Top 5 Tips for Selling a Business?
#3: "Go for growth!"


When it comes to valuing your business, growth is golden

The reason is simple. A buyer can afford to pay more for a business with profits that are growing than for one which is flat; the higher the growth of profits, the higher a buyer's return on investment is going to be.

That's why stock markets value growth, whether it comes from biotechnology or eBay. In fact, the better the growth prospects of a company, the higher its P/E (price to earnings) multiple. You can plot a chart of expected profit growth against price-earnings multiples for any sector you like and see for yourself that there is a clear correlation.

Go for growth!

So if you want to raise the multiple a buyer will pay for your business one day, get that business on to a higher growth track as soon as you can. The really good news is that you'll get a double benefit from this; not only will the multiple be higher, but it will be applied to a higher profit figure than you would otherwise have had.

Let's take an example:

  • Let's say a business with flat profits-after-tax of £1m trades in a sector where a stable business would fetch a P/E of 10x, so it's worth £10m
  • Suppose faster growing businesses in that sector, doubling profits every 3 years, fetch P/Es of 15x
  • Then if that flat business can get itself onto a higher growth track and double its profits in 3 years, it would be worth 15 x £2m = £30m

In other words, achieving the higher growth rate triples value within 3 years! Worth pursuing?

We are talking primarily about profit growth here, rather than revenue growth. But sustainable profit growth has to involve revenue growth, so going for top-line growth is obviously important too. Often markets reward strong sales growth long before the profit growth has fully materialised - remember Google's acquisition of YouTube?

And the growGo for growth in the years prior to selling a businessth we are after has to be sustainable.

Buyers are understandably wary if future growth is uncertain or if there are risks of the shine coming off a business.

But if you can identify and harness the growth engines in your business, and demonstrate that they will drive bottom line growth for years to come, you are well on the way to remarkable results when it comes to selling the business. Easier said (and easier understood) than done, of course. It takes extra effort and discipline to weave value-building into the month-to-month management of a business. But the returns on that investment can be astronomical! This is what Shield's Business Improvement Programme is all about.

Once your Business Improvement/Growth Programme is underway, you'll be ready to turn to Tip #2 for managing the value in your business: "Communicate the investment case"

You will have exciting potential to talk about. How to do that credibly is something we'll be covering next time..

Meanwhile, remember: Go for growth!

© 2008 Shield Corporate Finance


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