Too often owners sell businesses ignoring the potential that might excite buyers.
Many businesses are unable to exploit the underlying strategic value in their operations or are simply unaware that such a value exists.
Most firms are focused on what they can do today, and spend their efforts on the parts of their business that are easiest to leverage in the short to near term.
Extra value that may be exploited from underlying assets or capabilities is left unrecognised or untapped. But this may be where the real capital gain on the sale of the business resides.
Acquirers are prepared to pay a premium on the purchase price where they can see assets or capabilities that can be leveraged through their own resources.
For example, they may be able to open up considerable potential for products in the business they are buying if it has products that complement their own. This can happen if they have a well-developed distribution channel, a large customer base or alliance partners that can utilise the products.
The test of strategic value is simple: Are we able to exploit the potential of this business in a relatively short period? The key to strategic value is in releasing the potential of the acquisition.
They may also see how existing products could be used by them to open up new markets or where underlying technologies could be combined with their own capabilities to develop new products for an existing market or to enter a new market.
Most businesses are valued on the basis of the profits they make from their current operations. This "fair market value" is usually defined as the value an independent investor would pay for the business, based on the flow of free cash expected to be generated by the business - that is, the value of continuing the business as usual.
The assumption is that the business will continue to be managed the same way and work in the same market. This is fine for businesses of limited potential, but seriously undervalues those that could be leveraged into larger markets by a stronger entity or that could benefit from better funding for growth.
Many privately owned businesses are limited by their access to internally generated funds or by the capabilities of their owners. Most are reluctant to seek external finance as this either puts them at greater risk or dilutes their ownership by having to give up equity.
Ascending to the next stage in the development of their business might mean investing in new technology, specialised staff, new plant and equipment or a professional sales force - all very scary to the owner that has a nice, tidy business that is generating a good income.
But the business itself may be more than capable of expansion by an injection of more-experienced management talent or by access to the money needed to enter a larger market.
Often there is a gold mine of intellectual property or intellectual capital in the form of patents, unique processes or specialised knowledge lying dormant in the business that is not reflected in the balance sheet or income statement.
The business might be sold in haste due to the ill-health of the owner or due to a serious downturn in revenue without these underlying assets ever being noticed.
In the rush to sell the business, the owners simply have not taken the time to evaluate the potential of untapped assets or capabilities. In the end the business is sold and the owners never reap its true value.
The key to unlocking strategic value lies in preparing the business for sale. Instead of rushing to market, the owner needs to take 18 months to two years getting the business ready.
During that time, the strategic value within the business is examined in light of how a buyer might exploit it, not how it is being used. The owner needs to answer the question: "Who can make more money out of this business than I can?"
Most strategic buyers work within the same industry as the seller and are often working with similar products, services or technologies. Often it is simply that the larger business can readily exploit the potential.
So slow down, take a real hard look at where the strategic value lies in your business and take time to prepare it for sale to a company that will pay you a premium for the opportunity to exploit it.
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