[Editor's note: Last year, six clients of The Mead Consulting Group successfully executed sales with transaction values of between $30M to $200M. We have helped over 30 clients add value, prepare for a sales transaction, and execute successful transactions. A number of economists are predicting that 2013 - 2015 will be the best years to transact a business over the next decade. - DPM]
You're ready. You want to reach for the phone to make that call to the investment banker, M&A adviser, or business broker to sell your company. Stop. Consider if you are really ready. A recent survey of investment bankers indicated that more than half of the companies presented for sale will not result in the seller realizing the desired price. For companies under $30 Million in revenue, over 85% are not ready. In fact, most business owners wait until an unfortunate event - health issue, untimely death, partner dispute, loss of very large customer, burnout, etc. before putting the company on the market.
There are financial, legal, regulatory, and management issues that need to be addressed before the company can be properly marketed. Some relatively short-term actions (120 days to one year) can add significant value to your business and increase your selling price:
1. Do you have a Growth Story? Put some excitement (not hype) into your business plan.
Is your future strategy a mere rehash of what you've done before? If it's not exciting to you, why would it be exciting to a prospective buyer? What would you be doing if you were buying the business? Develop a strategic plan that is realistic and can be executed. Be reasonable with your financial projections, but make a compelling case for the prospective buyer. Remember, that a buyer is interested in the FUTURE opportunities for the business, not your history.
2. Drive value - in the buyer's eyes
Many times what matters to a business owner may not be what drives value in the eyes of the buyer. Adding an acquisition or product line in an unrelated field may be interesting to you, but would not fit within the investment model for a prospective buyer. It is likely better to work on things that will drive additional value to your business than what could best be described as a "distraction."
3. There are immediate profits hidden in your customer base. Focus on both your most profitable customers and your least profitable ones.
One-third of your customers are unprofitable? Think that isn't so at your company? Data from over a 1800 companies ranging in size from Fortune 500 to small and mid-size companies reveals that on average 30% of a company's customers are unprofitable when all costs related to acquiring and servicing a customer are allocated. These "bottom tier" customers typically lose between 40% to 200% of total company profits. That means that your efforts with profitable customers are constantly diluted by the bottom tier.
Customer profitability can be calculated in most companies using the existing software and information technology. There are proven methods for allocating costs to customers so that a profit per customer profile can be developed. Customers can then be segmented into Tier 1 (high dollar profits), Tier 2 (lower dollar profits or break-even), and Tier 3 (unprofitable). Once identified, actions can be taken with each group.
The thought of taking actions with unprofitable customers makes most business owners and CEOs' knees wobble. Managers initially fear that changes will result in lost customers and lost revenue. That simply is not the case. Companies find that turning unprofitable customers into profitable ones is not as difficult as one might think. Carefully identified and properly implemented changes typically result in very few customer defections. Most customers that like your products and services are not fast to change. Those that do leave actually result in an increase to overall profit. Since valuation of most companies is based on multiples of profit or cash flow, profit is much more important than revenue. A wholesale distribution company with $45 million in revenue found that by implementing relatively simple changes to pricing, packaging, and servicing, it reduced the number of unprofitable customers by 45% in 180 days, adding almost $700,000 annually to the bottom line. At a relatively modest multiple of 3 to 6 times EBITDA, these actions alone could add $2 to $4 million to the selling price.
Expanding business with your most profitable customers is the most direct way to increase revenue and profit. By examining the needs of your most profitable customers, you can unlock ways to develop incremental profitable growth. In difficult economic times, it is far easier to increase revenues with your best customers than it is to find and close new profitable customers. Have you asked your best customers how you can gain more of their business? A manufacturing firm with $100 million in sales learned that by adding project management services for its best three accounts, it was able to add an additional $10 million in revenue and almost $1 million in net profit in the first full year.
4. Are due diligence nightmares hanging over your business? Don't wait until you get ready to sell to clarify potential due diligence issues. Waiting will, at best, delay your sale and may result in a significantly lowered price. At worst, they can kill a deal. According to one Denver transaction attorney, "I have seen sale prices lowered by as much as 60% because of a surprise that comes up during the buyer's due diligence. It is far better for a seller to discover these in advance when they have the time to resolve them. A Denver investment banker recently described this situation: "A buyer almost walked away from a purchase because two weeks before scheduled closing, the seller could not produce the proper documentation on their corporate 'S election.' The seller, in order to get the buyer back to the table, ultimately had to agree to put millions of the selling proceeds into escrow to cover a potential tax liability. All because the seller didn't prepare in advance."
Begin to review such issues as:
· Business entity organization, structure, and ownership
· Ownership, protection, and use of Intellectual Property
· Operating and financing contracts and transactions
· "Auditable" financial statements
(Isolate closely held business expenses)
· Pending litigation
· Securities and Tax matters
· Environmental or Other Regulatory issues
5. Get help selecting a "seller's representative" (investment banker or M&A Advisers).
The Mead Group has been involved with our clients buying and selling businesses in this region for 25 years. We have developed good working relationships with the best in class seller's representatives. We can help you to make an informed, educated decision that could make a significant difference not only in the final price, but also-and more importantly -how much you will be able to put in your pocket after taxes and selling expenses.
Start preparing NOW. It may be a 5 year journey!
The demographics of the "Baby Boomer Business Transition Bubble" make it critical that you begin preparing now so that you can sell in the next few years. Estimates for 2012 indicate that there are between 1.2 -1.5 million business owners in the U.S. (of businesses between $2M to $90M in revenue) that need to sell to provide liquidity for retirement. What most seller representatives do not tell you is that it may take you 5 or more years to leave the business - if you expect to maximize your value. This may include 1-2 years to properly prepare your business for sale, 6 months to one year to sell it, and then you may be asked by the buyer to stay on for 3 -5 years to run it. Financial buyers and many strategic buyers don't know your business as well as you do and frequently require managers to stay on to help run the business.
So, before you make the call to an investment banker to sell your business, take a critical look at your company and its current situation. Will you get the kind of price you want? Are there some short term steps that you can take that will add value? Spending some time improving business operations may enable you to reap real value within a relatively short time.
Contact us if you would like to discuss what the best performing companies are doing?