Take two seemingly identical companies with very similar financials, but one of the companies was worth substantially more than the other company. One company will sell for $10 million \u201cas is\u201d or some changes can be made and the same company can be sold for $15 million. Following is a partial list of potential company weaknesses to consider in order to assess a company\u2019s vulnerability.<\/p>\n
Customer Concentration: First, one has to analyze the situation. The U.S. Government might be considered one customer but from ten different purchasing agents. Or, GM might have one purchasing agent but be directed to ten different plants. One office product manufacturer with $20 million in sales had 75% of its business with one customer\u2026Staples. They had three choices: 1. Cross their fingers and remain the same; 2. Acquire another company with a different customer base; or 3. Sell out to another company. They selected the third choice and took their chips off the table. The acquirer was a $125 million competitor which was unable to sell to Staples, so after absorbing the smaller company, the customer concentration to Staples was only about 10% ($125m + $20m=$145m of which $15 million was sold to Staples or 10+%).<\/p>\n
Single Product: Perhaps the most famous example of a single product acquisition is when General Motors overtook Ford\u2019s single product, the Model A, with Alfred Sloan\u2019s brilliant concept of a different model for people with different financial thresholds. Henry Ford\u2019s stubbornness to stay with one product (Model A) almost cost the company its existence.<\/p>\n
Regional Sales\/Limited Marketing: Companies with parochial focus have limited capabilities to grow other than within their own domain. A widget company with national and international sales has substantially greater prospects to grow than one limited to its own region.<\/p>\n
Aging Workforce\/Decaying Culture: Skilled workers in certain trades, such as tool and die shops, are not being replaced by the younger generation. This is a sign that the next generation will not provide the companies with a skilled workforce in certain industries.<\/p>\n
Declining Industry: Some companies are agile enough to completely change their industry, such as Warren Buffet\u2019s Berkshire Hathaway and Fashion Neckwear Company which completely changed from neckties to polo shirts.<\/p>\n
Pricing Constraints\/Rising Costs: Companies who sell a commodity product often lack pricing elasticity and are unable to pass on their increased costs to their customers. For a while, the steel industry was in this predicament, but through massive industry consolidation and a booming demand from China, the situation changed.<\/p>\n
CEO Dependency\/No Succession Plan: Many middle market companies have successfully been built up by the founder\/entrepreneur\/owner and some critics call these individuals a \u201cone-man-band\u201d for good reason. These superman types tend to dominate most aspects of the company, but this is no way to build a sustainable business long term. Furthermore, these CEOs usually have not created a succession plan.<\/p>\n
Maximizing Value<\/p>\n
If the owners of a company, many of whom may be outsiders, want to increase the value of their investment, they should, through the Board of Directors, try to overcome the company\u2019s weaknesses. On the other hand, the CEO may not be either capable or motivated to do so. The alternative is to implement a CEO succession plan, preferably with the cooperation of the current CEO. Kenneth Freeman\u2019s thesis in \u201cThe CEO\u2019s Real Legacy\u201d (Harvard Business Review, Nov 2004) is that the CEO\u2019s real legacy is implementing a succession plan.<\/p>\n
Freeman advises:<\/p>\n
\u201cYour true legacy as a CEO is what happens to the company after you leave the corner office.<\/p>\n
\u201cBegin early, look first inside your company for exceptional talent, see that candidates gain experience in all aspects of the business, help them develop the skills they\u2019ll need in the top job\u2026<\/p>\n
\u201cDuring good times, most boards simply don\u2019t want to talk about CEO succession\u2026During bad times when the board is ready to fire the CEO, it\u2019s too late to talk about a plan for smoothly passing the baton\u2026Succession planning is one of the best ways for you to ensure the long-term health of your company.\u201d<\/p>\n
Both buyers and sellers should assess the company\u2019s weaknesses. While some weaknesses are difficult to overcome, especially in the short term, one potential weakness that is very easy to overcome is to implement a succession plan\u2026especially during the company\u2019s good times before things go bad and it\u2019s too late.<\/p>\n
Looking to buy or sell a business in Dallas-Forth Worth? We can help. Fill out the Angel Brokers Group contact form on the right and we will be in touch with you shortly.<\/p>","protected":false},"excerpt":{"rendered":"
Take two seemingly identical companies with very similar financials, but one of the companies was worth substantially more than the other company. One company will sell for $10 million \u201cas is\u201d or some changes can be made and the same company can be sold for $15 million. Following is a partial list of potential company […]<\/p>\n","protected":false},"author":10,"featured_media":3764,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[63],"tags":[],"class_list":["post-3822","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-buyer-articles"],"yoast_head":"\n