An Operational Checklist – 24 Months Pre-Sale

An Operational Checklist – 24 Months Pre-Sale

Last week MRSI Systems sold to Mycronic AB of Sweden. The purchase price amounted to USD 40.7 million (approximately SEK 358 million) on a cash and debt free basis and is financed with a combination of Mycronic’s own funds and bank financing. Under certain performance parameters, an earn-out will be payable. Press Release link.

This is the third TPP client in the last 12 months to achieve a successful exit. As you consider your strategic plans, you might consider what operational actions, you could take, over the next two years that would move the valuation dial, if you were to cash out. It’s about looking at your business through the lens of an acquirer. You need to accept that the thesis of valuation is quite simple: sellers aspire to price, buyers perceive value. Here is a list to consider that will influence how buyers perceive value. We believe these issues are unreasonably important in the acquirer’s mind. Of course the longer you have to execute operational improvements to these drivers, the bigger the impact.

CHECKLIST

  1. Acquirers love a compelling story. They love targets with significant market share. Are you measuring your market share? Are you comparing your SEO performance with the competition? Are your results you deliver for customers clear? Are you executing an editorial calendar that delivers remarkable content to the marketplace? Creating a constant buzz around your brand is not easy but essential. Customers and acquirers buy for emotional reasons!
  2. Acquirers searching for targets are always comparing your company with competitors. Do you stand out? Would you be seen as in the top five in your industry? Are you continually comparing your positioning, you value proposition, your messaging with the competition?
  3. Strong margins are clearly an attraction to acquirers. However looking through the lens of an acquirer, is always about relative margins. How do you compare with the competition? How do your margins compare across the product family? Is there a need to rip costs out the system to ensure a product can contribute? High competitive margins indicate a quality management team with a secret sauce worth buying.
  4. The speed of growth or lack of it, is a major driver in any transaction. Are sales & profits growing at 25%? What is spoiling the average getting to that number? Is there a region suppressing your margins, or a specific product, or a specific division? In practice we find leadership teams are flying blind. They haven’t invested in product management skills and their sales teams are not uncovering the drivers behind a customer’s performance. Bottom line, growth drives value. A company growing at 20% plus could be worth more than a much larger competitor with low growth.
  5. Customer dependency, a customer accounting for more than 20% of your sales could be a deal breaker. Design a sales process that uncovers new markets, that increases the market share of customer’s spend, that diagnoses the issues preventing customer success. And use the larger customer(s) to build credibility in the eyes of prospects.
  6. Hopefully you are in a sector with attractive growth rates. If not, two years is not really long enough to pivot into a new business sector! However it is never too late to reposition your company in a faster growing segment of the market e.g currently in recruitment, temp hiring is rising three times faster than permanent hiring. We have helped clients over the years find a higher growth, and a higher margin business within their sector that became an attractive acquisition target. Sector examples include printing, manufacturing, software and media.
  7. Legacy products are a great source of steady profits and cash but you can’t run the product family into the ground and expect to exit at top dollar (or exit at all). Invest constantly in innovation and keep it tightly linked to your compelling story. Be brutal about mistakes. Understand where your markets are going and build to that. Even in a two year window, there’s plenty of time to build and launch a new service or product that has a great sales pipeline when the acquirer comes knocking.
  8. Building a deep bench of world-class managers is hugely attractive to acquirers. Build focused teams and align them to achieve great things. Weak management teams miss things. They lack gumption. They miss bends in the road. Invest in training programs, outreach programs with universities, relationships with recruiters and build a robust process for capturing great talent.
  9. Related to point 8 above but different, is owner dependency. A business dependent on the owner is not an attractive target whatever its size. Of course there are exceptions, but in principle you want to build systems and people that dilute the dependency on the owner. This requires patience. Finding the right people shouldn’t be easy! Story telling described at point 1 is a really important aspect of talent finding. Of course addressing this issue assumes a self-awareness in the owner few possess.
  10. Staff engagement may sound a soft issue to address years before a sale but it’s vital. Acquirers will want to interview your key staff. Underlying resentments, conflicts and behavioral issues will shine through. Most acquirers will have developed a fine set of diagnostic questions to understand your culture and staff engagement. Of course labor turnover rates and online surveys may also reveal there are issues. The solution involves building a great team of motivated employees. Embrace the social science research on why people come to work. Autonomy, mastery and purpose. Blog post.
  11. Timing can be everything. However markets come and go. What you have some control over is to choose a time when your financials are supportive of a transaction. Ideally when you come to market to sell, the following equation is true. The current year P&L forecast is significantly higher than last year’s actuals and the future market statistics point to a high growth environment.
  12. Business models with a sales annuity stream – supporting sustainable earnings growth have rarity value. Look buyers want some certainty over the profits produced by your business, after they own it. Long-term contracts, subscriptions, service agreements, and large order books are all examples of business models that help answer the age-old question, what’s my visibility of earnings?
  13. Use a respected auditor with expertise in your sector. File clean, timely accounts in accordance with GAAP.
  14. Ensure all legal contracts, employment contracts and especially all IPR and patents are up to date. Ensure all regulatory filings are in order especially tax.
  15. The absolute size of pre-tax profits has a major bearing on the Price Earnings achieved on exit. Research supports the alignment between absolute levels of EBITDA and multipliers paid. Drive your profitability by ensuring employee bonus schemes are linked to profitability. Consider small bolt on acquisitions to accelerate your scale in the next 2 years.

Summary

These are some of the issues our operational playbooks address day in day out, to help our clients scale, build shareholder value and facilitate the option for owners to sell if they so choose.

Further reading: The Exit Playbook

The Acquirer’s playbook

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