Expertise Beyond the Numbers

To Boost Business Value, Be Ready for the Curveball

Authored by Matthew Roberson 

At deal time, reap the rewards of a resilient business

A predictable business is a valuable business. Owners take comfort when they can be confident in a company’s revenue forecasts, and the high-performing team expected to deliver on them.

Acquirers of companies feel the same way, but they aren’t blind to the potential reality of unpleasant surprises, even in the most stable of industries. With Covid-19 fresh in their minds, buyers will come to the table with sharp questions about the many what-ifs that can befall your business. And they will be expecting answers. Companies that roll with the punches – and have a compelling story of how they do it – will be more highly sought after and command stronger valuations.

Smart business owners are already writing that story. They identify risks and take steps to minimize their impact. They may lock in key suppliers and customers to long-term contracts, offer attractive incentives to key employees to keep them from leaving and fill their pipeline of future business.

But no matter how thoroughly an owner prepares, life often throws a curveball. The Covid-19 pandemic is a prime example. Every company had to figure out how to keep going amid severe restrictions on mobility and face-to-face interaction, making the pandemic a litmus test for how resilient companies really are. It is a test with real-world implications (thrive, survive, or nosedive), and market transaction and valuation data is showing that buyers reward resilient companies.

Another curveball that can be one of the biggest blows to any enterprise is the untimely death of an owner. It is why so many experts stress the importance of a succession plan, and why buyers spend significant time assessing depth of management in a transaction.

A good succession plan considers the fate of any assets and safeguards heirs, but it also ensures a business can carry on and avoid an unnecessary fire sale. That means identifying and nurturing potential leaders, essentially creating a depth chart for your company. The players you identify and incentivize will be prepared to bring stability to your company, regardless of whether the owner is active in the business.

A third curveball that can be a systemic shock to a company is the loss of a major customer, whether because it switches vendors or suffers a financial collapse. The concentration of revenue in a single or a handful of customers represents a significant risk to the stability of a company, and buyers will significantly discount valuation or pass on an acquisition if the concentration is too high.

Companies should also consider the sectors they are selling into and assess whether sector diversification is warranted in addition to customer diversification. For example, while the Covid-19 pandemic stifled some industries, others remained busy, especially essential sectors such as food, defense, and health care.

The tough reality is that building resilience in your company requires constant effort.  The good news is that it is never too late to start. Success, though, hinges on taking action today. Tomorrow may be too late.

You may not see the curveball coming, and you can’t always control what will come across your plate next. But you can anticipate that you will receive questions from buyers about how your company handled the last unexpected event, and how you’ve prepared your company to survive the next one. The better prepared you are to answer this question (thoughtfully and convincingly!), the more value you create for your business.