Spencer Tenney, CM&AA | Tenney Group
In the book Culture Code, Daniel Coyle writes, “Great organizations use moments of crisis to crystalize their purpose.” That is what my team sees happening in pockets of the 3PL space right now. Exceptional leaders are choosing to respond to the challenges of COVID-19 in a way that is quite inspiring: with bold action. They are harnessing their team’s collective talent, creativity, and energy toward one unifying purpose—building value. How? They are 1) recognizing the real disruptions and risks in the market, 2) focusing on only the areas of the business they can control, and 3) taking bold action to increase business value in those specific areas.
One major area for value building opportunity is in financial and operational reporting. Many transportation and logistics business owners do not fully appreciate the role financial and operational reporting plays in how a buyer values a business. In the absence of excellent reporting, a buyer sees added risk with the transfer of ownership. Added risks require a discounted business value. Below are three principles to help you get on the path to building value in an area of your business you can control right now.
1. The speed and accuracy of reporting during a buyer’s “first impression” may dictate whether a buyer places any kind of value on your business at all.
Many buyers are looking at multiple deals at the same time. You should expect the buyer to make up their mind about whether or not they are interested in pursuing a deal very quickly. The more effective you are in capturing their attention through speed, accuracy and preparedness, the more likely you will be to separate your business from the rest of the pack. Tenney Group recently closed the sale of a $90M logistics business. We represented the seller. Initially, the buyer saw our client’s company as a bolt-on to an existing logistics platform company. That changed when our client demonstrated how quickly they could create complex, financial reports around any facet of the company’s performance. By demonstrating exceptional financial and operational reporting, they began to illustrate to the buyer that their business, not the buyer’s company, was the better foundation from which to build future growth. This is when the conversation about “multiples,” future leadership teams, and possible deal structures dramatically changed. Quick tip: Create a one-page teaser that has a buyer’s FAQ’s preemptively addressed. Then, update it quarterly. This will demonstrate that you are a) on top of your game and b) already expecting and or receiving offers. These two things alone will affect the way a buyer initially perceives the value of your business.
2. The historical accuracy of your budget projections can affect the way a buyer values your future projected performance and, consequently, the structure of an offer.
When a seller can present a historical track record of accurate financial budgets, he makes performance projections more credible. This is a function of de-risking your business. When you reduce the risk of transferring ownership to a buyer, you simultaneously drive the value and demand for your business up. Also, there is a much better chance that you will command more cash at closing versus an earnout or seller note. On another recent deal, our client agreed to have $8M of the $60M total sale consideration allocated to a one-year earnout. A week from the deal closing, the buyer’s CPA firm convinced the buyer that the earnout was a huge accounting headache and unnecessary. The seller’s historical projections had been extremely accurate which made the likelihood of the seller missing the projected performance mark in the upcoming year extremely low. Ultimately, all parties agreed to substitute the earnout with cash at closing. The seller got almost everything he would have gotten if he delivered 100% of the earnout requirements with zero worry or hassles. Seller notes and earnouts can be wonderful instruments to expand the total sale consideration for sellers. However, if you can command cash at closing, we recommend you take it.
3. In order to increase the likelihood of getting paid, get serious about what will be required to survive the scrutiny of the due diligence process.
Many deals with premium offers are lost because owners forget that securing a high offer is different than receiving a monster check. Few businesses are ready to efficiently navigate through due diligence. As a result, they can’t fully capitalize on the amazing business they have built. The demands placed on your leadership team to produce all kinds of financial and operational reports during the process of due diligence is mind-blowing for some. Are you ready? We were helping a client through the due diligence stage of the sale process recently. The buyer pulled us aside after a meeting and shared something quite remarkable. He said, “Your client fulfilled all of our due diligence requirements in 45 days…over 135 unique information requests…like it was nothing. In our last deal, we were in the due diligence stage for over nine months. I can’t tell you how excited we are to get this deal done and to get your client paid.” Start educating your leadership team about the type of information they will be required to produce during due diligence. Life changes overnight. If you decide you want to sell your business, don’t allow a lack of financial and operational reporting preparedness keep you from getting the money you deserve.
Despite the incredible challenges (and opportunities) in front of the transportation and logistics industry, you have more control than you may realize when it comes to adding multiples to the value of your business. Use the challenges in the current economy to crystalize your company’s purpose. Focus that energy on what you can control. Lastly, inspire your people toward bold action and have fun building something special.
Spencer Tenney is President and CEO of Tenney Group, a merger and acquisition advisory firm that has been dedicated exclusively to the transportation and logistics industry since 1973. For more on Tenney Group, visit www.thetenneygroup.com.
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