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How to Build a Buyer Ready Business – Part III – Value Your Intangibles

By Generational Equity

11/18/2016

Today we conclude our three-part series examining key steps to build a buyer ready business. The series is based on a study conducted by the Cass Business School of the City University London and Intralinks. The folks at Cass and Intralinks analyzed 23 years of acquisitions and examined a global sample of 33,952 public and private companies in the process of their research.

Their in-depth examination revealed, as we have learned over the years, that there are a number of key steps business owners can take to enhance their company valuations and eventual salability. Our recommendations are contained in a document we call the Roadmap for Enhancing Value (REV), which we provide to every client at the conclusion of our business evaluation. It examines a few dozen key areas that typically buyers are concerned about and that business owners can address in order to build a buyer ready business.

Today we look at our last key area from the Cass and Intralinks study which is often overlooked by business owners:

  • The Value of the Company’s Intangible Assets

Also known as “off-balance sheet assets,” these are items that specific buyers will find attractive about your company, and their attractiveness will vary from buyer to buyer. This is how the study describes these features:

Many of our survey respondents point to intangibles such as brand value, the capabilities of management, legal and regulatory compliance, social responsibility, risk management and reputation – with culture often being mentioned, as a key factor in business growth.

Looking at this list above, folks with an MBA in finance will correctly point out that these are impossible to truly value. What is the dollar value of a company that meets all compliance standards in an industry? What intrinsic value does a firm’s reputation have? Well, we only need to look at the debacle that Wells Fargo now faces to understand that although these items may not be listed on the balance sheet, they have a huge impact on the valuation of any business.

Here are some keen insights from professional buyers surveyed by Cass/Intralinks:

“We look at the value and the name the company has made for itself in a particular region,” says the head of M&A and strategic investment at a Singaporean public company. “We believe in sustainable growth and have been focusing on companies that have been a part of it. But we also look at the way business is carried out and the culture within the company.”

“The target’s culture is very important. Having a clear understanding of the target’s culture will reveal several insights, making it easy for the acquirer’s management to take control and introduce new growth methods to help the business grow at a faster rate, benefiting all the people involved in this operation from the management right up to the employees,” says a partner at a UK PE firm.

Culture is just one of the many intangibles that buyers examine closely when making an acquisition. In our first article in this series we focused on top line growth being a key issue. The second piece honed in on profit margins and the bottom line as being equally valuable to buyers. However, based on our work with buyers, assuming that revenue and profit trends are positive, intangibles often will become a key determinant affecting not only deal value, but structure as well.

Here is a short list of some intangibles you may have in your business that you may not even be aware of having “value”:

  • Backlog: is the buyer acquiring a business with planned revenue streams based on booked orders?
  • Branding: does your business have an established, recognized brand?
  • Computer Software: have you developed proprietary software?
  • Contracts: does your company have any short or long-term contracts with existing clients (in writing)?
  • Credit: is the buyer acquiring a business with established excellent credit with all vendors?
  • Custom Designed Factory Floor: have you designed unique, proprietary manufacturing processes for your company?
  • Customer List: is the buyer purchasing a blue chip customer list?
  • Customer Relationships: does your company have long-term relationships established with its clients?
  • Customer Testimonials: what do your clients say about the business?
  • Distribution Network: is the buyer acquiring an established network of distributors?
  • Dominant Market Position: is your business a clear leader in the market?
  • Employee Manuals: do you have established training and development programs?
  • Environmentally Friendly: is the buyer acquiring a company that operates a “green” manufacturing facility?
  • Established Staff: do you have an employee base of long-term, tenured personnel?
  • Formulas/Trade Secrets: have you developed any proprietary formulas or trade secrets for the business?
  • Government Programs: are you part of any local, state, or federal purchasing programs?
  • Growth Potential: is the buyer acquiring a business with above-average growth potential? If so, why?
  • Internet Presence: does your business have a well-designed website and solid web recognition?
  • ISO Standards: is your company in compliance with any international ISO standards?
  • Management: is the buyer purchasing a solid management team that is not dependent on the owner?
  • Patents: does your company have any patents?
  • Procedural Manuals: have you created documented procedural manuals for employees to follow?
  • Product Uniqueness: is the buyer acquiring a company with products that are unique in the market?
  • Production Equipment: even if fully depreciated, does your equipment have value to a buyer?
  • Profitability: is your business more profitable than industry norms? If so, why?
  • Proprietary Production Processes: have you developed any proprietary production processes?
  • R&D: is your business investing in product development/improvement to remain competitive?
  • Security Clearances: is the buyer purchasing a company that has employees with security clearances?
  • Skilled Employees: do you have any employees that have earned industry recognition?
  • Solid Supplier Base: have you developed a base of solid, assorted, dependable suppliers?
  • Systems and Procedures: is the buyer acquiring a company with documented systems and procedures?
  • Technology: are you using cutting-edge technology in your business?
  • Tooling: have you developed proprietary tooling used in the production process?
  • Trademarks/Copyrights: is the buyer purchasing a company with trademarks or copyrights?

Now this list does not apply to every industry and in fact, in some industries, you will find some very specific intangibles that buyers look for. What you need to do before you approach any buyers with your opportunity is to brainstorm your company’s intangible assets. Have you ever done this? It is an exercise I would encourage you to do. You might be surprised at how long your list may be. And the reality is this list will determine how you approach buyers, items you will highlight in your marketing materials, and features you will focus on when negotiating.

Interested in learning more about how buyers “value” intangibles? Attending a Generational Equity M&A workshop is a good place to start. A few hours invested in this meeting will help you generate a long list of possible intangible assets that exist in your business. To learn more, call us at 972-232-1121 or visit our website to learn when we will be in your area next.

By Carl Doerksen, Director of Corporate Development at Generational Equity.

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