Do your “systems” include manual processes, accounting software, and Excel spreadsheets? Is integrated software missing from your list, or not being used to its fullest potential? How do you think these systems will be perceived by someone considering purchasing the company? When considering the “value” of a company’s systems, business owners need to look at the procedures, processes, and software currently used. How would a prospective buyer use these systems, both right away and in the future? Here are a couple examples Chortek has encountered that highlight the value of investing in new integrated software. We’ll call them Client A and Client B.
Case Studies: Clients Using Non-Integrated Systems
With Client A, the company’s buyer was in the same industry, but had a different geographic territory. After acquiring the company, the buyer continued using Client A’s software to run the newly attained locations, but now, they are in the process of migrating critical Client A data to the new owners system.
It should go without saying that working with one system has many advantages over managing two separate systems, or maybe even multiple systems. Imagine running the same business for a number of locations, but having to switch between systems throughout the day based on territory. Running two systems is far from efficient.
For Client A and their buyer, the perceived “value” of Client A’s system was low, since the buyer ultimately moved important and relevant data off Client A’s system and onto the buyer’s current system. Knowing they valued their current system, the buyer placed little value in Client A’s system, knowing that they would transfer processes and software down the road.
However, it’s important to recognize the key factor in this scenario: An option existed to export necessary data directly into the buyer’s system. This allowed Client A’s buyer to continue operations as normal with little disruption.
Let’s look at Client B for a slightly different example. Client B’s company used manual processes and non-integrated systems for accounting, quoting, and other operations. Instead of placing the emphasis on systems and technology, Client B was focused on people. Knowing they ultimately wanted to sell the company, Client B wanted a buyer to be able to take over the operations as-is, as opposed to merging processes into an existing company. This client wanted to get the most value they could out of systems, procedures, and processes already in place.
So, where do people come in? Client B saw the value that a new, integrated software could bring to the company both in the short term and in the long run. Short-term benefits included getting something in place that could generate more revenue, manage and grow the client base, and train people who could support the integration. The long-term value, in the client’s mind, comes from creating systems that support the success of the company, keeping it cost-effective and efficient to run, with people who are well-equipped to continue Client B’s prosperity.
Why is Value So Important?
With the number of acquisitions and mergers expected to rise over the next few years, more companies are looking for ways to integrate and assess target companies successfully. We have all heard about deals where the stars appeared to align, but things fell apart. In some cases, this may have happened because the buyer and seller aligned on finances and strategies, but struggled to integrate operations and technology. In fact, these issues may not have even been addressed during the due diligence process.
Why aren’t these matters addressed sooner? One way this can happen is if operations and IT executives on the buyer’s side are not included in the acquisition process. Keeping these executives out of negotiations means that their voices are not being heard on matters concerning costs of integration and other practical realities of merging businesses. For example, if an executive doesn’t have a deep understanding of what is required when integrating two companies’ information systems, how can they be expected to accurately forecast the savings from merged supply chains?
This key information is often overlooked, but it doesn’t have to be. If parties on both sides who are responsible for operations and IT are actively involved in the merger and acquisition process, they will be able to address any and all issues that might surface during negotiation proceedings.
Mistakes to Avoid When Selling Your Company
As a business owner, you have spent years developing and building your company to get it to where it is today. Your entrepreneurship and successes have now made you a target for companies looking to acquire your business, bringing both your customers and your talent into their fold. However, before you sell, consider the following mistakes that companies often make during the selling/buying process:
1. Misunderstanding the value of your company’s software.
Do not wait for a buyer to name his or her price. Instead, determine how much your company and its processes are worth, and enter discussions with that baseline in mind.
2. Selling to the wrong buyer.
A failing acquisition happens more often than we like to admit, because the sale is about so much more than just the price. Since it is a merger of people, customers, and business lines, there needs to be a strategic fit. Assess all of the above factors and more when determining whether the buyer is the right fit to acquire the business.
3. Not understanding what buyers want.
Knowing your audience is critical, because not all buyers are looking for the same things. Ask yourself: How will your software, processes, and systems increase the value of the buyer’s company?
4. Lacking transparency.
The due diligence process allows the prospective buyer to uncover everything about your company, so it is important to be as transparent as possible. Failing to disclose any skeletons in the closet could negatively impact the terms of the sale.
5. Waiting too long to sell.
The value of your company is determined by more than its financials. The market, the evolution of your products, the momentum in the industry, and the economy all play a part in determining the best time to sell.
Many mergers and acquisitions fail to live up to expectations, simply because they stumble on the integration of operations and technology. But a well-planned strategy for IT integration can help mergers succeed. When evaluating your current systems, consider not only the short-term return on investment, but also the long-term effects that the systems will have on your company, both positive and negative, should you decide to sell later down the road.