Prepared For The Buyer's Knock?

By Henry Cromeek, CPA

Are you still recovering from the 2008 recession? Were you contemplating selling your business at that time? Has the recession taken a toll on the value of your business? It is three years later and, in the next two years, you may have the opportunity to sell before another recession. Your business has probably recovered somewhat with higher earnings recently and the valuation has improved, but not to the level of where it was in 2007.

What can you do to enhance the multiples of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) within the next two years? I will explain a technique that I was involved with while I was the Chief Financial Officer of three platform companies of Private Equity firms.

Businesses that are platform companies of private equity firms generally command higher multiples of EBITDA. If a privately held company with an EBITDA of $1 million can secure three times EBITDA, it will generate $3 million in proceeds. A PE company with an EBITDA of $1 million can secure five to six times EBITDA and will generate $5 to $6 million in proceeds, thus generating $2 to $3 million more in proceeds. Why is that? It is because the private equity owned company will invest in a process to ensure a company is ready for sale.

The process consists of strategic enhancements that can be addressed, which are different for every business, but do have common areas of focus; however, for this purpose, I will focus on the common areas that apply to all businesses. They fall under two categories:

1) Organizational
2) Financial

Organizational Enhancements:

  • Develop a logical presentation format of all the data of the company so there is consistency.
  • Create activity plans that are weekly and monthly for all disciplines that have measurements.
  • Create a business plan and update it at least once a year. It should include strengths, weaknesses, opportunities, and threats, as well as address tactics.
  • Implement a structured business review concept so that all segments are reviewed monthly. Performance should be measured against goals for all business disciplines.
  • Develop, document, and communicate the policies and procedures of the company.
  • Secure patents and copyrights to protect intellectual property.
  • Create visual "whiteboards" of key performance indicators and activities, based on budget, which drive excitement.
  • The whiteboards should have weekly and monthly measurements.
  • Develop your managers so they can replace you.
  • Create an organization chart.
  • There are many others that can be addressed.

Financial Enhancements:

  • Develop a monthly budget for all business disciplines, as well as for customer and product profitability. The budget should include a monthly income statement, balance sheet, and cash flow statement.
  • Create a weekly dashboard for all key indicators that permitted immediate corrective actions.
  • Create a 13-week rolling cash flow forecast (52-week for seasonal businesses), including expected collections and expenses to be paid over the period. This practice will ensure that the line of credit can be "rested" for 30 days. The cash flow forecast will allow for planning with vendors, if needed, and for driving sales activities, if required.
  • Create customer and product profitability reports versus budget and prior year by business segment and lower levels, where applicable. Action allows for the reporting of variances on costs or prices, so corrective actions could be addressed.
  • Create a five-point program to improve owner's Stockholders Equity section of balance sheet.

The time frame for getting a business ready for sale depends on the current readiness, but, in general, could take two to four years.

While working with Private Equity platform companies, I have learned that the best way to be ready for the buyer is to gradually develop documents that the buyer's "due diligence" checklist will require. Store these documents in a server "data room" and update them periodically using a logical sequence.

The due diligence documents should be organized into categories in the data room. Some examples are:

  • Corporate organization and history
  • Products
  • The market
  • Customers
  • Marketing
  • Competition
  • There are many more

It would be my pleasure to discuss situations and elaborate on the above. Please feel free to give me a call.

(originally published in the October 2011 eNewsletter)
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Henry Cromeek, CPA, has been with B2B CFO three years and has multiple clients serving emerging and mid-market owners. Henry works with business owners who need to increase cash, profits, sales, and company value. Henry's point of distinction is that, prior to B2B CFO, he was a full-time CFO for five mid-size companies, three with private equity platform companies in multiple industries, serving as a chief financial and operations officer. Henry's early career consisted of 15 years with KPMG, Revlon, and Nabisco in New York City. Originally from New York, Henry has worked in a variety of industries, including manufacturing, retail and wholesale distribution, transportation, food service, and contract services companies, including selling to national dealer networks. Contact Henry at:
Email: hcromeek@b2bcfo.com
Phone: 303-588-9310
Website: henrycromeekcfo.com