By Ann Pitts
We’ve all heard that old saying “run your business like it’s for sale” a million times, but the problem with old sayings is they are frequently right on target and full of wisdom, but ignored. This saying is particularly interesting if you examine the benefits of running a family owned petroleum business not just in the moment, but truly as if it was going to be listed for sale in the near term.
When business owners start thinking about selling, they often start the process of “cleaning up” obvious problems. Impactful items like profitability, sales trends, staffing issues and asset utilization go under the microscope. That type of cleanup is terrific, but the absolute worst time to start those projects is in the months before a company goes out to market. Starting initiatives at that point means the seller has missed the opportunity to capture best value and is actually cleaning up solely for the buyer’s benefit.
Because buyers typically make an offer based on several years of trends in the business, not just what’s happening currently, it makes a huge difference when sellers start the clean-up process well in advance of a possible sale. Just think of the cumulative total ten years of improved cash flow, stronger company structure, improved disciplines and better company culture would add up to? Following basic steps to this type of project also provide an immediate result of much less sleepless nights, headaches and firefighting.
No matter where you stand on long-term ownership, start today by taking a very close look at your own financial reporting. Not just the usual dashboard, hitting the high spots on financials, but a true deep dive into those numbers. Having a clean set of books, with proper, consistent reporting is critical to management of a healthy, thriving company. It’s also the starting point for buyer due diligence. Closely examine records with an investigative eye looking for incorrect information, irregularities, unreported liabilities, negative trends or any other threats to the continued profitability of the company. Keep in mind, incorrect or unexpected information found in the financials immediately erodes buyer confidence and trust which is critical to completion of a deal.
Next, take a look at the company’s balance sheet. Each line item of the balance sheet is an opportunity to shore up, or even maximize company value. Items like accounts receivable being in best case condition, with little bad debt hanging in the past due buckets. Customer behavior, both good and bad, is very evident in the A/R asset class. Is this something a buyer wants to bring into their own operation? Focusing staff on small yet incremental improvements to credit and collections practices can bring big positive results to accounts receivable trends. Trucks are frequently a large asset class. Who owns the trucks? Is there a complete listing of trucks including detailed specs on each piece of rolling stock? Equipment in the field will also be an asset consideration. Where is the equipment located? Are there properly executed lease agreements? Detailed, up to date information is going to be necessary if a seller wants to capture full value of those assets. Real estate is frequently held outside the corporate entity, so develop a preferred game plan for handling all real estate holdings.
What about contracts with both customers and vendors? Are dealers under long-term supply contracts? A long term, non-contractual dealer relationship is going to be viewed by a buyer as a relationship that could easily go away. Get those contracts signed sooner than later. Are long term leases and contracts transferable? Check for right of first refusal clauses, and change of control provisions. Signed, long term contracts and being on approved bid lists give buyers confidence that what they just paid for will continue to thrive after the sale is complete.
Examine working capital trends, which is a huge source of company value that should be managed carefully. The basic equation (A/R + Inv + Prepaids – A/P) must be taken apart and examined for weaknesses that create profit leaks. If the company is under earning what needs to happen to turn that around? Where are the segments causing the profit leaks, and what’s the plan to divest of those pieces?
Customer analysis, especially who makes up the current customer base, is worth taking a look at. Customer concentrations, industry concentrations and non-contractual relationships my impact a buyer’s appetite to complete the deal. Solving this challenge is much easier to do when there a few years to work on the problem. Give sales staff the incentive to move into other segments, move into new markets or make an acquisition to dilute customer concentrations. Leveraging the equation brings security and increased strength to the company value.
When the time comes to consider an actual sale, there are a couple of additional steps to take. Unless an owner plans on staying in place and working after the sale, now is the time to step back in the day to day operations. The more easily replaceable you are, the more valuable your business becomes. Delegate more daily tasks, and spend increased time working on your business instead of in your business.
It’s also a good time to clean up the balance sheet by removing non-business assets like boats and airplanes. Sell under used or redundant assets. Pay closer attention to expense control and cost efficiencies. Lower capital expenditure requirements when possible. At this point, focus on identifying and solving underlying concealed problems or issues that will be uncovered during upcoming due diligence.
Part of the problem with this type of business cleanup is it’s difficult to be aware of all the blind spots that exist in your own company. Things that seem very normal to one owner will be unimaginable to another. A project of this scope also takes a lot of energy, planning and the willingness to initiate change. All this must take place while continuing to run the business to the highest level of financial performance.
Difficulty aside, it is hard to come up with a real drawback to running your company like it’s for sale. Protecting cash flow, perfecting best practices and eliminating problematic practices is a true win/win for both the present and future health of your business.
Ann Pitts is the President of The Pitts Group, a company dedicated to assisting petroleum marketers with increasing their cash flow by improving accounts receivable results. Staff training, sharing of best practices and strengthening company policy are all part of The Pitts Group program. Ann is an experienced business speaker and trainer who has enjoyed focusing on the petroleum industry for over 12 years. Contact her via cell, 817-304-1533, or email, Ann.Pitts@PittsGroup.net.