By Rafi Musher
A member of the YPO Metro New York Chapter since 2009
Founder and CEO of Stax Inc. and Stax Dev Corp
Learning about positioning your company for sale and maximizing exit value is about as important as it gets. If you decide to sell, you can realize far greater value; if you choose to keep the company, you can still have a more profitable asset.
At Stax — where our clients include more than half the world’s top 25 LBO funds and family businesses considering change of control— we see great interest in preparing for a sale or a transition of generation, and we’re increasingly asked to help prepare companies for sale.
Based on 20 years of experience advising on the buy side of commercial due diligence and helping companies increase profits, here are six ways we see to increase exit value. These generally take just four weeks to six months to complete, and most have a significant ROI within three to six months if you choose not to sell.
- Use information to run your business better.
You have tons of data, but no one extracting it or translating it into valuable analysis and insights. Either get someone to do this or get outside help. Ideally, have someone on your team champion data-driven business insights and also get some help. Start with small steps, earn back the cost of the analysis, then take the winnings and reinvest in getting even better information to make better decisions. These can be decisions around profitability, sales force allocation, marketing spend — anything. I’ve seen our team walk into a multi-billion dollar company with an empty hard drive, walk out with a terabyte of data, and within weeks show massive potential for value. And you don’t need a new IT system; just the ability to export and import data from whatever system you have.To get going, here are two key questions for you and your team to answer:
— What are the five most important decisions where having data/insights could help us make better decisions?
— If I know that on average a particular activity works, what would we do differently if we got beneath the averages and could see a large variance in outcomes/returns on that activity?
- Maximize your working capital.
Get an understanding of where you are spending, how productive your spending is, and the ROI of all key activities. Many activities (e.g. calling on the low value customers) and resources (e.g. opening new locations) don’t pay off in terms of risk-adjusted ROI. Reduce those money-losing and low ROI efforts and you reduce costs while maintaining revenues.This has the added benefit of reducing your working capital, making your ROE higher, and making it easier to get debt, which makes your equity more valuable. As a first step, get your team together — they have hypotheses on where you are not getting a good return for investment and where you could invest more efficiently. For each area where there is a good hypothesis and general consensus of leakage, assign an owner for back-of-the-envelope analysis; if that proves out, do a deeper dive.
- Better understand and segment customers.
In our experience, many businesses don’t understand their customers and markets as well as they could. Better understanding can result from quantitative analysis of markets, customers, segments, geographies, and trends combined with first-hand customer interaction. Go see your customers and call on non-customers. Understand what they are buying, who they are buying from, and why. Run a customer needs and profitability analysis. Look at wins/losses by customer needs and size of customer. When companies focus on getting into the details of needs and what drives wins/losses, they always find new growth opportunities.
- Understand multi-channel changes.
The world is quickly changing how customers get information and how they shop and buy for all products and services, in every industry. This is creating threats and opportunities throughout the value chain. Map out your customers’ entire purchasing journey. See exactly what happens and what the process is, where they get information, and how they make decisions. Use these insights to address your marketing, positioning and nurture path. We traditionally find an imbalance based on historical investment or current skill sets, and there is usually an opportunity to rebalance based on what the customer values.
- Generate top-line growth through new products and/or markets.
This sounds basic, yet companies often overlook ways to drive organic growth through new products in existing markets or existing products to new markets. Primary and secondary research, which can be done rapidly, can identify the best short and long-term opportunities and help organizations make prioritization decisions. Your team often has great information as a starting baseline. Facilitate a discussion to set parameters for further research. This ensures that you’ll leverage what you have and get buy-in from your team.
- Identify your optimal acquirer.
Chances are there are logical buyers for your company. Figuring out who are the most likely and what makes sense for them is important. Similarly important is to understand what they buy and why, what they value, and what the rest of their acquisition pipeline looks like. With this information you can be more proactive about positioning your company and developing relationships with the right potential partners whether for this year or in five years, and similarly figure out who you would want to acquire with more capital.
These actions to position for exit and maximize exit value should be staged according to each company’s situation and needs. In fact, sometimes the potential value created is so great that owners decide to reinvest rather than sell. As for the best time to start preparing for exit, I tend to favor the proverb, “The best time to plant a tree was 20 years ago; the second best time is today.”
About Rafi Musher
Under Musher’s leadership, Stax has grown to become an internationally-recognized strategy consultancy serving the world’s largest corporations and private equity firms. Since founding Stax Inc. in 1994, Musher has advised senior executives on a broad range of issues including corporate strategy, profit improvement, competitive positioning, leveraged buyouts, investment, divestment, and due diligence/M&A. Musher regularly counsels clients across a number of key business sectors including agriculture, business services, consumer/retail, education, energy/environmental, financial services, healthcare, industrial and technology.