After investing significant effort into growing a business, ensuring value is maximised ahead of any potential sale is imperative.
Considering this, here are 10 key value drivers that influence earnings and multiples that offers are based on, enabling business owners to increase their chances of achieving a premium valuation.
Quality and retention of earnings
Buyers value secure and predictable earnings. Revenue streams that are recurring, particularly those that are regulated or non-discretionary, hold significant value for both strategic and private equity buyers. They instil confidence in the sustainability of earnings and serve as a robust foundation for future growth. Whenever possible, management teams should focus on generating revenue with these traits. Once secured, ensure that it is maintained as buyers will also be evaluating retention rates.
Differentiation
In a crowded market, differentiation is essential. Establishing a unique value proposition through products or services distinguishes a business from its competition, allowing premium pricing to be commanded and better profit margins to be achieved. This differentiation can create a ‘competitive moat’ around a business’ earnings, making it harder for rivals to compete. The key is to be able to clearly articulate what makes your business standout in the market.
The markets in which you operate
It’s important that management teams thoroughly analyse the markets the business currently operates in and those it is considering entering. Buyers want to see that a business is pursuing a substantial market opportunity which is growing at a strong rate year-on-year growth, underpinning organic growth. A comprehensive understanding of a business’ competitive landscape can also reassure a buyer that the business can maintain its competitive advantage and continue to grow.
Tech adoption
Adopting technology and enhancing internal systems is crucial to staying ahead in a competitive and rapidly evolving marketplace. A genuinely tech-enabled, automated offering allows businesses to optimise operations, improving gross margins and providing essential scalability to capitalise on future growth opportunities.
Data
Data is essential in informing both the business strategy and the sales process. Recognising the key metrics that matter, and being able to identify and analyse relevant data, will give businesses the context needed to double down on their chosen strategies or adjust it, as necessary. The KPIs monitored should align not only with a business’ growth objectives but also with what constitutes ‘market leading’ from a buyer’s perspective – as they will be benchmarking a business against its peers in the sales process. In addition, in the current market, buyers have become increasingly data-hungry – having the information they desire at the ready will facilitate a smoother process.
M&A
Being recognised as a potential M&A platform can add significant value. In addition to accelerating growth, acquiring complementary businesses can rapidly enhance a business’ offerings and market presence to capitalise on market opportunities. Businesses will also achieve multiple arbitrage where purchasing businesses at lower multiples than what they will ultimately be valued at. Positioning a business as a buy-and-build platform is likely to increase the multiple that private equity firms are willing to pay, particularly given their current emphasis on M&A-driven growth – just over 60% of all PE investments in 2024 were bolt-ons for existing portfolios.
Depth of management team and succession planning
Private equity as an industry has a huge amount of undeployed capital, but a dearth of high calibre businesses and management teams to invest it into. Mid-market private equity firms are backing management teams, relying on their industry expertise and operational knowledge to implement a 3-5-year plan. The absence of a team to lead a buyout jeopardises private equity as an exit strategy, and with it a population of hungry investors willing to pay premium values for the best assets. It’s essential for a business to have a strong management team to lead it under private equity ownership.
Preparation
In today’s deals market, processes are increasingly vulnerable to disruption. Dedicating time for thorough preparation can significantly reduce this risk by proactively pinpointing and addressing potential areas of weakness. It is advisable to consider engaging vendors for due diligence – bothfinancial and possibly commercial – before the process begins. This approach allows businesses to maintain control and present buyers with a single, consistent narrative to evaluate the business and meet their internal requirements.
Engaging buyers
Identifying and approaching the right buyers in the right time and in the right way is crucial. Premarketing ahead of the process is used to facilitate their understanding of a business and the opportunity, and allows business owners to learn about their buyer’s priorities and internal acquisition processes, which will then help underpin the formal sales process itself. But above all, it will enable you to start evaluating whether they are a suitable cultural fit for a business as its future custodians.
Creating competitive tension
Competitive tension serves as a key value driver within a transaction process. It results from careful preparation, effective buyer identification and engagement, and strong trading performance while in the market. Multiple parties vying against each other will allow a business to capture buyer’s synergies (in the case of trade) and maximise cash out and ongoing equity (in the case of private equity), which a buyer or investor might otherwise wish to retain for themselves. Competition also drives momentum throughout the process, accelerating the completion timeline.
And a bonus number 11
Selecting the right advisor
The selection of an appropriate advisor is essential. Ensure you appoint an advisor who is familiar with the main buyer audience for the business and has access to the key decision-makers within those organisations. They should understand the metrics that influenced valuations in similar processes and how to position the business to buyers. Furthermore, they should possess the experience and skills needed to design and adapt the sales process as needed, ensuring that no potential value is left on the table. Chemistry is also critical – processes are hard and can be stressful – it is essential that business owners choose an advisor that they feel they can work, trust and can speak openly with.