Getting Lean, Mean, and Clean in Advance of a Sale or Transition

Getting your business “Exit-Ready” in advance of a sale or transition takes a different mindset - one that could be described as getting “Lean, Mean and Clean”.  Lean, mean, and clean businesses are not only more saleable but will also attract a larger set of potential buyers that will help drive value and exit choices for the seller.  Transitioning a business to the next generation or to new management is also likely to be smoother and more successful when all the business affairs are rationalized, simplified, and well organized.

Every business owner and management team strives to keep purchasing expenses in line, however, often the majority of the time and effort is spent with the key suppliers, i.e. the 20% of the suppliers that make up 80% of the purchases.  According to Expense Reduction Analysts’ Tony Davies, the savings that are possible from expenses derived from the other 80% of suppliers, what he calls the “Tail Spend”, can be ripe for improvement.  Most businesses can reduce their Tail Spend by somewhere between 10 and 40%.  These expenses typically include things like waster management contracts, janitorial/office cleaning services, pest control, cell/telecom services, etc.  A systematic review can yield results that translate directly to the bottom line, as well as drive the value of the business.  Incorporating a Tail Spend monitoring process will also drive enterprise value and its marketability.

The opportunities to make a business leaner and meaner can extend well beyond expense reduction strategies with suppliers.  Are there redundant assets that can be disposed of to generate some cash?  Should the real property be sold and leased back?  Can you tighten your working capital needs with just-in-time inventory management or take advantage of supplier payment terms?  It is always advisable to make sure the business is not carrying excess working capital unless it is in the form of cash or cash equivalents.

Getting leaner and meaner may also involve the streamlining of the products and services you offer, by discontinuing lower margin products.  It may mean a greater focus on specific markets or customers and letting go of underperforming divisions or firing unprofitable customers.  It may mean raising the bar for the minimum return expectations for new expansionary capital expenditures, the entry of new markets, or the launch of new products.

Cleaning up the balance sheet well in advance of a potential sale or transition is also advisable. Perhaps there is goodwill or non-performing investments that should be written off.  Implementing a regular process to assess inventory turns by SKU or product line can help improve the management of slow-moving inventory or help to ensure obsolete inventory is written off or written down when appropriate.

Cleaning up the business physically can also make a business more marketable.  That doesn’t necessarily mean undertaking extensive office renovations, for example, but rather thinking through the best way to “stage” the business, like a realtor may stage a home before listing it.  We all know that you only get one chance to make a good first impression and it is amazing how that can translate into confidence by the buyer that they are acquiring a quality, well-run business.

Cleaning up the business can also entail updating and modernizing safety programs, standard operating procedures, supplier agreements, etc.
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Businesses in the lower-middle market are often quite lean when it comes to personnel, but an “over-stretched” workforce has little capacity to focus on becoming leaner, meaner, and cleaner. Sometimes the best approach may be to strengthen the management bench, fill in some personnel gaps, or reorganize the team before a sale or transition.  In other words, you may need to take one step back to move two steps forward but a well-trained workforce with a solid management team and well-defined roles, responsibilities, and incentives, may be the epitome of a “clean” business.

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