By: John Stude – Vice President, Business Development
Investors, whether financial or strategic, are interested in acquiring top performing companies that add value through acquisition or by assisting with capitalization. Financial buyers want to improve their portfolio while corporate strategic buyers are looking to add to their bottom line. With over 35 years of experience in the energy sector (through corporate acquisitions with Superior Energy Services/Complete Production and as CFO & Plant Manager with International Petroleum Services/Cardwell), I’ve evaluated countless companies.
The following are some issues I have encountered that cast companies in an unattractive light, and have been deal breakers in some cases, followed by suggestions to right the wrongs:
- Improper accounting methods, bookkeeping errors, lack of usable reporting
- Inadequate control of expenses
- Employee under-utilization, lack of training
- Poor management techniques
- Lack of planning for potential expansion
- Facilities and/or equipment in need of upgrading
- Customer concentration issues
- Faulty or non-existent safety practices
- Failure to evaluate your company objectively
First, an entrepreneur shouldn’t start a company with the sole purpose of selling the business. Rather, the goal should be to build a successful company for the long term. If you have accomplished this task, then selling your company at the appropriate time will be much easier and certainly more fruitful. Second, it is sometimes difficult for owners to cast a critical eye on their own business but it’s important to honestly evaluate each aspect of your business whether you’re selling or just running your company. Finally, business owners may need to accept the fact that in some cases they simply do not have the financial resources to fix all of the problems, in which case they need to consider giving up some of their control to an investment partner in order to properly grow the business. Given these general observations, below are a few suggestions to help business owners maximize their company’s value in the eye of an acquirer:
- Remove non-operating expenses. I understand that business owners want to maximize income tax expenses but if you are looking to sell your business keep in mind that valuation is normally based on EBITDA (Earnings Before Interest, Tax, Depreciation & Amortization) so while you might get a tax break on repairs and maintenance of that vintage pickup, it will dilute your valuation by whatever multiple an interested buyer is applying. Ensure that your accounting software is adequate to provide you with timely and helpful information and that your personnel are properly trained for such software.
- Don’t wait for hard times to cut out unnecessary expenses. It is sometimes easy to ignore minor, unnecessary expenses when times are good and you have good profits to cover such spending, but cast a critical eye towards reducing unnecessary expenses whenever and wherever possible.
- Strive for optimal headcount. Normally the concern is whether or not a business has excess employees but there are also situations where a business might try to skimp on employees at the expense of customer needs. In order to have a healthy company you need to have a good balance of dedicated employees.
- Do you have the right management team in place? You most likely do if you have built a successful company. However, if you are ready to exit and your entire management team is ready to retire, then potential buyers will be rightfully concerned about business continuity. Plan ahead to ensure that the right individuals are being trained to take over management responsibilities. Again, this should be a strategy whether or not you are looking to sell.
- Identify near and long-term growth opportunities whether through expansion into new geographic areas, expansion of complementary product lines, or even acquisition(s) of competitors. Such opportunities can enhance your own valuation at a future date or provide potential growth for a buyer, which will enhance your value to a potential buyer.
- Take a hard look at the condition of your facility and equipment and shed assets that are not needed. Be proactive in regards to equipment maintenance by establishing and documenting, routine maintenance practices.
- Grow your customer list with the goal of no one customer being an unreasonable percentage of your total revenue.
- Firm up safety practices, update employee handbooks, conduct and document safety meetings, strive for a TRIR equal to or better than what is acceptable in your particular industry.
- Conduct an honest SWOT analysis by identifying your company’s strengths, weaknesses, opportunities and threats. A potential buyer will do this, so if you do it first, you’re ahead of the game.
Two more important items to keep in mind when you consider a potential transaction are as follows:
- You can’t really build a company with a certain corporate culture in mind that will fit a buyer when you have no idea who that certain buyer will be. However, simply be aware that if a potential buyer has a corporate culture that is vastly different from your culture, then a successful transaction is probably not in the cards. This can be a major concern if your sale includes an “earn-out contingent consideration” clause or if you are retaining equity in the company going forward. Even if you are not continuing with the company, an incompatible corporate culture can have adverse effects on your employees going forward.
- Entering into a sale or a recapitalization should never be a spur of the moment decision. Align well in advance of a transaction event with advisors who specialize in your industry. For example, experienced advisors can help you understand the tax implications of any proposed transaction structure and position your company now for the best future outcome, which has a direct impact on the net amount that you realize. Citadel Advisory Group has consulted with sellers sometimes years ahead of a sale. It’s never too early to hire an M&A firm that understands your industry and already has relationships in place with the best partner to meet your end-goals.
Take a step back from the day-to-day and look at your company through the eyes of an acquirer. Surround yourself with experts who know what buyers look for in target companies. Taking action today will maximize your future returns.