Posts Tagged ‘Acquisition’

Buyers for your company: How to build a great list?

by Steve Popell on June 14, 2010

In a previous post, we discussed the fact that becoming an attractive strategic acquisition candidate should begin with learning precisely what prospective buyers think that means, and how to elicit that information in a series of telephone interviews.  But, an equally important element is determining whom to interview.  This post will address that question.

The first, and most obvious, step in compiling a list of prospective buyers in your industry is simply to brainstorm with anyone who fits the following profile.

  1. Has a valid input on this topic
  2. Can be relied upon to keep totally confidential even the fact that there has been such a conversation.  The notion that your company is (or will soon be) for sale can be very destructive in the marketplace.

As long as you have complete confidence in the discretion of each individual, the more contributors the better.

The next step is to consult as many merger & acquisition databases as you can identify.  Database research can help in two distinct ways.  First, it can provide information on specific acquisitions.  Second, and as importantly, it can suggest matchups that might not have occurred to you and your colleagues.  Discussions that follow will often lead to whole new categories of prospective buyers.  The basis for this research is your company’s Standard Industrial Classification (SIC) code number, along with the parameters that are most relevant, such as:

  1. That the SIC code number relates to sellers;
  2. Period of investigation (e.g. last three years)
  3. Sellers’ annual revenue range
  4. Whether to include international buyers and/or sellers

When in doubt, do not leave out any parameter, or narrow it unduly.  It is far better to have too many data points than too few.  You can always drop any that prove to be irrelevant.

The rest of this part of the process is iterative; i.e. back and forth between brainstorming and database research, until you feel that you have reached the point of diminishing returns.   At that time, shift your attention to identifying a specific executive to interview in each company.  This information should be readily available on the prospective buyer’s website.

In a relatively small company, the CEO or CFO is the most likely choice.  In a larger company, there may be an individual specifically charged with acquisitions, such as the Director (or Manager) of Corporate Development.  Since the title will vary from company to company, it may be necessary to click on the name of someone you think may have this responsibility.  His or her write-up should be very helpful in this regard, and will probably provide contact information, as well.

Once you have developed the list of companies and individuals to contact, craft a questionnaire along the lines discussed in the previous post, conduct the interviews, collate the data and, finally, analyze the results.  The product of all this effort will be the profile of the attractive strategic acquisition candidate from the perspective of the marketplace.

Good luck.

PhotoPopell 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

Selecting a Business Valuation expert

by Steve Popell on February 18, 2010

Introduction

There are myriad reasons why the owner of a privately held company may want or need to have the company valued, including (partial list):

  1. Acquiring another company
  2. Selling the company
  3. Buy-sell agreement
  4. Repurchase of minority shares
  5. Divorce
  6. Partnership breakup
  7. Estate planning
  8. Probate

Regardless of the reason for the valuation or the urgency of the task, finding the right expert will pay off in the quality and utility of the opinion.  Here are a few tips to help you to make the best choice.

Background Check

Just as in hiring, you accept a resume on face value at your peril.  Always check references and publications.  In addition, go beyond the references provided by the expert.  You can do this simply by asking the listed references for the names of others who may have valid input on the competence and relationship skills of this individual.  These are called secondary references, and will typically be a more reliable source of information than the primary references.  You can even take it a step further by asking the secondary references the same question and, thereby, developing tertiary references.  Some questions you may want to ask will include the following.

  • Did the expert communicate clearly on all aspects of the prospective assignment at the initial meeting?
  • Did the engagement letter accurately reflect the shared understanding of the purpose of the assignment?
  • Was there a firm fee quote, or did the expert work by the hour?
  • Did the expert exhibit a genuine commitment to impartiality?  In other words, did the expert indicate clearly that s/he would simply go where the evidence led?
  • Was the request for data, including financial, reasonable?  If you didn’t have a particular document or piece of information readily available, did the expert insist on getting it, even if it seemed tangential?
  • Did the actual performance of the expert (data gathering, analysis, report, etc.) match up well with what you expected, based on the initial meeting and the engagement letter?
  • Was the report clear and easily understandable – even by non-financial people?
  • In the case of a divorce valuation, was the expert sensitive to the emotional aspects of the process?
  • How did the expert relate to other professionals on the case, such as a Collaborative Practice team, attorneys or mediator?
  • If you had to make this choice again, would you select this expert?

Absence of Ego in the Process

There is no place for ego or pride of authorship in the business valuation process.  One way to scope out this aspect of an expert’s approach is to determine if s/he is willing to submit a preliminary report that is open to criticism.  It is always possible that even the most competent expert will over-emphasize or under-emphasize some important data or, perhaps, miss something altogether.  It is also possible that something unexpected has cropped up during the valuation process that was knowable as of the valuation date, but the client(s) neglected to mention same.  The expert should be open to (even anxious for) the client(s) to provide such feedback.  The objective, after all, is the best valuation report possible, not the easiest to crank out.

Fundamental Understanding of What is Really Going On

Fair Market Value (FMV) is defined as what a hypothetical willing buyer will pay a hypothetical willing seller in a hypothetical free market in which both sides have essentially all the information they need to make an informed decision, and neither is compelled to conclude a transaction.  FMV is an appropriate standard of value in many situations, such as probate or any other circumstance in which the opinion will be presented in court or involve the IRS or other federal or state agency.  However, a number of other scenarios call for a different standard of value.

In a divorce, for example, or for a buy-sell agreement for a company with 2-4 owners, investment value is far more appropriate than fair market value.  The reason is very straightforward.  In either of these situations, the objective is not to determine what some outsider would pay for the company, or a portion thereof.  Rather, it is to ascertain what it is worth to one spouse (or one owner) to own a greater share of the company.

Avoid an expert who fails to grasp this critical distinction.

Flexible Fee Schedule

Anyone can charge several hundred dollars per hour.  It is more challenging to provide a fee schedule that offers the client genuine choices.  There are a few key questions in this regard.

  1. Will this opinion be offered in court or to some government agency?  If so, an “official” opinion will be required, and will be the most expensive.  If not, does the expert offer an “unofficial” opinion for a lot less money?
  2. Can delivering a much shorter report cut the cost significantly?
  3. Is there a choice between a broadly based analysis and report and one that considers financial documents only?  Is door #2 cheaper.

In sum, you have a right to expect quality performance from an expert with whom you have an excellent relationship, and for a cost that is commensurate with you needs.  Go for it!

This article has been contributed by Steven D. Popell CMC (Certified Management Consultant.) Steve has been qualified as a business valuation expert since 1974, and has published extensively on this topic. CMC, a certification mark awarded by the Institute of Management Consultants USA, represents evidence of the highest standards of consulting and adherence to the ethical canons of the profession. Steve was a 2007 winner Collaborative Practice California Eureka Award for contributions to Collaborative Practice in this state and is a Senior Partner in Popell & Forney, with offices in Los Altos Hills and Pleasant Hill, California.

business graph increasing profitsIn 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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PhotoPopell 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