Most business owners are familiar with the phrase “Adjusted EBITDA”, the process of adding back all non-recurring or excess operating expenses to net income to arrive at the “true” operating income of the selling business. While this remains a critical calculation for business sellers and buyers alike, owners should first conduct a strategic “Eyes of the Buyer” (EOTB) analysis of their business before engaging in the sale process.
My good friend and prominent transaction attorney Andrew Sherman uses the term EOTB in his book Mergers and Acquisitions from A to Z. Andrew encourages owners who are contemplating a sale to answer the question, “What will buyers see when the due diligence veil is removed?”
Conducting a thorough and objective review of a business, from the perspective of the buyer, may uncover potential value drivers that can be highlighted by the seller’s M&A advisor in the offering memorandum or emphasized during management meetings. Conversely, a comprehensive EOTB analysis may also identify potential value detractors that can be addressed before engaging in a sales process.
Andrew points out in his book that in order to be effective, the EOTB analysis should be done on a “no-holds-barred, no sacred-cows basis, with candor and integrity as the guiding principles.” The seller must be honest and non-defensive throughout the analysis.
For service businesses, there are three keys areas to evaluate:
- How does the business distinguish itself in the industry that it services? In the U.S. accounts receivable management (ARM) industry, for example, there are over 3,000 companies that, on the surface, provide collection-related services to credit grantors. What makes your business stand out in a competitive marketplace? Perhaps your company specializes in providing a particular service or focuses on a particular segment of the marketplace that distinguishes it among other ARM companies. Also look at the financial performance of your business for distinguishing characteristics. Buyers will take note if your company is able to generate a relatively high level of profitability on a consistent basis, for example.
- What parts of the business will the buyer need to improve upon? Perhaps your industry is rapidly changing and the need to upgrade technology is not something you want to incur on your own. First, identify the specific needs that you are confronting with your business. Second, identify companies from your industry that already invested considerably in their infrastructure that can support your needs. These companies may be the ideal buyers because their return on investment will be considerably higher than a buyer who does not already have the infrastructure in place and will have to incur these costs if they buy your business.
- Does your leadership team have any holes that need to be filled? As a business grows, owners need to add to their leadership team to support its expanding needs. Perhaps you relied on a bookkeeper to handle your company’s financial needs and you realize that you really need a controller or a strategic CFO instead. If you’re not planning on selling for a few years you may want to fill this position. If you’re planning on selling in the next year to eighteen months, you may want to rely on your outside accountants to assist in the preparation of your financial information and not upgrade your internal finance person.
Another part of your leadership team that needs to be closely evaluated prior to a sale is the sales team. If your sales people are not performing, then a buyer will not retain them. If your sales people have the closest relationships with your largest clients, then you may have a dilemma that you should address in advance of a sale process. The buyer will seek to retain these people to ensure client continuity post-closing. If you don’t already have a non-compete, non-solicit agreement with your key sales professionals then you should consider putting one in place. Be careful not to concern your sales people because they may decide to leave and join another company that they perceive is more stable. One way to address this is to bring them into the sale process and bonus them properly.
Kaulkin Ginsberg provides owners and executives with an in-depth assessment of their company’s strategic opportunities and enterprise value with our product, the Strategic Valuation Assessment (SVA). SVAs provide an understanding of value relative to transaction structures and current market conditions and is a more strategic tool used to aid in business discussions and planning.