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Getting a High Sales Price for Your Company

Mike McGill, co-founder and managing partner at MHT Partners and member of the CNBC-YPO Chief Executive Network
Wednesday, 3 Jul 2013 | 8:04 AM ET
Lovegull | E+ | Getty Images

The process of selling a company often focuses on historical financial results, but exceptional valuations generally flow to sellers with a clear and compelling vision of their company's future growth.

When I represent an entrepreneur or shareholder group in the sale, my job as an investment banker is to get the best possible deal for my clients. "Best" doesn't always mean the highest number, but whether it's raw purchase price or extremely favorable terms, the formula for maximum results for the company owner is the same.

Simply put: A buyer who fully believes in the story you are telling about the future will offer you more money, cut you slack at the negotiating table and be less likely to walk away if the transaction hits a pothole.

Your vision for the future must be built on a solid foundation. You can't have a five-year historical growth rate of 10% a year and expect a prospective acquirer to believe that you're suddenly going to jump to 50% annual growth for the next five years.

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Big valuations require analytically sound growth stories. Growth stories are built primarily on additional revenues, and additional revenues need to be broken down for easy analysis by the prospective buyer.

"Organic growth," which is revenue and profit growth coming from operations of the company itself, is most highly valued by potential acquirers. "Inorganic growth," which is generally defined as growth through acquisition or merger, is good too, but not in and of itself usually capable of generating outsize valuations. Knowing that there are lots of acquisition targets that could be layered under the brilliance of your high organic-growth management team, however, could get many buyers even more lathered up for big prices.

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Here are several potential elements of a growth plan that a prepared seller should put together:

Underlying Market Trends

1. Is demand in the market you serve exploding? Are more and more customers clamoring to get their hands on what you make or do?

Underlying Competitive Dynamics

1. Are there competitive changes in the wind? Is your scale starting to overwhelm your competitors, or put you on a cost reduction curve others won't be able to meet?

2. Is your product or service so superior to alternatives that increasing demand and pricing power is inevitable?

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Pure Revenue Growth

1. Selling more product or service to existing customers: Explain why you believe existing clients will do significantly more business with you in the future than they do now.

2. Selling product or service to existing customers at higher prices: If you believe you've got pricing power, you'll want to explain why and how much to a prospective buyer.

3. Selling existing clients things they're not currently buying from you, if you can capture some kind of adjacent product or service business that fits with your existing offerings.

4. Selling services related to your existing products, or products related to your existing services.

5. Acquiring new customers: Can you convince a prospective buyer that you've left plenty of untapped clients on the table, and that your company has the ability to pursue and capture them in the future? Do your prospective customers look like your existing ones, or are you doing something different to pursue the new breed?

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Pure Profitability Growth

1. How do you plan to operate your business more profitably in the years ahead? Are you cutting expenses? Growing expenses more slowly than revenues? Investing in labor-saving technology, or cutting capital expenditures?

Potential Acquisitions

1. Direct competitors to get more market share and power over both pricing and costs.

2. Vertical integration acquisitions that help you capture additional margin that leaks out in the value creation chain of your business.

3. Strategic acquisitions that enable access to new markets or leverage existing core competencies.

4. Skill acquisitions that give you new, exploitable competencies or technologies.

Remember, as you assemble the pieces of your growth story, it's all about defensible data and verifiable information. As our math teachers used to say to us, "Show your work!"

If you establish credibility throughout the sale process, build a compelling growth story and share it transparently and passionately, a high valuation for your business could come your way.

—By Mike McGill, co-founder and managing partner at MHT Partners, a Dallas-based middle market investment bank and member of the CNBC-YPO Chief Executive Network

CNBC and YPO, Young Presidents' Organization, have formed an exclusive editorial partnership, consisting of regional "Chief Executive Networks" in the Americas, EMEA and Asia-Pacific. These "Chief Executives Networks" are made up of a sample of YPO's unrivaled global network of 20,000 top executives from 120 countries who are on the frontlines of the economy. The opinions of "Chief Executive Network" members are solely their own and do not reflect the opinions of YPO as a whole or CNBC.

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