Middle Market M&A — Selling A Company? What Is My Company Worth? Part 5


Source: Todd Ganos from Forbes

Selling a company?  In this series of articles on the value of your business, we’ve tried to acknowledge a few things. First, your business will have multiple values at the same time due to different types of buyers valuing your firm differently.  Second, your company’s financial performance relative to other companies in your industry and of your size will affect your firm’s value in the eyes of a buyer. Third, top-dollar buyers — private equity funds and large companies — are only looking at the top 20% of companies in terms of financial performance; two segments of buyers might be beyond your reach.  Fourth, the quality of your financial reporting as well as accounting policies you maintain will affect what a buyer will pay. In this installment, we will get deeper into how decisions you make (or change) might enhance the value of your firm.

For you, this will be a process of “wading into the pool” as opposed to jumping into the deep end. Why? If you simply jump into the deep end — honestly — you will be overwhelmed and you’ll quit.  The objective here is to help you enhance the value of your firm. We will take the path that will do that.  And, that path starts with getting into the pool ankle-deep.

In the simplest terms, you can segregate your company into four top-level categories: marketing, operations/fulfillment, financial, and infrastructure. Ask yourself how these are done by 1) your firm, 2) the average company in your industry and of your size, and 3) that 20% top-performer group. This is just you doing this analysis. This does not include your management team. This is ankle-deep.  You need to be honest with yourself about where things stand. Acknowledge your shortcomings because your buyer will.

Once you’ve done this, you move to knee-deep. You begin to drill down past the four top-level categories. This is still just you and not your team.  You begin to ask yourself the kinds of questions identified by The Owners Forum (a non-profit organization that helps educate business owners).  Click here to take the survey. These questions will give you a flavor of the questions your buyer will ask.  They will also prepare you for your discussion with your management team.

Next is thigh-deep.  You begin a conversation with your management team.  You will need your management team to psychologically buy into the process.  If they don’t, you have a problem.  So, you start with them at that top level. How do we do things compared to our average competitor?  How do we do things compared to the top performers?  They start easing into the process.

You then move to waist-deep. You move the conversation with your management team to the survey questions. Show them your answers.  (They will be particularly keen on your answer to what happens to them upon sale.)  In this conversation, you begin to discuss, “Now, beyond this, what are the questions a buyer is going ask?”

Well-known value growth consultant Kenneth J. Sanginario is the founder of the Value Opportunity Profile. He tells us, “Given that due diligence has evolved over the last ten years or so — to be broader and deeper than ever before — we believe that companies need to be better developed than ever before in order to achieve the best results in a sale.”

Recall that about 30% of middle market companies transition to the next generation within the family. 70% are sold. But, not all are in market-ready condition.  Industry surveys tell us that only 20% — or roughly one-third of those sold outside the family — are in market-ready condition. According to Mr. Sanginario, “Approximately one-third of companies that receive offers to sell have their transactions fall part in due diligence.” He goes on to say, “Another third of sellers end up granting concession in order to close their transactions.”

Once you’ve adapted to waist-high in the pool, based on experience . . . and this has happened to all of us . . . what happens next?  You either get out of the pool or you take the plunge. In the case of your firm, you either decide to plod along or you decide to do those things that will enhance the value of your firm.

The vast majority of owners will fall into one of two groups: 1) I’m “done” and want to sell my company within 6 months to a year or 2) I’m looking to sell in 3 to 5 years. What you’re able to “enhance” and to what extent you can enhance it depends on which group you’re in.  But, if you want true value enhancement, Mr. Sangiario says, “We encourage companies to start preparing for transactions three to five years prior to going to market, with the objective of creating the strongest and most balanced company possible to support future growth.” Is it worth it?  He says, “Most private companies have an opportunity to double in value by following a disciplined, methodical, approach over several years.”

One thing you will need to accept is this: you say “3 to 5 years” and then the out-of-the-blue offer comes in, you’re not prepared, and you fall into the group that has to make concessions.  So, if you’re going in past waist-high, you need to do it now.  Using the pool analogy, you know what happens when you just stand there waist-high in water . . . waiting only makes it worse.

For the purpose of starting self-examination, we started with dividing your firm into four strategic-level categories. The Value Opportunity Profile drills into 8 strategic-level categories.  The eight categories include Planning, Leadership, Sales, Marketing, People, Operations, Finance, and Legal.  Those 8 categories are further divided into subcategories. Now, before you go tilt at the prospect, there is another thing that you will need to accept: a buyer does NOT want a perfect company.  If your company is perfect, it means that you’ve captured all of its value enhancement potential . . . and there’s no value enhancement potential left for the buyer.  Think about it.  So, what we are really talking about is finding a balance between those things you will fix and those things that you leave for the buyer to fix . . . and value to exploit.

Mr. Sangiario says that a process such as the Value Opportunity Profile allows the business owner to self-examine a company as a buyer would . . . but well in advance of selling and offering time to improve those areas the owner chooses.  And, that is the big take-away: you don’t necessarily have to dive into and work on all 8 categories . . . you are going choose the areas to work on.  He offers a subtle follow-up, “Even if a company has no aspirations to sell in the near future, this type of improvement process will help the company achieve stronger sales, expanded margins and maximum sustainable profitability.”  That is, going through such a process puts more money in your pocket while you still own your firm.

In our next installment, we’ll dig a little deeper.  We’ll get into some nuts and bolts examples . . . some actual company numbers.

This article was written by Todd Ganos from Forbes and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.

The views expressed by the author are not necessarily those of Fifth Third Bank and are solely the opinions of the author. This article is for informational purposes only. It does not constitute the rendering of legal, accounting, or other professional services by Fifth Third Bank or any of their subsidiaries or affiliates, and are provided without any warranty whatsoever.