No matter the value of your business or how far in the future you plan to sell it, there are certain steps that every Aerospace & Defense (A&D) business owner can take that will help ensure a smooth, successful transaction once the time comes. A well-prepared business shows better in the market; proceeds more quickly through due diligence; and is more likely to transact and close. In the third article of this series, I will briefly go over each step and discuss how to maximize benefits and mitigate risk. 

Financial Reporting: 

Accurate, clear financial reporting that follows industry standards is a basic buyer expectation. The financial information you disclose represents the performance of your business, and many buyers will go to significant lengths to confirm that it does so accurately. If your reporting is cash-based, you should switch to accrual-based as soon as possible, because it records revenue and expenses more accurately and is the accepted standard for buyers. Correct application of the appropriate revenue recognition policy is important, as is relevant cost accounting, so that profitability is depicted accurately. For A&D companies with significant work in process this can mean using a percentage of completion method. Note that ensuring these items are in order may involve professional assistance from an outside CPA firm if you do not have in-house resources with the right skill set. 

Investment and Maintenance Matter: 

One mistake that some business owners make is to neglect or reduce their investments in the business, because they think that since they’ll soon be handing it over to someone else, it does not matter. This mindset is short-sighted. When you stop investing in things like tools, equipment, and employee development, buyers will notice and it will likely lower the value of your business when it comes time to make a deal. It is critical that A&D companies make necessary strategic investments to maintain adequate capacity in facilities, machine tools, and material handling equipment to support the future growth of the business.  Many buyers expect A&D companies to have implemented Lean Six Sigma methodologies to drive operational efficiency.  

Contracts and Licenses – Compliance is Critical: 

All contracts, licenses, and other key documents need to be current, signed, and available for buyers to look over. In the A&D world, there are countless regulations and limits in place that companies must follow, licenses that must be acquired, and complex contracts that need to be signed by any involved parties. Conformance to all export and security regulations is mandatory for A&D company owners seeking to sell their business. Lack of compliance is a red flag, if not a deal-killer for buyers.  

Human Resources – Get it Right When it Comes to People: 

While capital assets are important in the A&D industry, they are secondary to the employee base.  A&D operational processes, including the design, production and delivery of parts and equipment, is all done through people. Employee skills and capabilities are important differentiators for any A&D company, as exemplified by the highly skilled labor that electrical engineers and machine tool operators perform. Another key element is employee retention. Are the employees happy and appropriately compensated relative to market? When a buyer sees a company with high turnover rates, they may suspect management and supervision issues. Also, ensure that you have the proper documentation for every one of your employees. 

Safety: 

Manufacturing can be very dangerous, which means that ensuring the safety of your operations is critical for operating and eventually selling your business. This is where the OSHA1 element comes in. Companies with poor safety ratings will have higher insurance costs and more significant employee impacts, and substandard ratings are a big red flag for buyers. Implementing a strong safety program before selling your business, if you haven’t already, is incredibly important. It will not only lower your MOD2 rating and increase the value of your business, but it will also signal that the well-being of your employees is important to you, reducing risk post-transaction. 

Environmental Issues: 

Environmental issues are another thing buyers will investigate thoroughly. ESG3 is a huge component for A&D buyers, partially because of the community impact environmental issues within the company can cause. Companies with bad ESG ratings may be damaging the community where their employees live and work, not to mention the damage they do to the environment in general. Sustainability and protecting the environment are currently top priorities for many different industries, including A&D, and a poor track record reduces the likelihood of getting a transaction done. 

It’s impossible to prepare for every eventuality and every transaction has unique elements. However, these six areas are great places to start because of how often FOCUS sees issues related to them. Preparation is key to successful M&A transactions, making your business more attractive in the market and more likely to transact smoothly.  

In the next article of this series, we will look at safeguarding employees through a transaction process and the transition of the company to new ownership.