In my experience, the number one objective of any business owner looking to exit is to achieve the highest possible sale price.  It stands to reason, then, that all of you business owners out there would like to know the secret to maximising value.  This little secret applies to all businesses, from the corner store to the largest public company.  It is the one undeniable reason behind the relative success or failure of any M&A transaction.

 

Okay, here it is…

 

The number one secret to maximum business value is…

 

[drum roll]

 

Risk.

 

That’s all there is to it.  A business’ risk profile has an inverse correlation with its value.  What I mean by that is if a business’ risk profile is high, it’s value is low in comparison with similar firms.  Likewise, if a business demonstrates a low risk profile, the value placed on it by potential buyers is significantly higher.

 

As a discipline, risk assessment is fundamental to the analysis of value of any class of asset, be it businesses, real estate, equities, commodities, etc.  Investors seek out returns commensurate with the amount of risk they are prepared to take to achieve those returns.  Similarly, buyers of businesses assess the inherent risk in the acquisition in order to determine how much they are prepared to pay for it.

 

Let’s have a look at a quick example to demonstrate the power of the risk profile:

 

Assume recruitment Firm A is on the market and is typical of its ilk:  established for 10 years or so, $5 million in revenue and a historically sustainable EBITDA return of $500,000.  The firm’s owner generates 50% of sales revenue, gross profit margin sits at around 15% and the majority of net margin is generated by permanent placement fees.  Most of the relationships with clients are uncontracted and based heavily on the personal involvement of the owner.

 

Recruitment Firm B also has a long history and generates $5 million in revenue and an EBITDA return of $500,000.  However, Firm B’s owner moved out of front line involvement 2 years ago and instead focuses on financial management and that of the team.  Client relationships are covered by PSAs or individual contracts and the majority of the business’ net margin comes from on-hired labour.

 

Rather simplistic, I know, but it demonstrates the point.  Firm A has a significantly higher risk profile than that of Firm B, due to the inherent risk to the business’ fortunes should the current owner leave.  If the market is paying 2.5 to 4 times EBITDA for acquisitions, Firm A would be towards the bottom end of the range and might be worth $1.25m, whilst Firm B might be towards the upper end and worth closer to $2m.  That is up to $750k in additional exit return for the owner who has put in place some basic risk mitigation strategies and processes for essentially the same business.

 

Granted there are a more risk factors to consider in addition to principal-dependence, income sources and the nature of client relationships, but you get the idea.  If you can lower your business’ risk profile, it should be worth considerably more come sale time.  And the investment of time and resources required to achieve this should be negligible.

 

Risk minimisation is the cornerstone of exit planning, so make sure you take the time to understand the risks, put in place strategies to mitigate them and build considerable value in the process.  The last thing you want is to have a business that holds little appeal for buyers or perhaps even worse, you can only sell through a medium-term earn-out deal.

 

Andrew Cassin is an Exit Advisor and Business Broker licensed in Queensland, New South Wales and Victoria. His company, Acquisiti is premium business brokerage and advisory firm, providing services aimed at maximising the exit result for its clients. Andrew holds a Bachelor of Business and has pursued post-graduate studies in financial services, corporate governance, mergers & acquisitions, and change management. For more information contact Andrew via email at enquiry@acquisiti.com