Steep interest rate increases to fund capital needs. Supply chain tensions. Difficulty retaining and hiring employees. Looming geopolitical and economic doom (recession). These and other factors are serious challenges facing business owners today. But as the saying goes, we should first and foremost focus on what we can control, not the things we cannot control.
The same goes for running a business and preparing it for sale.
The present and local decisions you make are most likely to have the greatest impact on the value of your business as you build it for a possible sale. Treating customers and employees well and participating in value-added market shifts are sound practices for improving business value over the long term.
If the past few years have taught us anything about the ag retail business, it is even the most severe and impactful of geopolitical situations can often be good for this business. Our company performs surveys and develops financial benchmarks of ag retailers each year, and we have found that ag retail, on the whole and also in most individual cases, has performed exceptionally well over the past several years, despite the many serious challenges.
This is not only a signal of a strong customer demand but also a credit to sound management practices, loyal employees and the importance of keeping our heads in the business and focusing on what we can control.
What does that mean for business valuation? Compared to par, it is good news. Buyers and investors want to see businesses resilient to challenging situations. But, outsized premiums for these businesses do not manifest without something special, such as a unique market area, size, intellectual property rights or competitive advantage. A typical distribution business cannot command an unusually high valuation multiple simply because the past few years’ financial results have been better than the prior 20 years of results on average.
We used to say if strong financial performance happens more than one year in a row, then it’s a trend.
Well, current circumstances have shown the market is willing to carve out the definition of “trend” to mean something different. That means looking at businesses in multidimensional ways to identify pockets of sustainable value and not purely focusing on trend numbers, which many see as a rising tide of unique market circumstances that are unsustainable for the long term.
Break down your business into pockets of value proposition that an outside party might look at and say, “OK, that is something special we can grow and build upon.” These are differentiators that buyers and investors seek and that demand premium value. The old “The numbers look great...” adage is likely not enough by itself to supersize business value to the extent you might expect.
