I have worked with a wide range of companies in the PCB, PCBA, and other tech and electronics sectors. Through the years, I have developed some ideas on how companies can improve their valuation. Some of these ideas are simple and involve little cost, other ideas are more long-term and involve more effort or investment.
In general, companies are valued on their profitability, growth, technology/know-how, reputation, and assets. Some of the main issues that detract from value, lower the amount of cash at closing, or limit the number of interested buyers are: customer concentration, key-person risk, poor financial reporting, under-investment, disorganized documentation, legal/employee/environmental issues, and poor appearance. Simply put, if you augment the positives and reduce or eliminate the negatives, the value of your company should increase and make it easier to sell in the future. With that in mind, here are 10 things you can do to increase the value of your shop:
1. Increase Sales Efforts: I talk to many companies in the PCB/PCBA space who make little or no sales efforts. These shops work to keep current customers satisfied, and find new customers through word of mouth or when engineers or purchasers change jobs. Some shops like to keep sales at a certain level to avoid investment in more equipment or hiring a second shift.
While it is admirable to be able to maintain customers without a sales staff, many buyers will deduct a certain amount from profitability by adding back sales and marketing expenses. Also, while stable revenues might be comfortable, buyers strongly prefer to see some increase in sales (and will pay more). If you are planning to sell within 2−3 years, try adding some sales resources. For example, outside reps can help uncover new opportunities and do not require a fixed investment. Make every employee a salesperson and motivate your staff to improve sales in any way possible.
2. Increase Promotional Activities: While advertising and trade shows can be expensive, other less expensive promotional ideas are writing articles, posting on LinkedIn, Facebook, or sending out newsletters via a mailing service. Some companies send out postcards or letters to potential customers. Work on getting your website’s Google results up. All these are relatively low cost, and can increase the visibility of your company (and increase sales).
3. Analyze Profitability by Product: Many shops do not analyze profits by product, or assume that some products will always have lower gross margins. It is important to analyze profitability by product and determine the reasons for low margins. Maybe you should raise prices on low margin products: I have found many companies lose money at the gross margin level on 5−30% of products. One company raised profitability by over 50% by eliminating low-margin products, either by raising prices, ‘firing’ low-margin customers, or by uncovering the causes for low margins or yields.
4. Regular Supplier Review: Our customers always seem to be asking for lower prices and better quality, but how often does your company review your suppliers? We should be just as or more demanding of our suppliers as our customers are with us. Are you taking advantage of early pay or bulk purchase discounts? Are you always receiving multiple bids, even on pencils? Review your suppliers on a monthly, quarterly, or at least annual basis to find better deals. These savings go straight to the bottom line.
5. Regular Expense Review: Similar to reviewing suppliers, how often do you review operating expenses? Companies often find hidden savings by periodically reviewing all expenses. Should you outsource some activities (for example, using a PEO instead of having a full-time HR person)? Are there ways to reduce power or water use? Ask your employees for ideas, and give out bonuses for cost-saving ideas. Give your purchasing manager incentives for reducing costs.
6. Reduce Key Person Risk: Many shops are too reliant on the owner: if you cannot take 10−14 days off without all hell breaking loose, you have key person risk. Buyers will lower the value of your company, or will insist that you work for several years during a transition. Your employees need to be trained to be able to run the company without you, or new managers need to be hired. However, do your investment banker a favor, and do not schedule your 14-day trip while we are selling your business.
7. Reduce Customer Concentration: This is a tough one, as typically a large customer demands extra resources, which does not allow the company to allocate resources to other customers. If any customer is over 20−25% of revenue, or if the top three customers combined are more than 50%, it can cause a reduction in value. This can also cause buyers to put less of the deal in cash at closing and more in deferred compensation, such as earnouts, seller notes, escrow, etc. Some ideas are to add incentives to sales staff or reps to find new customers. Sales teams should be reviewed often to make sure they are working to obtain new customers. Keep your eyes open or actively look for acquisitions of competitors who you can consolidate into your facility. Customer concentration almost always results in lower valuation and terms, or that customer leaves before or during the sale of the company, which can reduce value even more.
8) Mind your P’s and Q’s, Dot I’s and Cross T’s: It is good to periodically review contracts and agreements to make sure they are up to date and transferable to a buyer. Do you have NDAs and non-competes with your key employees? Do you have contracts with your outside reps or contractors, and are they still valid? Is your intellectual property documented and your brand trademarked? Do you have any verbal agreements with employees, suppliers, or customers? If so, these should be memorialized in an agreement. These are not only good business practices and will help avoid issues, but can help a deal go more smoothly once you have a buyer.
9. Keep Investing: Buyers will quickly know if you have kept up with investments in equipment, facilities, technology and training. While investments are costly, you should see a significant improvement in efficiency and capabilities. A well-educated and trained staff is more productive. Consider investing in energy-efficient lighting or even solar panels; tax credits are available, and many systems pay for themselves in under five years. Investments should be closely tied to goals, such as improved sales or profitability. Maybe your ‘friendly’ competitors or others can also use your equipment for a fee, which can increase service revenues for your shop (and effectively reduce the costs of equipment). Don’t forget to paint the building, keep up the parking lot and landscaping, and change the carpet occasionally.
10. Improve Financial Reporting: Small companies often have trouble producing clear, clean, and timely financial statements. Many cannot analyze financials or identify key performance indicators (KPIs). You do not need large SAP or Oracle systems to help tell you how many boards you sold in Walla Walla, and you do not need a high-power CFO from Harvard to get you financial statements by the third day after the end of the month. However, you should have financials by the 15th, and be able to respond quickly to inquiries such as ‘gross margin by top 10 products for past 3 years,’ for example. Financials do not need to be fully audited, but a less costly review by your CPA should be done for the three years prior to selling the company. Your CPA and systems should pay for themselves by identifying issues or by helping buyers feel more comfortable with your numbers.
Bonus! Evaluate Yourself, the Owner: For most businesses, the owner is key in many ways. Continuously evaluate your capabilities and goals, and add complementary abilities/employees as needed. As the business grows, no one person can be great at everything. Step back from your role as owner, and try to independently evaluate your performance and abilities. Of all factors, you have the greatest influence in whether the company can grow sales and profits, or will stagnate or fall backwards. Many owners find a lot of value in peer groups or independent advisors, who can help you evaluate what you and the business need to grow.
Every business is different, but in general the above methods should help you to improve the value of your business and make it easier to sell. Remember, every dollar that goes to adjusted EBITDA not only goes in your pocket, but gets multiplied by four, five or more times at closing.
Tom Kastner is president of GP Ventures, an M&A advisory services firm focused on the tech and electronics industries.