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April 27, 2020

Don’t Wait Until You’re Moving to Remodel the Kitchen!

Why thinking like a buyer may be the key to building a better business today

Key Takeaways

  • Thinking like a buyer is a useful framework for making strategic decisions.
  • Many practices that maximize future sale value can be put in place and benefit owners today.
  • Improved reporting and reduced risk are good for owners regardless of succession plans.

Talking about change – whether a management succession or ownership transition – is difficult. It naturally feels threatening. What’s more, for many owners and managers in the prime of their careers, it may be years or even decades before they intend to hang it up. Preparing for an exit now is too abstract. But developing a transition plan is critical, since being caught flat-footed by an owner’s sudden illness or a key manager’s departure can be devastating.

In contrast to a distant future transaction, the daily challenges of operating a business and making improvements are tangible and ever-present. For many owners, the hard part is prioritizing the day-to-day while maintaining a high-level view of where the company is headed. As it turns out, thinking like a buyer and operating with the end in mind can not only help with an eventual transition, it also provides needed focus and structure, and can even make a business better today.

Like updating the kitchen before a selling a home, it adds tangible value in the future and allows the owner to enjoy the benefits of shiny, new granite counter-tops and maple cabinets now.

Plan, Report and Make Better Decisions

Much like fresh new cabinets, planning and reporting systems are a great place to start.

Access to information during the M&A process is critical for both buyers and sellers. A seller needs to be able to communicate information about the business and its strengths in order to command the highest value. Buyers expect to receive information supporting their investment decision, and robust reporting capabilities are a great help in the due diligence process.

But having access to information on how the business operates isn’t only helpful during a transaction – it can make owners and managers better able to react to current challenges and proactively improve in the near term. As a starting point, owners should consider the following:

  • Measure shareholder value regularly, as an objective benchmark for tracking progress.
  • Develop and document specific plans around growth opportunities.
  • Tie financial and operating performance together with metrics such as margin by customer and product, which allow management teams to make informed decisions.
  • Identify the constraints faced by the company and set priorities for growth and improvement accordingly.
  • Maintain an inventory of important documents such as customer and vendor contracts and aim for consistency.

Better Earnings & Reduced Risk Now = Better Valuation Later

Now come the granite counter-tops … revenue, cash flow and risk mitigation.

Though markets fluctuate, a buyer’s view of business value is fundamentally driven by a company’s ability to produce and grow sales, efficiently generate cash flow, and limit risk. Of course, these things benefit a company’s owners today as much as they do a future buyer!

Actions that build long term value while benefitting an owner today include:

  • Build a recurring revenue base – whether contractual or through sticky relationships, recurring revenues are more valuable.
  • Deliberately diversify customer, vendor and employee bases. Over-reliance on one or a handful of others is an avoidable risk.
  • Develop and invest in a strong, deep management team and build value at every level of the company. Hire for complementary strengths and culture, the secret sauce of successful enterprises.
  • Focus as much (or more) time on growing margins than on increasing revenues. Low margin sales can become a drag on company resources as a business expands.

When it comes to working on the business, not just in the business, assuming the perspective of a buyer can provide a much-needed framework for prioritizing improvements and opportunities. Decades of M&A experience have taught us that the characteristics buyers look for in a business are in many ways things that benefit existing owners. And even better than a kitchen remodel, you can see an immediate return on investment in the form of stronger earnings.

Remember, succession and transition aren’t a single event but rather a process – one that should start much earlier than many realize. Many of the steps typically taken to prepare the business for sale are practices that can be put into place today. Improvements that will be valuable no matter the timeline for exit.

For more insights from the series, The Path to Private Company Liquidity: A practical guide to M&A for business owners, click here.