Is Your Company Hiding an “Orphan”?
Does your business have an orphan product or service that is doing okay, but doesn’t seem to fit into your core business? Many companies, private equity groups and even some individual buyers are seeking product lines to augment existing ones, or even to build a business around. Here are just a few of the reasons why a company might want to divest itself of a product line or even a particular service:
- It may not be a good fit for the parent company, thus diffusing efforts that could be placed into the core business.
- Because it is an orphan, it is a distraction.
- It man be a break-even side business that with a full-time effort could be profitable, but resources are better devoted to the core business or service.
- The money received could be used to expand the core business or fund some improvements that are not currently budgeted.
Certainly, there can be some disadvantages in allowing the adoption of an orphan – on both sides. There is the all-important people issue. Some valuable employees may be attached to the product line – and may go with the sale or decide to leave and move on. This can negatively impact both sides of the transaction. It can also have a negative impact on the selling company’s employees when the selling or purchasing company releases employees. There are cultural issues to consider. The product may be a more important part of the selling company than management thought. It may have played a role in selling other products or services. The distribution channels may play a role in other product lines. It is important for management to consider whether the orphan is really an orphan before selling it off.
On the plus-side for the acquiring company, the addition of the product line may be a perfect fit for their existing distribution chain. The brand name acquired may provide name recognition to some existing products. The new product line may be able to be manufactured with only a minimum increase in employees and plant capacity.
The purchasing company may have a difficult time establishing a price. It may seem easy to look at the sales and the cost of sales, but the cost of sales may not include an allocation for rent, and for support services such as legal, accounting, corporate oversight, etc. Some part of the product may be manufactured on equipment used for other products, warehousing may be shared, and parts used in other products. Many acquisitions are sold with a form of licensing agreement so the selling company receives a royalty or license fee representing a small portion of the sales of the acquired product line.
Company management is prone to think of only selling the entire business, a division or subsidiary of the company, when a sale of a product line may be an excellent solution. The decision to sell a product line or service may solve a host of problems and perhaps even eliminate the need for sale of the entire business. As Fortune magazine has written, “Companies once obsessed with cutting costs are now urgently trying to boost sales – with new products, new services and new markets. The surest – and ultimately cheapest – way to increase your total sales is to persuade your existing customers to buy more products.”
Keys to Improving the Value of Your Company
The first key is to have your accountant take a look at your accounting procedures and make recommendations on how to improve them. He or she may also help in preparing financial projections for the coming year(s). Getting your company’s financial house in order is very important in establishing the value of your firm.
The second key is to review the reputation, image, and marketing materials of your company. Certainly, the quality of your product or service is paramount, but how your firm presents itself to customers, clients, suppliers, etc. – and the outside world – is also very important. The appearance of your facilities and customer services – beginning with how people are treated on the telephone or in the waiting/reception area – are the kind of first impressions that are critical in dealing with your customers or clients. Don’t forget about the company’s Web site; in many cases, it is the initial introduction to your company. Now may also be the time to update your marketing materials. The image of a company can help create a happy workforce, improve customer service, and impress those that you deal with – all of which can increase the value.
A third key is to get rid of outdated inventory – sell off any extra assets such as unused or outmoded equipment. The proceeds can be used in the business. If there are any assets that should not be included in the value of the company, such as personal vehicles or real estate, you might want to separate them from the assets of the company. This is especially important if you are considering placing the company on the market. A prospective purchaser expects everything they see to be included in the sale. If a portrait of your grandfather is your personal property, delete it from any list of company furniture, fixtures, and equipment; and if the business is for sale, remove it entirely.
Another important key is to resolve any pending items. For example, if the company has a trademark on any of the important products, and the paperwork for registering is sitting on someone’s desk, now is the time to complete the filing. Trademarks, patents, copyrights, etc., can be very valuable, but only if they have been properly recorded and/or filed.
Contracts, agreements, leases, franchise agreements, and the like should be reviewed. If they need to be extended, take the appropriate action. A contract with a customer has value and if it is scheduled to expire soon, why not get it renewed now? The same is true for leases. Favorable leases for a long period of time can be a valuable asset. Do your key employees have employee agreements?
The key factors outlined above not only build value, but they also increase the bottom line. If you are considering selling your company at some point, these key issues will come back many-fold in the selling price. A professional business intermediary can help with other factors that can influence the value of the business.
One other hidden benefit of building the value of your company is that you never know when the Fortune 500 Company will come “knocking at your door” with an offer that you can’t refuse. At that point, it’s probably too late to work on some of the issues mentioned above.
What Are Your Company’s Weaknesses?
Every company has weaknesses; the trick is to fix them. There is a saying that the test of a good company president or CEO is what happens to the company when he or she leaves. Some companies–on paper–may look the same, but one company may be much more valuable due to weaknesses in the other company. Not all problems or weaknesses can be resolved or fixed, but most can be mitigated. Fixing or lessening company weaknesses can not only significantly improve the value, but also increase the chances of finding the right buyer. Here are some common weaknesses that concern some buyers, causing them to look elsewhere for an acquisition.
“The One Man Band”
Many small companies were founded by the current president, and he has made all of the major decisions. Since he has not developed a succession plan, there is no one in place to take over if he gets hit by the proverbial truck. He is the typical one man band; and, as a result, the company is not an attractive target for acquisition.
Declining Industry
Companies that are in a declining market have to be smart enough to recognize the situation and make changes accordingly. A real-life example of a “smart” company is one that made ties, and, realizing the decline in this apparel item, switched over to making personalized polo shirts. A company can still make ties but has to have the foresight – and ability – to move into new product areas.
Customer Concentration
This is a major concern of most buyers. It is not unusual for the one man band to focus on what made the company successful – one or two major customers. He has built the relationships over the years. These relationships are seldom transferable. Finding new customers may take time and money, but the effort is absolutely necessary should the owner eventually decide to sell.
The One Product
Many one man band run companies were based, and still are, on either the manufacture and sale of one product or the creation and development of a single service. Henry Ford made a wonderful car – the Model A – but that’s all he made. General Motors decided that many people would like something different and were willing to pay for it. Fortunately, for Ford, he caught on quickly, but almost went out of business with the thinking that one model fits everyone.
Aging Workforce/Decaying Culture
Young people are not entering the trades, leaving many jobs such as tool and die positions filled with “old hands” who will soon be retiring. Technology may be able to replace them, but that decision has to made and implemented. No one wants a business that will have idle machines with no one trained to operate them.
There are many other areas that could be considered company weaknesses. If there is a Board of Directors or an Advisory Board, perhaps they can help the one man band create a succession plan and just as importantly – a successor. Certainly the time to act on all of this is before the decision to sell is made. Whether current ownership plans on staying the course or eventually selling the company, the good news is that resolving company weaknesses is a win-win situation.
If you are considering selling your company in the next year or so, the time to start is now. Planning ahead can significantly add to the eventual selling price. A visit with a professional business intermediary is the first step.
When Is A Company In Trouble?
Companies can be in trouble or headed for it for many reasons. However, most of them can be linked to one or more of the following:
• Lack of proper focus
• Poor management
• Poor financial controls
• Loss of key employee(s)
• Loss of important customer(s)/client(s)
• Not keeping up with technology
• Quality control or other operating issues
• Legal or governmental issues
• Target market change or shift
• Competition
Unfortunately, by the time a business owner realizes that the business is in trouble and recognizes why, it may already be too late. The obvious solutions are to either fix it or sell it. The decision should be made quickly, since time may be of the essence.
Unfortunately, too many owners of privately held businesses wait too long. A decision to sell should be made when the business is doing well, not when it is in trouble.
Now may be the time to check with a professional intermediary to see what you can do to prepare your business for sale.
What Sellers Don’t Expect When Selling Their Companies
In the proverbial “perfect world,” business owners would plan three to five years ahead to sell their companies. But, as one industry expert has suggested, business owners very seldom plan to sell; rather, selling is “event driven.” Partner disputes, divorce, burn-out, health, and new competition are examples of events that can force the sale of a business.
Sellers often find, after they have decided to sell, that the unexpected happens and they are “blindsided” and caught off-guard. Here are a few of the unexpected events that can occur.
The Substantial Time Commitment
Sellers find that the time necessary to comply with the requests of not only the intermediary, but also the potential buyers can take valuable time away from the actual running of the business. The information necessary to compile the offering memorandum takes time to collect. Many sellers are unaware of the amount of their time necessary to gather all the documents and information required for the offering memorandum, nor of its importance to the selling process.
There is also the time necessary to meet and visit with prospective buyers. An intermediary will play an important role in screening prospects and separating the “prospects from the suspects.”
Handling the Confidentiality Issue
Owners of many companies are also the founders and creators of them. They can have difficulty in delegating and tend to want to make all of the decisions themselves. When it comes time to sell, they want to be involved in everything, thus, again, taking time away from running the business. Members of the management team, like the sales manager, have a lot of the information necessary not only for the memorandum, but also on competitive issues, possible acquirers, etc. The owner has to allow his or her managers to be part of the selling process. This is easier said than done.
Forgetting the Others
Many mid-sized, privately held companies also have minority stockholders or family members who have an interest in the business. The managing owner may be the majority stockholder; but in today’s business world, minority stockholders have strong rights. The owner has to deal with these people, first in getting an agreement to sell, then convincing them about the price and terms. A “fairness opinion” can help resolve some of the pricing issues. Minority stockholders and family interests have to be dealt with and not overlooked or pushed to the end of the deal. When this happens, many times it is the end of the deal, literally speaking.
The Price is the Price is the Price
All sellers have a price in mind when it comes time to sell their companies. Most businesses go to market with a fairly aggressive price structure. When an offer(s) is presented, it is generally, sometimes significantly, lower than the seller anticipated. They are never prepared for this event – they are blindsided, and obviously not very happy. They turn the deal down without even looking past the price. Here is where an intermediary comes in, by helping structure the deal so it can work for both sides.
Not Having Their Own Way
Business owners are used to calling the shots. When an offer is presented, they, in some cases, think that they can call all of the shots. They have to understand that selling their company is a “give and take.” They can stand firm on the issues most important to them, but they have to give on others. Also, some owners want their attorneys to make all of the decisions, both legal and business. Unfortunately, some attorneys usurp this decision. Owners must make the business decisions.
Confidentiality Leaked
There is always the small possibility that the word will leak out that the business is for sale. It may just be a rumor that gets started or it may be worse – the confidentiality is exposed. Sellers must have a contingency plan in case this happens. A simple explanation that growth capital is being considered or expansion is being explored may quell the rumor.
“Keeping Your Eye on the Ball”
With all that is involved in marketing a business for sale, the owner must still run the business – now, more than ever. Buyers will be kept up-to-date on the progress of the business, despite the fact that it is for sale.
