With the M&A market still hot, there are many businesses for sale that seem attractive at first glance, but upon a deeper review, may not be truly ready for a transaction. In these situations, the seller may not realize as much value as they originally hoped. Or worse, they may be forced to delay selling.
When a company goes up for sale, it may have great curb appeal (or attractiveness) and generate a fair amount of interest. However, if the substance of the business is not up to par when a buyer starts their due diligence, the lack of its true readiness for the sale may represent a significant hurdle in the transaction.
To further explain, let’s take a deeper look into what we mean by attractiveness versus readiness when it comes to a business that is up for sale.
Business attractiveness
Attractiveness represents the attributes of the business that give it the initial pop to the buyer. Good examples of factors that can increase business attractiveness are:
• The company’s industry.
• Products or services.
• Brand recognition and awareness.
• Years in operation.
• Intellectual property and technology owned.
• General profitability and size.
The stronger each of these items is, the more the business will appeal to a third party. A common trait of the attributes that make a business attractive typically take substantial time to develop, which is why they tend to draw in prospective buyers from afar. On the other hand, due to the inherent time needed to develop them, these factors are also more difficult to change.
Market factors also play a large role in a business’s attractiveness. For example, the forecast for businesses within the life sciences industry is certainly more attractive than for a manufacturer of obsolete products, such as the typewriter.
Although these characteristics are harder to change in a business, they are usually not what ultimately impedes a potential transaction. In most cases, the buyer has already assessed these attractiveness factors prior to making a preliminary offer. Where business leaders sometimes fail is in preparing for the readiness factors.
Readiness Factors
In many ways, entrepreneurs accept their business as it is and are willing to forgive all of the warts that have developed over time. In doing so, they may perceive the value of their business as being worth more than what a buyer would be willing to pay. Ultimately this is because the owner is placing a greater emphasis on the attractiveness of the business than its readiness. A business owner may have a very profitable company in an emerging industry, but if the organization itself is not transaction ready, the owner may be leaving a lot of value on the table.
Business readiness factors include:
• The owner’s individual readiness.
• Deal structure considerations.
• Management team.
• Systems and processes.
• Documentation and records (financial and non-financial).
• Compliance.
• Corporate structure.
• Environmental.
• Litigation.
Each of these factors (and many more) will be carefully vetted when the business goes through the due diligence process. And each will have an impact on a buyer’s risk appetite when considering what they are willing to pay. This is because readiness has a direct correlation to a business’s sale value. The more ready a business is will only make the due diligence process smoother. The smoother the due diligence process is, the less worried a potential buyer will be, which leads to greater value. Conversely, if the buyer finds issues during the due diligence process or if the process is bumpy, it may lead to buyer uncertainty and may detract from value.
When is the right time to assess business readiness?
The answer is anytime. Business readiness is simply good business practice. Businesses that operate at a high level and have strong governance (such as a board of directors)address the readiness factors on an ongoing basis as a normal course of business. These factors go beyond increasing business profits and dig deeper into re-risking the business and developing a model that ensures sustainable long-term success.
By continually working on readiness factors, a company can not only increase its long-termvalue, but it can also create near-term success by increasing cash flows and creatingenhanced opportunities for its employees.
What is the best way to go about addressing readiness factors?
A third-party consultant is a good idea. An independent professional who works in M&A or a valuation consultant are ideal candidates to identify potential areas of improvement inyour business. These professionals are skilled at understanding the drivers of value and employing their guidance will provide opportunity for value creation, regardless of whether a business sells or not.
Making sure your business is sell-ready can be daunting and time intensive. Our M&A advisory team has more than 40 years of experience helping privately-owned, middle market businesses successfully navigate the process.
Brian J. Sharkey, Director-in-Charge, Business Advisory, Kreischer Miller