Even if it is not your intention to sell your business it is interesting to review what potential purchasers look for in acquisition targets. Would an action plan along the lines suggested below enhance the robustness, growth potential and profitability of your business ?
The chances are that many of your business practices have evolved over time and would not be what you would put in place if you were starting today with a clean sheet, so some changes may be worth considering.
You may see it as inevitable that your product / service offerings are customised to meet the needs of individual customers. If this is your perspective try to stay open minded when reviewing the list. With a little thought and creativity there may be more you can do to specialise, productise, systemise etc than might be your first instinct.
Checklist of key points to enhance the attractiveness of your business to potential buyers
- Specialise. Narrow your focus, specialise in one/small number of product area(s) and strive to excel in this area(s). Stop selling everything – have external partners if necessary to satisfy the full end to end customer need. This requires you to identify the product or service where
you have a unique and sustainable competitive advantage. Saying ‘No’ to business opportunities takes courage, but you will have to be prepared to turn down business from outside your areas of core competence, following such a review.
- Productise. Reduce customisation and modularize your offerings. There is research which suggests that offering too many options leads to confusion, which turns potential customers away. Being customer focused is about finding the sweet spot between full customisation and ‘off the shelf’ offerings.
- Systemize and document. Could you have more efficient and replicable processes? Seek to have clear written policies and procedures, and ensure that controls are in place to ensure that the standard process is followed, with clear escalation procedures for exceptions. The more systemised your business the less you will be dependent on specific employees in key roles. As part of due diligence potential buyers of your business will look for written operational procedures, and test that procedures are followed in practice.
- Eliminate reliance on you. Buyers will shy away from situations where there is a dependence on you especially to generate new business or maintain customer relationships. They will look to see that you have an effective sales organization, with quality well incentivised sales people (more than one), preferably with a product rather than service sales background – service sector sales people are wired to offer customisation.
- Reduce dependence on one or a small number of customers. Potential buyers will see such a concentration as a potential vulnerability. They will discount the price they are willing to pay for your business to reflect the risk of losing key customers. Your bargaining power with such customers will also be assumed to be weaker.
- Business terms. Easier said than done, but could you change payment terms to limit the amount of cash tied up in debtor balances ? For example, introduce up front cash payments. Cash positive businesses are much more attractive to potential buyers as future growth does not require significant additional investment in working capital.
- Create ‘competitive tension’ amongst potential buyers. Identify a list of potential buyers, more than one, at least two years in advance of your desired disposal date. If using an M&A broker make sure that he/she is independent – acting on your behalf with no conflicts of interest.
- Key employee retention. You should have a long term incentive scheme (for example, loyalty bonus payable after say, 3 years) in place to give assurance to potential purchasers that key staff will not leave following a change of ownership. Share options should be avoided, as they can be problematic to unravel.If you are planning to sell your business you need to have a clear plan as to when you bring key staff into your confidence, as you don’t want them to hear this from an external source. You should be able to make a credible case as to why the move is good for their career development. For example, point to opportunities for advancement as part of a larger group.
- IP protection. Try as far as possible to own all aspects of your process and intellectual property in order to prevent former employees setting up in competition.
- Sales and marketing plan. You need to be able to demonstrate, as part of due diligence, that the business has growth potential. Financial plans will be required, which must be supported by a credible market analysis.
If you were to implement even some of the above advice, it counts as smart working and would give you as business owner a less stressful day to day work experience and better work/life balance!