CFO Insight LLC
Why limit the “People” analysis to just employees and those inside the Company? Prepare for sale should also include a review of the customer and vendor contacts, as if you were an independent reviewer trying to understand the risks, opportunities and value of a potential acquisition.
A scenario for consideration …keys to valuation at the company are the new customers acquired, new products introduced and the latest price increases applied during the past 6 months…
As the pseudo Due Diligence reviewer on ABC Company, you’ve asked for the customer lists in several different configurations: high-low listing of sales for the last 12 months and the last 3 months; sales of the latest new product introduction, by customer; high-low gross margin by customer for the last 12 months and the last 3 months; high-low listing of cumulative credit memos issued by customer; summary of the latest price increases; listing of contracts expiring in the next 6 months, if any; listing of new customers during the past 12 months, including name, sales value and month started.
By reviewing actual summaries of the keys to value, you might be surprised to find items such as:
- Some of your best customers will have contracts expiring in the next 6 months, presenting business risk to potential buyers.
- Price increases may not be universally acceptable, as evidenced by the number of credit memos due to price discounts.
- While you actually believed that the new products were being universally accepted, most of the sales occurred in the ‘south’ indicating less than uniform acceptance.
- Sales at several of your best customers have been quietly declining in several product areas that you hadn’t noticed before.
A prep-for-sale review well in advance of sale will highlight these risks and allow you to implement corrective action so that positive trends may be demonstrated by sale time. Establishing monitoring processes to highlight keys to valuation will ensure that you aren’t surprised by adverse conditions.
… Another scenario with vendors as a key to valuation…
As the pseudo Due Diligence reviewer on ABC Company, you’ve requested key vendor lists in several different configurations: high-low listing by vendor of purchases for the last 12 months; a listing of all the products/services provided by critical vendors; listing of contracts expiring in the next 6 months, if any; listing of new vendors during the past 12 months, including products/services supplied and vetting process used to qualify the vendors.
If the supply chain is a primary source of value (e.g. sole supplier relationship for key components), have you effectively protected your sourcing through contracts to ensure supply? Also, have you properly vetted suppliers to ensure their continued viability? In such industries as metal fabrication, will they sustain a prolonged downturn in the economy? And how extensive have they become embedded in your supply chain? For example, in some companies, design and production responsibility have been delegated to the supplier to improve overall Company competitiveness. If the vendor can’t deliver results in the future, will you be required to find two highly qualified vendors rather than just one?
Of course, these are two examples of review steps that could be implemented. The key is to examine the business as if you were a reviewer looking for risk and opportunity, and modify your business to minimize the risks and accelerate opportunity. Review the business early to effectively implement corrective action and realize the benefits of improved earnings, accelerated cash flow, and minimized risk.
Copyright CFO Insight LLC. All rights reserved.