Preparing for a Successful Transaction — Beyond the Diligence Checklist
Prepare now to sell your company, even if selling isn't in your short or long-term plans.
Laying the preparatory groundwork for
a potential business sale yields better
business decisions, practices and value.
Nothing reveals more weaknesses than undergoing
the preparation and the type of due
diligence investigation involved with the
sale of a business. Whether or not there is intent
to carry out a transaction now or down
the road, business owners can meaningfully
impact business performance and value by
periodically evaluating their business as an investor
would and by taking actions to address
In our experience, the vagaries of life,
health, industry dynamics, and opportunity
defy prediction. Changes in any of these factors
may quickly swing the pendulum towards
a pressing need for liquidity or a desire to take
advantage of an unexpected opportunity,
when the consequences for being unprepared
may be significant. In many cases, there exists
a unique point in time when the market accords
a business its optimum value. Delaying
preparation work is the equivalent of deferred
maintenance and, if timing becomes urgent,
there is little time to address the nagging issues
that constrain or undermine value.
WHAT DOES "BEING PREPARED" REALLY MEAN?
Preparation comes in two forms. One category
can be thought of as "housekeeping" and
its value becomes crystal clear when a buyer
presents its due diligence list and the clock is
running. Housekeeping matters, as we've commented
numerous times in IN$IGHT. Undertaking
the cleanup in advance avoids showstoppers
such as disagreements among owners,
managers, and third parties whose consent is
required to complete a transaction. Organized
documentation indicates management's grasp
of the business and all of its vagaries. A welldisciplined
and organized process gives the
seller leverage throughout the transaction and
assures that information is revealed in the appropriate
sequence and timing to move the
process forward efficiently towards the end
zone. Shareholder value can quickly diminish
when due diligence findings by the buyer surprise
the seller. Disruption of the process can
extract a cost and potentially put the endeavor
at risk. As every transaction advisor knows,
time is the enemy of a transaction.
The second category of preparedness goes
beyond the due diligence checklist and addresses
the fundamental economic proposition
of the business. A clear and concise
articulation of the fundamental mechanics,
economics and risks attendant to the business
and the industry generates rational confidence
and enthusiasm, while the absence of
such an explanation should trigger questions
and skepticism from the company's bankers,
potential investors or buyers, as well as from
the current ownership.
A well-prepared business
plan that results from a deep
demonstrates the company's
value proposition to its
customers, suppliers, and
employees, addresses risks,
provides evidence of the ability
to adapt and innovate, and is
supplemented by appropriate
THINK LIKE AN INVESTOR
Every business exists somewhere in the
value chain between the supply of basic resources
and the ultimate end user. Suppliers
push from behind, customers pull from the
front, and competitors, both direct and indirect,
confront and squeeze from all directions.
An investor searches for an understanding of
the dynamics of those relationships and an
explanation of how the target business competes
to earn its existence. The investor wants
to know the forces that threaten the company's
market position and the strategy, infrastructure,
and talent the business employs to
defend and expand its position. The view on
this framework forms the basis of interest and
terms of a potential investment.
Owners need to be able to articulate the
material variables or drivers that underlie
operating results and demonstrate tangible
insight into the interaction of these drivers.
Owners and managers of businesses instinctively
think of their business in these terms but
often don't challenge the basic premises and
quantify the metrics of the business model.
Taking this next step of examination and documentation
reveals conclusions about how the
business can be improved, leading to a stronger
business, and when and if the time comes, being
in sync with an investor or buyer.
THE VALUE PROPOSITION
"First you need a customer." Understanding
how the company competes for and succeeds
in satisfying its customers with products
or services, quality, pricing, and delivery as
compared to other competitors is critical. Beyond
the company's direct customers, all customers
in the value chain need consideration.
For example, if a manufacturer sells to distributors,
how that distributor sells through to
the ultimate end user can be just as important
as the initial sale. The end user can be served
through alternate channels. The relative effectiveness
of the different delivery or sales
channels can have as much effect on financial
performance as how the company competes
with its direct competitors. Wal-Mart obtains
product directly from manufacturers in
Asia, domestic product companies that subcontract
manufacturing, as well as distributors
that buy from various manufacturers. These
various channels offer different costs and levels
of service. As product demand changes at
the retail level, different channels become
more or less important. Having a level of
knowledge of the dynamics of the industry,
volumes of product or services, and comparative
business models for satisfying end user
needs provides a framework for evaluating
competitiveness (stability), growth prospects,
and potential risks.
There is an "equation" that explains the
economics of each business. Understanding
it allows a prediction of performance under
different levels of demand for products and
services, pricing, input costs, and operational
infrastructure levels. Once this is embedded
in a "model," sensitivities to the variable business
drivers can be known and evaluated, possibly
leading to changes in strategies to make
the business more successful.
Each business also has an infrastructure
of tangible and intangible assets, people, and
systems that conduct daily operations and
provide the basis for competing in the marketplace.
Factors that can threaten operational
success include manager and key employee
depth or succession, common organizational
knowledge, vendor and customer concentrations,
and market or other external event risk.
Collectively, these attributes reflect an investment
hypothesis that, of course, remains
vulnerable to a host of risks and uncertainties.
Management's ability to identify and outline
measures to mitigate those risks heightens
credibility in the ability to achieve future plans.
Every business needs a scorecard. Knowing
the point system and measuring continuously
allows the business owner and potential
investor to calibrate the effectiveness of the
business model and strategy employed. A
business employs capital to create and maintain
a business infrastructure and, as a result,
it generates cash flow from operations. How
well it does this task contributes greatly to
how an investor views the value of the business.
When systems to collect the data necessary
to perpetually evaluate the business'
return on the capital employed, owners can
measure the effectiveness of strategic decisions.
Conclusions drawn from analyses of
business performance create the framework
for the preparation of a plan to improve the
business. Addressing weaknesses and building
on strengths can make the business stronger
and more successful.
A well-prepared business plan that results
from a deep introspective assessment demonstrates
the company's value proposition to
its customers, suppliers, and employees, addresses
risks, provides evidence of the ability
to adapt and innovate, and is supplemented
by appropriate supporting documentation.
Collectively, these measures improve business
practices, profitability, and value, which
the business owner will reap whether or not
they pursue a transaction.