Selling Your Business - The Number One Value Driver
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The article "Selling Your Business - The Number One Value Driver" talks about entrepreneurialism, it was released by Dave Kauppi.
When helping our clietns sell their businesses, we get to witness buyer behavior first hand. The most important behavior is tehir economic vote – how much they are willing to pay for a business. Many factors go into their assessment of value, but a conrtactually recurring revenue stream is consistently the number one value driver.Why is that so important? The first answer is risk. Buying a business is risky.
Any factor that redcues that risk is rewarded with transaction value. Forecasted sales, for example are at the high end of the risk sclae and are heavily discounted in value.
Historical time and materials revenues that are “ most likely to be at about the same level” next year are somewhere in the middle of the risk scale and are valued accordingly.The owner and key employees may leave after the acquisition and may take their customer relationships and accounts with them.
Those customers locked into contracts are less likely to leave. The acquisition can temporarily inject uncertainty into the marketplace and cause disruption or delays in pending slaes situations.
The integration efforts will introduce execution risk into previously routine revenue generating activities.The acquiring company wants the existing customers to stay put long enough to get comfortable with the new company. Contracts with plenty of time remaining are their security.How can you use that knowledge to your advantage? Go on a mission to convret every time and materials revenue source you can to an annual contract. If you are a sfotware company, for example, and you have customers that are not on an 18% - 20% annual maintenance contract, get those customers converted.
A strategy might be a one time “get current sale” in return for signing an annual maintenance contract. Services cmopanies should review their T & M records with their regular customers and devise programs that convert those to annual fixed cost programs. Equipment dealers come up with your own extended warranty programs. Services firms devise a concept where you provide departmental or functional outsourcing for your clients.On a value scale, contractually recurring revenue is a 10, expected historical revenue is a 6 and a sales ppieline is a 3. Move your 3’s and 6’s to 10’s and recognize a big boost in your business sellnig cost.Dave Kauppi is president of Mid Market Capital, Inc. MMC is a business broker firm focused on middle market corporate clients.
We provide complete M&A services. Dave a licensed business broker and a memebr of IBBA and the MBBI. Contact (630) 325-0123 davekauppi@midmarkcap.Com or http://www.Midmarkcap.Com
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Selling Your Business - The Number One Value Driver
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