There are many value drivers that a business can maximize, whether in a sale or leading up to it, or when buying a business or integrating.
One way to drive value is to time the sale with a favorable swing in the market. That, according to Bloom Engineering President and CEO Dave Boyce, requires preparation. If your company is always prepared, he says, it’s ready when the markets are ready.
Another value driver he discussed at the 2024 Pittsburgh Smart Business Dealmakers Conference is recurring revenue.
“Recurring revenue is the easiest thing for somebody to look at and say ‘That's driving value, especially if it does have a defensible moat around it,” Boyce says. “It's not always easy to quantify, and sometimes it's difficult to think through what that recurring revenue in your business is. But if you look at your business and have a little bit of help (to) draw this out, there are elements of recurring revenue in every business. It doesn't matter whether you're a product business, if you've got aftermarket sales, you can turn those into a proxy for a recurring revenue stream.”
Though it’s important to understand what drives value, it’s also important to understand what holds it back. These deal killers, he says, are inherent in any business. Those could be unfunded pension liabilities that are difficult to manage, or liabilities associated with environmental.
“There's a number of things that can drag value down,” he says. “If you’re exclusively focused on what's trying to drive value up, you may not see what's pulling value back down.”
He says he’s taken on the moniker of the Grim Reaper because he’s closed more businesses than he’s acquired. That’s in part because those businesses were acquired without a clear plan of how that business was going to produce the value that was envisioned. That could happen because, while it’s expected that a business with $10 million in revenue will continue to produce $10 million in revenue, it won’t if, for instance, there’s a cannibalization of customers and product lines. Also, he says another issue is that it's not that easy to integrate business, especially if the buyer is a competitor.
“There's no fight like two engineers who are both right and both have the right product, and they've always had the right product, and they're never wrong,” Boyce says. “I've unwound cat fights that are easier than two engineers in an argument. So, making sure that you have a management team that has a really clear view of the future and capability set to handle the post merger or post acquisition integration is just absolutely clutch.”
Maximizing value is also about deal prep. To get the business ready for a transaction that’s well down the road requires stepping back and understanding how to drive continued organic sales growth and establish why customers are going to want to continue to buy from you after that initial sale.
“The critical narrative in the minds of a buyer is that there's a set of customers that my business caters to, that they're going to continue serving, and that there's continued business activity in the future,” he says. “If you don't have that business model in place right up front, it's difficult to set up, it's difficult to get your sales team wrapped around that notion, it's difficult to get your product team wrapped around that. So, lining that up in advance is really going to have a powerful effect on executing a successful sale.”
When it’s time to take the company to market, he suggests keeping the team that's in the know as small as possible, but as large as necessary to contribute to all of the data requests and the due diligence needs.
“It's a massive effort, even for a small company,” Boyce says. “It's tough because you've got to make sure that you have the right management team that has the capability and the EQ that can handle that kind of stress. And then it's supporting them. It's making sure that they understand the objective clearly. If they're part of the equity team, it makes it that much easier. If they're not, it really comes down to the relationship that you have with them to handle knowing something that the rest of the company doesn't know, and also that their job may be in jeopardy. It's tough.”
It's also important for the CEO to not only maintain a positive image throughout a process, and to take care of themselves.
“The last time that I was through this, I talked about the three S's,” he says. “You got to find a way to smile as the CEO, because everybody in the company is looking at you. They're looking to you to see what confidence you're projecting, no matter what uncertainty is behind it. You got to find a way to deal with the stress, whether that's working out, whether that's taking a run, whatever. And then find a way to sleep because that uncertainty and that stress really tends to impact if you don't have a way to deal with those 3 S’s.”
