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M&A Seller: People

Let’s first define People.  People include all constituents with whom the company routinely interacts.  This certainly includes employees, but when considering M&A, every person, organization, community that is within the normal scope of business activity should be considered.  People – in this case - also include organization structure, compensation, routine processes used in the business.

But why go beyond employees when preparing for sale?  The Value Chain drives your business and competitiveness… and people are involved in every aspect of your value chain.  Consider the business activity that may be affected by outsiders.  For example, sales agents, distributors and manufacturer’s representatives all can have a significant impact on the success of your business.  Each of these representatives manages relationships within your trade channels.  They have a record of performance.  Even if the historical performance is poor, and you engage new, proven performers, they have no performance record in your business.  You will not realize the true value in a sale transaction until they have proven themselves in your operation. If you truly believe that an individual’s (organization’s) performance is substandard, why not make the changes earlier in your strategy, and – if the strong performers really will impact your business – reap the benefit of change well in advance of the sale. Especially since improved performance may increase the business selling price, since two criteria often used in valuations include cash flow and earnings. If an organization change adds $1 million to annual EBITDA, and the relevant pricing multiple is 6 times earnings, you may have just increased your sale price by $6 million. 

Relationships with vendors, government agencies or any constituents may also impact your business success.  In each case, established formal and informal processes may simplify day-to-day operations… changes to the routine may reduce your effectiveness. 

How will change in process, structure or personnel affect these relationships?  One certainty is that there will be an impact, which may range from insignificant to devastating. Given that change will have an impact, it is best to execute change well in advance of any sale.  Once change is implemented, monitor the performance versus expectations.  Each time you project, and reach established goals credibility increases… credibility equals valuation, since companies are buying future performance. And a 12 month trend is better than a 6 month trend… and a 6 month trend is better than a 3 month trend.

As a Due Diligence reviewer, it is difficult to attribute any significant positive impact to future earnings or cash flow for any major changes made within weeks or a few months of a potential sale.  Some examples follow:

  • A recently appointed COO has a potential negative implication on valuation, rather than a positive impact since he (she) has no proven track record in the position at the Company. 
  • A recent change in commission payment schedule has a negative implication, since there is no proven record of success.  Will the change truly improve sales performance?
  • A recent restructuring that reduced overhead headcount and cost by 10% may ruin the effectiveness of the organization, and adversely affect competitiveness – reducing the legal staff may slow the new contract negotiation process.  Reductions in force may add legal risks such as discrimination lawsuits against the company.

Also, if it is likely that people actions will be required by a buyer, the financial impact for the changes made by the acquirer will likely be conservative (on the high side…) to hedge the unknown.

Review a list of all the people with whom the company interacts, prioritize the list based on impact to the company, and improve personnel, organization structure, process, (including compensation/fee structure) well in advance of a sale decision.  If changes are required, make the changes early and reap the benefit in current performance, future salability and valuation.