Addressed primarily to owner managers “What would a purchaser do with this business?” is a technique that can be used by any one intent on maximizing the contribution from a department or function. We talk to the challenges of preparing a business for sale and share our experiences working with enterprises of varying size in multiple industries.
The frequent reaction from business owners to the idea of preparing for sale is “I have years to prepare” but no one can predict when circumstances may force them to have to step aside. It is never too early to optimize the value of an asset needed to finance maybe thirty years of retirement or fund the future for heirs or dependents.
The majority of business owners express shock when told the market value of their business. Their influence and control so embedded that in their absence, the business would cease to function. Businesses that are ready for the exit of the owner attract greater value. To increase a business’s value and attractiveness to a buyer either in a planned sale or unexpected exit, an owner needs to detach themselves – this is insurance that will continue to grow in value.
The common refrain during a transaction is that it is all about the multiple. We agree because in a transaction it is too late to prepare for sale. The multiple wuill be at the high if an owner prepares ahead of time. A buyer wants to be sure that they are buying an efficient operation and a seller wants to be able to negotiate the minimum of conditions. Preparing for an exit does four things:
- Improves the value of the business
- Improves the ongoing return from the business
- Mitigates risk for a buyer
- Enables seller to concede fewer conditions
Owners often assume who their eventual buyer will be; a bigger competitor that offers scale, market share or other commercial advantage, as if that were a justifiable rationale for not being “sale ready”. It may offer comfort about the likelihood of a sale but not the price. Prepare the business, in much the same way a realtor would a house and the potential sale price will grow.
Owners for the most part under estimate their management activities and how much delegation needs to happen. A buyer wants to ensure that the business will perform after purchase without the former owner, as well as it did before and will seek due diligence evidence of indicators to confirm this. A vendor should prepare by anticipating this need and take the same fundamental steps to be sale ready:
1. Organisational discipline – many owner operated companies often do not have a rudimentary organization chart or job descriptions. Their presence signify that employees know their roles and can fulfill them without task by task supervision by the owner. They indicate lines of authority and infer that while the organization will still require leadership, it can function on its own.
2. Alignment – organizationally this means that every employee communication (e.g. management briefing, newsletter, compensation target even benefit plan) positively reinforces the dsame common values. In other words, strengthens a culture that fosters engagement and productivity. Significant companies often overlook alignment and say one thing but have compensation plans for example, that motivate behavior in a different direction. Buyers don’t like dysfunction.
3. Performance Discipline – a discretionary incentive plan with payout determined by the owner and lacking formal feed back signifies subjective and inconsistent performance standards. Preferred would be an objective process, ideally metrics driven with predetermined payouts and individual achievements feeding a talent plan.
4. A Talent Plan – in the same way that an owner can never predict when they may have to relinquish ownership, they cannot predict when key employees are going to depart. Knowing who they are is a first critical step and that doesn’t necessarily include those at the top. Who have the essential skills both technical and leadership? For example the informal go to person who leads employee opinion on the shop floor. Knowing the key positions and having a contingency plan to fill them is an important tool that will mitigate risk for a buyer.
These are just four examples of areas of leadership and management that in our experience, owners take for granted and that need to be converted to formal processes that can be operated by others. An exercise to identify and institutionalize them will create ongoing value for any organization whether a sale is planned or not. The longer these are operational prior to a sale, the greater profitability and sale value they will generate.
Taking these steps will likely not be remebered when sale day planned or otherwise, comes around but they will place a seller in a stonger position to negotiate and at a higher price.