Maximizing Value in a Corporate Sale: Business Infrastructure

Is your company’s infrastructure adequate to support its current operations? Is it adequate to support your projected growth?

Your company’s infrastructure includes many things. Office, manufacturing and/or warehouse space; IT systems; purchasing and supply chain logistics; administrative functions; and more.

Potential buyers will view your company’s infrastructure as either mitigating or creating risk to your quality of earnings and growth potential.

If your company’s infrastructure is where it needs to be, the business will be more robust and able to take on challenges and growth opportunities. If it is fragile, and barely able to keep up with current operations, then the possibility that something will go wrong (whether or not you sell) skyrockets.

Inadequate infrastructure signals to prospective buyers that there is high risk to quality of earnings and potential for growth. Any prospective buyer will understand that they will have to develop and implement an investment plan to improve the basic assets of your company. This represents additional time and cost, and slows down a buyer’s post-acquisition plans.

Alternatively, having your company’s infrastructure primed, and ready to take on growth opportunities and industry challenges provides assurance to prospective buyers and mitigates their perception of risk.

Company infrastructure is an aspect of your business that you may take for granted; potential buyers won’t. Due diligence will unveil the adequacy of your company’s infrastructure and will be a factor in whether or not you are able to maximize value in a sale.

Maximizing Value in a Corporate Sale: Obsolescence

If obsolescence issues are present in your business, potential buyers will naturally understand there is increased risk for your quality of earnings and growth potential. One question any good buyer will ask is “are your products/services going to be obsolete in the next 3-5 years?” Smart buyers will not stop there.

With evolution in business accelerating, potential buyers will ask if your products/services will simply be less competitive in the near to mid-term. If they are, risk to quality of earnings and growth potential increases.

Most company’s products/services will not be obsolete in the next five years. Smart CEOs and owners make sure their company is always improving what they deliver to clients and customers.

The area many companies ignore in regard to obsolescence issues involve their business processes:

Are your revenue generation processes becoming obsolete? Sales, marketing, advertising?

Are your financial control and reporting functions keeping up with your company’s growth?

Are you employing financial and operational analytics and business intelligence tools that are becoming standard operational tools for strong businesses?

Is the management team that got your company to where it is the right one to get it to the next level?

Are the production methodologies used for your products/services at a current state of excellence?

The list goes on.

As you examine all aspects of your business, do so with an eye towards competitive analysis. That is what good potential buyers will do in due diligence. The more competitive your products, services and business processes, the greater the likelihood that your company will have high quality of earning and growth potential. Potential buyers will factor that into their valuation.

You can sell your company if there are weaknesses in regard to obsolescence. You will simply not maximize value.

Maximizing Value In A Corporate Sale: Business Concentration Issues

Having too great a percentage of your company’s revenue from one or two customers creates business concentration risk, a risk to quality of earnings that will be recognized by any potential buyer. Those important clients/customers may simply take their business elsewhere, rapidly eroding the economics of your business. Even the most airtight supply agreement leaves you with some risk.

Similarly, if your business is reliant on one or two key suppliers, the risk of being cut off will be a red flag to any potential acquirer.

Mitigating these risks seems simple, and sometimes is not. If you can obtain additional customers and or suppliers, do so whether or not you are selling your company. If it is simply not possible, maximizing the value of your business may be best realized by consistently distributing out as much cash as possible, rather than seeking a sale. If you do decide to sell, a transaction containing contingent payments – an “earn-out” – may be needed as a risk-sharing mechanism between current shareholders and a buyer.

Customer and supplier concentration are not the only areas where business concentration risk may exist

If one or two salespeople control most of your revenue, risk flags will fly, as they could opt to leave at any time including after a transaction. If one person controls the flow of financial information or your IT infrastructure, risks arise. If decision-making, even on relatively minor matters, is controlled by one person (perhaps you), risks to both quality of earnings and growth potential exist.

Addressing these types of operational concentration issues are within your control as CEO. If you decide against addressing such issues proactively, you may mitigate risk in a number of ways. Providing bonus payments to key people contingent on staying with the company through the transaction process, and alerting the potential buyer that employment agreements should be arranged with key people are two actions that may mitigate these risks.

Your company can be sold if you don’t address concentration issues relating to customers, suppliers and operational functions. The value will simply reflect the risks to quality of earnings and growth. Those risks will be evident to any competent buyer during the due diligence process.

Maximizing Value in a Corporate Sale: Quality of Strategic Plan

How potential buyers think your company will perform once they own it will determine their valuation.

Your strategic plan is the single best tool for explaining to potential buyers that your company has achieved its current performance due to thoughtful, calculated, well planned and implemented strategies. Your current strategic plan will show potential buyers that the same quality of analysis and thought provides them with a blueprint they can implement that maximizes the likelihood of continued success for your business.

If you don’t provide potential buyers a strategic plan that is clear and coherent, there will be an assumption that luck or you personally are wholly or largely responsible for what your company has achieved and what it might do in the future. Luck and your executive capabilities will be perceived as risk to your company’s future quality of earnings or growth potential under the ownership of a potential buyer.

Many companies small and large, do not have prior or current strategic plans that are clear, coherent and actionable.

All the thinking and information might be in your head, but if it is not written clearly and coherently, other people will not be able to understand it. If this describes your company, putting a plan together will pay off when you move to sell.

If your company does not have a quality strategic plan, it is important to hire an investment banker who will generate one for you. Having your “story” told in a way that potential buyers can understand, and which will stand up to the extreme scrutiny of due diligence, is critical to the process of allowing potential buyers an opportunity to understand why maximum value should be paid for your company.

If you don’t have a quality strategic plan, or an investment banker who can explain your business’s historical and going forward business strategy you can still sell your company. You simply will not get maximum value.

 

Maximizing Value in a Corporate Sale: Quality of Management

You undertake the sale of your company. How does the quality of your management team impact potential buyers’ perception of the company’s quality of earnings and growth potential, and thus its value?

In the vast majority of cases, the CEO and/or owner of a company does not stay for long after a sale.

There are many reasons for an owner or CEO to depart after selling their company;

  • It’s hard to work for someone else once you’ve been the boss
  • Difference in operating styles
  • You’re too expensive
  • You want to retire
  • You just took home a lot of money and you don’t want to work anymore……

The result is that potential buyers will determine the value of your company WITHOUT YOUR PARTICIPATION.

If your business is reliant on YOU, potential buyers will correctly think that the loss of your services could disrupt the continuity and capability of the company’s management function. Decisions made without you might not be as good, creating risk to quality of earnings. Without you driving the business, there is a risk that growth will slow or cease.

If you have invested time, effort and money in a superb management team, this risk to quality of earnings and growth potential are mitigated. The people who have been operating and driving the business day-to-day will be there after you leave.

Potential buyers will see a cohesive management team and be able to rationally assume that the business will not do worse under their ownership than it has in the past. If buyers are confident in their own abilities and resources, they may assume that your company will do even better post-acquisition.

This is true even if a potential buyer is a private equity firm that requires you to maintain an equity stake in the business and continue to run it as a condition of closing. If the company is dependent on YOU and you leave for any reason, the PE firm is at risk if there is no team to maintain operational continuity of THEIR company.

When you sell a business, you and your team will meet with the potential buyers’ team for a management review. If your team members speak at least 70% of the time, and demonstrate their abilities to potential buyers, you are on your way to maximizing value.

A truly critical negotiating lever is also created when you demonstrate to potential buyers that you have a high-quality management team. Your business is successful and runs well in your absence, so your motivation to sell is not as high as it might be. YOU DON’T HAVE TO SELL! This is a more controllable negotiating lever than competing bids.

If you do not have a quality management team you will still be able to sell your company. You just won’t maximize value.

Maximizing Value in a Corporate Sale: Introduction

You are a CEO. You lead a successful business you share numerous qualities with your peers. Among them, being somewhere between bright and “whip-smart”. You turn ideas into reality. Your leadership has a direct impact on your company.

Selling your company will be one of the most important financial events in your life. Maximizing value in that sale is critical to all stakeholders.

You approach me as an investment banker who sells companies and ask “What’s my multiple of – EBITDA or Revenue or Book Value?” How do I get maximum value when I sell? What are you going to do?

Some M&A professionals, your lawyer or accountant would gladly answer those questions.

BUT …. you are taking the wrong approach to maximizing the value of your company in a sale.

The same characteristics that make you a successful CEO will allow you to maximize value in the sale of your company.

As your investment banker, my job is to present your company’s value proposition to appropriate potential buyers in a clear, compelling, accurate manner. This will allow them to perceive its value. From that perception, we can negotiate price and terms. Accuracy is critical: You must assume EVERYTHING will come out in due diligence. If any representations are proven false in due diligence, or material omissions arise, you will undermine credibility on every aspect of negotiations.

This series of articles will demystify the process of maximizing value in the sale of your business and explain how you, as owner and/or CEO, control that outcome.

 

The premise of these articles is that two things determine the value of a business:

  • Quality of Earnings – Is profitability from your core business sustainable?
  • Growth Potential – Whether your market or industry are growing, static, or shrinking, does your company have the ability to grow at an above-average rate; are you better than mediocre.

The next six installments of this series will discuss the most import factors in maximizing the value of your company by creating upside or risk to your company’s quality of earnings and growth potential:

  • Quality of Management
  • Quality of Strategic Planning
  • Business Concentration Issues
  • Obsolescence
  • Business Infrastructure
  • Financial capacity, controls & reporting

All of these factors are controlled by you as owner and CEO.

Tune in in two weeks for our next segment.