As owners consider taking their companies to market, the table stakes are a clear articulation of the business strategy and a financial forecast that shows how it plays out. Investors, especially financial sponsors, will focus a great deal of attention on a company’s operating team and processes to assess its ability to execute the articulated plan.
Why do Business Operations Matter?
Every business is a revenue and profit generating machine. Such a machine requires mechanics to create those revenues and profits. In a business enterprise, the mechanics are the managers and leaders of the company.
Operations include:
- The day-to-day employees who make the machine run.
- The systems that are utilized to manage the business operations and provide timely feedback and reporting
- Depending on the type of business, the equipment required to make the product and its capacity
The resulting revenue and profits generated by the machine provide the cash flow by which businesses are measured. Typically, valuations for a business are expressed as a multiple of such cash flow. Companies that consistently improve profitability (profits divided by revenues, expressed as a percentage) are more attractive to buyers.
Financial buyers typically aren’t going to operate the company themselves and rely on the existing team, systems and infrastructure to do so for them. This is why financial buyers will spend significant amounts of time doing diligence on the operations to ensure that the machine will deliver the anticipated growth in revenues and cash flow to provide a return on their investment.
If a financial buyer can’t determine that the leadership, employees, and systems can deliver the expected investment returns, they will withdraw from the transaction process.
How to Improve Operations
Because of the above, it is of paramount importance to have the operations side of the business well in order before going to market. As part of our process of discovery and learning as much about the company before considering value creation methodologies, we interview the company’s key leaders individually.
It’s important to have those conversations ahead of the planning process for several reasons. We want to understand each leader’s role, identify any gaps in the team, and assess whether the existing leadership will present well during a transaction process. We also want to know what each of them thinks of growth plans and have their candid assessment of ways to improve the operations and growth of the business.
In every company we work with, there’s a time when we will ask why a certain process is done the way it is done. The general response is along the lines of “We’ve always done it that way.” In every company we work with, because of the perspective and experience we offer to clients, we will find easy-to-implement ways to improve the business’ operations. It is far better for us to find and address these issues than to have the prospective buyer discover them.
As we proceed with the planning process, once the forward-looking strategy has been agreed upon, we will then work with the team to develop the implementation tactics and resource requirements. The fact that this evaluation and implementation process is underway demonstrates both thoughtfulness and credibility to prospective buyers. Taking the time to implement the plan and demonstrate progress against its goals before going to market further underscores the credibility of the financial forecast presented to buyers.