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Frequently Asked Questions

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How can my company increase its transaction value?

If you are a business owner wanting to increase your company's transaction value, you may want to look at your business by considering what is salable. Investors are always concerned with the transportability of the business; can they operate it as effectively as the current owner. This is one of the most crucial areas. One of the best things you can do is build a strong management team under the owner, which will broaden the market for the company. You need to show that the business can carry on without you while keeping cash flow predictable. You won’t have a lot of potential buyers if you don’t have a management team that can keep the purchaser’s investment stable. The deeper the bench, the less concern the buyer will have regarding this.

Along the same lines, as a company gets nearer to selling the business, owners should make themselves as unimportant to the daily business as possible. Put others in charge of daily operations and customer relationships. And, let your investment banker execute the transaction. Again, this is a way to create a portable business.

Another thing is the significance of contractually recurring revenue. Revenue stemming from a recurring contract for annual maintenance or services, licensing fees, annual subscription fees, etc. are a much more powerful value driver than new sales revenue or other non-recurring revenue streams. It has to do with the amount of risk a potential investor or acquirer identifies with. The higher the risk (future sales) the lower the return. The lower the risk (contracted revenue stream) the higher the return.

An example of this is in the software industry where businesses are typically sold at a multiple of recurring maintenance revenue. In some cases, a company\'s new license sales, future project work or pipeline contracts and forward-looking installation revenue are virtually eliminated from the valuation formula. The lesson here is that if you can adjust your pricing model and turn a situation into a recurring annual contract, you will be greatly rewarded when it comes time to sell your business.

On the flip side, the most important factor in reducing the 'transaction value' of company is whether or not the current business is concentrated in too few customers. That is perceived as a negative in the acquisition market. The concern is that if the owner exits or customer service suddenly falters and the major customers leave, the business could be negatively impacted. On the plus side, if none of your customers accounts for more than 10% or 15% of total sales, that is viewed as a real plus. If you find yourself with a customer concentration issue and are planning an exit, start focusing on a program to diversify. A quick fix might be to make an acquisition of a competitor with customer diversity, integrate them into your business and then take your company to market.

At Lexington, our overall strategy is dedicated to helping lower and middle-market businesses achieve their strategic and financial objectives across the entire range of traditional investment banking activities.