Many business owners consider succession planning as they age, change life objectives, or decide to move on from their business to something else in their life. Many baby-boomers are considering the sale or transfer of the company they’ve spent their lives building and they want to maximize the value they receive in the transfer. These transfers can include an outright sale to either a financial buyer or a strategic buyer, or transfers to the management team, family members, a trust, an ESOP, or other “buyers.” Regardless, the objective is to maximize value so the owner’s wealth is also maximized.
A rule of thumb for establishing a company’s value is a multiplier times EBITDA (earnings before interest, taxes, depreciation and amortization). For manufacturers and distributors, that multiplier is usually between 5 and 7, but that can vary with industry and buyer. Sometimes the value is significantly different due to the buyer’s strategic objectives. An example is when Krave sold their jerky operations to Hershey for almost 10 times revenue, a number that greatly disrupted industry valuations in the snack meat industry.
If you want to quickly boost the value of your company there are five elements you should consider. The first three are often used by private equity firms and others to help determine value:
- Profit growth
- Revenue growth
- Free cash flow
The next two are used by both private equity and strategic buyers:
- Strength of the management team
Take a look at these factors in your company to see how you can quickly improve the value of your company and its attractiveness to potential buyers. It could really move the needle in a positive way for your personal wealth.
© 2016 – Rick Pay – All Rights Reserved
If you’re not developing partnerships with suppliers, you could be leaving money on the table…a lot of money. A recent article in Industry Week cited a survey of 435 top automotive suppliers, which found that the Big 3 (Ford, GM, FCA) and Nissan had weak supplier relations, costing them over $2 billion in sales in 2014. Those relationships were based on pressure to cut costs using adversarial approaches. Suppliers feared retaliation if they didn’t comply.
The survey suggested that the fault lay with the buyers. Top management wanted to improve relationships, but they couldn’t because GM, for example, has over 600 buyers. Give me a break. Doesn’t management control or influence the people who work for them, and isn’t management driving the effort to cut costs? While they may not be directly ordering their buyers to beat up suppliers, corporate culture and short- to mid-term focus on meeting Wall Street expectations are driving the buyers’ behavior.
Toyota and Honda, on the other hand, had good supplier relationships and achieved many of their cost targets through “respect for the individual,” a basic tenet of the Toyota Production System.
Supplier partnerships are based on trust, respect and the goal of reducing the total cost of ownership, which goes well beyond part price. I know of one manufacturer that wanted to be their supplier’s most profitable account, while the supplier gave the company world class pricing. The company achieved 23% profit before tax and inventory turns north of 17 due to profitable partnerships.
© 2015 – Rick Pay – All Rights Reserved
As part of my participation as a speaker at the Institute of Supply Management International Conference back in May, I did a short video interview on what supplier partnerships really are, and what their true potential is. The interview is up now on the Supply Chain Brain website, which does require you to create an account, but if you choose to do so, please have a look – the video is listed under the All Videos category.
© 2014 Rick Pay – All rights reserved.
Executives at most small and middle market companies have goals and objectives that are often very personal in nature – providing a great product or service to their customers, living a good life contributing to their own well being as well as that of their employees and community, perhaps accumulating a good number of “toys” or that house in the mountains or at the beach. Many want to make a good profit, make a name in the business community and build their company’s reputation among their peers. People define “success” differently, but their business is almost always a key part of the picture.
Your suppliers have the same goals and objectives. Many companies treat their suppliers as someone with whom to negotiate a better deal, to beat into submission and to use until they can no longer perform, only to replace them at the drop of a hat. Perhaps if more buyers and supply chain people treated their suppliers as they would like to be treated, (hmm – I’ve heard that somewhere before) the result might be better than one could ever imagine.
Suppliers are people too. Treating them as partners in your business (and you in theirs) can yield amazing results.
© 2014 – Rick Pay – All Rights Reserved
I can’t overemphasize the importance of communication with Sales. When I was VP of Operations at a manufacturing company my production managers did the planning, and I required them to meet with their sales manager every Monday morning to convey the past week’s results and to update the forecast for the coming week and month. Sales managers know if a major retailer is planning a sale, or if they’re about to get a really big customer. Communication with Sales offers Operations a glimpse into the future.
Likewise, Sales needs to know what Operations is doing. Are machines breaking down? Are there labor problems? Currently I have a client with 180 positions, 30 of which are open because they can’t find qualified workers. That has a tremendous impact on output, so communication is key.
Communication doesn’t end at the front door – we also need to communicate with the supplier base. At my former company the buyers visited our top 10 suppliers twice a year, and those 10 suppliers visited us twice a year, so we came face to face once each quarter. A client of mine, who has one buyer, keeps running out of inventory and the buyer refuses to talk to the suppliers, even on the phone. How can this buyer possibly know what’s happening or what’s coming down the pike?
© 2012 – Rick Pay – All Rights Reserved