Private equity firms, in particular, are keen to invest in companies with low operating costs and significant growth potential. Companies preparing for a sale need to take a careful look at the business – particularly their operations and technology – to make sure they are as attractive as possible to a financial buyer. But where do you begin?
Get your technology and operations in shape
Start by reviewing your IT systems and operations and identifying any problem areas that might be “red flags” for a financial investor—in particular, look at these key areas:
IT Strategy: Make sure you have a defined IT strategy that is aligned with business goals for the next three to five years.
IT Resources: Identify a strong leader capable of leading the IT organization through change. Once you’ve identified the right leader, work to understand your IT staff’s skills and fill any gaps that will be a liability for the buyer.
IT Processes: Be sure to have key processes in place for budgeting, project prioritization, technology support, release management and infrastructure “care and feeding.” Establish an IT steering committee with key executives as members. Implement appropriate disaster recovery processes, test them regularly, and simulate a complete disaster at least once a year.
Application systems: Most companies have a mixture of purchased and custom applications. For purchased applications, be sure to address the following:
- Are you on the latest release of the product? If not, why not?
- Are you in compliance with software licensing?
- If you have customized a large portion of the application, are these changes critical to your business? Or, is there an “off the shelf” system that might suit your needs? Many out-of-the box systems incorporate industry best practices and should be seriously considered when considering the removal of customizations.
- Have you documented processes and developed user guides for these applications? Be sure that knowledge doesn’t reside with just one or two team members. Create redundancy and document as much as possible to help with onboarding and turnover.
For custom solutions, be sure to address the following:
- Have you documented features and processes? With custom systems, it is even more critical to have proper documentation given the high likelihood of single threaded knowledge in the business. .
- Can more than two of your IT resources operate, manage, and update your systems?
- Does your IT staff understand how to scale your systems? If your custom systems aren’t easily scalable, work to build flexibility into the product.
- Do you have a clear roadmap for growing the product that is approved by the business and in alignment with the overall business strategy?
IT Infrastructure: Be sure that key areas such as servers, licensing, storage, telephony and your data center are adequate for today as well as tomorrow – especially if the business has plans to acquire other entities:
- Replace server infrastructure that is more than five years old.
- Review licensing agreements. Where necessary, true up discrepancies.
- Remove any legacy IT infrastructure that is no longer vendor-supported (e.g., database and operating systems).
- Secure your data center from intruders and the elements (heat, water, etc.).
- Implement proper disaster recovery infrastructure—such as power generation (if not in a co-located facility) and backups.
You have the right technology in place. But is it making your operations more efficient or less?
Technology is only effective when it runs in concert with the right people and processes.
Manual processes: Ensure that any manual processes today exist for a good reason – not just because it has “been done that way forever.” Where appropriate, leverage commercial applications and associated best practices.
Reporting: Assess financial and operational reporting honestly. Do you have a single “source of the truth” for reporting, or are there “islands” of data throughout your business?
Sales management: Far too often, companies implement customer relationship management (CRM) tools thinking that they are a silver bullet—and far too often, these tools are underutilized and mismanaged. Insist on consistent usage of sales management tools and the data they collect and house.
Manufacturing operations: Many manufacturers centralize critical functions such as supply chain management, inventory management, and shop floor control with just a few key people – usually with little redundant knowledge. Make sure these resources document their work and train backup resources that can step in at a moment’s notice. Additionally, don’t allow critical functions to circumvent systems capabilities such as an ERP system in favor of more familiar tools such as spreadsheets; otherwise, you risk disparate data, lack of process standardization and general operational inefficiencies. .
Quality control: If your organization has a quality control function, be sure to manage—and as your financial resources allow, automate—complaints and corrective /preventative actions consistently. This is an often underserved and inefficient area.
While there are various other IT and operations considerations, the points above have financial implications. The cost to correct these issues will put pressure on EBITDA calculations and will lower the multiple the buyer is willing to pay for your business. Luckily, many of the costs associated with these fixes can be reasonable if tackled early and managed religiously.
For more information about West Monroe’s Merger & Acquisition services, please contact John Stiffler at firstname.lastname@example.org.