Below are 5 key value drivers that must be discussed as early as possible in the process so that all parties are on the same page:
One of the most important value drivers to discuss is your customer. An understanding of how a business makes money and who its customers are is essential for any potential buyer and deal negotiation. Too often, I see write-ups or pitch books of a business that do not explain how the business makes money. You must be able to answer that question; you have to succinctly be able to tell someone how the company makes money.
You also have to be able to speak to how you acquire customers. What is the profile and size of your customer base? How do you engage with them? Having a more organized CRM and legitimate salesforce, while not necessary for a successful deal, can help demonstrate to an interested buyer that you are working with regular, sustainable customers.
Last, but not least, you also have to be able to speak to how you lose customers. If your customers are able to abandon your business overnight with little to no switching costs, it will be a red flag for many buyers. If you have customers that can leave next week without pain and heartburn, that’s not a good thing. While it is not an insurmountable challenge, the deeper entrenched your business is in the customer’s life and business, the better.
2. Industry & End Markets
In addition to your customers, it is imperative to be able to comment on the size of addressable market. There is no need for detailed reports, but you must have a sense of the number of potential customers and trends in that space. Is your industry growing or shrinking? Is there heavy regulation? These types of extra-company factors can make realizing a successful investment difficult for most business buyers.
We already discussed the addressable market and your customers, but now it is time to consider your suppliers. The two questions you need to address are:
Are their any supplier concentrations? If your business is being influenced by your supplier because of their consolidation or control of the market, that is not a deal killer, but it is something that must be disclosed to the potential buyer as soon as possible. It is important to understand the costs and risks of switching suppliers.
Can a supplier go straight to your customer? If that is the case, it makes investors very nervous. Most sophisticated investors want to see a fundamental, tangible reason why your business exists. If you are relying on opportunistic inefficiencies, there is a great deal of risk that your business will be squeezed out by larger competitors or those with vertical integration capabilities. You need to demonstrate that your firm will be around for a long time because it is addressing a clear need.
As the interested investor gets the lay of the land, he will also need to know about the level and type of competition surrounding your company. You will need to effectively be able to address the presence of any competitors and how you differ from them. What are the variables? Price? Service? Location?
if there is no competition, then you still need to explain why the customer is buying from you. Are they buying from your firm because of the salesperson? Or because of the right price? It may sound like a silly question, but it is fundamental to why a company exists. The more and better you can answer the question, the more value you can demonstrate in your business.
5. Management & Financials
Only after understanding the full ecosystem in which you company exists will the investor begin to look into the company itself. Understanding the key stakeholders and management of the business is absolutely crucial to a successful deal.
Many potential buyers will spend a great deal of their time getting to know the sellers and making sure there is a fit. The transition of a business from seller to buyer is very critical and the two parties must be able to work closely together and have a level of trust between the two parties. Without developing a level of trust the deal could fall apart quickly.
When it comes to financials, the numbers will be what they will be. At this stage of the process, the investor is probably most interested in seeing how organized your business is. The numbers need to be reliable. We don’t want to be in a situation where we’ve made a deal, then did some diligence only to discover that we were misled. In those situations we have to break the deal, which is disappointing for everyone involved. The more confident we feel in your ability to track numbers, the more confident we will feel about the deal. However, don’t worry about too many add-backs or no CFO — just be systematic with the process.