This article is being written for Indian Manufacturing companies. Although major points apply to all companies preparing for a sale, some aspects are specific to Indian conditions, specifically those that manufacture products.
Getting your company for sale is a serious business. An owner probably started his business 30-40 years ago and went through many lean periods before finally deciding to sell his company. The company and its employees are very dear to him. The process of getting your company ready to be sold could take anywhere between 2-4 years.
Solid Reason to Sell
Any owner deciding to sell his company must have a solid reason to sell. A typical sale process takes between 6-24 months and can be quite time consuming for seller as well as the buyer. Therefore a buyer will want to make sure that the seller is serious, before investing much time.
Most owners just want to find out how much they will get and that alone is not reason enough. To find out the value of a company owners can easily engage valuation firms, chartered accountants or investment bankers experienced in such tasks.
Generally, smaller manufacturing firm ownership stays within the founder and his family or close friends. Some of the reasons for sale might be:
- When the second generation isn’t interested in the same type of business, the owner(s) may decide to sell. We have found this to be most common reason for sale.
- Many times the market becomes competitive and a small company may not have the financial or technical resources to compete and must invite outside capital, thereby selling outright or over time before the company’s relevance withers away.
- If your company has had poor returns for last few years due to poor economic conditions, you may think you want to cash out. Our suggestion to you would be to persevere. An owner is not likely to get the full value when selling in distress.
- Sometimes an owner has reached the point of exit or certain milestones and wants to just sell. In the industrial space where we advise, this is very rare.
- Business partners have different goals and some of them want to get out. Many times this is an ideal situation to have more dedicated partners to continue with the business.
- Cash from this business could be used to fund other more promising businesses. Buyers will want to make sure that they are not buying a business that is a drag to their existing business over the long haul.
- Owners are concerned about a downturn and want to sell beforehand. A bigger buyer maybe in a better position to withstand a sustained downturn in the industry. The sellers should expect a discount to the prevailing values for their business.
- Sometimes owners sell because they are just tired or have medical problems (with themselves or a loved one) that prevent them from putting in enough time. The buyers will want to make sure that owner can be replaced without much disruption to the business.
Most owners in India are very involved in the day to day decision making in the company to an extent that the company may lack systems, procedures and management to manage the company in their absence. It is critical to prepare the business and its second line of management under the owners that is capable of running a business when the owners are either absent or gone. A domestic buyer may or may not have the resources to devote to management. A foreign buyer will certainly look to buy into a company that can be managed from its home base (maybe in US, Europe or another country outside India) with certain level of involvement depending on buyer’s inclination.
- Current senior staff should have good communication skills and be able to answer questions regarding their area of expertise. In a recent case lack of language skills of the second line management made it very difficult for a buyer to assess the management team and they walked away from the transaction.
- In manufacturing product development, quality, manufacturing, quality and R&D are important departments. Owners must make sure that his engineers can answer any questions regarding their department in their native language as well as English.
- Most companies that are professionally run generally expect their managers to take ownership of their respective areas and they expect the same from companies they buy. At least a 2-3 years in advance of an exit, allow the second line management to take on more authority and responsibility so they own up to their departments. Owners must also groom other talent within the company to manage in the absence of the second line of management.
- The first line of alignment within two companies often tends to be financial reporting. A competent finance manager is a must in making sure all financial requirements are met and at the same time is available to answer key questions regarding financial statements and procedures within the company that is being sold. We will deal with the getting your financials in order in another section in this article.
Document policies and procedures
Over the years any company develops a great amount of knowledge regarding its domestic markets and about the best ways to organize itself to address the needs of this market. They develop internal processes that often remain undocumented and are known to owners or people who have stayed with the company for a long time. This information is critical to normal functioning of the company after sale. In the event of a transaction, this knowledge could just walk away from the company leaving the new owners in a lurch.
- All unwritten rules and procedures should be documented for each department so the company and its employees can run the company without the owners. The process of documentation itself lends to finding ways to improve operations of the company.
- This information must be made available in such a way that it is easily accessible and understandable. This helps in knowledge transfer as well as training one’s own employees.
Improve manufacturing floor
Manufacturing is the heart of any industrial enterprise. Some basic ideas can go a long way in presenting your manufacturing floor well.
- Keep manufacturing area clean and well lit. Make sure that aisles are clear and raw materials, in-process materials and finished products are stored in well-marked bins. The factory floor should have clearly marked lines that demarcate areas where machines are kept and areas suitable for walking.
- Make sure there are clear signs for each department such that anybody visiting can make a mental note of how the material flows throughout the plant.
- Ensure that all machinery and equipment that needs repair or replacement is appropriately attended to.
- Selling unused machines and inventory often clears up space and gives the manufacturing floor a fresh look. Cash generated from sale of unused assets can be used to pay down debt or put to other productive uses.
- Organize and label your stores, tool rooms, warehouses and offices so they make a good impression anytime someone walks through it.
Readily available financials
Financials are one of the best way to show off your hard work. Even before a buyer visits your company, they will request financial statements
- Audited financial statements for last 3-4 years goes a long way in communicating the progress of a company in numbers. More importantly it shows the buyer that you are well prepared.
- Ensure that as an owner any issues that are pointed out by the accountants are appropriately addressed so they do not crop up during the sale process.
- Owners should make sure that the business employs a competent financial manager. An able financial manager can help the owner make the right financial decision based on facts and is also able to respond to data requests quickly. Most buyers employ professional financial managers, timely and accurate responses to their queries can go a long way in assuring the buyer that financial controls and systems are in place.
- Many financial statements contain one-time expenses and excessive personal expenses of the owners. The financial statements should be normalized to make sure the buyer sees the true profit potential of the business. Sellers should consult competent advisors before making such changes.
Realizing real estate value
Real estate, especially in India has appreciated tremendously over the last 10 years. In big cities like Mumbai, New Delhi, Bangalore, the real estate under the manufacturing plant is often quite valuable. Owners clearly see the value of the business and real estate as being much higher than the total business as valued by many foreign buyers. Many buyers find having to pay the high price for business and real estate is too high for just acquiring the business interests.
- We suggest that owners (sellers) structure their real estate in such a manner that buyer has an option whether to keep the real estate or not. The buyer could lease the space till they finalize their plans for expansion.
- Separating the real estate can lead to more reasonable valuations for the business that can be more acceptable to the business.
Exiting your business
Exit plan for your business require as much careful planning as running a business. The owners have to think about how much value they will receive but also how the business will do after their exit.
- Value of a business isn’t just determined by metrics but by situation around the business as every business is unique. To learn more about valuing your business read the following article http://www.gammer.com/content/2012_10_01_News/WhatToExpectWhenSelling.htm
- Careful planning is required to showcase your business in the best light to achieve the best outcome for all involved. We recommend that the owners work with trusted experts such as their bankers or accountants to develop a sense for valuation for their business.
- Think of issues that are important to you in a negotiation such as employment contracts for key employees, retention of employees, contract agreement for owners, partial sale or full sale and who continues to manage the business and how.
- Lastly be very honest. Identify all sources of potential bad news and have good answers for them. Getting bad news out early builds trust between the two parties and allows for better communication.
At GGI, we have advised numerous businesses regarding their exit options in the Americas, Europe and even India. We are sensitive to cultural differences and never offer the same approach for all situations. If you think that a cross border transaction helps you realize the best value, do not hesitate to reach out to us.