Posts Tagged ‘acquisitions’

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

January 23rd, 2009 Comments off

     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

Corporate valuations – Premiums start w/ the foundation

September 18th, 2008 Comments off

Some recent conversations and emails have prompted discussions regarding the valuations placed on a company and how to move towards achieving a premium. While there are some PE / VC firms that seem to have their “formula”, the process of applying a valuation is a very fluid process that is affected by an unlimited number of elements. The most obvious are trends within an industry, the company’s market share within that industry, as well as the market’s view of the company in question. There dozens of data points to start with. One thing is for certain….securing a premium valuation does not happen over night. It starts with methodical planning that begins with a solid internal foundation and extends to the external efforts directed at satisfying the customer base. It’s a journey and not the result of impatience.

This is not rocket science but it does take the formulation of a specific goal and a disciplined approach. Whether your company is working on a succession plan or working towards an acquisition, discipline is the key. And it’s not going to be just a discipline focused on financial results. The discipline has to start at the operational foundations of a company. The potential buyer of your company does not want to inherit a myriad of headaches or a company that needs a complete facelift. They want a company that will be a complement to their bottom line, their operations, and will be accretive in a very short amount of time. Any areas that are viewed as a “fix” are going to bring down your valuation.

1. What is the state & accuracy of your budgeting, forecasting, and planning process?
2. What is the quality of your working capital elements? Inventory, A/R, etc….
3. What is the quality of your employee base and their skill sets? Tenure, degrees, etc.
4. What is the extent of processes documented within the company?
5. What is the quality of the information systems that are in place? Quality of data….?
6. What is the state of the customer base? Strong relationships, reliance on one customer….
7. What is the state of the vendor base? Is there any single source risk……

This is far from any type of an exhaustive list and the typical due diligence checklist will make most managers heads spin. When these elements are not in place and they need to be addressed last minute before any type of a potential deal, it will typically result in mistakes or the identification of weaknesses in the business. It also means that the efforts of management will be pulled away from the day-to-day operations, which might result in decreased short-term performance. The few issues listed above cannot be remedied in a month or two. They need a much longer planning window to address. When these elements, and many more, are dialed in it will result in a much higher premium in placed on the entity. Strong foundations result in premium valuations.

Thanks for reading . . . .

Jeffrey Ishmael