Mergers and acquisitions (M&A) play an increasingly important role for companies looking to scale their operations appropriately, transition into new markets, or simply survive. For owners who plan to sell their mid-market companies in the next few years, there is still a general optimism for M&A in the year ahead, despite the challenges that remain as we faced diminishing ROI on transactions in recent years. Signs of a strengthening economy are unleashing pent-up demand as large, healthy companies with stockpiles of cash are getting off the sidelines to make strategic acquisitions.
On the flip side, more companies will be on the market, and the money is chasing strong, seasoned companies that know how to prepare and present themselves. What does this take in today’s environment? How can you ensure that all the time, money and talent you’ve invested in your company are reflected in its value when you sell?
IMG’s full complement of M&A consulting services gives us deep and wide perspective on successful deals from both sides of the table. It’s our experience that most sellers profit from making thoughtful investments to maximize their value. They know and do things to set their business apart from the crowd, showcase their strengths, attract competitive bids, and gain greater ultimate value in the process.
But getting top value for your business means knowing what to invest in; the last thing you want to do is waste precious resources on initiatives of no material value to a prospective buyer. For instance, if all a buyer will care about is acquiring your dazzling IP, investing in a new ERP system would be a waste of money. Understandably, many middle-market businesses have had their heads down for so long that they don’t know what they’re really worth in the eyes of today’s buyers, or what they can do to drive value now.
Assess your value drivers as perceived by potential buyers: What do you do, and what do buyers value? To begin, you may want to draw on your professional network to ask companies what matters; reach out to business development directors and M&A leads whenever you can. Trade association meetings can also provide a forum for large public companies to discuss the businesses they’re acquiring, the multiples they’re paying—and why. Then consider the following ways you may be able to elevate your value in the eyes of a qualified buyer.
SIX KEYS TO IMPROVING VALUE
At IMG we find that companies can often increase their market value through initiatives in one or more of the following areas:
1Reinforce or create a competitive advantage. Consider what you can do to raise the profile and value of your company’s sweet spot. For example, we work with many clients that have built their companies and competitive advantage on valuable IP. During the sale process, their “secret sauce” can be at risk if it’s not adequately protected.
We recommend a tight strategy to protect your core assets and capture your IP in the value of your business. Look for ways to quantify and add value without spending capital. For instance, you might ask customers with seasoned contracts to sign new three-year contracts a bit early to extend, and thus increase the value of, those on-the-books agreements.
2Strengthen your revenue streams. Naturally, buyers are attracted to a strong sales pipeline. Some companies increase their value by further “professionalizing” their sales pipeline — ensuring potential buyers that a sophisticated, strategic sales and marketing function is in place, backed by robust and up-to-date information systems.
3Make your business attractive to more than one buyer. The value of your business is dictated by the amount of competition for your assets. One of the greatest risks is positioning your company to be bought by just one buyer. Focus on doing what you can to make yourself attractive to multiple prospective buyers. Sometimes an external perspective can help you see prospects that you hadn’t considered before. It may pay to engage an investment banker to reach out to prospective buyers in a research effort before committing to sell your business.
4Optimize your cash flow. Review the state of your accounts receivable and payable. Clear up credit policies. Consider creating customer incentives such as accounts receivable discounts for quicker payment. Look at expense capitalization; if your business has operated out of a checkbook to expense costs, consider amortizing costs over longer periods. Review your compensation strategies; many closely held businesses have idiosyncrasies that affect the perceived value of the company. You may need to do a pro forma of what the business would look like under new ownership in order to communicate the opportunities for new, free cash flow.
5Demonstrate business maturity. To be bought by a public company, you need to look, act and smell like one. Crisp information, accounting and compliance systems go a long way to help you sail through the scrutiny of the buttoneddown types who will be evaluating your company. Now’s the time to clear up any murky areas—liabilities, lawsuits, or contingents—that might raise eyebrows and questions. To avoid risk-related discounts in value, think in terms of risk mitigation—securing key vendor relationships, addressing any supply chain back-ups, cleaning up any contractual issues— and act on improvements that make your company a lean, transparent, smooth-running operation.
6Treat people right. Your employees helped build the value of your business. In most companies, they’re viewed as a significant asset. And all of them will be affected by the sale. How do you create security for those you want to keep and be fair to those who will leave? The human side of a business sale is a huge strategic issue that can make or break the deal; as such, timing is key, and it’s essential to plan in advance. Solid transition management and communication plans should be part of your playbook— including when and how to share the news and make a transition with respect for everyone involved.
THE BOTTOM LINE
Ensuring a successful sale that captures the full value of your business is a process worth starting at least a year before you announce plans to sell. It takes dedicated time, bandwidth and leadership to do it right. There is value in managing the process proactively and setting aside the resources you’ll need to effectively sell and transition your company—well before you begin courting prospective buyers.