06. Salability Gap

As discussed in the previous article, you now know how much you need to increase the value of your business to be a Value Creator. But remember, you are starting from a placeholder market valuation, so first you will need to ensure your business can be sold, even at the current value.

To do that, you need to determine if your business is actually salable.

Based on our decades of experience running companies ourselves, selling our own businesses, and advising owners for more than 20 years, we recommend using a framework that focuses on the areas most important to business buyers.

While we use proprietary scoring models we’ve developed for our client’s use, you can simply rank these on a scale of your choosing to see if you are better or worse than the average peers in your industry.

There are two parts to the valuation framework: 1) assessment of Risks associated with the business; and 2) the depth and transferability of your Strategic Capabilities.

The Risk Assessment (or why someone would NOT buy your company) is the most important for you in the short term, and the first area potential buyers evaluate. These are assessed from the buyer’s point of view and can be considered as follows:

• Costs: Ensure your costs are in line with industry benchmarks. Review all expense items (including employee compensation) to determine if you overpay or underinvest in your business compared with your peers.
• Revenue: How diversified is your customer base? Is income recurring, periodic, or project-based? Are your customers transferable to a buyer?
• Asset Utilization: Assess current equipment utilization as well as replacement, maintenance, repair, and equipment standards compared to best practices in your industry.
• Contingent Liabilities: This can be the real deal killer. Buyers are concerned about any potential litigation that could arise once they acquire your company. Review with your business attorney any issues, such as those from employees, customers, suppliers, direct or indirect competitors, government entities, or others.
• Management Team: The big issue here is whether the business can operate without you. If so, to what degree could the current team grow the business to the next level? Just as important is how you are compensating employees. Overcompensating key employees poses a significant risk to a potential buyer, as they would want to normalize the compensation to align with industry standards.

Completing a detailed, honest assessment of each of the factors in this part of the framework will demonstrate whether a buyer would run for the hills or acknowledge how well you have managed or mitigated the most important business risks.

Strategic Capabilities are the aspects of the business that provide the platform for you to generate income today, but more importantly, drive future cash flows. Buyers want to buy companies with capabilities that you can prove are transferable and they can leverage.

• People: Evaluate your personnel practices to determine if you have a strategic advantage in terms of hiring, developing, and retaining staff versus your competition (are you a preferred employer?).
• Systems and Process: What is your secret sauce for providing your services or products in a manner that is better, faster, and cheaper than your peers using your current capabilities and capacity? These need to be well documented, and you must be able to demonstrate how a buyer could use them to scale the combined businesses.
• Markets & Channels: Ensure you have clear, written strategies and quantifiable evaluation methodologies for each of your target markets, prospective markets, and sales channels. Document what has been optimized and what additional resources could make these more effective.
• Products & Services: Articulate your product and service strategy to demonstrate you have gone appropriately deep or wide in your offerings compared to your peers. This should include a roadmap for future offerings.

As you can see from the Strategic Capabilities items, buyers want businesses that provide a platform for growth. They want to acquire your capacity, capabilities, end markets, sales channels, and revenue-generating products and services. Most important here, again, is proving these are transferable to a buyer of your business.

Overall, if you score below average on the Risk Assessment area, your business is not sellable at almost any price (regardless of your book value). This means you are living with excessive business risk today and are holding it together purely by your own efforts.

When you score your Strategic Capabilities, you will notice that while you have all of these competencies in your business, you may have a difficult time proving to a buyer that these can be easily transferred to them. Work on your documentation and run strategic planning sessions for each area to demonstrate your business is ready for the next level of growth, not just surviving.

In our next two articles, we will show you that focusing on this framework will improve your business performance today, create happier, more fulfilled leadership, and allow you to sleep better at night.