Three Operational Improvements When Preparing to Sell
When COVID-19 cases first began to spike in the United States earlier this year, companies quickly realized that liquidity and cashflow were tantamount to survival. Once their cash position was understood, companies had no choice but to wait and see how the new economic landscape would unfold. With each passing month, business has begun to regain some semblance of normalcy, despite looking much different than before the pandemic. Since July, mergers and acquisitions have begun to pick back up as companies determined they could cautiously spend their pandemic cash reserves. Now, however, they face a new obstacle: a lack of good companies to buy and inflated prices at which they are sold. In several instances, companies have put in high bids only to be outbid by those willing to pay even greater prices.
A marketplace with a surplus of cash and few good businesses to buy is a seller’s market. Whether it is a purchased standalone business or a division that no longer seems to be part of the long-term strategy, here are three key areas of operational improvements companies should keep in mind as they contemplate a sale or divestiture.
Taking the time to better position a business for sale by increasing EBITDA is time well spent.
Supply and demand
By now, most companies are seeing their customer and supply base begin to stabilize as they adapt to the new normal. There are important questions to ask when contemplating the sale of a business. How can a company demonstrate stability to potential buyers in sales projections? Is there a way to show current projections are turning into purchase orders? And how do those projections affect future financial periods? A potential buyer may also be interested in how the company fulfilled orders during the start of the pandemic and what actions and policies were put in place. Being proactive and anticipating those types of questions shows buyers how company leadership reacts when faced with uncertainty and sets a precedent for the future.
Although controlling supply chain costs varies according to the level of vertical integration and inventory levels, it is vital to good cash positioning and will lead to higher sale prices. Assuming the current supply chain is providing the goods and services that are needed to fulfil production, what modifications can the company make to further optimize inventory levels of either raw or finished goods? One way is to revisit its sales and operations planning process to ensure maximum efficiency and integration between the customer and supply base and ensure that value is reflected to end customers and potential buyers.
Sales and operations planning
A robust sales and operations planning (S&OP) process is critical for selling more profitable products, reducing inventories, and ensuring that the operations team is producing the correct products. Selling higher margin products and reducing inventory helps improve a company’s cash position at the time of sale and its ability to react to the current environment. All parties involved should use the same reporting data and align to the same key performance indicators (KPI) in order to ensure that operations and procurement are working in tandem with the sales team. This provides a forum to discuss stock keeping unit (SKU) retirement of slower performing products and possible new products that may cannibalize sales. Finance should be included in these discussions to ensure there is budget to offset the cost of the inventory reduction. Finance can also help with pricing that could result in margin loss in order to sell the slower moving SKUs. If done well, the S&OP also enables effective supply chain management of raw and finished goods, leading to lower inventory levels and more cash on the books.
Operating model revisited
When thinking about a sale, it is important to revisit how the organization is delivering value to its customers and beneficiaries. It is critical to validate new product development processes to ensure efficiency and provide products that align with the company vision. This includes checking in with each team to ensure they are not stretched too thin or scattered in different directions. Defining and describing back-office efficiency can help with this exercise. For example, are the accounts receivable/accounts payable KPIs aligned or is time needed to tighten processes? By focusing on these areas, there may be an opportunity to consolidate the office and manufacturing footprints or to sell excess project materials and unused equipment, which can free up additional cash. How activities in the value chain and support functions link in a business organization impacts the financials and makes them more appealing to prospective buyers.
An informed seller drives value. Taking the time to better position a business for sale by increasing EBITDA is time well spent. Focusing on a company’s operating model, sales and operations planning, and supply chain and demand are just a few ways to increase and reflect value in a sale or divestiture. But even in a seller’s market, savvy and prepared buyers require financial and operational metrics to mitigate any risk aversion and support their investment decision. A seller will be in a better position to negotiate if it is aware of all the opportunities to derive value.