Is Your Company Ready to Be Sold?
What owners should do to ensure an attractive price when they sell their company. by Bob Rossow
It’s not easy owning an EMS company these days … if it ever actually was. And by all reports it’s getting even harder. Covid, the dysfunctional supply chain, inflation, tight delivery schedules, just finding qualified employees – all these problems and others have combined to challenge even the most seasoned owners. Given all this, who has time to take the necessary steps to prepare a company for sale?
The bad news is this article won’t give you more hours in the day or more days in the week to do it. But it does list some of the things, maybe improvements, needed to show your company in its best light when you are ready to sell. And one thing to remember is that these goals are best accomplished over time. Trying to do it all at once as some kind of crash project is not the method of choice.
This list is by no means comprehensive, of course, but tries to highlight some of the major areas buyers will consider. And, as the owner, you may wish to step out of your role for a bit and think of yourself as a potential buyer. Put a critical eye to it. What would you like to see improved if the shoe were on the other foot? The following are points for your consideration.
Finances. Generally, the first thing a buyer wants to see are the financials. They want a profit and loss (P&L) statement and a balance sheet at minimum, plus a cash flow breakdown, if you have one. Typically, these should reflect the past three years. The more professional and inclusive these appear, the better the reception. A qualified accountant or a CPA is usually best used for this work. You will need these documents before you put the company on the market.
Customer list. Prospective buyers will want to know who you sell to. They will want a history of orders by the larger customers. What is your margin on these orders? What percentage of your entire business does each of the larger customers make up? The customers do not have to be named, per se. They can be identified as a large medical OEM, a small aerospace government contractor, etc.
Employees. Is your workforce adequate and stable? You may be asked to provide a list by title or job function with dates of employment, wages and other pertinent information. An organization chart, usually quick and easy to make, is very helpful as well. To a buyer, this is the classic “picture worth a thousand words.”
Ongoing management. Will you be available to stay on for six months or longer after the sale? Is there someone in place to take over your job when you leave? How about other key managers? In many cases, the owner of a small- or mid-sized EMS company is also the chief technical officer. If this is you, prospective buyers may determine that you will have to be replaced by two different individuals. This can be a serious obstacle and could end up nixing the sale. If this is your situation, consider hiring an engineer as an understudy for the eventual transition prior to a sale.
Relocation of the work. Some buyers will be interested in buying your company only if they can relocate the work to their own plant. For many owners, this is not something they are prepared to allow. They want to keep the work in place, typically for the benefit of their employees, and continue payroll as is. But if you are open to moving the work, you might want to look at each of your customers and determine if their programs could be relocated.
While there may not be much you can do about changing the existing order base, you may wish to look at future work with an eye in this direction.
Supply chain. With the frustrating state of this essential part of the EMS business right now, how is your company coping with getting needed inventory to make product? How has this affected delivery times? Is there a risk of losing any business as a result of long lead times? How much work in process (WIP) is being held up by a shortage of parts? Are you working on improving your methods for getting components faster and reducing lead times?
If you are one of the few not already working on this or don’t know how to go about it, you may wish to hire a consultant to advise you. And whether or not you sell the business, reducing lead times is only a positive down the line.
Equipment list. Most companies have an equipment list, but if not, you will want one for prospective buyers. It may be the second most-asked-for document on the request list. It is helpful to include brand, model number, date of manufacture, etc., for the whole picture. Equipment is not typically the biggest factor in a sale, but buyers want to know what exactly you have and how it will fit into their own organization’s list. A date on this record will show a buyer how current it is.
Certifications. In most cases, smaller EMS companies have few or no certifications. Presently, this does not seem to be an obstacle to a company’s sale, as customers of the assembler obviously don’t require any. But as sales increase, especially in those areas where certifications are increasingly required, the picture changes. ISO 9000 registration may be needed, especially in the medical and defense markets.
The downside of certs may be cost and maintenance time, but I believe they bolster confidence with buyers. It is for something an owner to consider prior to selling.
Sales program. Of all the items listed here, this could be the most interesting. How is new business brought in? Or is everything organic, with longtime customers simply increasing business? Is anyone dedicated to sales (either an employee or a manufacturers’ rep group)? Or is the owner responsible for bringing in new business? If the latter, what happens to new business growth if they are out of the picture?
Potential buyers are almost always interested in ways to increase sales. If they see an active, successful sales force, they might see the potential of integrating it into their own organization. Alternately, they might see cost savings in scale by reducing or eliminating these positions in favor of their existing salesforce adding the acquired company’s offerings to their own portfolios.
On the other hand, if sales growth has taken a backseat over the years, they might determine a little more effort in that direction could yield considerable new business.
As the owner, you should be prepared to speak to this. Buyers will be sure to ask.
How does the company show? One of the easier things to enhance the company’s image is to make it show better. Think of a customer visit. Are the floors painted? Is your inventory organized? Does your office look reasonably modern and up to date? Details are important. When you walk in the front door and look around, ask yourself if this is a business you would buy (or buy from). Your answer could be the same as any prospective buyer’s.
Your website. Is it crisp, cutting-edge, with video and good graphics? Does it tell your story properly? Does it look professional? A fair number of smaller EMS companies have what appear to be home-grown, somewhat older sites. This goes to image – and what you are selling is at least partially based on perception. Think about it. If you are trying to buy something online, does a poor website really invite your order?
Cost-cutting. Here is an area that can be worked on at any time (even today!) and yield results, in some cases immediately. If profit is the largest single driver of business, assuming other factors remain the same, by cutting costs you will increase profit. And higher profit will always push a higher sales price. Look around, if you haven’t lately. It could easily be worth your while, whether you sell or not. Your workforce and methods might be the first place to start.
Reputation. Last, big or small, any serious potential buyer will do some kind of due diligence. Does your standing with customers, suppliers, employees or community need repairs? See what you can do to fix whatever can be fixed. This is best taken care of now, not later. Like concrete, the longer it sits, the more it sets.
In summary, this list is not in any special order, but is meant to draw attention to areas that might well be looked at in the normal course of business. As mentioned, trying to do it all with a deadline just before putting a company on the market is a tough job. Do it as time goes by, and it will pay big dividends down the road.
Good luck and all the best in the new year.
Bob Rossow is founder of E/Search International (esearch21.com), an EMS business broker firm with an active buyers list of about 80 potential buyers interested in EMS companies; email@example.com.