As featured in our Q3 2013 Capital Ideas Newsletter. An article by Jim Eaton, Managing Director of our Los Angeles office.
Statistics show that many companies, particularly of the privately held small-to middle-market variety, are simply not ready to be sold once ownership decides to pull the trigger and enter into a potential transaction process. The investment banking community is full of examples of clients desiring to sell and/or with deals on the table only to see them collapse during due diligence, if not before, because of false value expectations or a lack of strategic organizational structure and execution capability.
Clearly, such sell side companies arrive on the radar screen of strategic or financial buyers alike for one reason or another, such as market position, proprietary product(s), financial strength, roll-up strategy, backlog buy, talented personnel, etc. These attributes are typically quite visible in the marketplace and are pivotal to any potential transaction. However, it is what can’t be seen at the expression of interest, management presentation, plant tour, or letter of intent stages that has the potential to sour the deal to some degree or perhaps even in total.
So what is the “missing link” to a successful and satisfying negotiation, due diligence and close process for all parties? As a private business owner, CEO, and having personally experienced both the buy and sell side of transactions in my 35 year career, I propose that a robust growth strategy development and execution management process is a must. Fortune Magazine reports that:
- 85% of executive teams spend less than an hour per month discussing strategy
- Only 5% of the work force understands the strategy
Further, 9 of 10 companies fail to execute strategy potentially because:
- 60% of organizations not linking their budgets to strategy
- Only 25% of managers having incentives linked to strategy
Given these statistics, is it any surprise that potential buyers pass on acquisition prospects and/or look for a reduced valuation due to the infrastructural planning, execution, and human resource elements they will likely be required to bring or develop to ensure the future success of their acquisition target?
To negotiate and successfully close a transaction at full value, it is my contention that selling companies should:
- Exhibit a culture inclusive of an intentional strategic planning process, derived by all of its key leadership personnel (not just the CEO) through the analysis of Strengths, Weaknesses, Opportunities, and Threats (SWOT) impact methodologies leading to a clear and inspiring Vision Statement (ideal future), Mission Statement (purpose), Core Values (internal behavior drivers), and measureable Annual Initiatives (strategic objectives required to ensure year by year success to keep the company on track and pace to achieve its vision).
Next, to ensure the critical execution of the strategic plan the following is imperative:
- Employees and managers should develop individual primary job responsibilities, measureable goals tied first and foremost to the Annual Initiatives, and a perpetual (preferably monthly) communication review process that occurs between them to review employee performance status on all of the aforementioned individual and applicable corporate attributes.
One statement that I’m sure we all have heard before is that “What gets measured is what gets done.” Assuming we all agree on the merits of this statement, then it is also imperative that:
- The strategic plan is linked to the annual budget of the company and that a shared earnings (performance-based incentive compensation) plan is engaged to objectively reward “say what you’ll do and do what you say” performance particularly for the organization’s key leaders.
Walt Disney once said, “Of all things I’ve done, the most vital is coordinating the talents of those who work for us and pointing them toward a certain goal.”
Clearly in history, companies have achieved operational and financial success and yes, even successfully completed sale side transactions at full value without the missing link. But why would owners want to risk the opportunity to maximize their potential liquidity event of a lifetime by simply not adopting such good hygiene measures well in advance of selling? Implementing a robust growth strategy development and execution management process will maximize results in advance of sale; prove the strategic, organizational, and operational prowess of the senior leadership team to prospective buyers; galvanize troop moral prior to, during, and after the close process; and make all transactional and due diligence requirements that much easier for both parties to produce and reconcile. So don’t forget the missing link…and achieve the maximum result you both desire and deserve upon the sale of your business.