Acquisition Strategy & Value Drivers

How to Maximize Your Company’s Sale Price

“As a CFO, take steps now to increase the value of the business before being ready to sell — whether this will be next year or five years down the road.
~ Stuart Pasternak, Toronto Regional Director, CFOLC

Stuart Pasternak, Toronto Regional Director, The CFO Leadership Council

Many entrepreneurs/owners’ managers (OM) have or should have a succession plan or exit strategy when it comes to their business. For many, the eventual goal is a liquidity event such as to sell the company either wholly or partially to generate funds to support their desired retirement or to cash out to create funds to start or purchase another business.

In most scenarios like these, OM’s want to sell their company for as much as possible. The key to maximizing the sale price starts by focusing on an acquisition strategy and value drivers long before the decision to put the company up for sale – The Readiness Stage. As a CFO, take steps now to increase the value of the business before being ready to sell — whether this will be next year or five years down the road.

Long-term planning for a liquidity event requires making management and financial decisions today that will best position your company for sale in the future. However, many owners make these decisions based on short-term financial goals, like reducing taxes.

THE PROCESS

The first phase is the Readiness Stage.  The primary acquisition value drivers that buyers are looking at when deciding how much they’ll pay for business are future earnings, cash flow, and when they will materialize.

The CFO Role Can be Broken Down into Three Key Concepts to Help the OM through the Process:

  1. Determine the liquidity alternatives

Who do we what to target, such as Family transfer, management buyout, private equity or IPO.

  1. Secure the Company Position

Growth Opportunities
Acquirers don’t usually buy businesses to maintain the status quo. They are in search of companies where they can ramp up growth to boost sales, profits and market share. Develop a strategic plan that focuses on growth opportunities, such as exploiting underutilized markets, expanding into new territories or capitalizing on new technologies and trends.

The Management Team
Don’t make the OM indispensable- this can significantly decrease the value of the business in the eyes of acquirers. To guard against this, start strengthening the management team long before it’s time to sell the company to ensure a smooth transition to new ownership. This includes delegating real decision-making authority and responsibility to Executives and Managers.

Customer concentrations
Is a large percentage of your revenue dependent on a small group of customers? If so, this represents a significant risk for acquirers since the loss of a substantial customer could threaten the business financially. Strive to diversify your customer base beyond a small group of customers to reduce concentration risk.  Secondly, document key customer contacts to eliminate uncertainty.  The best ways to boost the future value and selling price of a business are to pursue opportunities that offer the most significant potential for high returns and to spread out the risk among different types of customers, products, services, and market areas.

Financial performance and accounting process.
This is an area that acquirers are usually most interested in examining and where they will perform the most due diligence. They typically want to see strong cash flow, steady revenue, growing profit margins and EBITDA. Identify several key performance indicators (KPIs) that best reflect your financial performance and focus on improving these during the months and years leading up to the liquidity event planned departure. Acquirers will usually want to see high-quality financial statements. Consider a reviewed or audited engagement three years prior.

The competitive advantages.
What is the company’s unique selling proposition (USP)? Why do customers conduct business with you instead of your competitors? It could be outstanding service, high quality or low price — but whatever it is, make sure you emphasize this in your sales and marketing efforts. Also, be prepared to demonstrate that your USP is sustainable over the long term.

Supplier relationships
These relationships form the backbone of many companies.  Hence, it is vital to solidify these relationships before putting the business up for sale. Introduce Executives and Managers to critical suppliers and start transitioning those relationships accordingly. And lock in as many long-term contracts as you can for delivery of raw materials to help stabilize your cost of goods sold.

Legal Clean-Up
Missing critical resolutions or signatures on options/equity promised to advisors, employees etc. or a Shareholders’ Agreement, which has never been documented or has been documented informally, needs to be resolved.  i.e. issues when individual directors, officers or shareholders have died, moved away or left the company on bad terms.  The rectification of these errors may not be rectified or quickly resolved. Failure to address these issues well in advance of a sale process can give one minority stakeholder disproportionate power to “hijack” the sale process.

Employee Matters
Ensure that all employees have written employment agreements and codify termination/severance costs. Failure to do so will generally result in much higher cost as common law will prevail. Non-competition and non-solicitation covenants should be in every key employee contract.

Intellectual Property
If you have any intellectual property, start the process to protect them in the jurisdictions you operated or plan to. Ensure signed agreements with employees and contractors who have worked on the creation of IP is in place. These items will add additional value to the business and could take several years to complete.

  1. Identify appropriate advisors to guide you through the process

Consider engaging the following advisors:

      • Advisory Board
      • Merger & Acquisition Advisors
      • Legal Counsel
      • Accounting Advisors
      • Tax Advisors

Final Thought

Most OMs’ of mid-sized businesses have an endgame in mind when it comes to exiting them, such as selling the company to generate funds to support their retirement. Maximizing the sale price of a closely held business starts long before the day you decide to put the company up for sale. Consider taking these steps now to increase the value of the business and focus on these crucial acquisition value drivers.

Future blogs will address the next three phases to prepare a company for sale.

Engage with Stuart Pasternak and other CFOLC leaders at one of our 27 chapters or at our 10th annual CFO Leadership Conference, CFO Masterclass being held May 11-12, 2020 in Boston’s Seaport.  Learn more at www.cfolcconference.com

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About  Stuart Pasternak, Toronto Regional Director, CFO Leadership Council
Stuart is the Toronto Regional Director of The CFO Leadership Council, the premier networking and educational forum for senior financial executives – built by CFOs for CFOs with 23 chapters across North America and growing. Stuart and the Toronto team manage membership, sponsorship, events and growth of the Toronto Chapter. Stuart is also Principal at PSI which provides entrepreneurs and small-medium organizations with growth and value strategies. They advise and guide the progress of Strategic Planning, Performance Management, Accounting and Financial Management, Treasury & Cash Management, Project/Critical Event Management and Human Capital to ensure that the actions taken are realistic, achievable, foster long-term development and mitigate risks. Stuart is Vice Chair of the Board of Directors for the Alzheimer Society for York Region and a Certified CPA Mentor.

 

About The CFO Leadership Council
The CFO Leadership Council offers both live & online programs that feature expert panels and interactive sessions that drive meaningful conversation and leadership development among our membership. Our collection of leadership development resources similar to this article contain pragmatic insights and advice sourced directly from our members and industry experts.  Recordings of CFOLC webcasts are made available to our current CFOLC Premium & Virtual members. CPEs are now offered for our webcasts to current CFOLC members only.  To learn about our membership and connecting with our growing CFOLC community, visit www.cfolc.com.

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