In our experience over the last 30 years, working with entrepreneurs, there are ten initiatives that are missing from their action list. These missed opportunities are the cause of disappointment when it comes to the exit process. These areas are heavily scrutinized by acquirers and so often private companies fall short.
These ten areas are at the heart of an acquirer’s worry list! These are the tests that consistently undermine a deal closing. At best, assuming the buyer’s assessment of a target’s credibility on these items is weak, the deal might go through, but at a heavy discount to mitigate risk (By the way I wouldn’t recommend a buyer does that). We are asking owners of private companies to look through the lens of a buyer and see what a buyer sees.
The Big 10
#1 Positioning of the company and brand are crystal clear both inside and outside the company
Have you carved out a unique space in the marketplace? Acquirers don’t like messy businesses that expanded into a range of activities. Examples we’ve seen include:
- HR outsource businesses, that offer recruitment, payroll services, HR advice, pensions advice, employment contract advice, bookkeeping services. They became too broad, unfocused, and unremarkable.
- High tech manufacturer to the aerospace industry that diversified into medical devices with no real expertise in the new sector
- Software company dedicated to logistics solution moving into new sectors with limited credibility in financial services, healthcare etc
And we’ve seen general players refocus into niche players resulting in premium exits including:
- General contractor repositioning into deep trench utility work at higher margins
- General PR company repositioning as a specialist in the restaurant sector
- General printer covering all sectors changing direction and becoming Pharma industry’s supplier of choice.
Building a business that fulfills a need in the marketplace and is attractive not just to customers but to a host of buyers one day, is often about scaling around a cause. What’s the unique superpower? Would you be missed if you disappeared tomorrow? It’s about defining a space and dominating it. Creating a market leader leads to a remarkable business that is safer not riskier. Most private companies are invisible or remarkable through the lens of a buyer. Don’t be invisible. Build a brand that builds buyer desire even if you never sell it.
#2 Business is not dependant on the owner.
Of course the business is dependant on the owner, it was the owner who started the business! But it can’t remain that way. It’s never too early to worry about succession planning. It can’t happen overnight but it starts by attracting smart talent. The two solutions we’ve found work best is firstly, doing everything in your power to attract the best talent at every level as you scale. It’s not about volume of people, it’s about quality. Three talented software developers are far more productive, accurate and effective than 20 average ones. The second solution is to build short and meaningful playbooks covering essential protocols: Marketing, Sales, Metrics, Production Planning, Product Innovation, Talent management, and M&A to name a few. Playbooks allow lesser beings to manage chunks of your business replacing dependency on the owner.
#3 Business is not dependant on legacy products.
Acquirers need comfort that the best days of your business are ahead of you. Constant successful innovation is an important measure of success. Businesses reliant on legacy products are at best cash cows and generally speaking are not very valuable. Build an innovation engine into your product roadmap to continually address your customer needs. it starts with really understanding how your customer currently uses your service or product. How can you continue to drive value for that customer? Understand the pressures on your customer’s customer. What does the value chain look like?
#4 Business is not dependant on a few big customers
Dependency kills deals. Some of our partners are ex-investment bankers and trust me nothing kills a deal more or undermines value more than a key customer firing you during the exit process. If no one customer represents no more than say 5% of your business you are in a good place but as soon as that % rises to 25% or more, you are in a bad place. The key is to constantly measure those % and if depenancy starts to happen, use the cash flow to launch more aggressive campaigns to win work to dilute down that dependency. But continue to overservice those key customers!
#5 Competitive value propositions can be articulated by the Sales Team.
Value propositions are useless if they are not compared with the competition. What’s your relative value is the key. Customers have choices. Are you clear on the differentiators? In a recent exercise we interviewed the global customer base of a client to get behind the real value they were bringing to the table. The speed, reliability and efficiency of their high tech production equipment shone through but equally important was the deep knowledge of our engineers and their ability to simplify the complex.
#6 All KPIs are benchmarked quarterly against the competition.
Are you aware of your competitor’s Gross Margins? EBITDA? SEO performance, productivity ratios by employee, market share, pricing policies, ROI on their products. There are a plethora of KPIs that are competitively measurable. Most private companies are flying blind with no insights into their competition and it shows in there sales pipeline close rates!
#7 Company owns its IP and Trademarks.
Specifically in family businesses, we’ve seen family members owning key IP personally rather being owned by the company. That is housekeeping that needs to be addressed long before a buyer appears on the scene. Companies also get sloppy about registering trademarks. You need to audit these areas now, to decide the best way of locking in value.
#8 Sales team understand their customer’s world in depth.
A sales team is expected to understand their products and should have a clear sales process articulated in a sales playbook (how we do things around here). However the weaker area in our experience is a third skillset. Does your sales team really understand your customers at a micro and macro level? The micro level should include, a detailed organization chart of reporting structures, decision making processes, budget approvals, customer products and their competitive value propositions, corporate objectives and the personal objectives of your key sponsors within the customer. The macro level would include an understanding of the market trends, legislation, technology and competitive pressures impacting your customers.
#9 All departments major initiatives are aligned to corporate objectives.
Have you compared the strategic objectives of each department and the actions they expect to complete this year with your overall company objectives? Let’s say your top three objectives this year are:
- Launch a game changing new product
- Transform quality across all products
- Achieve $200m in revenue at an EBITDA margin of 15%
How do the departmental objectives tie in with these 3 big audacious goals? Is there a disconnect between granular execution and ambition? Clearly not all actions can relate to these 3 big objectives but each department should have a connection to achieving these goals. Have you consistently communicated these goals to employees? Do you report back on progress in Town Hall meetings?
#10 Financial forecasts are constantly measured for credibility.
Building a financial forecasting muscle takes time. Getting better at forecasting requires constant practice and regular post-mortems. Clearly there are one off events that change things, – Covid, wars, large acquisitions. The landscape can change quickly, invalidating assumptions and throwing you off course. However one area we see constantly underwhelming acquirers during their dance with sellers, is the constant revision downwards of the full year forecast for the year. This is one area that will get special scrutiny throughout the exit process. Document your assumptions and constantly articulate the story of why the actual results were ahead of or behind your prediction. Just understanding the reasons for your forecasting performance will improve their accuracy.
Ian is the CEO/founder of Boston based The Portfolio Partnership, a value creation team of operators. We help owners “build businesses buyers love to buy” by deploying our successful playbooks. It starts with Positioning/Branding. We seamlessly join your team to work on the right stuff.
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