This is the third article in a three-part PE Hub Canada series on what CEOs, managers and investors must consider in the various stages of a business transition.
I now look at how CEOs and owners—including private equity owners—can prepare to sell a business.
There are a number of areas to provide direction on as you prepare the business for disposition. These include:
- Managing the balance sheet
Throughout the growth stage of a business, the need for capital—more specifically, working capital and capital for equipment, infrastructure and inventory—is ever present.
You may not want or need to change your spending leading up to a potential sale of your business; but some would say this is not the way to approach a sale.
Each business is different. However, it can be effective to manage your capital investment more conservatively in the final year to enhance your earnings and produce a better Ebitda multiple.
This does not mean you stop investing in growth. You may want to consider a delay of capital investments that do not drive short-term earnings growth.
- Locking in revenue and margin projections
At least three things create angst in potential purchasers.
First, they want to know that your revenue and margin is predictable and that they have grown consistently over the last three years. Have direct performance activities led to increased revenue and increased margin? Can you clearly explain your markets, competition and other factors that have driven results?
Secondly, buyers want to know about the concentration of clients and products and services offerings. Put simply, how concentrated are your sales and margins in the company? If you have a single client with a concentration greater than 20 percent, that is risk that needs to be offset leading up to a sale.
Thirdly, buyers often wonder about the top three factors that could create a negative change in your margins. How can you control these and what do you have in place to ensure margins are managed?
Not long ago, I was involved with a very good business that had divisions and broad geographic growth but had recently experienced a change in leadership in a key market. The incoming manager had not been well versed in profit-and-loss (P&L) responsibility and had allowed a competitor to underbid a key high-revenue and margin-generating client. This single loss produced a bad quarter.
Be vigilant on the sustainability of these value drivers heading to the finish line.
- Managing risk
It’s impossible to control all risks. The key is to assess the internal risks that could impact the valuation and potential sale of your business. These include:
People: Lock in your team so you do not lose a key player leading up to a sale. In fact, best practice is to lock your team in not only for the sale but for the entire earn-out period, should that be a consideration of the sale.
Systems/IT: This might not seem like a typical area of concern; however, I’ve seen issues in this area that cause significant stress throughout the due diligence period. The challenges occur when information is required and cannot be seamlessly accessed. Get organized now to avoid issues later.
Lawsuits or other business interruptions: Look at all aspects of your business and ensure that anything on the books has been addressed and that nothing coming up could stall or stop a sale. Currently, I’m working with a company that is trying to clean up a small lawsuit that is impeding the ability to move forward with a sale.
Take care of such issues earlier rather than later.
- Managing expectations
There are two areas in which CEOs and owners must manage expectations of a sale: communication and timeline.
Communication must be very discreet as the ups and downs of going through the sale process can significantly impact various direct and indirect participants. Less is more, but no communication is usually not a good option either.
In many ways, communication ties directly into the process and the inability to control the second item: the timeline. Closings involve a number of outside stakeholders and, as a result, can take longer than expected.
- Proactively carrying out the succession plan
I have touched on the importance of a succession plan in the past and, frankly, it should be addressed and in place well before the CEO/owner takes the first step toward a sale. Often it has not been well thought out and no plan is in place.
As the majority shareholder and/or owner-operator, your participation will be crucial during and well after the close. It is extremely rare to sell a company and walk off into the sunset shortly after closing. Expect to be actively involved in the transition and post-sale succession plan implementation.
- Understanding your role as CEO
In summary, your role as a CEO or owner actively managing a sale is to ensure you are fully engaged.
Keep a watchful eye on your team’s engagement and the cadence of the business, and stay focused on the execution, value-drivers and key metrics of your business plan.
Larry Kaumeyer is president and CEO of CEO Insights Canada, based in Edmonton. He is a hands-on leader currently running an Alberta portfolio company owned by a private equity firm. www.ceoinsights.ca.