M&A Seller: You're Selling Future Cash Flow

Copyright CFO Insight LLC. All rights reserved.


Seems simple enough.  When a potential buyer intends to buy a company, they will be examining your business from their viewpoint, not yours.  If you haven’t considered their goals, you will not represent your company effectively.

Your goals – the way you operate your company – may differ significantly from the potential buyer’s.  They may not need your private plane… your vacation house … or your Uncle Ned, as VP of Sales.  They may also decide that formal procedures and accountability, well-trained personnel, and routine formal planning are essential.

They may not support your local charities, or have those deep-seated warm feelings you have for the community.  They also may not consider your employees as extended family.

And of course, what role will you play in any post-deal business?

Each of these personal nuances in your company will represent – in some way – cash flow.  Cash outflow from realigning to the buyer’s mode of operation can be in the form of severance packages, continued salary for unnecessary personnel, retraining costs, new data systems etc.  When the potential buyer identifies these gaps, they will first think of the savings after acquisition, and then list each of these as negotiating points – ideally resolved before any deal is concluded.  Their decisions will not be emotional in any way.  Assume that they will initially be fact based… spreadsheet driven … valuation considerations.

In reality, every dollar of cost to align the acquired company to the buyer’s standard will be a dollar less in the purchase price. 

When you consider selling your company, advance planning – at least one year – will allow you sufficient time to plan, execute, and measure the impact of changes that you make. For example, if you hire a new VP-Sales 3 months before you offer the Company for sale, this represents potential risk to a buyer.  Their questions:

Will such a new VP fit into the culture? 
Will that VP require organizational changes to meet his goals? 
Will the sales force require training? 
Will there be a shift of resources to other sales processes – company sales reps versus manufacturer’s reps? 

Each of these potential questions can be avoided by changing the VP of Sales one year + before the Company sale.  The Company performance can be evaluated with the required changes in place for a reasonable measurable performance.

And if the changes truly focus on a better Company performance, earnings will increase, and when pricing is influenced by comparative multiples, one dollar of earnings will translate into “x” dollars of selling price (e.g. if PE multiples range from 5-7 for your industry/size, $100,000 of increased earnings could result with $500,000-$700,000 increased selling price).