Business Strategy

How to maximize valuation before selling

This is a fantastic time to be selling your business. The market is seeing record multiples of revenue and EBITDA when private equity and venture capital firms value the worth of a company on the selling block. Companies that have proven recurring revenue streams are seeing enormous buyouts. Still, money is often being left on the negotiating table, and with credit so inexpensive to acquire, this can be avoided.

The typical formula

When venture capital and private equity firms are acquiring new companies to their portfolio, they often defer to a specific formula that has worked historically. A typical example of this is to fix accounting, replace the ERP system, and/or improve sales and marketing. By pouring money into these quick fixes, the VC/PE firms hope to maximize returns. Technology improvements are not often part of the formula because firms are not holding onto the business long enough to make this investment.  

How do you add value?

There is an opportunity in the post-transaction for EBITDA improvement through layering of tech improvements that don’t carry a heavy investment cost but return hard capital to the bottom line. A question many VC and PE Firms should consider is,  “What is the Day 1 readiness?”

This means that as companies try to sell for the highest valuation possible, they often haven’t maximized the impact that technology can have on the sale price of their business. Usually it is a result of two challenges: they either haven’t had the internal resources to analyze how different technology integrations/enhancements can directly impact the bottom line, or they haven’t had the resources to make the investment. With low interest driving multiples, it is critical to get this valuation correct for the seller to capitalize.

A new approach

Quality of earnings reports are done historically on the buy side, but we are seeing an increasing number of sell side investment in these reports. By encouraging sell side QoE reports that include EBITDA drivers relating to technology optimization, the seller can provide a roadmap to improved performance through integrations with ERP, maximizing transaction flow, and increasing efficiencies that directly impact the bottom line.

What is the growth story?

We can help a buyer or an investment bank tell their growth story. By specifically clarifying how to factor in software improvements, we can provide a clear path to increased profitability by small investments in technology that directly drive revenue and profit. The way that bankers sell companies is through the growth story, and the better the story, the higher the valuation. We can help build that section of the send so that the investment banker and the selling company can maximize the acquisition price.

Take advantage of opportunity

There is heavy traffic in the mergers and acquisitions space, and there is an opportunity for business owners to capitalize. Strategy matters when taking your company to market. Don’t miss out on maximizing the purchase price of your business because you didn’t do your due diligence on the front end. Want to know more about how technology can impact your EBITDA? Schedule a time to talk.

By Kevin Archer