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Beyond the checklist 

Marco Tomassetti has been working on corporate mergers and acquisitions for the past 17 years, mostly advising clients on the sell side. Tomassetti recently rejoined KPMG’s Vancouver office to lead the Corporate Finance practice for British Columbia. What brought him back to the firm? A desire to work with clients long before they actually plan to sell their businesses.

“We offer a unique platform and delivery model that allows us to work with clients well before they’re actually looking to take their business to market,” says Tomassetti. “Whether we undertake a formal preparation advisory engagement or simply provide a series of informal discussions, we leverage our vast deal of experience to offer insight and advice on how to make a business more attractive in the eyes of potential buyers.  Not only does this lead to a higher price, but it also leads to a smoother, more robust sales process for our clients. Effectively, we work on what we can do today to make it a better sale down the road.”

 

Of course, you need to make sure your financial reporting is strong years in advance of any potential sale – tracking key performance indicators, documenting and refining forecasts and budgets, and cleaning up your balance sheet. But there are key questions beyond the standard checklist that Tomassetti asks every client. Understanding the answers well before you put your company on the market will help ensure you maximize the price for your company in the future.

 

What is your company’s strategic positioning?
Even if you’re not considering a sale right now, you should be tracking not just your company’s rivals, but your potential buyers, as well. Ask yourself: why would XYZ company be interested in buying your business? Do they want to acquire your geographic presence in a particular market, or are they more interested in a particular product, service or piece of intellectual property? “You can’t just run a business to sell it,” says Tomassetti, “but by understanding your company’s strategic positioning, you can make better investment and resource-allocation decisions for the future.”

 

Consider this scenario: you have $2 million to invest in either a new sales and marketing program to break into the US market or to boost your Canadian marketing budget to accelerate your Canadian growth and market share. If you know that potential buyers of your business already have a strong presence in the States and that their main interest in your business would be primarily to break into Canada, the answer becomes very clear. By understanding your strategic position, you gain a clearer understating of the motivations of your potential buyers, which in turn influences what you can do to make your business more attractive to those potential buyers in the future.

 

Where are you in the business cycle?
Are you holding on to your company because it’s thriving and you want to squeeze out the last few peak moneymaking years you see ahead? You might be making a mistake. “Often, owners will, in an attempt to sell at the absolute peak, hold their businesses too long,” says Tomassetti. “When companies reach their peak, you often start to see cracks in the business, which is not the best time to sell.” Buyers are drawn to companies with solid (and growing) sales and profitability trends that can demonstrate a continued profitable growth. “They need to see that there is a good runway for growth or an ability to extend the runway with new strategies or transaction-related revenue synergies – and the more comfort on the length and slope of that runway, the greater the premium they might pay,” he says.

 

The reverse can also be true: an entrepreneur can wait too long to sell a business, meaning velocity of growth has slowed and key metrics such as profitability per unit have started to fall. In these scenarios, Tomassetti explains, buyers might be fearful that the party is over and they’re standing at the top of the business-cycle curve – and the only direction is down.

 

Where do you make your money?
This might sound a little rudimentary, but there are lots of companies that don’t clearly understand (or appropriately allocate resources) where they are generating their profit. For instance, says Tomassetti, if you sell 3,000 SKUs and 40 per cent of those produce 90 per cent of your profits, maybe you should be focusing on SKU rationalization, “I have often posed a simple question to clients: would you rather own a business with $60 million in revenue that generates $5 million of profit, or a $30-million business that generates $10 million of profits?

 

It’s a pretty simple answer,” says Tomassetti. He explains that many companies sacrifice profits in the pursuit of top-line revenue, which can often be justified on a case-by-case basis but that, over time, can lead to a less attractive business. Understanding where you make your money, and investing in resources and initiatives that drive these areas – and, of course, weeding out areas where you don’t make money – will make your business more attractive to potential buyers.

 

Are you part of the deal?
Understand the concept of personal versus commercial goodwill and the impact that will have on the sale price of your business. Look at it from a potential buyer’s perspective: if they’re paying $10 million for the company, and the assets are only worth $5 million, that means half of the sale price is goodwill. This goodwill can either be tied to the company’s brand, customer base or intellectual property (commercial goodwill) or to the abilities, contacts and know-how of the owner (personal goodwill). “In many cases, the founder is driving the critical aspects of the business, making it difficult for buyers looking to acquire the business,” says Tomassetti. “If, as a buyer, I write a cheque to the owner for $10 million and, the day after closing, they’re off to their new home in the Bahamas, I have to be extremely comfortable that the $5 million in goodwill I just purchased is not off sun-tanning on the beach.”

 

If your know-how is a major part of your company’s value, a prospective buyer will likely require you to retain some skin in the game, in the form of equity, or could introduce a so-called “earn-out” or similar structure into the mix. In extreme cases, they might walk away from the deal altogether. Tomassetti says it’s imperative that business owners looking to exit build the right team around them so that, when they eventually do sell, they can take the personal goodwill discussion off the table.

 

“It comes down to what drives value,” Tomassetti concludes, “whether it’s the buyer’s motivation, their ability to pay, the quality of cash flows they’re buying, the market position, the prospects of growing the business. It means thinking of the business every day and assessing what you can do today to make it more attractive both to you as an owner and to buyers who might have an interest in acquiring you down the road.”

Beyond the checklist

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