A whole sub-industry has grown up around corporate transactions. Sometimes this preparation activity is called ‘grooming’ for sale. I went through a phase in my life where I thought that all such activity was irrelevant. This prejudice was fed by the numerous horror stories I came across. I recall a client in Cheshire telling me about spending £250,000 on grooming his business. It turned out that none of the potential purchasers his accountants identified cared about any of the changes they had themselves initiated! This provides me today with my first key point. “Do not make changes to the business that a purchaser does not care about, or that they can institute more cheaply than you.” My second point follows rapidly on: “Find out what a prospective purchaser will care about and do that!
Do not make changes to the business that a purchaser does not care about
A simple negative example of what I am seeking to convey is that of Credit Control. Early in my career, I worked in an excellent firm that had poor credit control. Some attempts were made to improve over a couple of years, but it was sold with that still a real issue. The multinational purchaser had it sorted in a month – by just dropping in their own highly effective systems. In conversation with the new General Manager, he told me that the issue was part of the attraction of the company. What was to them a minor adjustment brought rapidly accelerated payback. However, if all likely buyers for our firm had instead been private companies with limited resources, such a fault would probably have left it unsold. Proper preparation thinks into the shoes of the most likely buyers.
Find out what a prospective purchaser will care about and do that
Much later I was working with a logistics firm to establish their ‘value proposition’ for acquirers. They were quite negative about their proprietorial load management software. I had to fight to keep it on the list. The eventual buyer sneered at the trucks, the management, and the customer base, but went all quiet when evaluating the software. It turned out that theirs had cost £2m and still barely functioned! The target company was reversed into the much bigger operation and assumed its control functions! So, next points: “Some of your weaknesses are strengths. Some of the things to which you give little value, matter a lot to others.”
Buyers buy future results by turning their back on unmanaged risks
However, what people will never buy are unresolved court cases, warranty issues, untried technology, shoddy HR practices, etc. “Buyers buy future results by turning their back on unmanaged risks.” Nobody wants to buy risk. Acquirers can produce enough of that themselves without your contribution! All company preparation for sale should contribute to risk mitigation. By the way, perceived risk is as bad as actual risk. Much of your preparation may need to be around making sure that there are no misconceptions. Large companies find it particularly hard to evaluate SME customer bases, for instance. They look for big names familiar to them and can baulk if they are not there. So, do the hard work of showing how your own client base will work to their advantage – or improve it!
Some of the things to which you give little value, matter a lot to others
I do not understand today why I thought that preparation for sale was non-vital, other than the very real abuses of twenty years ago. (Advisors who would lose their client if the client sold, constantly finding further areas to groom – at a hefty daily rate!). Most crucial is absolutely up-to-date input as to what matters and what does not.
If you’d like to find out more about mitigating the risks and selling your business for the right price and best terms, please contact us.