Adding Value to Your Business Prior to Sale, Pt. 1
I was recently at a conference where one of the sessions discussed how purchasers value partner businesses. All pretty standard stuff to me, but my ears pricked up when James Vandervelden of Pleasant Bay Capital Partners shared a shocking statistic – ~40% of owners of privately-held partner businesses are coming up for retirement in the next 5 years. Of course, the best will already have succession plans in place, but inevitably, a significant number of owners will be hoping to cash out for a more comfortable retirement. For those who may be thinking of a sale, James had some great pointers as to how potential purchasers would value these businesses. There is so much to share that I have divided the content into two. In this first part, I’ll cover what James had to say on the shape of the business. I will then follow up after the holidays with a focus on the financial aspects.
- Customer diversification – this is at the top of the list from a valuer’s perspective. However good customer relationships are, any business focused on a limited number of customers is vulnerable, especially where those relationship coalesce around the partner owner. A respectable number of customers is essential if you want to achieve a decent sale price. What constitutes respectable? There’s no definitive answer, but it’s safe to assume that more is better. Some of the other points below may help you define what might be a suitable number for your partner business.
- High customer switching costs – valuers want to see strong Terms & Conditions, a wide range of sales and services interactions, and anything else that makes it difficult for customers to leave a partner as a way of protecting revenue projections. In addition, evidence of long-term customer relationships will play in your favor. Low churn in your customer base is a critical component in contributing to an attractive sale price for your partner business.
- Strategic relationships with your customers – having good relationships is not enough to influence business valuations. You need to be able to demonstrate that you are viewed as a trusted advisor. This is one of the best ways of making switching hard – customers who rely on you and trust your counsel are significantly less likely to move their business, and are more open to cross-selling and upselling new technologies and services.
- Geographical domination – the greater your market share in the geography/ies you serve, the higher the company’s valuation will be. So don’t try to expand too fast into new geographies as a way of increasing your number of customers. Make sure you are recognized as a serious player in your main geography first.
- Industry sector focus – whilst this might appear to run counter to the geographical domination dimension, valuers recognize that the best businesses are successful because they focus on a selection of verticals that they can serve really well, rather than simply chase any business. By focusing on a limited number of sectors, the business gets deeper understanding of customers’ pain points which, in turn, helps it to uncover new opportunities that can then be rolled out across customers in the same sector.
- Investment in infrastructure to scale – most of the 40% coming up to retirement will have started their business in a low technology age. But valuers want to see that these businesses have embraced appropriate technology and made the necessary infrastructure investments that have enabled their businesses to scale cost-effectively.
- Specialized skills and services – Don’t be just another distributor. Partners that are offering specializations and services that differentiate them from the competition have the potential to attract a higher valuation and more acquisition interest. The differentiation effect on your company’s valuation will be even stronger if it is hard for any competitors to copy your offer.
- Established, diverse partnerships – if stronger businesses are those that are focused and specialized, they are not going to be able to satisfy every need of their customers. Rather than leaving the customer in the lurch, the best businesses will have a good network of relationships with businesses that have complementary offerings so that they can solve the customer’s problem. And as much as I hate to say it, this includes a range of complementary vendor relationships!
So, if you want to ensure a strong valuation of your business in the next five years, you need to do what you can to make your customers thrive, so you thrive too. If you are a Partner Plus partner, you have access to benefits that will help you. Whether it’s using marketing campaigns in Partner Marketing Central to attract new customers and broaden your customer base, acquiring certifications and specializations to differentiate you from your competitors, or using the Cisco Marketplace to identify potential strategic partners, Cisco is here to support you.
But there’s more to come. My next blog will cover what James had to say on the financial elements that go into building up an attractive sale price.
In the meantime, what are you doing to help your customers thrive? I’d love to hear from you.