M&A Seller: Value of Prep for Sale

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Why would executives who intend to sell their company in 12 months prepare the company for sale so far in advance?  Simply put, if done properly, preparation for sale will improve the marketability of any company, but also concentrate improvement activities in areas that matter most – earnings and cash flow – which will convert to cash at the appropriate multiple… 6-10 times the increment.

Let’s review a hypothetical example of what can be done in a series of steps more completely outlined in the “Seller’s Bingo” section of this website (http://michaelpgendron.com/MichaelPGendron/Readiness_Kwik_Check.html).

  • The preparation for sale should consider what kind of investor would likely acquire the company.  If it is clear that either a strategic or financial buyer will buy the company, this will narrow the kinds of improvements that can be made to improve valuation.  For example, if a strategic buyer is likely to buy the company, infrastructure investments in ERP may be an unnecessary expense, since the strategic will install their brand of ERP.
  • When selling a company, identify the keys to value among the following topics:

           a. People: Inside or outside the company. Inside includes all employees, and outside includes any individuals/organizations that the company interacts with in the ordinary course of business… customers, vendors, subcontractors, and out-sourced individuals.  Do you have the proper structure, and are the best people in the key positions?  Be harsh in your assessments, since Due Diligence reviewers will do so.

           b. Processes:  Are optimal processes defined, and how well are they applied.  If the processes are ineffectively designed, value will be lost.  If properly designed, but not effectively implemented, value will be lost.  In each case, time and expense will be required to improve the value of the company.

           c. Plant/assets:  Do you have the proper asset structure – e.g. right-sized the physical plants - located optimally for the company business?  Are the assets up-to-date and properly maintained to be most effective?  Consider all significant tangible and intangible assets – owned, leased or used. For leased property, is the lease appropriate?  Or should you renegotiate a low-cost, longer-term lease to improve the value of the firm?  Are you effectively managing the intellectual property development process so that Patents can be easily supported and obtained?

          d. Product:  Is the product line properly maintained, without extraneous minimal value SKU’s?  Have you effectively pruned the existing lines?  And have you improved the products and positioning whenever practical?  Have you developed products where you can get the most benefit – e.g. a minimal cost product line extension, rather than a higher cost & risk, long-term investment?  Have you judiciously added to the line so that you have a more competitive product line?  … And have you discontinued those products in the tail of the Pareto distribution?

          e. Market:  Have you effectively managed the competitive environment by enhancing your strengths, eliminating or minimizing your weaknesses?   And also, have you nurtured the market so that it is obvious that there is a long-term customer relationship that can be acquired?

In each category, put yourself in the acquirer’s place, and view the company value from their independent point of view. Some of the questions to be asked are listed above, but there are many more to be considered.

Also, when making changes, consider how a Due Diligence reviewer will view the changes.  For example, if you implement a price increase on selected products, would you prefer to see a record of acceptance by the customer … For 2 months  …for 6 months … for 9 months?  If a substantive change has been in effect for many months, it is more likely that the reviewer will accept its permanence. … And if – e.g. a price change has been successfully implemented for 6 months – cash flow and earnings will be higher, and result with a higher purchase price for the business, based on earnings and cash flow multiples.

Win … win … win …