What do Customers mean to your Corporate Exit Strategy?

Corporate Strategy - Customer Base

The key question when considering the value or sale of your company is how does the BUYER look at YOUR Customer base? A Strategic perspective is more relevant than tactical perspective.  So, Take a helicopter view.

Here are Six factors to consider…

Direct or Indirect?

Do you sell directly to your customers or do you sell through a third party?  Direct customers are customers you own and are likely to be “stickier”.  If you sell through a channel, you do not own the customers.  Your business is therefore less valuable to a buyer.

Customer Concentration

Look at your customer by annual revenues.  What % of your revenues are accounted for by your largest customer?

Largest Single Client – 80%, 50%, 20%?

If the answer is 80% – you have a problem if you lose this customer

If the answer is 50% – you are likely to move into losses if you lose this customer

If the answer is 20% or less, you have a more resilient (and valuable) business as you can probably weather the loss of this single customer.

What % of your revenues are accounted for by your Top 10 Customers?

Pareto’s [80:20] rule probably applies here.  If this is 80% or more you either have a small customer base or a highly concentrated one.  If the measure is below 50% buyers will be more comfortable that you have a sustainable business.

Recurring Customers or Recurring Revenues?

Do you have recurring revenues (e.g. support and maintenance contracts, software as a service) or recurring customers (i.e. customers whom you can demonstrate buy from you on a regular basis)

The first is contractual (1 year up to 5 years typically).  The second is not contractual but a good counter argument to the absence of recurring revenues.

Sector Concentration

When you group your customers by revenues and sectors – are there any clear sector concentrations.  Sectors often have different cyclical patterns.

Are your sectors in a growth phase or a retraction phase?

Are they supported by Government finance plans or likely to be adversely affected by cuts in Government spending?

Can you reference your sector experience as a marketing tool or to sell to other customers in the same sector?

Should you be looking to reduce sector concentration by seeking customers in other sectors?

Geographical Concentration/National – International

What are the geographical characteristics of your customer base?

Have you ever mapped them to find out?

What percentage of your clients are International (or could be if you offered to support them internationally)?

Do your customers have particular national concentrations?  Why? Is this representative of the location of your offices or your sales staff?  Could you gain more customers (and service existing customers at a lower cost) by opening another office based around a concentration of customers which may be some distance from your existing facilities.

Are your sales, operations and support staff aligned to the geographic spread of your customer base?

Additional Services?

What can the above tell you about devising a growth strategy?

What do you sell your customers today?

What can you sell them tomorrow?

What could you sell them in the way of additional products and services?

What is your share of their wallet spend?

When considering the value of your business it is important to look at your customer base in the same way as the buyer.  There are other ways to analyse customers and we may return to this topic in the future.

6MS - What do your customers mean to your EXIT Strategy?

In the meantime, I would really like to hear your views and get your perspective.

Please add comments or contact me directly.  If you like this – please RT!

Six Minute Strategist – A Mini Guide to Selling a Company Part 2

Welcome to Part 2 of my mini guide to Selling a Company.  I hope you found Part 1 interesting.

In this post I shall be covering the topics of Proceeds, Process and Proposal.

Stage 4 – Proceeds

Six Minute Strategist - Proceeds

1. Valuation – Evaluate and establish the likely valuation of the company – understand the history, current trading and forecasts along with risk factors

2. Acceptable Outcomes – Agree in advance the acceptable outcomes of the proceeds – all shareholders to commit to this

3. Nature of Proceeds – Discuss and agree the nature of acceptable proceeds – cash, shares, loan notes etc.  Different shareholders may have different priorities

4. Comparable Transactions – Consider comparable transactions and valuations

5. Valuation History – Measure against historic investment and valuation

6. Ability to Pay – Evaluate the ability and inclination to pay against the potential acquisition partners – consider historic transactions, funding, access to capital markets, current balance sheet strength

Stage 5 – Process

Six Minute Strategist - Processs

1. Contact – Contact buyers – identify and contact key executives in buyers, distribute teaser, sign NDA, issue Information Memoranda, answer questions for further information

2. Indicative Response – Request indications of interest and value – issue a standard set of terms asking potential partners to scope their proposals within this framework

3. Short List – Establish short list of potential partners – negotiate terms with short list – then move negotiations with limited number (1,2 or 3) into due diligence phase, key conditions, evidence of finance (ability to pay)

4. Stage 1 Due Diligence – Prepare and issue first draft of sale and purchase agreement – vendors lawyers to prepare – provide access to data room (possibly on a limited basis – data room 1) to potential buyers, management presentations and site visits if appropriate

5. Stage 2  Due Diligence – Exclusivity and time table to completion; complete due diligence (data room 2) and finalise negotiations with purchaser.

6. Close – Complete sale and manage communication with external and internal stakeholders – shareholders, management and employees

Stage 6 – Proposal

Six Minute Strategist - Proposal

Adviser’s Engagement Terms should cover:

1. Retainer – Monthly Retainer

2. Success Fees – Min Success fee

3. Ratchet – Success Ratchet

4. Costs & Expenses – Reasonable costs and expenses

5. Progress Reports – Regular progress reports

6. Alignment of Interest – Fee structure aimed at aligning interests of Adviser with shareholders

I hope you have found these two posts helpful.  I have uploaded the presentation to Slideshare. If you like this please post a tweet to spread the word.  Thank you.

Selling a Company – A Mini Guide Part 1

I have recently been asked to prepare a proposal for a client regarding a sale mandate.  I wanted to create a presentation using my Six Minute Strategist methodology to explain the sale process and how I would go about  it.

It then struck me that this might be of interest to my fellow bloggers and readers so here is part 1 of 2

The Six Minute Strategist Mini Guide to Selling a Company

This is the top level hexagon.

Company Sale 6MS Hexagon

The Six elements of the process are:

1. Planning

2. Preparation

3. Partners

4. Proceeds

5. Process

6. Proposal.

In this Part 1 I will cover the first three and in Part 2 I will then cover the second three.  I will also post the whole presentation on Slideshare to make it easy to download – under a creative commons licence.

Stage 1 – Planning Stage

Six Minute Strategist - Planning Stage

1. Core Team – Agree core transaction team – adviser, external and internal shareholders – key to managing impact on management and employees

2. Objectives – Establish the objectives of the sale process

3. Options – Consider the range of options – merger, spin off, sale to strategic partner, sale to financial partner, recapitalisation, acquisition, IPO, status quo

4. Approach – Evaluate the approach to the sale process; targeted rifle shot, limited auction, broad auction

5. Consensus – Agree the objectives of all shareholders and ensure that there is a consensus; management commitment of time to the process is essential; future of management post sale

6. Other Advisers –  Agree on accounting and legal advisers – appoint when appropriate

Stage 2 – Preparation

Six Minute Strategist - Preparation Stage

1. Positioning – Establish company positioning and selling thesis

2. Documentation – Prepare and verify documentation – teaser, information memorandum, financial projections, sale process letter, list of data room contents

3. Management Presentation – Prepare management presentation for potential buyers – an opportunity for management to showcase themselves as much as the company

4. Data Room – Prepare data room for the due diligence process; legal, accounting, environmental, pension, contracts and loan agreements (change of control), regulatory issues

5. Communication – Consider PR and internal communication issues

6. Timetable – Agree timetable for the process – evaluate impact of public holidays and management vacation plans

Stage 3 – Partners

Six Minute Strategist - Selecting Potential Partners

1. Positioning – Establish the market positioning of the company

2. Company USPs – Identify and classify its USPs and strategic positioning

3. Segment Matching – Match the company to the broad market and compatible segments of the market

4. Segment Extension – Identify adjacent categories where the company can offer product, service, geographic or sector extension to a potential partner

5. Long List – Screen databases to create long list of potential partners

6. Tiered Short List – Narrow Long List to Tier A and Tier B short list of potential partners – on a global basis

In the style of the Six Minute Strategist, this outline is brief and I hope it provides a helpful structure to anyone considering a company sale.

I have uploaded the Presentation to Slideshare.

Please contact me or leave a comment if you find this interesting.  In my next post I will cover Proceeds, Process and Proposal.