Hairy is Scary

This is the latest article in a series on how a business owner can be confident they have a valuable and sellable business when the time comes for an ownership transition. In past articles we explored a few factors influencing value and salability, such as cash flow, risk, customer characteristics and employee retention.

Now we will discuss specialization, growth opportunities, and “hairy” businesses.

One way to build a more valuable and sellable company is to develop a proprietary or specialized product or service. Is the company a generalist or a specialist? I know roofing or siding companies that are more consistently successful than general contractors. They don’t have the glamour of building showcase homes, but they have a consistent business in a niche. It is easier to become the best in a specialty niche. Bottom line? Buyers and customers would rather hear “we are the best at building left-handed blue widgets” than “we do it all”.

Is the business selling a commodity or a unique product? Ask if there is something unique about what you are selling. You may be familiar with the Montana wheat producer who transformed into a leading retail bakery brand. I know machine shops that have transformed from a job shop, making parts to customer specifications, to a manufacturer with a proprietary product line. In both cases the proprietary product is more valuable than the commodity product.

If you were buying a business, would you want growth potential? Scalable businesses have a business model that can support growth without a significant increase in fixed costs or investment. For example, when a business would need to invest in equipment or facilities in order to grow, then the overall investment is higher. If the business can grow with little fixed investment, then the buyer can pay more to the owners and the business is more valuable.

Let’s look at a manufacturing plant running at 50% capacity. The company can double production volume with no fixed investment. The only added costs would be the variable costs of labor and materials. If the plant were operating at 100% capacity, then a buyer would need to allow for investment in plant expansion and machinery in order to grow.  Which company do you think is more valuable, all else being equal?

Another factor that makes a business salable is having trained employees who follow “best practices” and standard procedures. An owner or management team who micromanages the delivery of the service or product has placed a short leash on company growth. That situation also raises the risk during an ownership transition. Your vitamin manufacturer, your airline, and your doctor all use checklists and standard procedures to assure consistency.  Why not your business?

Let’s face the truth that some businesses are clean and some are “hairy”. Hairy is scary to buyers. Any friction in the sale process is can lower value and salability. Are you wondering what “hair” looks like on a business?

“Hair” could be deferred equipment maintenance, equipment at the end of useful life, unsalable inventory, uncollectible receivables, non-assignable contracts or leases, uncooperative partners, employee problems, or myriad other issues that add friction to the sale process.

What is the solution? Shave it off before an ownership transfer! As you prepare an exit plan, recruit your advisors to review your company from a buyer’s perspective by going through the same “due diligence” process a buyer will use. Don’t try this yourself; there is no substitute for an independent viewpoint on your business.

Remember the full body scanner you walked through last time you boarded an airplane? Due diligence is like running your business through the scanner. There isn’t much to hide. You had better know the anomalies a buyer is going to find, and fix them, before stepping into the proverbial full body scanner of due diligence.