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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.

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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.

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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.

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