Understand the ‘aesthetic’ rules about what makes a business attractive
Pictured above is the most beautiful car ever made; the Ferrari 250 GTO. It may seem odd to be so definitive about an opinion. Beauty is subjective. There are, however, components of aesthetic beauty that seem to be universally accepted. Curves, lines, elegance, proportions, materials, and composition.
Qualities of beauty, whether we’re talking about people, landscapes, sculptures, or wine find wide consensus. Opinions differ on specifics but subjectivity does not stop us from agreeing on much of what it means to be beautiful.
In Western culture, the final scorecard is often market value. The last Ferrari 250 GTO sold at auction for $48.4 million in 2018; the most for any car ever. Does that make it beautiful? Of course not. But the price a buyer will ultimately pay for an object is a convincing argument for its attractiveness. The same is true of a business. The price buyers are willing to pay is a strong demonstration of its desirability.
There are aesthetics that make a business attractive or beautiful to buyers. ‘Aesthetics’ may be a misnomer since businesses don’t have physical beauty. The things that make a business beautiful are not sensory in nature.
Businesses aren’t beautiful :
by Sight; like an architectural masterpiece to the Touch; like fine fabrics and clothing to Hear; like a Beethoven symphony to Smell; like perfectly roasted coffee brewing to Taste; like a great Brunello di Montalcino with a Tuscan steak
When a business is beautiful, a sophisticated buyer is willing to pay top dollar for it. The goal is to become the Ferrari 250 GTO of its industry.
Why should a business owner care whether or not the business is attractive?
A business owner should emphasize value growth whether or not there are plans to sell. Owners can focus on building value through an understanding of the way sophisticated buyers look at businesses. Most of these factors are within the control of the business owner.
I have identified 6 categories and 54 individual factors.
Most of the factors can be improved through intentional, disciplined execution.
A business doesn’t need to score perfectly in every area to be beautiful. But since improvement in some of the categories can take years, it’s best to operate from a value creation mindset at all times.
To operate with a value creation mindset is to operate as if the business is always for sale.
Here are the factors through the eyes of a prospective buyer. The individual factors within each category are hyperlinked for easy access.
1. Personal Factors
In closely held family businesses, business and personal factors are intertwined. Potential suitors understand this. Due diligence on a business purchase involves investing an extraordinary amount of time and money. This is the first category because it remains the number one reason why deals don’t close. When personal factors are given short shrift, time gets wasted. It’s essential for owners to have detailed personal and financial plans in place. Potential buyers will ask a lot of detailed questions to figure out how much thought the owner has put into their personal planning. If the owner seems unprepared or cagey, buyers will pass.
2. Business Operational Factors
Once the personal planning is complete, the heart and soul of business attractiveness and, therefore, is the business operations themselves. These factors are very much within the control of the owners and management. Businesses that score well in these factors are good performers and very desirable to business buyers. Improve in these factors and the business value will improve. It’s not realistic to score well in every single category. It is realistic to grow the company’s enterprise value by choosing 1–3 of these factors to focus on over a year. Through the repetition of this process, a company can systematically become more beautiful and transferable.
3. Industry/Market Factors
Businesses operate in the context of industries and markets. Even highly specialized companies. Sometimes companies create industries as in the example of Uber and Lift. Business operations don’t take place in a vacuum. And before buyers are willing to risk their capital, they want to understand the businesses’ performance and prospects within the context of the industry and markets. What threats are there to the business’ ability to succeed and grow.
4. Legal/Regulatory Factors
It’s pretty hard to reconcile ‘Legal/Regulatory’ with ‘beautiful’. But remember our scoreboard is value. A business buyer that is considering writing an 8 figure check or more for a business is going to want to see that the legal and regulatory aspects are clean, organized, and don’t come with hidden risks. Many businesses of significant scale neglect these. Don’t. Buyers will discount values if there are weaknesses in the legal and regulatory areas. Protecting value is a part of business beauty.
5. Financial Factors
Strong financials demonstrate credibility to potential suitors. Businesses that have consistent, strong financial performance are going to get noticed by acquirers. Details matter in the company financials as due diligence processes are highly sophisticated. Companies that try to hide flaws or pull forward revenue to look good for one year are not going to be rewarded on price. It’s best for time and attention to be paid to these metrics as a part of managing the business. By staying focused on the right metrics, the business will perform better anyway. And buyers will assign higher values to businesses that have credible and consistent financials.
6. Economic/M&A Market Factors
Owners have no control over these factors. They are, however, important to be aware of how a buyer’s perception of beauty may be influence by the current economic or market environment. Theoretically, a business could score very highly in every area we detailed so far and still not be attractive due to the economic or market backdrop. These cycles are not permanent but could have a dramatic influence in the short term. Business owners should be aware of these cycles.
Improving business beauty or value is not easy. It is, however, practical and can be systematized. The key is not to get overwhelmed by how many areas within the business need to be improved. I suggest starting with 1–3 factors and really focus on making an impact on those. Most management teams are not able to digest more than 1–3 projects at any one time while running the day to day operations of a business.
Improve those one, two, or three factors though, and enterprise value will grow. Then you can move on to the next ones. Over time, owners find that they often add more value from this work than they do from incremental sales growth.