The federal government, via Small Business Administration loan guarantees, makes it easier for bankers to say yes. Interest rates are very low, which lowers the cost of debt financing and raises the purchase price that can be amortized. Banks just need sensible deals, just as they always have. A sensible deal is one that cash flows with a reasonable cushion (the exact amount hinging on risk factors such as volatility of earnings) and also has a meaningful secondary source of repayment, i.e., collateral or a good personal guarantee.

Equity contributed by the buyer will reduce the amount that must be borrowed and thereby improve the cash flow, i.e., “bankability” of the deal. And when the sum of the equity contributed and debt that can be borrowed falls short of the purchase price, the only way to make it up is seller financing. Most deals include some seller financing. That’s just the way it is. Yes, and the bank will want the seller note and payments subordinated to the bank.

“Banks get a lot of flak as being unfriendly to business, unjustifiably in many cases, in my view,” says Brit Callahan, a private business owner. True, banks are not set up to take much risk. They earn a slim profit on each loan, and one bad loan can wipe out profit earned on hundreds. “Many people get confused between equity investors and commercial lending institutions,” Britt adds. “Equity investors are ‘partners’ of the owner as they are in the same position, as holders of equity. It’s referred to as risk capital because they take larger degrees of risk. They only get what’s left over after the liabilities and cost of the same have been paid. As compensation for their more risky position, they have the chance to earn returns far in excess of their lenders.”

Cash Flow Is King

“It’s extremely difficult to sell a business that is not making a profit,” says Blayne Frieden, dealmaker with Acquisition Advisors. “Buyers just aren’t very imaginative. They assume what the business is doing now (and in the recent past) is what the business will do in the future. So if your business is performing well, this works in your favor. Storm clouds may even be on the horizon, but you will likely be able to get a deal done based on current (recent) cash flow. But if your business is not profitable, it’s almost impossible to sell the potential,” Frieden continues. “Try and you’ll almost certainly waste time and energy, unless you’re willing to give it away.”

And so the rich get richer. Those with profitable companies today can sell for a bit of a premium. This is because buyers of all types — individual, industry and private equity — are “out there” in great quantity; they just want profitable firms. Those earning profits today have the opportunity to sell for nice valuations as a multiple of cash flow. Owners of unprofitable businesses are stuck until they succeed in establishing a track record of profit.

Buyer Types and Selling Prices

“Much is written about business purchase prices and multiples,” says David L. Perkins, Jr., also of Acquisition Advisors, “but it’s not that darn complex and it doesn’t fluctuate all too much over time.“ Businesses with less than $500,000 in annual earnings almost exclusively sell to individual buyers at multiples of EBITDA in the 2.5 to 4.5 range, depending on risk factors and rate of growth. Private-equity groups and corporate buyers (primarily peers and competitors) will begin to enter the picture as possible buyers as annual EBITDA exceeds $500,000 but don’t become real players until annual profits exceed $1,000,000. Purchase prices (for all the non-cash assets and the assumption of working liabilities of a business) are in the 4x to 5x range. Higher growth rates can command higher multiples, as can synergies with the buyer. When annual EBITDA exceeds $3 million, the industry, i.e., corporate and private-equity buyers, come out in full force. These are the deals that have been bid up of late because of the supply-demand imbalance. Multiples of 6x are now pretty common, and growth and synergies can raise prices further. Look at it this way: It’s a reward for being able to operate profitably during a very weak economy.

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It’s a fine time to sell a business. Nothing is holding you back except, well, the performance of your business. Many businesses, of course, are struggling because of the moribund economy. Unfortunately, business salability and sale price are a function of current and near-term profit performance. There’s just no getting around it. If your business is performing well and you really want to do something different, it’s a fine time to exit. And you can expect to be rewarded for your business operating profitably during these difficult economic times.

When a corporation buys common stock from its stockholders, the transaction is referred to as a “corporate stock redemption,” and the stock so acquired is called “treasury stock.”

Corporate stock redemptions are considered by company owners principally for the following reasons:

1. Peace: To silence a troublesome minority stockholder.
2. Obligation: For example, one of your executives is leaving the company and he or she has the legal right to require the company to buy the stock he or she purchased previously under a stock option plan.
3. Mandated Buyout: When a court of law orders the company to buy out a minority owner’s shares.
4. Investment. Management might cause the company to buy the stock from willing sellers because they think it will provide a fair return on investment and raise the value of the shares that remain.
5. Stay below the 500-shareholder threshold. Private firms that have 500 or more shareholders can be required to make public filings similar to public companies.

As principal owner of your business, you have to be concerned with any corporate stock redemption, for the following reasons:

• Many states restrict or prohibit the purchase of stock by the company from its stockholders, principally depending on the availability of cash and capital surplus within the company to effect the stock repurchase. Basically, you cannot “impair” the capital account and solvency of the business by repurchasing “equity” securities.
• Other stockholders may complain because of the effect on the corporation, particularly its balance sheet. The operating agreement of the company may also require that such a transaction be approved by some percentage of the shareholders.
• You may be accused of unfair dealing if you don’t offer all owners the right to sell their stock back to the company at the same time, price and terms.
• Your creditors may object since the stockholders’ equity account drops after a redemption. For this reason, most loan agreements prohibit or restrict a company’s repurchase of equity shares or interest.
• You may be sued by the selling stockholder if you know of certain facts that affect the value of the stock and these facts are unknown to the seller (material insider information) at the time of the stock repurchase.

Effect on the Company

Below is a description of the subject business owner’s analysis, with explanatory remarks. Note that this approach can be applied to companies with other forms of ownership, including S-corporations, partnerships and limited liability corporations (LLCs). Let’s start with the stockholders’ equity account, in which there are 100,000 shares of common stock outstanding.

Let’s also assume that total company debt is $1 million and that of the 100,000 shares outstanding, 20,000 shares are being acquired by the company (20 percent of the outstanding common stock). The agreed-on purchase price is $10 per share (two times the company’s $5 book value per share), which represents a $200,000 total purchase price. Based on these facts, here’s the result:

• Corporate cash declines by $200,000 (20,000 shares times $10).
• Stockholders’ equity decreases from $500,000 to $300,000 — a reduction of 40 percent.
• Leverage increases from 200 percent ($1 million total debt divided by $500,000 equity) to 333 percent ($1 million debt divided by $300,000 equity). This assumes that no additional capital was borrowed to finance the stock repurchase. If that were necessary, the debt-to-equity ratio would have risen even higher.

Effect on Remaining Owners

The remaining stockholders increase their ownership percentages. Since 20,000 shares are in treasury, a stockholder owning 10,000 of the remaining 80,000 shares will now own 12.5 percent of the corporation (10,000 shares divided by 80,000). Before the purchase, this stockholder owned 10 percent (10,000 shares divided by 100,000). The percentage ownership position of all stockholders will increase by 25 percent.

Book value per share declines from $5 to $3.75 – $300,000 pro forma (after repurchase) stockholders’ equity position divided by 80,000 shares. The pro forma decline in book value occurs because the buy-back price of $10 per share was double the previous book value per share of $5 ($500,000 stockholders’ equity divided by 100,000 shares). That’s why other minority stockholders may not be in favor of the transaction – unless they also are given the right to sell shares back to the company on the same terms.

Based on last year’s net income of $75,000, earnings per share would increase from $0.75 to $0.94 ($75,000 net income divided by 80,000 shares). But note that if debt is used to finance the stock purchase, pretax income (and net income) should be adjusted downward to reflect the resulting interest expense. Company cash is being used for nonproductive purposes. This may significantly impact the company’s future growth and its profitability and, as explained below, can negatively impact the company’s borrowing ability.

Finally, the tax basis of each share of stock owned by the remaining shareholders remains unchanged despite the fact that the value of each share has risen due to the lower number of shares outstanding. When the remaining shareholders sell their shares, as if the entire company were sold, the taxable gain will be greater than it would have been had the buyout of the 20 percent owner been effected by a direct purchase from the shareholders. Such a purchase would have required the shareholders to use personal funds to effect the purchase, but a step-up in the basis of the stock would have occurred and the tax owed in a subsequent sale would be less.

Effect on Company’s Value

Since $200,000 is purchasing 20 percent of this company, the value placed on the business is $1 million ($200,000 divided by .20). In terms of fundamental valuation methods, this $1 million value represents:

• A price-earnings multiple (P/E) of 13.3 times last year’s net income of $75,000.
• 2.0 times stockholders’ equity of $500,000 before the stock repurchase.
• 3.3 times stockholders’ equity of $300,000 after the stock repurchase.

This value analysis is presented to give you additional information to help you in deciding whether or not to effect the buyout. You also will have to determine the value of the company going forward. For example, if this company were projecting net income of $150,000 next year, the $1 million value would represent a P/E multiple of only 6.7. This alone could justify the stock repurchase, particularly if the company’s growth continues on course.

Access to Capital

The company redemption/purchase of common stock also has dramatic effects on the company’s creditors, who now have a lower stockholders’ equity account under their debt position, and a debt-to-equity ratio of 3.3 to 1 ($1 million debt divided by $300,000 stockholders’ equity). In addition, the company’s future borrowing capacity is substantially lower. Thus, if you are going to redeem any stock, be sure your overall cash position (today and projected) is more than adequate to finance growth and contractual debt repayments.

What If You, the Owner, Are the Seller?

If you are the owner and your common stock is being purchased by the company, read “Owner Stock Repurchase Tax Traps”. Proceeds of your sale could be taxed to you at ordinary income rates rather than capital gain rates unless you completely sever your relationship with the company. Also, for liability reasons, make sure that the:

• Stock redemption price is at fair market value as established by an independent appraiser.
• Shares are purchased by the company on an arm’s-length basis.
• Acquisition price and terms don’t discriminate against other stockholders.
• Tax impact of the sale/purchase on both you and the company has been reviewed by your accountant.

In any stock purchase by your company, get sound legal and tax advice before moving ahead. In addition, remember this important legal fact: You, as a director and officer of the company, have a fiduciary obligation to all of your minority stockholders, irrespective of the number of shares they own. So be very careful.

Example #1: If the company redeems or buys back part of a shareholder’s stock, the full amount paid (not just the profit) to the stockholder may be taxed as a dividend at ordinary income tax rates up to 38.6 percent, rather than at the capital gain rate of 20 percent.

Example #2: If you sell all of your stock back to the company – for example, if you wish to retire – you also must completely sever your relationship with the company for the next 10 years. Otherwise, the full proceeds may be taxed to you at ordinary income rates. That means you can’t be an officer, director, consultant or employee. It’s okay, though, to be a supplier or rent property to the company on an arm’s-length basis. You may also be able to be a creditor, under certain circumstances.

Again, be sure to consult your tax advisor before you make plans to buy back the stock of any shareholder. The rules are complex and the IRS filing requirements are detailed. More information can also be found in the Internal Revenue Code, Sections 302 and 303.

Real Estate. In three classic situations, real estate can bite you. First, location is critical, but you can’t convey it to the buyer at a price certain for a sufficiently long time into the future. Second, you are obligated to a long-term lease, but the buyer wants to relocate the business. Third, you own the facility occupied by the business, the buyer wishes to relocate it, and you’re not confident you could find another buyer or tenant.

Unresolved Litigation. Business buyers avoid acquisitions that include assumption of unquantifiable liabilities. Unresolved disputes, litigation and threatened litigation are unquantifiable liabilities. That is, they carry a cost — in both time and money — that’s difficult or impossible to estimate.

Environmental Liability. Business buyers test the ground and groundwater beneath any business they consider purchasing. If contamination is found, the deal is as dead as the tree your letter of intent is made from. If there’s any chance you could have an issue here, consider going ahead and investigating the facts now and remediating any problems.

Assignment of Contract. Anytime a landlord, lessor, franchisor, distributor or licensor must approve a sale or transfer of control, the deal is not entirely in the hands of the buyer and seller. The time to avoid or minimize the clauses is when the agreements that contain them are established, or at the very least, well in advance of an attempted business sale.

Title Issues. Whenever rights to an asset are critical to the ongoing revenue stream or profitability of a business, buyers want total assurance that after their contemplated purchase they will have use of the asset. In some cases, assurance of exclusive usage is required. To the extent that buyers can secure use of the important asset but at an inflated price, the business purchase price goes down commensurately.

Unlicensed Use of Copyrighted Works. If you’re using a software program or other intellectual property on an unauthorized basis, your buyer may not be willing to “risk it” as you have been doing. Most buyers — during the pre-purchase audit — identify all intellectual property used by the company and then investigate whether the company’s use is authorized. If unauthorized use is identified, most buyers want to figure out the total cost of “going legit.” Such may include penalties plus ongoing costs. If the expense can be pinned down pre-closing, the purchase price can be reduced dollar for dollar. If it cannot, you may have a problem.

Debt Prepayment Penalties and Re-Price Triggers. Typically, interest-bearing debt of the seller is paid off in full at closing (by the seller, using monies paid by the buyer). If said debt has a prepay penalty, it could put a dent in the seller’s sale economics. Conversely, if the seller enjoys debt financing that’s attractive to the buyer, so-called change-of-control covenants could spoil the party.

Double Taxation. Uncle Sam takes a healthy cut whenever a gain is realized, but few sellers pull back from the closing table because of the taxes, that is, except when the selling entity is a C-corporation. C-corporation sellers face double taxation when the buyer buys assets. Yes, the seller could require the buyer to purchase the stock instead, but it’s not that easy. Buyers pay less when they are forced to acquire C-corporation stock. There are a few strategies for reducing taxes in a C-corporation asset sales (see “Reducing Taxes in a C-Corp Sale,” May/June 2006 issue), but it’s an uphill battle. The best strategy is to convert to S-corporation status well in advance (eight or more years) of the anticipated sale date.

Minority Shareholders. If you don’t own 100% of your company, your deal could get held up. First, if the parties choose to effect the sale by purchase of stock, any minority shareholder could hold up the deal if you don’t have agreements in place that force them to accept terms agreed to by the controlling shareholders. This is because buyers almost always want to buy 100% of the outstanding stock. Second, minority owners can hold up asset sale transactions if a so-called super-majority provision exists in your governing documents.

When it comes to selling a business for maximum value, timing is everything. Start the process when the business’ performance is trending up, the economy is strong and buyers are aggressive. Get multiple buyers working and you’ve got it made — so long as you’ve cleared away the deal killers in advance.

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David L. Perkins, Jr. wrote this article. Kenneth F. Albright, a tax lawyer and transaction lawyer, partner at the firm of Albright, Rusher and Hardcastle, contributed his expertise.

“I know a handful of companies that would be really good buyers for this business. I could just call them, but for some reason that doesn’t feel right. Why?”

This business owner’s instincts are right, and he’s in the minority. A good many business owner-sellers make the mistake of handling the sale themselves. After all, “if you want a job done right, do it yourself,” right? But “For Sale by Business Owner” is not the way to garner maximum value. It’s not the way to maintain confidentiality. It’s not the way to get the deal done in a timely manner.

Pitching for your own benefit just does not work well. Why? I explained it to the Denver business owner like this:

Joe Wright would like to join Old Pine Country Club, the most prestigious in the region. Joe knows several members, so he calls them and expresses his interest. Each is a bit taken aback by his directness. No big deal, but when they learn that Joe called several of them, it becomes a bit of a joke among the members. And because Joe’s the subject of ridicule, nobody wants to sponsor Joe and nobody’s very excited about him becoming a member.

Kevin Best also wants to join Old Pine, and has friends who are members, but he instinctively knows the job is one best handled by a representative. It’s a bit like enticing a cat onto your lap. He knows the members will want him only if he doesn’t want it too badly, and he’s humble and appreciative. So Kevin doesn’t make calls and inquiries himself but rather figures out who might be the most willing and able to represent him. Then, when he happens to be around this person and the time is right, he expresses his high regard for the club and the quality of the membership. Inevitably, the member says, “Hey, Kevin, you should join.”

Now Kevin reacts with great humility and flattery, but he’s careful to temper his enthusiasm. He says, “If you would like to have me as a member, I would not object, but I doubt seriously that I meet the qualifications,” or something of that order.

Kevin’s sponsor now takes it upon himself to call various members and explain what a great guy Kevin is and what a great member he’d be. The sponsor makes it his personal mission to get Kevin in, and the members lend their support because of the sponsor’s efforts as much as anything. And because Kevin is not tooting his own horn, everyone trusts that what Kevin’s sponsor says about Kevin is true. In fact, because perception is reality, all those flattering things being said about Kevin ARE true.

Kevin’s application is well received, he gets in, and it’s an easy and enjoyable process for him. All he has to do is smile and be gracious. Joe Wright? Unfortunately, he’s still making calls, schmoozing, and word’s all over town that he wants to get into Old Pine, but nobody wants him.

Buyers simply do not trust sellers who peddle their own business. They innately think something must be wrong. But when a skilled representative calls and talks to buyers and explains why such and such business is a great investment opportunity, and that Mr. Seller is a great guy, buyers listen and the seller can stick to what he should: running the business and being a “nice guy.”

Selling a business is like applying to join a country club. Nobody wants to pad the pockets of a person who toots his own horn.

How can you find out whether you have the legal right to “drag along” minority shareholders in a stock sale transaction? If the selling entity is a corporation, such a provision could reside in Articles of Incorporation (aka Certificate of Incorporation), bylaws or shareholders agreement (if one exists). If the selling entity is an LLC, check out both the articles of organization and the operating agreement.

True, most private-company purchases are effected by asset purchase, but some are effected by stock purchase. For example, in case of a C-corporation seller, the shareholders may attempt to dictate that the sale be completed by stock purchase to reduce the tax burden. Also, title² transfer and contract assignment problems can often be alleviated by effecting the sale by stock purchase. Finally, public companies may at times prefer a stock purchase to minimize future depreciation expense (and maximize reported earnings).

What can you do if you’re the majority shareholder and you aren’t protected by “drag along” provisions? First:

1. Buy out your minority shareholders now.
2. Obtain, today, an option to buy the minority shares in the future at a price that’s economical for you and fair for them.
3. Get them to agree to “drag along” provisions (they may ask for “tag along” provisions in return, but that’s probably okay).
4. Remove any elements that dictate purchase/sale by stock.

Second, minority owners can hold up asset sale transactions if a so-called super-majority provision exists in your governing documents. In most states, a simple majority of the outstanding shares is all that is required for the shareholders of a company to approve a sale of all, or substantially all, of the assets, but that can be changed (usually only a higher approval percentage can be required) in the governing documents. If your governing documents do not stipulate a higher threshold, you’re clear. But if yours stipulate, for example, that a 75% vote is necessary, then you could have a problem if the consenting shareholders own less than that.

Where can super-majority provisions exist? The same places as “drag along” provisions. If the selling entity is a corporation, look in the Articles of Incorporation (aka Certificate of Incorporation), bylaws or any shareholders agreement. If the selling entity’s an LLC, look in the articles of organization or the operating agreement.

The best time to avoid minority shareholder problems when selling your business is when you sell or issue shares in the first place or invest in and/or buy the company. This is when you have leverage. Options are often few when the deal is negotiated and you need the approval of minority shareholders. The power shifts to the minorities and often the only thing that will loosen the logjam is money. Your money.

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Armand Paliotta, a business law and transaction law partner with the Oklahoma City-based law firm of Hartzog Conger Cason & Neville, and Kenneth F. Albright, a tax lawyer and transaction lawyer partner at the firm of Albright, Rusher and Hardcastle, each contributed expertise for this article.

Most successful business owners are good people. Caring people. I’ve worked with thousands of them.

Jerks tend to implode, eventually. Traits of care, honesty and integrity aid the business owner in surviving and succeeding over the long haul, so most who “make it” are “good folks,” as we say in the South.

Yes, most successful business owners are also driven to achieve material and financial success, but such is not the extent of who they are. They care about the people around them, such as their employees. They contribute to charitable causes.

When the time comes for business owners to sell their businesses, they worry a lot about the impact it will have on their employees. In most cases, I’ve found the owner’s “ideal exit” would have many of the following elements:

• maximum price
• confidential until closed
• all employees keep their jobs at same or better terms
• key manager or manager(s):

  assist in the sale, keep it confidential and earn a bonus at closing

  are hired by the buyer to continue running the business

  gain or increase their ownership in the business

  have a “good” experience with the new owners, who are committed to growing the business

• buyer is “good people” and succeeds in growing the business
• business continues to operate at its current facility or community
• seller retains an ownership stake in the ongoing business and such pays off handsomely

The amazing thing is, all off these are achievable for many business owner-sellers. Certainly, at least, when the business is stable and earning $1 million per year or more in annual profit. The buyers of businesses this size or greater are many, and most want the established management team to remain and continue to run the company.

The biggest barrier to making this happen for a business owner is — aside from finding the right M&A firm that has the knowledge, skill and staff to run the processes and put this type of deal — convincing him or her that it IS possible. That he/she can maximize the sale price AND secure these additional elements. The keys to making it happen are:

• Proper preparation and packaging
• Run a process that works the top buyer candidates simultaneously
• Skillfully communicate and negotiate the seller’s deal term desires
• “Sell” the skill of the management team and its desire to remain
• Negotiate on behalf of the management team

Buyers want to do business with good people. Buyers who trust that the person or persons whom they are buying out will pay more. Buyers who see that the selling owner cares about more than just money, such as the employees, view the seller as trustworthy. Of character. And this is why going for more than just money can result in an ideal sale. That is, a maximized sale price PLUS so much more. Everyone wins: the seller, buyer, employees and the community.

For more on this topic, go to AcquisitionAdvisors.com. Sign up for the free e-newsletter The Quiet Exit. It provides advice on how business owners can go about selling quietly, professionally, for absolute maximum.

Business owners find their motivation in varied things. Commercialize a pioneering methodology. Be one’s own boss. Prove naysayers wrong. Provide a great place for people to work.

While every entrepreneur has his or her unique set of goals, virtually all share one in common — to one day sell for a boatload. How much? Well, more is better. And so the question every business owner asks is: “What can I do today to maximize the eventual sale price of my business?”

To be sure, the answer depends on where the business is in its development and the time horizon of the business owner. But whatever the answers are to these questions, there are things that can be done. Acquisition Advisors has put them on paper. A single piece of paper.

“When the goal is to get absolute maximum sale price, the task entails both building a business that possesses the characteristics desired by buyers and conducting the sale effort in a certain manner,” says David L. Perkins, Jr., managing director of Acquisition Advisors. “Our ‘Best Practice Map’ titled ‘The Path to Absolute Maximum Sale Price (of a business)’ clearly and simply shows the important elements of both.”

The map format — as opposed to an article — allows a tremendous amount of information to be summarized in an easy-to-read format. The instructional “best practice” data are organized into four distinct sections. Each section is a phase in the journey that leads to the sale of the business at maximum value:

Phase 1: Build a Valuable Company

Phase 2: Plan and Prepare for Sale

Phase 3: Execute Sale Strategy

Phase 4: Post Closing

Under Phase 1, for example, two sections offer valuable guidance to business owners: “Accumulate Value Drivers” and “Eliminate Barriers to Marketability.” Listed are 19 value drivers and 11 barriers to marketability. Perkins explains, “To the extent a business owner can add the value drivers and eliminate the barriers to marketability listed, the value of his or her business will rise. Incidentally, the business will also enjoy enhanced profitability, lower risk and greater stability.”

Most of the map — indeed three of the four main sections — is dedicated to how a business owner should go about the process of preparing, packaging and selling his or her business.

“There’s definitely a right way and a wrong way to go about the sale of a business,” says Perkins. “Unfortunately, common sense does not lead the business owner down the right path. But the lessons of experience have, over time, revealed the path that will take the business owner to absolute maximum sale price. The essential elements of this ‘best practice’ are displayed in our map.”

Visit AcquisitionAdvisors.com/Best-Practice-Map to view it.

Acquisition Advisors consults on the purchase and sale of midsize U.S. companies and is owned by DL Perkins LLC, publisher of The Business Owner.

Thousands of sources of equity capital in the U.S. and around the world are willing and able to pay top dollar for great companies, leave the tenured management in place, provide meaningful ownership to the manager or management team that remains, and mentor and support the new owner-managers in continuing to grow the business. This is the type of transaction Acquisition Advisors specializes in and is proud to bring about.

Ideal candidates for this type of transaction have the following characteristics:

• The business is in the United States.
• The business is well-established, healthy and earning annual EBITDA of $2 million to $25 million.
• The current owner wishes to sell but does not need to sell.
• The current owner wants top dollar, but such is not his/her only goal in the sale. Particularly, the seller also wants to:

1. “Take care” of his/her employees (and secure higher ownership for the key manager(s) to the extent possible.
2. Do his/her best to place the business in a position where it has a good chance of continuing to succeed.
3. See the business continue to be in the facility and/or community it currently is in.

For more Information on Management Buyout visit USManagementBuyout.com

As it turns out, buyers have a lot in common. Below is a list of characteristics that, when present in a business, entice buyers to pay more. Conversely, a lack of these characteristics detracts from the price received. These “value drivers” are listed in rough order of importance.

1. Growth: Revenue and profit growth is the number one driver of value. Establish a pattern of growth and you will establish a substantial premium for your business. Of importance as well is rate of growth relative to that of the overall economy and, more particularly, of the industry in which the company participates.
2. Profit and Profit Margins: Buyers buy businesses to make money. The higher the established profit, the more the buyer can and will pay to obtain those profits for his or her benefit. Profit margins are important as well. Are they higher than the industry averages? Gross and operating profit margins that consistently exceed industry averages will command higher values.
3. Customers: Diversification of customers and customer tenure, loyalty and credit worthiness are important considerations when valuing a business. What would the impact on the company be if the largest customer were lost? If the answer is very little, then the company has virtually no customer concentration risk and, therefore, a higher value will be merited. If the answer is substantial, buyers won’t want to bear that risk without being handsomely compensated for doing so. Generally, if a company does not have a customer that accounts for 10% or more of revenue or profit, then there is little concentration risk.
4. Management Quality and Depth: Buyers are concerned with whether the proven profit stream will continue after purchase. To the extent the business has a diverse group of top managers and employees that will continue with the business, the buyer’s perceived risk will decline. The result is a willingness to pay more for the business. Management depth, quality, tenure, experience, success record and education are all criteria of importance.
5. Healthy, High-Growth Industry: Industry health and growth makes it easier to grow revenue and profits. Equally as important, competition tends to be not as fierce in expanding industries. There is enough business ‘to go around’ … so profit margins are higher. Find and serve an expanding industry and your job will be easier … as will your sale price. The stronger the industry, the higher the values.
6. Multiple Industries: If the product or service offerings of a company are sold into multiple industries, a higher value is justified. The business can grow to twice the size (assuming each industry niche is of equal size) and enjoy meaningful industry diversification. For example, a maker of titanium tubing has traditionally sold to industrial customers, but has recently successfully penetrated the sports equipment marketplace. This business will command higher values.
7. Proprietary Products: The more proprietary in nature of the products or services, the higher the value. In other words, is what you offer unique to anything offered by anyone else? Unique, of course, in a way that is meaningful or valuable to a certain customer group or groups? For example, a non-exclusive distributor enjoys little differentiation or protection from pricing pressure, whereas a manufacturer of a proprietary line of products should enjoy a more defensible market position and … higher profit margins.
8. Product Mix and Diversification of Gross Profit: The greater the number of products and services the company sells, and the greater diversity of contribution to overall gross profit, the lower the risk inherent in business. Businesses with a healthy product mix and good gross profit diversification deserve and earn higher valuation multiples.
9. Market Niche; Market Position; Brand Awareness; Identity: If a company fills a definable niche, commands a special leadership position in a niche or niches, or has strong and favorable brand awareness in its market, the business probably enjoys higher profit and growth rates. As such, buyers will pay more.
10. Low Debt: While debt is not really a value driver, it substantially affects the net-cash received by the seller. When a business is sold, the seller basically sells the net equity of the business. Whether the sale is affected via a sale of the business’ assets or shares of stock, something must be done with the debt of the business. If the buyer assumes the debt, he or she will do so as a form payment to you, lowering the cash you get at closing. Further, in an asset sale you’ll owe federal and state taxes on the amount of debt assumed by the buyer. If the buyer does not assume the debt, the seller will have to pay off the borrowing WITH AFTER TAX DOLLARS.
11. Interim Results: Buyers are interested in what the business will do in the future. The best indication is the present. Strong current performance can justify higher prices, and a dip in performance will quickly deflate value.
12. Off Balance Sheet and Contingent Risks: Risk and uncertainty lower values. If elements such as the following exist, correct them … or wait for the issue to subside … before attempting to sell your business:
    

    • existing or pending litigation.
    • real or possible environmental liabilities.
    • lease problems or uncertainties.
    • industry or market uncertainty.
    • customer concentration.

13. Future Maintenance Costs and Capital Expenditure Requirements: For the business to earn the profits projected by the buyer, or to continue to expand, how much money must be spent? Can the existing assets and staff handle the production requirements for the foreseeable future, or will new dollars have to be spent to replace, expand or … worst case … relocate? Future capital expenditure needs will have to come out of future profits, lowering the value of the business.
14. Quality of Financial Information: Financial statements present the financial condition and performance of a company. To the extent that a buyer feels certain that these reports are accurate and may be relied upon, his or her perceived risk will be low. So, keep detailed and accurate books and records that will breed comfort and confidence in them. The result is a willingness to pay more for the business.
15. Appearance: Does the business “show well?” Is it attractive in appearance? Is the facility clean, painted and bright? Does the office appear clean and organized, or cluttered and unprofessional? Are the logo, marketing materials and website up to date and convey a positive, vibrant image? Just as a clean and waxed car sells for more, so will a business.
16. A Growth Plan: Buyers are interested in the future. Lay out a path for significant future growth and profit and … if the buyer believes he or she can make it happen … he or she might be willing to pay more. At times, much more.

The above list is not meant to be all-inclusive, but is fairly comprehensive in scope and touches on the key areas of value and risk typically investigated and considered by buyers of businesses.