financial health. How much money is the business earning, what are its capital investments, what debt does it has, and how does cash flow through the company. A lack of fitness in any one of these areas may pop up as a red flag that, and until resolved, discounts the company’s value and diminishes a buyer’s interest. There are several other factors buyers evaluate that are often overlooked by sellers. • How much life does the company’s core product or service have in the marketplace, and can it retain and grow its market share? •
How dependent is and managed effectively, and are qualified and experienced leaders and managers in place, and for how long?
I’ve written in the past for a company to be successful, it must be sustainable, predictable, stable, consistent, and emotionally connected. To sustain its success, it must master five disciplines: strategy, mission, business development, people, and execution. Responses to anticipated buyer questions may expose vulnerabilities in the company and provide the focus for future goal development in one or more of the five disciplines. A constant, sys-
tematic, and disciplined improvement mindset creates value in the company. Determining your company’s value must be a vital task and starts the planning cycle for the subsequent year’s business and multi-year strategic plans. As an owner, you retain the most leverage in negotiating any mergers or acquisitions with other interested parties when you understand your company’s value. This understanding relies on your ability to articulate responses to a buyer’s questions about what’s under your company’s hood and how confident they are of your answers. In any merger or acquisition proposition, the seller wants to maximize their company’s value, and the buyer wants to minimize their risk and maximize their return. Sellers who use a very deliberate and thorough valuation process, then work on under-the-hood areas that need improvement will maximize their value and be able to negotiate very favorable terms whether being merged with or acquired by another entity. This is how you lead, think, plan, and act. Now, let’s get after it! Retired Col. Paul A. Raggio is co-owner, with his sister Lisa, of One True North INC Leadership and Business Coaching Solutions. For more information, visit onetruenorthcoach.com.
