What is your convenience services business really worth? Learn how to get the right valuation before you sell

As I reflect on my decades of experience as a sell-side business broker, one constant remains among sellers: they are emotionally attached to their business.

That is completely understandable. After all, the years of hard work, the endurance required to navigate changing business climates and the huge challenges faced by operators, including the pandemic, certainly justifies a strong level of pride and attachment.

Valuation is the core of a deal

Proper valuation of a business, especially when an operator is strongly attached to the entity, is a critically important process. Gone are the days (we can only hope) that a business broker writes their estimate of a business value on the back of a cocktail napkin, based on a gut feeling. The process of determining a proper valuation of a business needs to be both thoughtful and data-driven, using a valuation specialist who has a comprehensive understanding of the industry.

What drives the value?

Investment bankers Reed Phillips and Jeff Pundyk, in an article published in the business journal from the Wharton School of the University of Pennsylvania, suggested that business owners need to identify the true drivers of value.

“You can begin by doing a simple experiment: Imagine you would like to sell your company and ask yourself these questions:

- Who is the ideal buyer?
- How can my business add value to that company or companies?
- Where should I invest in my company to ensure that these buyers will find my business attractive?

Once you have answered these questions, compare the results with your own growth plan. Where does it differ and why? Do you need to redirect your efforts to align with what these buyers are looking for?”

Planning and positioning

Their pre-valuation thought process is right in line with the first article in this series, “M&A Best Practices — How to successfully sell your business.” That article focused on preparing to sell your business, planning and positioning your company well in advance of the sale. As the article points out, this advance-planning model has been championed by investment firms for many years. It works for convenience services operators as well.

The importance of fundamentals

The Wharton School article notes that there are well-established markers traditionally used to value a business.

Industry appeal. Are convenience services businesses similar to yours still attracting strong buyer interest compared to last year?
Sales momentum. Are your revenues trending upward? Have you successfully increased prices when needed?
Value by segment. Are certain areas of your business, like micro markets or office coffee, outperforming others and driving more value?
Competitive advantage. Do you offer something unique that sets you apart from other operators in your market? Do you have advantages over your competitors in your market that make you a better prospective acquisition?
Outlook and scalability. Does your business have a solid future and the potential to grow under new ownership?
Management structure. Is your leadership team essential to daily operations, or could the business run smoothly with new management?
Operational strengths. What core capabilities, systems or technologies help your business operate efficiently and profitably?
Vendor relationships. Do your partnerships with suppliers add value or offer advantages that buyers would appreciate?
Buyer interest. Have you received inquiries or seen interest from potential buyers already?

At VBB Advisors, we focus on ensuring that your company is as attractive as possible to potential buyers. Operators need to concentrate on their strengths, maximizing those areas, and take control of the defining characteristics of the company that can be controlled.

In “Your convenience services company looks great, but is it a premium acquisition?” published on VendingMarketWatch.com last year, I listed five key factors and defining characteristics that can elevate your company to the status of “premium acquisition.”

Location. Desirable markets are a positive for buyers.
Gross profit margin. Critically important. While the selling price may be stated as a multiple of gross sales, buyers are looking carefully at gross profit.
Technology. Do you have modern equipment? The right technology?
The general economic outlook. Are buyers feeling confident about the future?
Quality accounts. Do you have a strong core of contracted local business?

Control what you can control

While you cannot control your location or the general economic outlook, there are many factors that can be controlled with long-term planning. I work closely with my clients on the following areas, all of which represent defining characteristics of a premium acquisition that an operator can control:

Contracts. Are your key accounts based on a handshake deal? Buyers want the security that contracts offer.
Recurring income. Buyers love any income that is totally predictable. Rentals, delivery charges, service fees and subsidies are a big positive.
Management business. Are you top-heavy in this area? It can be considered serious clutter to some buyers.
Gross profit. There are many ways to pump this number up. As noted above, this is very important to buyers.
Choosing technology. Use the same big-name technology providers that the buyers are using. A budget-oriented technology choice is a negative factor that will require costly changes.
Pricing. Raise your prices to the appropriate level to make your company more attractive. Planning makes that possible.
Leases. Avoid long-term leases as part of your long-term exit strategy.

Finally, when selling your business, there are two important steps related to the valuation process.

Use an experienced sell-side broker

Those defining characteristics — whether controllable or not — are one part of the business valuation process that requires counseling from an industry professional. A business broker with extensive experience brings access to comps and deals along with a complete understanding of the market and players, especially the most active buyers.

Get a third-party valuation from a financial professional

A third-party valuation is crucial for validating the process. At VBB Advisors, we work with Sheila Darby, who has more than 20 years of experience as a valuation and financial professional. She is a recognized thought leader who has worked on projects ranging from asset to company valuations. Past projects have included work for companies ranging from Fortune 500 to small, privately held businesses.

Ms. Darby’s valuations provide the insight and credibility needed to facilitate deal-making and successful resolutions. As a certified business appraiser, she adheres to the high standards set by well-recognized, accredited organizations.

For any operator who sells their company with VBB Advisors on their side, Ms. Darby’s valuation is free. The benefit of having a professional valuation in hand when negotiating a deal with multiple buyers cannot be understated.