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Why discuss Acquisition planning now? We’re not selling now….

January 23rd, 2009

     I continue to work with both small and larger companies and continue to be amazed at the lack of real forward thinking when it comes to formulating long-term strategies for the entity in question.  In particular, the process of setting up a company for an eventual acquistion or the entrance of a key strategic partner.  Quite often the response has been “We’re not quite ready to put ourselves on the selling block” or “I think were atleast 1-2 years out from such an activity”. Did you really think about what you just said…?

     Let’s take the example of a smaller entity, that acknowledges they want to be sold, & that this is the stated goal within a few years. Let’s also assume that this entity is not ready now and has quite a bit of clean-up to do before deciding to start that fun little dance. Most Managers and Directors do not appreciate the complexities and depth that go into an effective due diligence process. Let’s start with only the top layer of information, which some companies even struggle to deliver:

  • Multiple years of auditied financials, tax returns, and supporting documents.
  • Documented internal controls and processes used for daily operating activities.
  • Implemented Budget and Forecasting efforts, along with reconciliations to judge accuracy.
  • Reconciliation of all H.R. related information to mitigate any post-deal employee lawsuit risk.
  • Reconciliation of all intellectual property matters, which support underlying business or identify areas of competitive risk or potential litigation.
  • Review of the management team, skillsets, and to determine if they will take the company to the next level.
  • Review of vendor listing to identify difficulting in sourcing or any single-source vendor risk.
  • Review of the customer list to determine depth/quality of customers and any single-customer concentration risk.

     Keep in mind, this is only a portion of the likely punch list. Starting to get the idea? This is not an effort that can be taken on and accomplished in a matter of months. To maximize the value that you’ll receive for the business, this effort needs to start well in advance and the planning process is immense. If you have not started going through and documenting these areas, then any attempt at a punch list will be half-baked and will not provide the most complimentary view of the company, thus resulting in a decreased valuation.

     The effort that will go into this exercise spans the entire organization and will likely be a large distraction from the business at hand if not properly planned for. The discipline to plan and enact the necessary change over a longer period will show that the management is consistent in their actions, show that they understand what it takes to change the business, shows that they are willing to make change, and ulitmately, will support higher valuations at the bargaining table.  Anything short of this will lead to varying degrees of discount in the final valuation. Want to improve your valuation?….then that’s why you start your planning now . . . .

Thanks for reading,

Jeffrey Ishmael

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