This article proposes a model of business assessment that business owners, investors and advisors may use when assessing SELL or BUY decisions for Merger and Acquisition (M&A) transactions.
A business assessment in any M&A transaction should not be limited to only a financial and commercial review. While non-financial key drivers are less likely to have a major financial impact on an organisation’s operations, some, like employee fraud and internal control lapses, can be detrimental to a business.
Getting ready TO SELL – What do you need to assess
Many business owners hope to get a buyout offer that will make them instantly wealthy. Some are happy to take profits, even if it means losing control over the business that they founded. Some are passionate enough to want to retain a controlling stake. No matter which category of business owners you belong to, it is very important to consider carefully: Are you ready to sell?
Business owners should do their homework before committing to sell their businesses. This involves understanding their current business position and being aware of what works for them, what the business needs the most and what they themselves want. In answering these questions, they can make reference to the model on the right.
This model comprises 7 critical elements of the management framework, driven by 2 main objectives – Profits and Cash Flow.
It analyses the few key areas in an organisation and helps businesses understand their current position, while giving the owner a chance to identify and respond to any issues affecting the value of the assets to be sold. Hence, the owner can avoid surprises, have greater assurance of the business value and be better prepared for negotiation.
| Category |
TO SELL – What to look out for and what should be done |
| Business Modelling |
• Identify market position and shape the business model to focus on core competencies
• Evaluate competitive landscape faced by the current business model |
| Revenue Modelling |
• Identify the sales channels and analyse product mix
• Identify customer mix and the collection mode
• Create a revenue model that best fits the business model to maximise profit and cash flow |
|
Capacity
Management
|
• Determine the optimum capacity at which the business can operate based on its present facilities and infrastructure
• Configure existing capacity to generate the best returns |
| Funding Structure |
• Know your business working capital cycle and requirements
• Identify capital expenditure needs during the planning process
• Align funding structure to organisation’s needs so as to reduce financial and business risks |
Management
Structure |
• Examine existing organisation chart and reporting functions. Identify any potential areas that may
hinder or slow down the decision-making process such as duplication of roles. Match key personnel’s
roles and responsibilities with the intention to best align his or her experience and qualifications |
Business Process
Re-engineering |
• Review operating procedures and processes to tighten systems and controls with a view to achieve
increased productivity, prevent leakages, and sharpen competitive edge |
Key Performance
Indicators (“KPIs”) |
If you cannot measure, you definitely cannot manage:
• Set targets, as well as define KPIs to be tracked, reported and used to motivate and reward staff
• Set up reporting systems to ensure the business stays on track |
This is a comprehensive model that reviews almost all business aspects of an entity. Business owners need to focus on adjusting their business models and chasing after the right customers. In addition, they need to build revenue that brings in profits and cash flows, exercise prudence in capacity management, and build resilience in their balance sheet and funding structure. This resilience can enable them to cope with unplanned shocks and survive. Business owners also need to relentlessly bring the right people into their management structure, continuously look at simplifying processes and re-engineer them to be more customer-focused, as well as to build lasting relationships with their employees, customers and suppliers.
Analysing the organisation with this model will enable the owner to know exactly what the business needs the most currently. While the business owner may be overwhelmed by a buy-out offer, setting the right pace and getting the most for the business are far more important.
Getting ready TO BUY – What do you need to assess?
The same model can also be used in a BUY situation. The approach is normally applied during the due diligence process. A well structured due diligence process can arm the buyer with detailed information on the target company and enable him to walk away from a transaction at a relatively early stage without incurring substantial costs. It also allows the buyer to avoid being placed in a post-completion position of discovering “holes” in the newly acquired business.
| Category |
TO BUY – What to look out for and what should be done |
| Business Modelling |
• Understand the industry and business in which the organisation operates
• Understand the competitors and the competitive landscape |
| Revenue Modelling |
• Examine concentration and credit risks associated with key customers, risks associated with the
revenue-earning process, and risks associated with the billing and collection process |
|
Capacity
Management
|
• Examine current supply chain management
• Review utilisation of existing capacity
• Evaluate capital budget / expenditure |
| Funding Structure |
• Assess red flags on liquidity and solvency risks
• Review sufficiency of working capital and compliance with financial covenants |
Management
Structure |
• Evaluate risks associated with poor human resource management, lack of succession planning, and
ineffective talent management |
Business Process
Re-engineering |
• Review the current standard operating procedures and highlight identifiable weaknesses so that any
flaws in internal control are identified upfront and rectified early |
Key Performance
Indicators (“KPIs”) |
Define the KPIs that are critical:
• Assess quality of earnings and net assets
• Identify underlying growth drivers and trends |
One should also focus on the following key risks:
Operational Risk
Where are the critical operational issues and bottlenecks that can affect the immediate and medium-term performance of the business?
Market Risk
What are the industry trends, changes and risks that can affect the current business and its revenue model?
Financial Risk
Are there immediate liquidity risks that will pose a danger to the working capital and going concern issues that will affect business viability in the future?
Compliance Risk
Are there compliance issues that will affect delivery of the business plans?
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