Many baby boomers are working long past the typical retirement age, but their exit is inevitable. Successful exit planning is about more than assessing your personal and financial readiness as an owner. To control your destiny and meet your long-term objectives, you’ll need to ensure your business is attractive in the eyes of potential buyers.
In manufacturing, it’s a particularly complicated process. Not only do you need to know the value of your manufacturing facility by keeping tabs on the age of your equipment and buildings, you also need to be concerned about compliance and having documented processes. Most importantly, you need to produce a sustainable volume with predictable cash flow streams.
Enhancing the elements that impact your business value and increasing your business’s overall attractiveness cannot simply be fixed at transaction time. They take significant time to build and develop over years.
Employing good business strategies and practices that are seamless in transition ultimately contribute to your overall success. You want to control that value, so you are always prepared — whether your exit is planned or driven by circumstance such as having a prospective buyer approach proactively.
Intangible assets drive value
The value of your company goes beyond your financial statements and tangible assets. How well do you manage your knowledge capital and intangible assets? These resources also contribute significantly to the multiplier at the time of transaction. It’s very common that private equity groups decide not to pursue an interesting transaction because of the intangible assets versus financial factors.
Four key areas contribute equally to this knowledge base: people, customers, infrastructure and culture.
Place priority on your people
Hands down, and now more than ever in recent history, your people have the strongest influence on the success of your business. You can have the best strategy, but without the right people in the right positions, you won’t get the same results.
The talent, skills, knowledge and relationships of team members drive your competitive edge, and a team with strong talent creates higher value for your company when it correlates to higher cash flow. That also means the success of your company does not (and should not) rest on your shoulders alone.
So how do you increase value in this area? Developing your team members needs to be a priority — especially in a competitive job market that challenges many manufacturers. Pay attention to four critical areas: recruitment, purpose, retention and development.
Recruitment. How well do you showcase your company’s top characteristics and core values?
Purpose. Top recruits want more than just a job. Find ways to inspire them and create a culture of teamwork.
Retention. Develop strategies for keeping your top performers and determine what to do with poor performers.
Development. Your management structure needs to develop along with your business to continue meeting increasingly complex needs. When considering a transaction, buyers generally would prefer that leadership not be solely related to ownership of the company.
Enhance customer relationships
After your people, is the customer at the center of your business decisions? Developing strong customer relationships is an area that is not easily replicated.
Is your business spread across a diverse customer base or industry? Concentrating too much of your business with one customer creates risk in the eyes of your buyer … and decreases the value of your business when it’s time to sell. Many private equity groups (and buyers in general) won’t consider investing in companies with more than 30 percent of sales or profit to any one customer.
Develop your brand
Your brand also incorporates the overall culture and accepted norms of your company. This is the most difficult element to replicate and is what makes your company most memorable. Create brand loyalty and a culture that employees want to be part of, which directly contributes to your market value. While difficult to measure, those who do it successfully reap the rewards.
Focus on good business strategy now to reap long-term results
Doing all these things successfully means your business has transcended you as the owner. Buyers put a premium on businesses where these elements are transferable as they help ensure longevity and success in the long term.
Even if you’re not looking to sell, at some point, a transfer of leadership will be necessary. If the people, customers and relationships dissolve when you step out the door, the value isn’t there. Honing these key factors will create value for you now and throughout your business life cycle. Φ
Lisa Horn, CEPA, is senior manager of operations consulting and manufacturing and distribution industry team leader with Schenck. Corey Vanderpoel is managing director and owner of the Taureau Group.