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In a previous Active Garage post, we discussed the importance of ensuring that the sale of your company is a strategic, rather than a financial, one. This article will present the prototype of the strategic “hot property.” While the strategic assets that are most valuable will vary with the industry and the individual buyer, comparing your company’s strategic profile with this ideal can help you to begin the process of building its strategic value.
Key Areas of Potential Strategic Attractiveness
- High Profitability
- Outstanding Financial Condition
- Rapid Earnings Growth
- Rapid Sales Growth
- Outstanding Industry Reputation
- Geographic Market Dominance
- Service Offerings
- Market Niche Dominance
- Unique Marketing Channel(s)
- Strategic Alliance(s) and/or Joint Venture(s)
- Potential Acquisition Hub
- Key Customers
- Technology
- Broad and Deep Management Team
- Modern Management Style and/or Techniques
Details by Functional Area
General Management
- Outstanding CEO with long track record of P&L success, excellent instincts and judgment, and a first-rate knowledge of, and reputation in, the industry
- An executive one step below (preferably COO) with at least 90% of the CEO’s attributes (#1 above)
- An excellent executive heading up each of the existing functional areas (breadth of management) and an excellent working relationship among them:
- Marketing
- Finance
- Product Development
- Purchasing
- Operations
- Human Resources
- A #2 executive in each existing functional area capable of moving up to #1 (depth of management)
- Modern management style and techniques, such as:
- Clear vision
- Clear mission
- Clearly articulated long-range goals
- Previous three items well understood throughout the organization
- Flat organization
- Effective bottom-up input
- Financial and other incentives
- Effective information sharing with employees
Marketing
- Industry leader, and recognized as such, in the following areas:
- Product offerings
- Customer service, including technology
- Relationship of price to value received by customer
- Market share
- The place where competitors’ key sales people want to come to work
- High-quality / low-cost producer; competitive price leader
- Consistently ahead of the competition by at least one product cycle
- Excellent information on all key competitors and the nature of competition
- Technology used effectively to leverage, monitor, and forecast marketing and customer activities
- Excellent press and analyst relationships
- Positive visibility in the press
- First-rate presentations to the marketplace, including:
- Website
- Printed materials
- Trade show booths
- Strategic alliances – partnerships appropriate to customers, marketing, sales, manufacturing and services
Sales
- Sales team highly motivated and well compensated
- Sales compensation program designed to maximize Gross Margins
- Technology used effectively to leverage, monitor, and forecast sales activities
- Highly effective territorial coverage
- Outstanding relationships with key customers
Finance
- Outstanding financial condition / balance sheet, including:
- Cash – substantial for company of its size
- Quick Assets – substantial for company of its size
- Quick Ratio – at least 0.7:1; preferably 1:1 or better
- Current Assets – substantial for company of its size
- Current Ratio – at least 2:1; preferably 3:1 or higher
- Working Capital – indicative of extraordinary liquidity
- Net Worth – substantial for company of its size
- Ratio of Equity to Long-Term Debt – at least 2:1
- Ratio of Total Debt to Equity – no more than 2:1; preferably 1:1 or less
- Debt Coverage – at least 2:1
- Average Age of Accounts Receivable – no more than 30 days
- Average Age of Accounts Payable – no more than 45 days
- Long history of excellent P&L results, including:
- Sales increases of at least 25% per year, every year, for 5 years
- Upward trend in Gross Margin as a percentage of Sales, with most recent year and current year well above industry averages and trending upward
- PBT increases of at least 25% per year, every year, for five years
- Selling Expenses at least 2 percentages points below industry average
- G&A at least 2 percentages points below industry average
- Earnings per share calculated on a fully diluted basis, including all stock options granted, but not exercised
- Excellent banking relationship
Operations
- First-rate inventory management that optimizes both inventory levels and delivery times
- Interchangeable parts (cross-training) throughout the operation
- Industry leader in technology
- Well documented processes
- Outstanding QA
- ISO 9000 certified
Customer Service
- Rated by independent customer survey as outstanding
- Reliable, and consistently used, methods to determine customer satisfaction
- Prompt and effective responses to instances of customer dissatisfaction, whether justified or not
- Industry leader in technology
- Well documented processes
Human Resources
- No potential for significant contingent liabilities, including:
- Complete and clear employee handbook that covers all important company policies, procedures and employee benefits
- All job candidates go through a complete background check
- Effective and well publicized policy on sexual harassment
- Periodic and formal personnel reviews that are on time and well documented
- Credible policy of promoting from within whenever possible
- Claims administration that is consistent and fair
- All paperwork up to date and accurate
Clearly, no company can be perfect in all these diverse functional areas. But, if you utilize this check list to advantage, you will be well on your way to increasing the strategic value and, hence, the sale price of your company. Good luck.
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This article has been contributed by Steven D. Popell. Steve has been a general management consultant since 1970. Steve is a Certified Management Consultant, business valuation expert, and inventor of ExiTrak®– a process designed to assist the privately-held company owner/manager to build an attractive strategic acquisition candidate