Pepperdine’s 2016 Private Capital Markets Report[1], which measures private middle-market company M&A activity and cost of capital across the United States each year, reminds us that just like in previous years “approximately 35% of deals terminated without transacting over the past year.” Of those that did transact about half involved lower EBIDTA multiples, contingent earnouts, or required seller financing. And many estimate that a majority of companies never make it to be included in these statistics as investment bankers decline to engage those with a low probability of finding a buyer. They tell them, “you just aren’t ready.”
While this may seem to contradict other reports that private equity groups are amassing large piles of cash that they can’t figure out how to spend, it reveals a harsh reality.
There is an almost binary phenomenon that leads best-in-class companies to be chased by potential buyers and their piles of cash, while the others get left begging for a buyer. There’s almost no middle ground.
What separates the best-in-class companies from others? In our experience, those companies that have team collaboration and balanced functional strengths in Planning, Leadership, Sales, Marketing, People, Operations, Finance, and Legal (all of them—not just the ones the founder happens to be strong in) can create saliently higher market values.
Furthermore, those management teams that live by a purposeful mission and vision, and can clearly articulate the strategy through which they differentiate themselves and emerge from their competitors, can often more than double their company’s value.
The others get left in a place affectionately known as “commodity hell.” It’s a place “where everyone has access to the same resources and talent, where the Web is the great equalizer, and where the market’s twin foundations are imitation and commoditization.” Managers of these companies often end up chasing value-destroying, non-strategic revenue or cutting the wrong costs to put lipstick on a pig in the months leading up to a sale. It doesn’t work, and these companies end up selling for miniscule multiples or not at all.
Becoming a best-in-class organization takes time. So as we kick off 2017 and guide our organizations to new heights, we should consider adding a few important items to our list of New Year’s resolutions.
1. Take a deep dive assessment of every functional area of your company. Evidence of maturity in each area should be in the form of written plans and memos that have been disseminated throughout the organization. If plans exist only in your managers’ heads, odds are high that your team isn’t aligned.
2. Establish a mission and vision to align your company. This isn’t an academic exercise that produces a statement framed on a wall never to be read again. It defines your organization’s reason for existing and is lived by the entire team every day. If you believe you’ve already done this exercise, bring your management team in tomorrow, turn the frame around, and ask them to write down the company’s mission and vision. If they can’t do it, then you don’t have one.
3. Schedule sessions with your entire management team to go beyond the mission and vision and develop your full strategic plan for this year. This should include how you will address all deficiencies in your deep dive assessment and accountabilities for each objective. If you believe you’ve already done this: ask one of your front-line employees what the strategic plan is and what objective he is currently working on. If he looks back at you with a blank stare, then you’ve created a culture that is less than best-in-class.
Whether you conduct these steps on your own or with the assistance of outsourced experts, they need to be done. It’s time to get to work.
[1] https://bschool.pepperdine.edu/about/people/faculty/appliedresearch/research/pcmsurvey/content/2016-private-capital-markets-report.pdf
