When preparing for the sale of their business, owners will ultimately need to assemble information, usually referred to as a data room that fully supports the story of historical and projected performance of their company.
The data room typically brings together comprehensive information covering financial results, key business drivers, legal affairs, organizational structure, contracts, information systems, insurance coverage, environmental matters, and human resources issues such as employment agreements and benefit and pension plans.
The extent of information and level of detail in the data room should be balances, providing enough information to enable buyers to determine a fair value but also limiting the amount of sensitive or competitive information disclosed to anyone other than the ultimate purchaser. Often, striking the right balance requires discussions between sellers and their advisors.
A comprehensive, well-thought-out data room demonstrates to buyers that a company has the tools, resources, systems, and abilities to analyze the business and tract the information needed to grow and safeguard profits. Conversely, a poorly assembled data room with significant information gaps signals potential buyers that there may be operational or other data weaknesses that could dampen their views on value.
Today, data rooms are, increasingly, online information hubs, rather than actual rooms in attorneys’ offices, that present the key information a buyer needs in order to begin judging value and underlying interest. Generally, online data rooms speed the process, lower costs, and better manage information flow by, among other things, differentiating access restrictions by buyer categories to block strategic ones from sensitive competitive information while opening the same information to financial buyers.
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When should you start your exit planning? The time to be thinking about the sale of your company is when you start it. Everything you do from Day 1 should be focused on driving enterprise value upon sale.
Startup entrepreneurs typically fail to consider when and how they will prepare for an eventual exit. Thinking with the end in mind, companies manage their businesses better and that helps prepare them to sell.Why is it important that I prepare my business for my eventual departure?
Why is it important that I prepare my business for my eventual departure?
Early preparation is required to optimize value. It leads to a higher valuation, makes the process easier, and allows you to sell the company when you are ready or if you receive an unexpected offer out-of-the-blue.
Begin With A Compelling Story
Sit down and write a paragraph for each of the points listed below, include them in your business plan. Design a roadmap to get you from where you are today to where you want to be in the future.
- Good growth prospects
- Unique products or services with operational strengths
- Proven trends and profitability
- Good management team and high employee retention
- Repeat customers with low concentration
Think about your personal objectives after the sell
Your personal financial needs
Your future role in the business
The impact to employees
Other business outcomes
Completing sell-side due diligence helps identify areas that have deal and value implications. It also identifies issues to address before approaching potential buyers. Concise, knowledgeable responses are required to answer key buyer questions: anything less can detract from value and from the overall transaction’s likelihood of success. Area of focus typically include understanding the quality of historical earnings, the components of both historical and projected business trends, key customer and supplier relationships, working capital and capital expenditure requirements, strength of the management team, potential synergies, and technology and intellectual property issues, among others.
Many of these areas can be addressed initially by a high-level management presentation or, occasionally, a Confidential Information Memorandum (the document that provides a detailed description of the business, future opportunities, and historical and projected performance) to educate acquirers of the benefits of owning the business. Ultimately, however, owners will need to assemble information, usually referred to as a data room that fully supports the story of historical and projected performance.
Thorough sell-side due diligence can help avoid a range of problems, including sellers’ being blindsided by unanticipated issues, potential post-closing disputes, and simply failing to close the deal. Sell-side due diligence can also help realize a faster sale process by addressing issues early and avoiding both lengthy negotiations and disputes after closing. Ultimately, the appropriate positioning of the information gathered during the sell-side due diligence process often helps owners gain a higher sale price.
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Working capital has the power to create, or destroy, value for shareholders. Three key components of working capital are inventory, accounts payable and accounts receivable. Each of these elements is examined by analysts for indications of a company’s financial soundness and operational efficiency.
Reduce The Cash Conversion Cycle
By reducing the cash conversion cycle, a key metric monitoring the length of time between when a firm buys a product from a supplier and the collection of payments from customers for that product, companies can significantly increase profitability. The longer it takes a company to turn raw materials into sales revenues, the longer the company’s working capital is tied up and cannot be utilized for growing its business and increasing profits.
Smart working capital management is a necessary part of company growth and profitability. Efficient management of working capital can potentially free up cash for other uses that can build shareholder value. The extra cash can be used to reduce the reliance on debt or other forms of external financing. Increasing cash availability can also help strengthen the balance sheet and enhance operational performance. The extra cash can also be used to build shareholder value through mergers and acquisitions. In the investor community, working capital is often considered a proxy for the strength of how well a company is run.
Working capital is a simply concept because it’s all about freeing up the company’s cash. Unfortunately many companies face internal challenges. There is a gap between recognizing the need for working capital improvement and understanding what steps to take to improve cash flow.
Challenges To Improving Working Capital
There are many challenges to improving working capital, including:
- Limited access to needed information. Many companies lack the real-time data and metrics needed to evaluate the effectiveness of working capital and improvements.
- Lack of formal structure for working capital improvement efforts. It can be difficult to sustain the effort without a formal structure. Few companies have a formal improvement program with clear ownership across the organization or the organizational tools and the capabilities to implement a program.
- The number of working capital stakeholders and their differing perspectives. The distributed nature of working capital can make it difficult to implement a working capital improvement program. Each stakeholder is likely to have a different perspective on how to enhance working capital and the relevant priorities.
- Time constraints. Organizations often struggle to focus on improving working capital because of other priorities competing for attention.
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Annual Business Planning Is Not Creating Value At Most Companies
Traditionally business planning is based on external financial reports as measures of internal performance. It all began when outside investors demanded audited financial statements. It was too time-consuming and expensive for companies to produce two sets of manual reports. For many companies the planning process has remained the same for decades and is in need of a major renovation.
The traditional annual budgeting and planning process is broken and full of flaws. Many times it is a manual process that consumes time and resources and doesn’t add value for the resources expended. The process is too complex, includes assumptions that turn out to be wrong and doesn’t respond well to a volatile and competitive world. The process is stressful for company leaders with endless budget iterations, debate over conflicting business goals and sandbagging leading to poor decision-making. When the annual process is complete, the result is a final product that becomes less relevant with each passing month.
A New Approach To Planning
What is needed is a new approach to planning, budgeting and forecasting, an approach that transforms business planning into a powerful tool for executing your business strategy and informing company leaders leading to better business decisions. The new approach to business planning should be a faster and more agile process with explicit evaluation and analysis of variability built into the planning and forecasting process through the use of technology. The agile process will enable companies to be sensitive to changes at the margin, in consumer spending patterns, in GDP growth rate, in foreign exchange rates and other important value drivers.
In a 2013 report on business planning practices KPMG stated that, “60 to 80 percent of firms fail to execute their strategies, and fewer than five percent of employees are aware of, or understand their firms’ strategies.” Renovating business planning practices presents an excellent opportunity to build business value.
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