Resolving Problems Before Going to Market

It is vital to resolve real or perceived problems that are conspicuous and undisclosed. Buyers are generally suspicious and cautious about any acquisition, therefore any "red flags" that are PERCEIVED as problems or challenges may slow the process and often derail what should have been a successfully completed transaction. A dispassionate, critical, objective review of all issues directly and/or indirectly related to a business must be performed in order to maximize the probability of effectuating a smooth marketing and due diligence process. The importance of absolute attention to macro and micro "issues and details" warrants the utmost in careful planning. Again, real and perceived weaknesses must be met "head-on". Depending upon the nature of the weaknesses and/or problems they must be rectified, mitigated, changed, defended, bolstered and dealt with assertively, without fear. Owners should examine and attempt to implement positive changes regarding the following issues before proactively approaching the merger and acquisition marketplace :

1) Image -

Improve and evaluate the cosmetics of the facility, image and strength (and weaknesses) of the products/services, as well as the reputation of the owners- management.

2) Financial Statements -

Present orderly statements, with foot noted explanations of fluctuations and financial changes regarding line items. A clear picture of how Revenue, Expenses and Income evolve will calm buyer concerns about questionable "Books and Records". Make sure all adjustments (recasting or reconstruction) are defensible and well supported with specific rationale. Weak and poorly conceived arguments will raise the specter of financial instability and concerns about the true financial strength of the company. "Clean" and easily comprehensible financial information is one of the important building blocks which help determine value, but not necessarily "price".

3) Legal Issues -

Review numerous issues, e.g., liability, liens, leases, licenses, all contractual obligations, Bulk Sales Act, intellectual property, tax issues, government regulations, environmental concerns, existing or contemplated lawsuits, past lawsuits or regulatory proceedings which may create future issues, representations, warranties, indemnification issues, past insolvency issues, etc. Review and attempt to resolve all legal or perceptible legal issues before "going to market".

4) Account Receivables and Payables -

Evaluate A/R and A/P regarding aging, better credit management, amounts, trends, quality of creditors (vendors) and debtors (customers), whether one or two creditors or debtors encompass a disproportionate amount of receivables or payables.

5) Inventory and Equipment -

Examine the quantity (too much or too little), turnover, cost, fair market value, age, condition and salability of inventory. Equipment age, condition, value, maintenance, technological obsolescence and needs are also very important.

6) Personnel, Employees and Management -

Will key individuals stay or leave? Can a key executive run the company if the owner retires or otherwise leaves the company? Explore respective roles, salaries, incentives - written or verbal agreements/promises and responsibilities. Are there too many or too few personnel? Employees or Independent Contractors - legal and financial ramifications must be evaluated. Employee Benefit and Retirement Issues must be reviewed. How strong is the management team? Is there a management team? All Human Resource issues are critical to the future well-being of the company.

7) Safeguards -

Evaluate contingency plans for unforeseeable events, i.e., sick personnel, supplier problems, equipment downtime or crash, and other potential issues.

8) Production and Service -

Manufacturing processes and/or service components of the operation must be evaluated for their specific efficiency and in comparison to the subject industry. Analyze specific line items and the company's cost of goods and/or cost of service as it compares to its specific industry.

9) Collateral Material -

Does the company have professionally prepared brochures, catalogs, policy manuals, written mission statements, and other corporate "manifesto's"?

10) Competition -

Articulate distinguishing factors; understand competitors' operations, products, pricing, market-share, etc.,

11) Marketplace and Industry Trends/Developments -

Understand trends and any cyclical factors which may impact the company. Is the industry and marketplace growing, stagnant or declining?

12) Information Technology and Internet Factors -

Evaluate the company's IT capabilities, strategy and opportunities? Are the company's margins, customer base and overall operational / financial stability threatened or enhanced by the Internet. Does the company have an Internet strategy to grow and/or defend itself against existing and unknown competition?

13) Margins -

Are the company's profit margins above industry standards or less than industry norms? Why?

14) Vendors and Customers -

Patching up or maintaining good relationships is important because buyers will want to talk to them. Buyers are very concerned about companies where more than 20-25% of the revenue is derived from one customer. The longevity of customer and vendor relationships is also of serious concern to Buyers.

15) Marketing and Sales -

Evaluate and critically examine the company's approach toward the marketing, selling and distribution process. How can it be improved?

16) Third Party Consents -

Third parties can create problems and/or impose roadblocks in the consummation of a sale. For example, "rights of first refusal", due on sale clauses, licensing entities, some suppliers, etc.

17) Product Pricing -

Review the company's rationale regarding pricing structure of products and/or service; how do the company's prices compare to the competitor marketplace; also, evaluate profit margins.

18) Potential -

Discuss prospects for the future and specify reasons why it should prove to be positive, e.g., new products, new contracts-business, anything which may foreseeable occur and enhance the value of the company. Project earnings (with disclaimer); discuss the strengths and investment highlights of the company, both financial and non-financial. It is the responsibility of the seller and its (his or her) advisor to articulate and specify reasons why "this company" is strong, stable and an excellent acquisition candidate.

19) UCC Lien Search -

Conduct one on the company. Check with any Private or Public Agency that may have information on you, to clear up any "recorded" or perceptible problems or issues.

20) Selling Rationale -

Have a good reason for selling and explain it to prospective buyers.

21) Transition and Training -

Explain to Sellers how the "training, transition, and familiarization process" will flow and the necessity of helping the buyer learn the fundamentals, subtleties and nuances of the business.

22) Threats -

Internal and external threats must be resolved or mitigated in anticipation of buyer concerns; there's an old saying that "your company is no stronger than it's weakest link". Strengthen your weakest link. Evaluate competition, legislation-regulation, marketplace forces, technological forces, personnel-management and many other issues that may present threats to the integrity, market position and financial stability of the company.

23) Opportunities -

Articulate clearly, and in writing (package), how the business can implement changes to increase sales, profitably and maintain (or reduce) costs and expenses "in line" with normal operating/management standards.

24) Strengths -

Make all of them known !!! .......including tangible, intangible, overlooked hidden assets, phantom assets, contingent assets, current and probable events which strengthen the infrastructure and prospects for a more profitable future.

25) Conclusion -

There are many other issues that a Seller should consider, however, an astute Business Advisor and / or Business Intermediary should play "Devils Advocate" respecting issues, problems and "perceived flaws" of the company.

Again, remember, to most Buyers "Perception is Reality". No one has to buy your company or your client's company. Buyers are naturally skeptical, concerned, suspicious, wary and anxious. It is critical that you put the company's best foot forward before "going to market". An Intermediary or professional advisor must gather lots of information, recast the financial statements, interview the Owner/shareholders and/or key individuals (if necessary), about all aspects and dynamics of the business, including strengths, weaknesses, opportunities, threats and trends. Essentially, an internal "Due Diligence" of the company must be performed. A dispassionate, critical, ego free analysis of the company must be performed by an objective - third party.