As a Mergers & Acquisitions Advisor, I have learned business owners should always operate their business as if they want to sell it. One never knows when a qualified buyer is going to contact you. If that happens, you want your business to be in good standing to obtain the highest possible value. There are several key factors that will determine value in a business and intelligent management practices that will result in healthy net income year after year. What are these key factors? What do you focus on when managing your company and business for sale?
Reducing Customer Concentration
Very often I see small to mid-sized dairy related companies with too much client concentration. If you have a handful of clients making up to 75% of sales, that’s customer concentration. One client representing over 40% of your revenue is client concentration. A healthy model is to not have any one client representing over 15% of revenues. Client concentration creates risk to the business and to any buyer that is considering acquiring your business. Increased risk negatively impacts value. The goal is to reduce risk to your business and to any potential buyer. Having your client concentration under control will put you in a position of strength when negotiating value and favorable terms and conditions to the deal. A company with just a few accounts is not viewed as an attractive acquisition to a qualified buyer.
Healthy Gross Margins
Every niche in the dairy industry has gross margin guidelines. The gross margin benchmark for cheese manufactures should be north of 20%. When growing your business have a strategy on pricing and stick to it as much as you can. The exception perhaps is with the development of strategic account scenarios. Have a rule in your game plan to discard low margin clients as you bring in accounts with stronger gross margins. Have your sales team stick to strict methodology when it comes to the ideal client. If your business is operating with low gross margins, what is a potential buyer going to think? “Why buy the company? I can just beef up my sales efforts.”
Have Management Handle Day to Day Operations
The business should be able to run by itself without the owner involved with day to day operations. I have seen businesses that are too dependent on the owner’s participation in the daily functions of the company. What happens if the owner is incapacitated in some manner?
Who takes his or her place? That is a huge risk. Incentivize your employees to take on more responsibility in operating the company as it relates to operations and sales. Then if something happens to you, the business is not impacted or interrupted in any way. Ideally, you want your company to be able to run itself.
This element is very important to buyers. Consider this situation: A young owner that has successfully operated his company for 5 years or so and wants to take some money off the table and merge with a larger like company that has a strong back office capacity with marketing and the sales operation in place so he or she can focus more on the front side of the business. Buyers like this situation with a young owner that hasn’t been in business very long. With a dairy company where the owner has been on board for 20 or 30 years, buyers want them to exit the company.
The transition of a long-time owner into an employee position after the acquisition rarely works for very long. It is best to get yourself out of the daily operations by getting the proper managers in place. Give your key client relationships to capable senior sales representatives. Connecting yourself to your major accounts increases the risk to any qualified buyer.
Have Management in Place Who are Willing to Stay
It is important that you as a seller communicate to your key managers who operate the business that you are considering selling the company. In selling the company its imperative that your top management personnel stay on board with the new company. Why is it important? Buyers are looking for the capable management to stay on as to make the transition as smooth as possible. Integration of the two cultures need to work for both sides to insure the company’s functionality and worth. There is inherent value in the new culture be stronger than it was pre-acquisition. The last thing a seller or buyer want to happen is to have the company’s team bail.
Industry Standard Compensation Plans
It is important that the compensation plans meet industry standards. If not, it will be an issue for any potential buyer, and it could be a factor in nullifying the deal. Seasoned buyers do not want to change any compensation packages immediately after the sale. A buyer risks losing key management and sales representatives by making compensation changes early on. It is important for buyers and sellers to understand how valuable capable and productive personnel really are.
The Exit Strategy is just that, it is a strategy and not something you decide to do on a whim. There is a statistic out there that over 75% of businesses today do not have an exit strategy. I always promote an Exit Strategy should be the last chapter of your Business Plan. What happens if you suddenly have medical issues or other matters that render you unable to be involved in your business and you have not prepared your business for sale? This becomes a weak position and the value of your business suffers significantly.
An Exit Strategy will urge you to develop a “value goal.” You must ask yourself how much money do you need to satisfy those goals to retire? The value goal is the number you need arrive at prior to selling. An exit Strategy will outline key items that need to be resolved, including the ones mentioned earlier, in order to attain maximum value when you sell.
Not only do you have to get all these elements working in your favor, but you must have at least 12 solid months of top performance.