You’re thinking about selling your business to get that great big pot of gold that will let you ride off into the sunset of retirement. In your mind, it’s a great exit strategy. Now the big question is: will your business attract buyers?
When positioning your business for a sale, don’t make the mistake of focusing solely on your financial statements. Of course, profit is important, but focusing on EBITDA—earnings before interest, taxes, depreciation, and amortization—and industry multiples isn’t always a winning strategy. Your off-balance sheet assets matter, too.
According to the Ocean Tomo 2021 data on intangible assets, 90% of the value of S&P 500 companies is comprised of intangible assets. This trend has almost tripled over the last 35 years as our economy has shifted away from manufacturing to the service industry. This statistic applies to privately held businesses as well, not just big public companies.
Every business has intangible assets
Intangible assets aren’t physical and don’t appear on your balance sheet. They might include intellectual property, such as patents, trademarks, and copyrights. Or your company’s brand recognition. Of course, not every business has intellectual property or brand recognition, but every business has intangible assets that provide great value.
The top three intangible assets that drive value are:
1. Human capital. The quality and depth of your employee teams are critical drivers of your business’s value. This includes leaders who have a vision for growth and the skills to execute your strategic plan. Employees whose skills, certifications, and experience exceed those of your competitors also add tremendous value. So does a positive corporate culture that creates high employee retention.
When evaluating the value of your team, an investor will want to understand your strategy to identify and attract new talent, your plan to continuously develop your employees, and how you retain your people.
Employees are so critical to a company’s success that there are “acqui-hiring” deals in which a buyer is primarily motivated to purchase a company for its talent rather than its product. This strategy to acquire employees has dominated the technology industry; as our labor market continues to tighten, this motivation has spread across other sectors.
A valuable organization has the right people in the right place at the right time—with the right skills at the right price!
2. Customers. A well-diversified customer base, with a high retention rate that provides recurring revenue, will always be the gold standard of value drivers.
Maintaining customer diversification is often the Achilles’ heel of growing privately held businesses. While it’s always fun to go after the big whale of a client, most investors will label a business as “too risky” if more than 15% of revenue comes from one customer.
High customer retention rates are the result of impeccable customer service protocols, and every investor will analyze your data as part of their valuation process.
Keep in mind: all customer revenue isn’t equal in an investor’s eyes. A business model that produces recurring revenue via auto-renewal subscriptions, service contracts, or hard contracts will always be more attractive to investors than transactional or project-based revenue.
3. Suppliers. A strong, reliable supply chain is critical to the success of any business. Investors will dive deep into your supply chain strategy and management to confirm it protects the flow of information, resources, and materials your company needs to produce its products or services.
As we’ve witnessed during the pandemic, healthy supplier relationships that avoid disruption can mean millions of dollars in value. Your business is truly only as good as your supply chain.
Suppliers are your ally and can be the secret sauce that maintains your competitive edge if you take care of them. For example, if your business has an exclusive agreement with a supplier, you’ll most likely have better pricing and delivery times than your competitors do—which will make your company more desirable to investors.
The bottom line
These top three intangible assets—human capital, customers, and suppliers—are interdependent. Strong supplier management that’s strategized and managed by top-tier employees supports customer expansion and retention. You can drive the value and marketability of your company enormously by focusing on these three intangible assets.
Be strategic and develop your intangible assets; document and defend them. They matter.