15 Ways to Increase Your Microelectronics Company’s Value Before an Exit: Part Two
In part one of our series, we covered topics related to leadership, team and culture, and revenue and customers. In part two of our series, we dive into the importance of talent development, financial management, and supplier management. Some of these “value drivers” are straightforward and involve little cost, while others are more long-term and require greater effort or investment.
4. Demonstrate high quality, loyal leadership team and key employees, willing and incentivized to stay on after sale
In Part One, we emphasized the importance of your company being able to run without you. If this isn’t the case, then your structure and its impact on business may be too risky for buyers. Investing in the development and training of your team demonstrates to buyers (especially financial buyers) that the company will continue to excel when you are gone. This is an ongoing process, and it takes time. The earlier you begin this process before you decide to put your company on the market, the more value you should create.
Much of this boils down to training. Training costs money and time. I’ve had business owners ask me why they should pay for training if managers and employees will just leave and go to competitors. My initial response is usually to ask, ‘why are their employees so eager to leave?’ I also pose these considerations to the owner: Is it worse that trained employees may leave or that you must trust your company to untrained, uncommitted people in the first place? Investing in your team not only boosts productivity, but also helps build loyalty.
How do you show loyalty to buyers? A clear way is through longevity – the longer employees have been with the company, the better. Most to all key managers and employees are typically interviewed by the buyer (at the end of the process) to determine their loyalty to the company and willingness to continue with the company after sale. One consideration is to offer a retention bonus in cash and/or equity in advance of sale.
5. Operate with professional financial foresight, management, and controls
Finances and financial documentation are often the number one issue for buyers. Small companies often struggle with producing clear and timely financial statements. You do not need the most expensive software or a top tier CFO to generate financial statements, but it is critical to invest in resources that can help produce statements at the end of each month, with the goal to have statements by the 15th. Ensure you produce accurate statements by having a professional controller, CFO, or accountant on staff who can help identify issues and back up the quality of your numbers. Audited financials are ideal; minimally, a review by your CPA should be done for at least the prior couple of years prior to selling your company.
Buyers will want to see at least 2-3 years of historical monthly financial statements (Income Statements, Balance Sheets, and Cash Flow Statements). Maintaining and analyzing a financial dashboard is highly valuable, as it shows buyers that you track KPIs and use numbers to help run the company. You should be able to quickly answer questions such as ‘gross margin by top 10 products/services for the past three years’ and be benchmarking your financial ratios with the PCB/EMS industry.
PCB/EMS buyers are all eventually buying cash flow. They may be buying your company as a strategic means to add people, products, IP, customers, locations, and/or technology, but ultimately, they are buying your company’s ability to increase their future cash flow. Is all cash flow created equal? No. Many buyers perform what’s referred to as a “Quality of Earnings” report, to ensure that your cash flow is as advertised and should continue.
Healthy numbers to date are a key part of your company’s history and growth trajectory. Buyers are buying the future – it’s important to convince buyers that growth will continue via the addition of people, customers, products, locations, equipment, capacity, or however you plan to scale, in a well thought out forecast with reasonable assumptions.
We cannot emphasize this enough. Buyers will often hire financial experts to parse the details of your financials, bank statements and ledgers, to ensure that you have been running a tight ship. You do not want to find yourself in diligence scrambling to respond to their requests for the most minute financial details, which assuredly will come.
6. Focus on diversification across suppliers and products/services
In Part One, we discussed the risk with customer concentration. This also applies to your suppliers and the products/services that you provide. With your suppliers, are you regularly reviewing their terms and conditions? Are you taking advantage of early pay or bulk purchase discounts? Additionally, are you heavily reliant on 1-2 suppliers? Buyers will want to know your contingency plan if a supplier goes under or decides to favor customers.
Product diversity is also important. While holding a niche in the market is usually good, companies with only one product are usually not as valuable as those with multiple sources of income. If your flagship product falls out of favor, it must not dramatically affect your revenues. Continually gathering feedback from your customers and applying that feedback to build diversified offerings not only strengthens your business, but also helps increase the value of your company.
Stay tuned for the next installment in our five-part series, “15 Ways to Increase Your Microelectronics Company’s Value Before an Exit”. For more information, contact Paul Dickson, FOCUS Managing Director in Advanced Manufacturing and EMS/PCB Team Lead, at [email protected]