Prior to a sale, it’s critical to professionalize your company, whether that means planning, education or just a better understanding of its value. And as with any strategy, that may require an investment to bear fruit.
“A lot of the enterprises I’ve worked with, in smaller companies, succession planning just doesn’t exist,” says Tom Lombardo, a long-time general management executive.
He has spent the past six years as president and CEO of Adams Manufacturing, joining the family company in 2013; five years later, it was sold to BC Partners-backed Keter Plastic.
Lombardo says private enterprises can be classified two ways: wealth creation and growth, or lifestyle. A lifestyle business is more about ideation — intellectual property and protecting your ideas — than a line of sight on a return.
If you want to get your organization ready for a sale, however, implementing a strategic roadmap so that everyone understands where the business has been and where it’s going can help a company move toward a wealth creation and growth mode that is more attractive to buyers.
At the 2019 ASPIRE Dealmakers conference in Pittsburgh earlier this year, Lombardo shared his insights on preparing a company for sale.
Even before you plan to sell, an investment banker can help determine what a company is worth, Lombardo says. That person can help educate you about how to go to market and give you an understanding outside of your world.
By creating a wider view and not being so internalized, you may be able to increase your top line and lever the bottom line better, which changes your risk profile, he says. If you’re looking to exit, it’s important invest in the strategy before you try to monetize. You want to surround yourself with the right people who can make that happen.
“From a private enterprise standpoint, understand what your limitations are,” Lombardo says. “I don’t mean it in a bad sense, but you need to have somebody come in and help ID who you are.”
Hire a financial executive
You may need to upgrade your financial executive, because a controller doesn’t have the same view as a financial professional, a CFO, he says.
Controllers control cost. They don’t look at the finances of a business. They don’t have banking relationships. They don’t always understand what’s happening in the market.
“They’re not going to have, traditionally speaking, the skill sets that are going to bring it home for someone that’s paying a multiple over in earnings in EBITDA,” Lombardo says.
In addition, having a strong CFO will help during due diligence. You don’t want a long list of items to come up because that’s a degradation in value every time another item gets added, Lombardo says.
“You want to have your quality of earnings at the highest level going in, because there are claw backs and adjustments as you get in it,” he says. “The price starts at $1, and it doesn’t go up when they get deeper into the deal. It goes down.”
Another risk to consider is how knowledge is distributed throughout the business. Is one person the business?
“If you don’t have an organization that’s been professionalized, if the owner is the only person that really has the keys to the car, the chances of your success on a multiple are going to go down relatively quickly,” Lombardo says.
In addition, a potential buyer is more likely to walk away if there’s not enough infrastructure and tribal knowledge to transfer with the sale, he says. So, as a sale gets closer to reality, you may need to lock in key people. While it’s important to keep things close to the vest, before a transaction closes, a buyer may want assurances — especially in manufacturing, where the knowledge that pockets of people have is critical, Lombardo says.
“Make sure you pay upfront to get the right deal team and make sure you pay upfront to check in the people to make the transfer happen, especially if you’re exiting out,” he says
Even if you plan to stay on, that mindset could change after the wealth creation a sale brings.
“You need that tribal knowledge to stay with the business,” Lombardo says.