In the last 15 years, operational improvements surpassed financial engineering as the key driver of business value and internal rate of return for acquirers, according to research from the Boston Consulting Group. This correlation between strong performance and higher sale price is a reminder that business owners interested in selling their companies need to look beyond the financial statements to optimize prospects.
Keep in mind that strong internal controls, including key performance measures (KPMs) and quality metrics, are the bedrock of any operational improvement initiative. KPMs should be integrated into pre-sale efforts, including the strategies discussed below in the context of the manufacturing and distribution industries.
A track record of at least three years of strong performance is ideal, so owners should consider implementing these or other operational improvement strategies well in advance of a potential sale.
Reduce expenses and improve EBITDA
Trimming expenses and improving earnings before interest, taxes, depreciation and amortization (EBITDA) are essential components of pre-sale performance optimization. Two places to start are applying zero-based budgeting methods and reviewing expenses line item by line item. When reviewing expenses, however, it is important to avoid cutting areas that support company growth and performance, like sales, marketing and training.
Another cost-cutting idea is renegotiating procurements expenses like shipping costs, maintenance contracts and high-volume material and components. Reducing inventory can also help improve cash flow but beware deep cuts that could hurt output or customers.
Unlike a comprehensive lean manufacturing strategy, EBITDA-focused performance improvements are shorter, more intensive and focused on boosting profit in key areas. Here’s one example of EBITDA improvement: Using KPMs, assess the profit of certain value streams and identify bottlenecks in the process. Eliminating constraints may require targeted technology or equipment. Often, however, it is possible to implement tools to more effectively manage the constraint in a way that increases profitability of the value stream.
Boost capacity, customer service for competitive advantage
Serving new markets and customers is a positive development for any business, but how can owners achieve this without additional staff or capital outlays? The answer is capacity expansion. Business owners who successfully create new, flexible capacity with the current asset base generate profits that are essentially “free,” because the major costs (outside of materials) are already on the income statement. The resulting geographic and customer base diversification also makes the company more resistant to economic downturns – a big selling point for potential buyers.
Consider applying lean manufacturing strategies to increase on-time delivery rates, shorten lead times and provide a higher level of customer service. Establish and maintain strong vendor relationships to demonstrate a durable supplier network that can stand the test of time. These efforts will boost a company’s competitive advantage.
Invest in workforce, leadership
Finding and retaining a skilled workforce is a top priority both for employers and potential buyers. That’s why it is critical to shore up the level of quality and productivity of the employee team before considering a sale. When it comes to company leadership, businesses that are dependent on an owner may not generate as high a price as those run by a strong leadership team or network of key employees. In addition to reducing perceived risk, a solid management team can also keep the company running smoothly during the time intensive sale process and avoid the performance drop-offs that can erode value and negotiation strength. Building a skilled workforce and strong leadership can take several years, so owners should make these investments now.
Spruce up facilities
Do not overlook the physical assets of the company. Just like staging a home, a tidy and organized workspace makes a good impression on potential buyers. The value of this strategy goes beyond first impressions, however, by assuring a potential acquirer that costly repairs or replacement of physical assets will not be needed in the short-term. Examples of clean-up tasks include checking forgotten corners and dark spaces under warehouse racking, wiping oil and dust from equipment, repainting walls, adding bright lighting and replacing lobby paneling.
RKL has the operations experience and performance improvement expertise to help companies improve execution ahead of a sale, or at any stage of the business lifecycle. Contact me to find out how RKL can drive performance for you.