Build the niche

All buyers of companies look for the seller who has carved out a powerful niche in which to do business.  The focused niche player has strong margins, is more profitable, and has greater barriers to competitive entry.

A+ companies have overall profitability in the range of 18 percent plus as a percentage of sales, and sometimes go as high as 25-30 percent.  They are often dominant players selling their products in their particular focused market – and they usually offer some products no one else does.  They typically have a defined business category which they understand well – and this gives them the ability to be first with the changing technologies and trends deemed desirable in their business segment.

The better you understand your customers, and the products which attract them, the easier it becomes to service that solid niche presence in your marketplace.

Build a financial track record

Buyers look closely at financial history in assessing value.  They look for strong profitability, steadiness of progress over recent time periods, and solidity of fundamental balance sheet.

The more you can keep costs well controlled and profits growing, the better.  It is easy in the mature company to become increasingly complacent about cost control.  To stay in that A+ category requires ever-vigilant focus upon improving profitability.

Also, as you build, your plans should include steady and fairly aggressive pay down of debt.  Most buyers, when they pay a multiple of cash flow, generally begin with a cash flow definition known as “EBITDA” (earnings before interest, taxes, and depreciation allowance), less normal recurring “Cap X” (Capital Expenditure Requirements).  The amount they pay is what they expect to pay for a normal mix of assets and liabilities, excluding interest-bearing debt.  Excess cash on the balance sheet can typically be added to the price.  Thus, the truly healthy company with minimal debt and/or strong cash, is highly reassuring to buyers and generates strong confidence quickly.

Understand growth potential

When analyzing a client seller, we commonly begin with a SWOT analysis (strengths, weaknesses, opportunities, threats).  To optimize strengths, one element to the attractive analysis is measurement of the size of your primary customer segment – both size today and possible size of future growth.  Even the best niche market in the world, if its total potential size is tiny, is not very attractive.

As you begin to see weaknesses in the market road ahead, look for replacement segments in emerging new markets for possibilities.  Analyze the forward prognosis in demographics and retail trends and in every other bit of information you can glean, to give you glimpses of the possible future.

Secure the intangibles

Intangible assets enhance value.  The most obvious intangibles relate to patented products, or products subject to exclusive supply agreements.  As your market presence and distribution networks become increasingly powerful, it gets easier to command exclusivity in sourcing the product.

Trade names and trademarks create value.  Be diligent about the legal maintenance of such intangibles.

An equally important but often neglected intangible asset is key people.  Depending upon the state laws, non-compete agreements may not prevent you from losing good talent. However, they can prevent key people from walking out with a head start in the form of business taken from you, as a former employer.

By the way, a firm, long-in-place non-compete for top management is something that needs to be in place as a matter of course, well in advance of consideration of sale.  If non-compete agreements are put in place immediately prior to sale, employees are likely to resent the change, and feel unfairly treated by both the exiting seller and the new corporate buyer.


The basic “housekeeping” which precedes sale is enormously simplified if it has become a real habit of the organization.  “Housekeeping” means maintaining clean financial records with audits or reviews on an annual basis by an outside CPA firm.  It means having defensible tax positions – nothing outrageously risky or “on the edge,” and having clean environmental and safety records.  It means complying with OSHA, ERISA, and any other governmental rules and regulations.  It means fully and properly adhering to rules for sales taxes, use taxes, franchise taxes, etc.

All of these areas and more will be reviewed in depth by an incoming buyer, and major uncertainties or exposures will show.  Additionally, any buyer paying an aggressive price will expect the seller to make certain representations and warranties about the condition of the company being sold.  The seller need not make reps and warranties about the future in any way, except he will need to say that he has fairly disclosed known threats and claims.  He will also have to attest that he has told truth and has not misled the buyer intentionally.

Positioning for the future – You can build into your plans the mechanisms to enhance value of your company.  By doing so, you ensure that your company will be worth more in the future and you increase its stability and security right now.   You make your employees safer, in that they will be more desirable to a future buyer of the premium company.  The outcome can be the best possible for everyone from the owner/CEO down through the youngest mailroom clerk.