Since the acquisition process itself is a lengthy process, positioning for a sale that might be several years in the future should already be in the works. While no two companies would undergo an identical process, there are some general guidelines that apply in order to maximize the value of a company. They involve the following considerations:
1. Management succession… a portion of a company’s value is directly related to its management. The question of what happens to that management team – and its value when the owner departs is of vital concern to a buyer. Buyers look for a strong management team that will stay in place. In fact, some buyers will be interested in having management take a minority equity interest in addition to offering management incentives to remain and support the trasition to new ownership.
2. Owner-related costs… while valuation formulas can be quite complex, the selling price will likely be calculated as some multiple of earnings or of cash flow. This value will be higher if certain “owner perquisites” that will disappear when the owner departs are segregated so that they do not influence the application of a valuation formula i.e., excessive compensation or rents on owner’s properties, travel, etc. Segregating such costs allows you to paint a more accurate picture of the post-acquisition earning power of the business.
3. One-time costs… the performance record of your business can be seriously distorted by one-time costs unless you isolate them and identify such to a potential buyer. The costs include any write-offs, settlement of litigation, environmental cleanup, fines and penalties, severance payments, etc. If these costs are isolated, they will not negatively influence the valuation calculations.
4. Pending litigation… the chief nemesis of accurate valuation is uncertainty. There is probably no greater source of uncertainty in business than unresolved legal disputes. Therefore, pending litigation should be resolved to remove this uncertainty. If that is not possible, it will be necessary to call in appropriate expertise to quantify the probable outcome. Unresolved or unquantifiable legal disputes can erode market value and, in most cases, will make the business entirely unmarketable until the dispute is resolved.
5. Transferable contracts… the maintenance of existing contracts, leases, vendor agreements, employment contracts, product or technique licenses, etc. can be an attractive selling point. It’s advisable to make all such contracts transferable. This provides additional continuity of operations for the buyer.
6. Unnecessary assets… assets which are not essential to the post-acquisition operation of the business should be identified and evaluated for possible transfer or disposal in the most cost effective way possible. Such assets can be sticking points in negotiations with a buyer e.g., real estate and family automobiles.
7. FDA, OSHA and Right-to-Know, EPA compliance… today, every business is under the scrutiny of compliance issues to some extent. It is prudent to retain an independent consulting firm to conduct an audit to ascertain the company’s level of compliance and possible exposure. Such an audit will either provide assurances to the potential buyer that compliance has been adequately achieved… or it will specifically delineate the potential liabilities so that you can take action to relieve your exposure and the buyer’s.
8. Business plan… a business plan is a benchmark against which a buyer can compare actual performance. It is also the sign of a credible and well-run business and a tool by which managers who will stay with the new owner can be evaluated.
Perhaps the best advice for positioning a business for acquisition is simply to adopt the mind-set of a buyer:
- Acquisition-oriented firms maintain a network of contacts to identify companies for acquisition. Don’t assume you are on an acquisition list… instead develop a list of potential buyers with who you feel comfortable.
- Develop solid market intelligence about these potential buyers i.e., the potential buyer’s needs and preferences, how these people negotiate, what companies have they acquired in the past, etc.
- Ask yourself some pointed questions… If you were interested in acquiring a company of your size what would make a company attractive to you? What would make the company unattractive?
If you answer those questions honestly and accurately, and then manage your business accordingly, you can position yourself for eventual acquisition on your own best terms.