Posts

We will assume that you have completed the preliminary steps and thoroughly prepared your business for sale.  Your balance sheet is in good shape, your market share and profits are growing, and your team is solid and firing on all cylinders.  It’s now time to consider the selling process.

After the vital preliminaries above, the first step is to prepare a list of potential buyers.  These can include companies in and around your industry.  They can also include family members or the management team.  The majority of sales are to third parties, so that will be the focus of the remainder of this blog.  The other avenues follow similar paths.

When preparing the list, do so without judgment.  List all the competitors you can think of including the indirect customers with complementary products.  List all of your big vendors and customers then look for the newer ones that are growing or have a special niche.  In this part of the process we are looking to be as thorough as possible to avoid leaving any potentially good prospects off the list.

Once you’ve gone through this process, divide your list into A, B and C players.  Companies in the A group would be the most likely buyers because of what you know about them.  Companies in the B group are less likely, but potentials, while the C group are the long shots.

Now the heavy lifting begins.  You and your advisors review the companies in the A group and analyze for 1) financial strength, 2) management team capabilities, 3) market and product trends and 4) reputation.  Next you record where your company would bring value to the business.  Uncovering this value is what drives the sales process.

Often times the owner has difficulty being objective about the value their company brings to potential buyers.  It is critical that value is accurate, neither significantly under or overstated.  Both the B and C companies are kept on the radar screen for major changes in their status, i.e. a B company starts buying up some of your smaller competitors, etc.

At this point some sellers go through the process of calculating what value their company would bring to each “A” company.  This step includes assumptions on additional channels and market share, geography coverage, cross selling opportunities, economies of scale, complementary technology and/or services, etc.  This gives the seller some idea who the best targets will be and how to position their company in the sales process.  However, it can not calculate some important intangibles such as desire, risk tolerance and ego.

The seller needs to prepare a credible forecast for the next several years that shows reasonable growth rates.  It will be important to hit the near term part of the forecast as that will be under scrutiny during the LOI and negotiation process up to closing.  Shortfalls in that period will readily translate into reductions in price.

In our next blog post we will discuss the two main avenues to take in contacting potential acquirers for your business.

According to Dr. Brad Smart of Topgrading fame, “the average cost of a mis-hire can be six times base salary for a sales rep, 15 times base salary for a manager, and as much as 27 times base salary for an executive” (Paper 360°, January 2008). Dr. Smart’s calculations depend on certain assumptions for setting the price of missed opportunities and organizational disruption. The price one has to pay for missed opportunities and disruption increases the higher up one goes in an organization, of course. He notes that the mis-hire of a CEO in a large organization can cost much more than 27 times base salary.

Are these numbers believable and applicable to your business? To answer this question, it’s necessary to think about what any given employee contributes to your organization’s top line: the employee’s economic contribution to your organization. For example, if you have a salesperson, what sales are attributable to the activity of that person? If that person is an average performer, what is the difference between their sales figures and the sales figures for an outstanding performer? You can start to appreciate that the cost of a mis-hire can be significant and this is before adding in the cost of managing an average performer and trying to improve their performance OR the accumulated cost of missed opportunities (sales that beget future sales).

If this does not start you thinking that the cost of a mis-hire can be significant, think about the times a below-average employee makes a mistake or doesn’t do his/her job as expected. What are the costs associated with mistakes and managing below-average performance? What are the costs of having to redeploy or let go of under-performers? What are the costs of a sub-par manager poorly managing all the people who report to him/her?

The point is the cost of mis-hires can be significant. The solution is to have a strategy to hire only the top-performers for any given position. More to follow on the strategy but in the mean time, please think about the difference between running an organization with all top-performers and one with only a few: the difference in the economic performance of your organization is the true cost of mis-hires.