In today’s highly active M&A market, we hear of more and more prospective sellers in the planning stages, wondering what they can do to optimally “prep” their companies for future sale.
Accordingly, for those who may be nearing the right time to contemplate sale, some well-planned positioning for the future could pay huge dividends. What should companies do to position themselves well as the time drives near?
#1: Build an image of focus
Buyers inevitably target acquisition of companies with especially powerful penetration and reputation in one specific, targeted area. They look for the manufacturer with the reputation for being the best in its specific segment. They look for the distributor who carries the most complete, comprehensive line of coverage in some specific type of product. They look for the service provider who is the only one (or the best one) in its targeted arena.
As we talk to buyers in almost any field, three out of four mention in their first few sentences, as they describe their acquisition desires, that they hope to find the niche provider, who has quality or “clout” in their field. Buyers pay more for focus. Our proprietary internal valuation model adds value premiums of anywhere between one and two times earnings for the attribute of strong business focus. Develop a reputation in your industry group. Aggressively court the biggest and best customers within your niche. Seek opportunities to employ top talented individuals in your specialized areas of concentration. Niche winners earn value for their companies.
#2: Reduce owner dependency
The selling company must be able to sustain business smoothly and efficiently, even as ownership management transitions to new endeavors. Any time such transition is likely to mean the loss of key people, who drive fundamental business success, value is severely diminished. Customers need to know and to see, quickly after sale, that operations continue to be carried out smoothly and that supplies of quality goods and services will not be disrupted by change.
Prudent business owners work hard to ensure multiple checkpoints and varied individual contacts and relationships with customer staff. Customer loyalty needs to be nurtured across a broad band of company connections, which include initial inquiry or order contacts, scheduling and planning coordination, core service or product providers, quality control checkpoints and any other fundamental access points to customers.
Proprietary products and processes need to be well documented and easily transferred to new talent, in case of individual turnover. When a company’s performance is not highly dependant upon personal input by owners, customers may be better and more dependably served, and owners have added personal freedom for time off when needed. Thus the payoff for reduction in owner dependency shows, on many fronts.
#3: Clean up roadblocks
Regardless of how profitable and healthy a company’s performance may be, there are certain types of issues that seldom arise to cause disturbance, except in times of transition. Environmental issues, labor related compliance matters, and attention to legal and corporate documentation, for example, are the types of issues which often get very little focus during normal operating times, but which inevitably get thorough scrutiny at time of sale.
Owners contemplating potential sale in the next three years do themselves a huge service by performing an internal “audit” of their preparedness in these arenas, anywhere from one to three years ahead of the actual planned efforts to sell.
Even the most honest of buyers, working with the most willing of sellers, will not overcome a gaping legal or compliance matter which may impair value in transition. Most problems of this type can be cleared and repaired with a bit of time and effort, ahead of sale. However, if a pending sale is derailed at late stage by these sorts of problems, the transaction seldom recovers to proceed on the original planned course.
Businesses that may face transition in the coming two to five years can benefit SUBSTANTIALLY by taking a good look to plan today. The company will be healthier, transitioning will proceed more smoothly, and exiting owners will profit from prudent preparedness.