Want a premium price for your business? Start collecting this.

December 12, 2017|Tyler Carlson

Use relevant data to effectively position your business for sale and drive premium values.

We are in a period where overall M&A deal multiples are hovering around all-time highs due to a large volume of buyers, lots of available capital and steady economic forecasts.

Since 2010, the number of private equity buyers has grown tremendously and currently there are 8,000-plus private equity groups. Additionally, private equity groups have approximately $566 billion of available dry power (money to spend) and corporate cash reserves are floating around $2 trillion.

Furthermore, during a recent M&A forum, Dr. Marc Schaffer, associate professor of economics at St. Norbert College, forecasted modest economic growth of 2 to 2.5% in 2018, providing further confidence for companies in the U.S. The combination of these factors is driving a strong M&A market, but this doesn’t come without additional requests from potential buyers.

Focus on your data to put yourself ahead of the competition

With these premium valuations comes the expectation that buyers want to completely understand your business model, financial performance and growth strategies. In the last few years, even more emphasis has been put on digging into the financial statements and reviewing sales by customer and gross margins by customer, product, and end-market to extract as much information as possible to validate such high valuations.

Any sophisticated buyer is going to want to analyze as much relevant data as possible to look at numerous scenarios and assess the total risk in a potential purchase. More often than not, the seller, not the buyer, makes this task of analyzing relevant data difficult because prior to a sale process the relevant data isn’t captured and stored.

How is data used during a business transaction process?

As an investment banker, my job is to create a private capital market to increase competition and drive premium valuations. Using financial data supports the overarching story of the company by showing trends, margins, capital expenditures and forecasts. In order to maximize value, I utilize relevant data to tell the story and highlight areas that will be most attractive to potential buyers. If you’re able to collect the relevant data, you can create the following reports:

  1. Gross profit by job
  2. Gross profit by product/service
  3. Sales by product
  4. Sales by end-market
  5. Sales by customer

Most companies, regardless of their accounting system’s sophistication, have the ability to generate sales by customer reports for specified periods. Most accounting systems are set up to capture invoices and purchase order data and convert this data into sales, expenses, accounts receivable/payable and more. In the past, buyers were satisfied with basic sales by customer information for their analysis. Now, with data and information available at our fingertips, potential buyers expect to have relevant and on-demand data to complete their due diligence.

What data is most important?

Now let’s talk about “relevant data,” since collecting data just to collect data is a waste of resources. Relevant data goes beyond the financial statement data to include the collection of product sales data, the associated direct costs and various categorizations for each job. The minimum desired relevant data to collect for each job is the following:

  1. Customer name
  2. Date
  3. Product/service type
  4. Job number
  5. Job description
  6. Direct costs (separate column for each associated cost)
  7. Unit price per product/service
  8. Quantity of product(s)/service sold
  9. Customer end-market

Many accounting and enterprise resource planning software systems can efficiently collect this data and build it into the existing business processes. Generally, these software systems already have the capability to capture the relevant data that a buyer desires and can then export data to a format most commonly used for analysis, such as comma-separated values or Excel file types.

Therefore, if you’re considering selling in the next few years, now is the time to start collecting relevant data. My suggestion is to work with your information technology group and/or software consultants to make sure you’ll have the relevant data when you need it to maximize the value for your business.

For more information or to better understand your options related to transitioning your business, please contact Tyler Carlson, vice president, at tc@taureaugroup.com or any member of the Taureau Group team at 414-465-5555.