Is Your Firm an All-Star Performer? Strong Fundamentals Drive its Market Value

Like some of you, I curled up on my comfortable chair this past weekend and watched the best that the NBA had to offer. Every player on the court during Sunday night’s All-Star Game worked extremely hard to advance to the top of their profession. Yes, all of these players are gifted athletes who can do amazing things with a basketball. Some are blessed with the height gene. Others like Chris Paul practiced countless hours to master the fundamentals of their trade and positioned themselves to be ready when their time came.

If you’re a business owner, is your firm an "all-star?" Are you going to be positioned to achieve the maximize price when it comes time for you to sell? Like the stars of the NBA, strong fundamentals and preparation will drive business value. Here are the star qualities that buyers look for:

Positive top line and bottom line trends

Buyers place a higher value on companies that demonstrate a consistent track record of annual revenue and net income growth. Twenty percent growth is optimal.

Sustainable levels of profitability

An average efficiently-run ARM business should be able to demonstrate a sustainable bottom-line operating income of at least 20% of revenue. Of course most privately held businesses will have to “normalize” their bottom line to account for any one-time and extraordinary operating expenses.

Diversified client base

Ideally, buyers prefer to acquire businesses with a diverse client base, so no client makes up more than 15 percent to 20 percent of revenues. Too much concentration in too few clients is generally perceived negatively. Of course exceptions exist, including the US Department of Education, some large issuers, and state government contracts. Knowledgeable buyers understand that higher levels of concentration risk could exist in certain market segments, but this risk could be reduced due to segmentation.

Management strength

Buyers seek comfort that after the owner cashes out, qualified senior-level management is in place to run the business and service the clients. An experienced buyer will try to incorporate more structure to a deal if they perceive that the owner is integral to the business.

A financial house that is in order

Reviewed or audited financial statements by a reputable CPA firm give a buyer a great deal of comfort in the financial integrity of the selling business. Also, prepare a current year budget and 2-3 year projection (no hockey sticks!) with a solid growth plan that management supports.

All of us can shoot a basketball, but it takes skill and dedication to make it to the NBA All-Star Game. As a business owner, with preparation and commitment, you can reach the top of your game when it comes time to for you to sell.