KUHN CAPITAL Monday, March 19, 2018
Dispatches from the front

The Ultimate Sale Part II: Getting Ready for Market

In Part I we talked about whether now is a good time to consider selling your business. Presuming that you’ve decided it might be, there’s a lot you can do in advance to maximize value.

I’ve listed some of the most common tasks here but a thoughtful business analyst who knows your company will likely have additional and more specific “to dos’”.

Wherever you get these suggestions from, put them into one of two categories: Quick Hits that can create value within several months; and Slow Hits that take longer.

Quick Hits
You are particularly alert to Quick Hits because they occur early enough in the usual six-month sales cycle to generate convincing evidence of value in the eyes of buyers. On the other hand, if you accumulate a lot of critical Slow Hit suggestions, you may want to get them at least underway before you start teeing up the company for sale.

Another caveat: your Quick Hit may be another company’s Slow Hit. Example: you can show the benefit of replacing an unproductive sales manager in two months but your large competitor needs 12.
Quick Hits enhance “curb appeal” and get your business looking more… businesslike. Buyers develop confidence in the quality (value) of your company when they see evidence of meticulous attention to detail. If you’re tending to the small things, you must be on top of the big ones, right?

• Freshen website and marketing materials
• Register intellectual property (trademarks, patents, etc.). Document steps to protect trade secrets. Confirm company’s rights in cases where employees, contractors or clients contributed to your IP (especially software code)
• Beat the PR drum: obtain customer testimonials, industry speaking engagements, trade press coverage
• Resolve or settle outstanding/potential legal disputes, tax liabilities. Document your right to do business and your history of paying taxes in states where you operate
• Obtain non-compete/non-disclosure agreements from all, or at least key, employees
• Terminate ineffective employees, “sacred cows”
• Update corporate records: minutes; tax and regulatory filings; shareholder agreements; environmental clearances, etc.
• Separate your personal expenses/assets from those of the business
• Buy out passive or unproductive small shareholders
• “Right-size” the org chart: reduce your direct reports to about five. Do the same when appropriate for the number of people your direct reports manage
• Clean up aged A/R and A/P
• Revisit key employment and stock option agreements
• In a related activity, set up incentives for key employees to cooperate with and benefit from the company’s sale
• Correct loan covenant violations
• Tweak IT system to deliver “management dashboard” data or timely metrics relevant to running the business
• Clean the place up: paint, organize, repair (especially the bathrooms!)
• Convert from cash to accrual accounting
• Sell devalued/obsolete inventory

Slow Hits
Movements in the underlying bedrock of your business can unleash huge energies when they hit shore. But rather than destructive tsunamis, Slow Hits boost sales and margins.

Because of their fundamental nature, some Slow Hits are comparatively expensive and may be risky (like starting up a new product/ service line or replacing your ERP system). But not always: some Slow Hits are simply slow.

• Replace IT/control systems
• Reconfigure production lines, invest in rigorous service delivery processes
• Launch major marketing campaign/initiative
• Launch new product/service
• Edge out less productive senior managers
• Exit from slow-growing or unprofitable products/markets
• Reduce shareholder and/or board member headcount for quicker, more unified decision-making
• Salt employees as officers throughout leading trade groups
• Replace non-assignable or conditionally assignable contacts with freely assignable contracts
• Negotiate more advantageous supplier contracts
• Move to new offices/factory locations; Negotiate shorter-term leases with the option to renew;
• Reduce client concentration: keep single clients below about 20% of sales. Four clients together shouldn’t account for more than 50%

Whether your Slow Hits are expensive or just require the fullness of time, only you can weigh whether their promise is so compelling that delaying your company’s sale is worth the trade-off.

Next up: Part III: How to Build a Winning M&A Project Team.

Ryan Kuhn

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