Increasing the Acquisition Value of Your Business: Operations Considerations

For a business owner, probably the most important financial transaction in the business’s life is a merger or acquisition. However, according to the Harvard Business Review, the failure rate for mergers and acquisitions (M&A) is between 70 and 90 percent.

The probability of the sellers getting what they hoped for and the buyers attaining the economic objectives of their investment is very low. Nonetheless, there are ways to improve the odds, starting with analyzing an acquiree target’s business processes.

According to CompanyWeek, the important areas for manufacturing companies to reinforce to optimize the value of a merger or acquisition are operations, raw materials and inventory, profitability, IT and, of course, management and HR.

IT issues are particularly important to investors, especially those who may be pursuing a buy-and-build strategy.

The key question to answer is not whether the technology is current. Instead, ask if the IT function automates inefficient processes. The IT department should be proactive in process optimization and re-engineering before automation. The latter is a much truer indication of corporate value than the former. For example, our client, a distributor of high-end automotive lifestyle and aftermarket parts, increased their channel throughput by 30 percent within 90 days with near zero increased cost. Due to process optimization and operational reorganization, their capacity increased without any increase in operating expense.

Efficiencies resulting from business process re-engineering create higher shareholder and business value. Such productivity and value-enhancing opportunities exist in most businesses.

In a recent blog post, I wrote that a doctor never diagnoses based on a single parameter. An accurate diagnosis needs multiple parameters to narrow down diagnoses and discover the root cause. An example of an 8-dimension assessment for operations and infrastructure is shown below.

Preparation for a merger or acquisition means ensuring the business has a value-enhancing operational infrastructure. It also means building reliable operations processes and financial controls.

Accurate financial reports are especially important if there is a possibility the firm may be acquired by a public company. Sarbanes-Oxley is demanding and unforgiving, but it doesn’t have to be costly. A deep-dive assessment must be multidimensional and tailored to the kind of value-extraction transaction anticipated.

Whether such an operational and infrastructure assessment reveals good or bad news, it’s better to know sooner rather than later. We have found that the roots of deal trouble are typically found in one of the following eight areas:

Gaps in any of these eight areas have the potential to adversely affect the value of the deal. While they require some incremental investment, assessment and gap closures payback enormously, whether or not a deal is struck to buy the business.

An operational and infrastructure assessment is often a case of the good, the bad and the ugly. Once significant gaps are revealed, a firm must launch an aggressive program to close them.

Ideally, this closure should be substantially completed prior to creating your offering memorandum (the good). Many organizations don’t know what they don’t know. They are also not aware of the consequences those gaps will have should they either be discovered during due diligence (the bad) or not discovered until after the deal closes, thus creating a clawback situation (the ugly).

Buyers negotiate a fair price to acquire a seller’s business – your business. That value is a direct reflection of the level of trust. Anything that erodes trust also erodes value, which lowers the sale price. Take actions that build trust — in systems, process, people, metrics, accounting practices, controls, etc. Don’t wait until an M&A project is underway to discover shortcomings.

It’s not only about EBITDA. It’s what’s behind the EBITDA that either makes or breaks the success of the most important financial transaction of a business owner’s life.