Insights | Blog
Getting Ready to Sell Your Business? – Time To Prepare
Good news for Seller’s is that over the last 18 months the valuation multiples have returned to normal levels and so has leveraged financing that will help fuel transactions. This change positively impacts many sellers who have been patiently waiting for the M&A market to improve following the Great Recession. The lesson learned from the dark years after the economic collapse in 2008 is that economic markets fluctuate. It is impossible to know for sure when or how steep the economic markets will fall (or rise). The market forces that impact valuation multiples used to price sales for ownership and investors alike, can happen suddenly, be long lasting, and are completely out of the sellers’ control.
However, there is another key variable within the seller’s control that can increase the proceeds upon exit, which is the recurring financial performance measured in revenues, earnings, and cash flows generated. Fortunately, there are many steps that can be taken to drive profit improvement that range from installing new management, new product/market expansion, strategic acquisitions/divestitures, facility consolidation, technology investments, and redesigning production methods.
One significant area for consideration where many companies lose sales, profit margin and cash flow is order fulfillment. Some symptoms of suboptimal practices in order fulfillment are defective inventories resulting in excess scrap or rework, inability to fill orders timely, proliferating SKU levels resulting in overproduction, frequent discounting to liquidate surplus or obsolete inventories, and declining profitability. Fixing the problems in order fulfillment requires a holistic and integrated approach involving a cross-functional team that may include your sales, operations, supply chain management, information technology, and finance functions.
Each situation is unique and can involve complex analysis. However, there 5 areas to investigate that will get your process started:
- Order to Production Process – Bring your cross-functional team together to solve your problem. Outside professional help can also frequently enhance the outcome by offering best practice solutions. As the team outlines the process, the benefits include a better overall understanding of what is happening, both the good and the bad so that it can be enhanced.
- Forecasting Practices – Forecasting your production needs should be a critical part of your process. Too often the sales forecast comes from an optimistic sales force whose ‘worst nightmare’ is running out of stock. (After all, this could undermine sales commissions.) Accordingly, forecasts, if not vetted properly, can drive up production and inventory levels well beyond sales needs resulting in surplus inventory, higher borrowing costs from bloated working capital levels, and ultimately, in profit damaging sell offs. Conversely, under-producing due to conservative sales forecasts creates the opposite problem where lost revenues, earnings, and cash flow is the result of shortages in product availability. Also, production costs increase as facilities become underutilized.
- Supply Chain – Review the supplier base including but not limited to the number of suppliers, locations, terms/pricing, minimum order quantities, lead times, and level of defects. This is a good opportunity to re-examine the methods and key performance indicators that are used to manage your key external suppliers to mitigate supply chain risk. This analysis will result in more reliable, timely, and cost effective raw material and finished product sourcing.
- Technology – Review and implement new strategies to tightly integrate your company with your customers on one end and your suppliers and/or operations on the other end. Are you leveraging your order to production module to initiate your production for new sales? Improvements in technology, if designed and implemented properly, will also reduce risk cycle time from order to delivery, inventory levels, and costs associated with administration.
- Product Life Cycle Management – Review and amend the practices for new product launches, ongoing management of order fulfillment, and product discontinuation. A well-designed and properly implemented product management policy will maximize margins on new products. It will also reduce the risks associated with production defects, SKU proliferation, discounting excess inventories, and bloated inventories tying up excess capital.
Each of these 5 areas is typically not managed well in most organizations. Why? They are challenging and require constant focus. However, when order fulfillment challenges are addressed proactively, the sellers will reap a much larger reward upon exit than if they leave it undone.