The Interrelationship between Business Value and Business Marketability

In previous blog articles, we have written extensively about many of the drivers that impact the value of a private business when it is sold to a third party.  Business owners that enter into direct negotiations with a potential buyer based on an attractive, but very preliminary offer, often find out that their business is not ready for a sale.  The earnings, sales, growth, products, markets, and facilities may be attractive, but there are underlying issues that are uncovered during the buyer’s due diligence process that sends them running or they attempt to “re-trade” the deal at a lower value.

Marketability drivers are aspects of the business that don’t necessarily add value but can dramatically improve the probability of closing a successful transaction.  They also increase the probability of receiving multiple offers when a well-run, competitive sale process is deployed, and therefore can indirectly enhance value. That is, more offers mean more choices, which equals a better negotiating position and possibly a higher enterprise value.

So, what are some of the drivers that impact marketability?

Outside audits and/or Quality of Earnings review
A business is much more marketable when it has clean financials without a host of “adjustments” or “add-backs” to normalize earnings.  Having at least a couple of years of audited statements can be important for some buyers and therefore increases its marketability, while reviewed statements are sufficient for others.  Audited statements will help ensure that the firm’s accounting practices are up to date and that the internal controls are up to industry standards.  In some cases, it may be advisable to hire an outside firm to conduct a “Quality of Earnings (QofE)” review. A QofE will help a buyer determine maintainable earnings by adjusting for one-time/non-recurring expenses and sales, owner-benefits, inter-company, and related shareholder transactions, etc.  Many buyers will require their own QofE to be completed during due diligence, however, if much of the work has been completed, it can make the business more marketable, the transaction process easier, and less likely to be derailed as items are uncovered.

Conflicts of Interest
Minimizing conflicts of interest in advance of a sale will help with its marketability, but business entrepreneurs often fail to recognize what might constitute a conflict of interest in the buyers’ mind.  Intercompany relationships are one area that should be reviewed and adjusted to market where necessary in advance of a sale.

Accounting and Enterprise Resource Planning (ERP)
It is critical buyers can understand the nuances of the business and how it operates.

An ERP system can offer several benefits to businesses, including improved efficiency, streamlined processes, better data management, and increased visibility on sales, customers, markets, etc. It can help management exercise more control over operations. It can also help organizations integrate and automate various business functions, such as finance, accounting, supply chain management, and human resources, leading to cost savings and improved decision-making.

A robust ERP program with up-to-date and professional accounting processes is essential in ensuring that the business is marketable. Some buyers will just walk if they can’t get the answers, they think are essential.

HR Practices
A company that utilizes best practices in HR across the organization is more marketable than a business that has limited capabilities in managing a growing workforce.  Best practices in recruiting, onboarding, training, development, compensation, performance management, cross-training, etc., with opportunities for promotions and personal development lead to high retention rates and a high intrinsic value of the business.
 
Processes/Systems/SOPs/Third-Party Certifications
Every industry has a litany of processes, internal and external audits, certifications, etc. that seem at times to add little value to the business but may be a necessary evil.  Many of these, however, give buyers an elevated level of assurance that the business is being operated professionally, and therefore many of these processes can increase a business's marketability.

Leadership, Succession, and Transition Plans
The leadership and management of a business are critically important to a buyer, however, providing more insight to a buyer on the business's succession plan at multiple levels within the organization helps build confidence in its long-term sustainability.

Environmental, Social, and Governance Factors
Businesses focused on reducing their carbon footprint, improving waste management practices, and resource usage are more marketable than those that make every attempt to skirt the rules and save costs. Likewise, a company's impact on society, including its labour practices, community engagement, and relationships with stakeholders is important to many buyers.

In recent years, ESG factors have become increasingly important to investors as they seek to invest in companies that align with their values and promote sustainable growth. Many investors believe that companies that prioritize ESG factors are more likely to achieve long-term success and generate positive returns.

A Written Strategic Business Plan
Buyers want to know where the business is headed and how the management team plans on getting it there.  Too many lower-middle market businesses rely on an unorganized, unwritten, let’s “see what we can do” type business plan, that works fine until you need to scale and need investment (either externally funded or funded from internal cash flows).  Taking key team members off-site for a couple of days of “deep strategic thinking and planning” and formalizing the outcome into a written business plan with key stakeholder buy-in, helps more potential buyers see the opportunity and therefore increase the marketability of the business.

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