In the last two parts of our “55 Questions” series, we will turn our attention from financial issues to important strategic, governance, and compliance matters. Lack of attention to these matters can result in lengthened due diligence, a delayed closing date, and in extreme cases, even abandonment of the transaction itself. In this Part V of our series of “55 Questions to Ask Yourself Before You Sell Your Business,” we will dig into strategic, organizational, and human resource issues.
The goal of our series is to encourage owners to make their businesses more attractive to prospective buyers, thereby earning the right to command a strong valuation and a quicker closing in an eventual transaction.
Strategic, Organizational, and Human Resource Questions to Ask Yourself Before You Sell Your Business
- Do I have an effective and well-functioning management team?
The value of your business can be significantly enhanced by investing in good talent at key positions, particularly the president, sales, operations, and finance positions. Many buyers, particularly financial buyers, do not want to step into day-to-day management of the company. Interim executive supply firm Cerius stated the following in a 2012 article, “The Financial buyer will generally provide board level oversight and financial resources along with key customer, technological, and supply contacts….the seller needs a strong management team that is positioned to take the company forward, and demonstrate that to the buyer.”
Business owners who fail to plan and to invest ahead of the desired sale date will be faced with two choices: a more limited market for their company or a post-closing commitment to day-to-day leadership until new management is in place.
- Do I have clear job responsibilities so that all employees know their roles and accountabilities?
Second in importance to having a strong management team is clear roles and accountabilities for each position in the company. In many small companies, lines of authority and accountability for outcomes are weak. The result is often a major hiccup in execution of customer orders, followed by a heroic effort by a few talented individuals to save projects from failure and to pull customer relationships “out of the fire”. If this pattern in true in your company, integrating your operations successfully into a larger organization will be painful, and potential buyers may discount the value of your organization.
It is worth the time and effort to invest in clear job descriptions and create a culture where every employee knows his or her role, is well trained, and accepts responsibility to execute at a high level.
- Do I invest in developing employees’ full potential through periodic performance reviews, goal-setting, formal and informal training, and through supporting, attaining, and maintaining professional certifications of my employees?
In today’s knowledge-based economy, the primary asset offered to a potential buyer is the seller’s workforce. Unique expertise, experience, and customer relationships are all possessed by your workforce. More than ever before, that workforce needs to be continually nurtured and developed.
Small- to mid-sized companies can significantly differentiate themselves from other potential acquisition targets by investing in the development of their workforce. Establishing and maintaining an effective system of goal setting, training programs, and performance reviews will improve retention of talented employees, especially during a transition to a new owner.
- Do I have a good record of employee relations, including a lack of tolerance for bad behavior?
Most buyers will perform a detailed level of due diligence on employee relations issues. The entire transaction could be at risk if the buyer uncovers a pattern of failure to deal promptly with harassment allegations, payment of settlements, and tolerance of bad behavior by certain employees.
If you operate in a relatively small market, either geographically or with niche products and services, your employee relations reputation is likely well-known by your competitors, suppliers, and the prospective workforce.
If this is an area of your company that needs to be fixed, start now.
- Do we routinely weed out low-performing employees or employees who fail to consistently enhance our culture and our brand?
Many years ago, I made the difficult decision to let go of a long-time employee whose performance had declined over a period of time. Later in the day, one of my other employees asked me, “What took you so long?” It stung, but they were right. While I had tried to encourage better performance, I had mostly ignored it and let my better performers pick up the slack. Department morale improved almost immediately.
As you contemplate a potential sale of your company and then begin the process, workforce morale needs to be as strong as possible. Nothing kills morale more often, especially among your top performers, than management’s tolerance of employees who consistently fail to meet their responsibilities. Similarly, there may be employees who perform adequately, but by consistently putting themselves above the mission and vision of the company; they damage the company’s brand in the marketplace.
Every employee struggling with performance deserves honest feedback, adequate training and tools, a second or third chance, encouragement from management, and time to improve. If those efforts prove unsuccessful, your key employees are counting on you to make the tough call to remove the poor performer for the overall good of the organization.
- Is the culture of my business such that it could be merged into another company?
Robert Sher, founding principal of “CEO to CEO”, an advisory company working with mid-market companies to navigate change, writing for Forbes Magazine, stated that research indicates the success rate of mergers and acquisitions is approximately 50%. I have seen research citing the success rate as low as 30%. In Sher’s article, he cites cultural fit as one of the top 5 reasons why acquisitions fail.
Hopefully, culture is part of the “secret sauce” of your company’s success. Healthy, sustainable cultures are attractive to potential buyers. It is important to deeply understand your own culture in order to be able to assess how well it will fit with other cultures when potential buyers come knocking. It is a waste of time to go deep into a potential transaction without an honest, up front assessment of the cultural fit between the two companies. In most transactions, large portions of the purchase price are paid after the closing either through seller loans, hold-backs, or earn-outs, some of which are dependent on the post-closing success of the merged companies. Forcing a transaction where you know the companies will struggle to come together culturally could be very expensive in the long run.
- Can all key day-to-day business processes run without my direct involvement?
The most attractive acquisition targets are companies that can run day-to-day without the owner’s direct involvement. Achieving this goal is the culmination of successfully answering the previous six questions. Without a strong management team, clear roles, a healthy culture, and a high bar for employee performance, the owner will always be tied to the company in some way for day-to-day operations. But once those pieces are in place, the company is well positioned for new ownership to take the company to even greater heights.
Strategic owners test their management teams by taking extended time off, thereby forcing the organization to deal with issues, make mistakes, and work through the consequences. These periods build confidence in the management team and allow them to test their skills in making even more consequential decisions.
- Is there clarity about what my business does and does not do?
We have noticed in our practice that one of the key traits of our most successful clients is clarity about what the company does and does not do. In short, the best companies do not chase revenues.
Many companies cannot resist the temptation to dabble in tangential markets, adjacent geographies, and supposedly easy, quick hit profits. The result is often stretched resources, damaged customer relationships, and depressed morale from employees straining to make a project work.
In the two to four years leading up to a potential transaction, we encourage owners to choose their expansion efforts very thoughtfully and to be willing to say no to those ideas that are outside of the company’s well-established strengths.
- Do I view Information Technology as a strategic resource?
There is a growing view that every company is a technology company. Consumers’ ease of doing business with companies such as Amazon, Uber, and Airbnb is becoming an expectation in the world of business-to-business transactions.
Tirrell Payton, a San Diego based technology consultant writing for “Business.com,” states that “These days, most of the leading edge methods and practices being adopted in enterprise technology come from the consumer world. Whether it be mobile, social, or advances in design and interaction, there is a lot more crossover between consumer technology and business technology. This may seem irrelevant; but you have to remember that your strategic partners, your customers, and even your employees operate in this consumer world as well. Therefore, customers expect their services and experiences to be customized and personal. This creates a huge opportunity to create value by meeting their needs, but it will require an updated, more flexible execution model. Technology systems will need to be more lean and flexible to fully take advantage of new opportunities.”
Hopefully, you are well on your way to digitizing your business model, particularly the interfaces with your customers and suppliers. If not, use the next two to four years before your planned transaction to begin your digital transformation.
- Do I have effective safety policies in place, and are employee and customer safety a priority at my company?
In 2016, we had the opportunity to work with a client who was approached by a qualified buyer. Before any financial information was shared or valuations discussed, the buyer conducted due diligence sufficient to satisfy himself that our client had a strong and effective safety-first culture. Without this level of commitment to safety, the buyer would have moved on to another opportunity.
The transaction above was in the engineering and construction industry, where safety has always been paramount. However, we are seeing an emphasis on employee and customer safety across nearly all industries, and many suppliers are now requiring proof of their vendors’ commitment to safety before they will do business.
As you begin to think about a potential sale of your company, prepare now to document your safety policies and your safety record.
- Do I have strong and effective project management to ensure projects are completed on time and on budget?
Many small- to mid-sized companies do not have a formal project management function because it is often viewed as an unnecessary cost. This is usually a short-sighted view, as the benefits of completing more projects on time and under budget would more than pay for the cost.
In a typical transaction, a company larger than yours will be acquiring your organization, and they will be looking at the effectiveness of your project management systems and personnel. In the case of a strategic buyer, a strong and effective project management function will help establish your company as a “platform” acquisition that other similar companies could be bolted onto. In either case, good project management is good for your business and is yet another way to position your company to command a higher valuation.
In the final installment of our “55 Questions” series, we will take a closer look at questions surrounding Tax, Regulatory, and Processes and Controls Matters.
We recently discussed our “55 Questions” with Gordon Deal on the “Your Money Now” podcast. You may listen to the podcast here.