Do you want to find ways to ensure your pet company is more valuable 12, 24, or 36 months from now then it is today? This is done through “Value Drivers” that increase the transferable value a buyer will eventually pay for your company. Generally, these value drivers increase cash flow both during and after the original owner’s tenure.
Determining how to increase transferable value is the owner’s job. But once owners and their advisors determine which of the value drivers (listed below) must be strengthened, everyone in the company should be involved. Owners cannot do it alone. If they could, by definition they wouldn’t be creating transferable value because once they departed, the value drivers would disappear. Based on my years of experience as a pet company M&A advisor, these top five drivers will give you the most bang for your buck with respect to increasing the value of your company:
- Stable, motivated, strong management team who is willing to stay on after an acquisition
- Sustainable revenue, resistant to “commoditization” through unique products or IP.
- A competitive advantage.
- A documented and proven growth strategy.
- A solid, diversified customer base.
A brief word about each:
- A stable, motivated management team that stays after owner leaves. If you plan to take any exit path other than liquidation, capable management is indispensable. Having the “best in class” management is the surest way to become a “best in class” company.
- A solid, diversified customer base. Buyers typically look for a customer base in which no single client accounts for more than 10-15 percent of total sales. A diversified customer base helps insulate a company from the loss of any single customer.
- Sustainable revenue. Buyers look for revenue streams that continue despite fluctuations in the economy. They also prefer those that are resistant to “commoditization”, which can be avoided if your company has strong patents or other forms of IP.
- A Competitive Advantage. To paraphrase Michael Porter of Harvard University’s Business School, competitive advantage is the product or service that a company offers–either better or more cheaply–over time than does its competitors. Your company’s competitive advantage is the reason your customers buy from you instead of from your competitors.
- A documented and proven growth strategy. In my experience as an investment banker, the first thing buyers want to know about a potential acquisition are the specific ideas/plans the company has on how to significantly grow the business over the coming years. Valuation multiples in the pet industry are still quite high, but those multiples cannot be achieved if the seller does not have a solid, defendable growth strategy that includes innovative, unique products or services in the pipeline. Even if you expect to retire tomorrow, it makes sense to have a written plan describing future growth and how that growth will be achieved based on industry dynamics, increased demand for the company’s products, new product lines, market plans, growth through acquisition, and expansion through augmenting territory, product lines, manufacturing capacity, etc. It is this detailed growth plan, properly communicated, that helps to attract buyers. Buyers will give credence to your current growth plan if previous plans have attained their goals.
Creating the plan to increase transferable value in your company is your job. No one else cares nearly as much and no one else will reap as great a reward. Executing the strategy to increase value, however, is everyone’s job. If you don’t already have top managers and skilled advisors ready and willing to provide ideas and implement value drivers, I suggest that you recruit them immediately.
Remember that this list contains only the top “generic” value drivers. There are many others that carry a great deal of weight, depending on what your company does. Your best course of action is to hire a professional advisor or CFO that can help you execute a plan to attain your maximum valuation.
Carol Frank of Boulder, CO, is the founder of four companies in the pet industry and a Managing Director with BirdsEye Advisory Group, where she advises pet companies in M&A transactions and Exit Planning. She is a former CPA, has an MBA, is a Certified Mergers and Acquisitions Advisory (CM&AA) and holds Series 79 and 63 licenses. She highly values and incentivizes referrals and can be reached at cfrank@birdseyeadvisory.com.