March 2018 | Przegląd Piekarski i Cukierniczy (Baking and Confectionery Review)
SELLING THE COMPANY
The sale of a company is a complex, difficult operation, burdened with a great emotional charge, which does not remain without influence on the final sale price.
The active presence of external specialists will lower the emotions and introduce the indispensable objectivity and calm. Nothing, however, will replace the time devoted to preparing the bakery for sale.
It may seem surprising, but there are investors who estimate the value of the next sale of a company after the changes they will make, even before they buy that company. These are speculative funds. However strange such an attitude may seem to an ordinary entrepreneur, it must be admitted that it is practical in the context of multiplying money through the rapid building of a company’s value.
A prospering bakery or confectioner’s shop should be prepared for sale over a long period with a view to its market value. This of course concerns to a greater degree enterprises with significant production and sales potential. Time is an enormous ally in this process. In order to raise the company’s value, one has to concentrate on most or all of the areas listed below.
W-MOSZCZYNSKI ppic 3-18Before we move on to discussing the successive points, I would like to emphasise that there are various groups of investors. The value of a bakery will be assessed differently by speculators specialised in trading in real estate, differently by private equity funds, and differently by competitors wishing to enlarge their sales market. The points below concern above all the assessment of value by business investors who are not interested in speculative activity, but in continuing bakery or confectionery production.
Area one: the role of the company owner
If the sudden disappearance of the owner means the immediate and inevitable collapse of the company, then it can be said that this company cannot be sold on market terms, but only on the terms of its liquidation. In other words, the owner of the company constitutes close to 80% of the company’s value, and their departure has catastrophic consequences for the value of the bakery or confectioner’s shop. The role of the owner in the life of the company should be limited as quickly as possible in favour of employed persons or of experts acquired from outside. This is where one would have to begin, because the sudden death of the owner or their exclusion from professional activity may lead to the collapse of the bakery and to a difficult material situation for the family. This is the first point and rather the most difficult of all. Its realisation may take months and years; unfortunately it is indispensable in the process of building value.
Area two: diversification of the sources of revenue
The concentration of the sources of income on a few products, on a group of strategic customers or on a few points of sale is perceived by investors as a risk which significantly lowers the company’s value. In bakeries it is usually the case that one kind of bread accounts for 80% of the value of sales. In a chain of confectioners’ shops, 20% of the retail outlets account for 80% of the revenues. In large bakeries there often appear several large wholesale customers who buy for their retail chains as much as 50% of the bakery’s or confectioner’s shop’s daily production. If now the lease agreements for the best retail sales outlets are terminated, if the strategic customers break the contract for the supply of bread from one day to the next, the bakery may lose financial liquidity and go bankrupt. It should be remembered that investors prefer companies burdened with the lowest possible risk. Sales should therefore be diversified in a sensible way; one may think about new products, new possibilities of production technology (I have in mind here, among other things, the use of deep freezing), a reorganisation of the present sales network, or the employment of several sales representatives to look for new customers.
Area three: company money and family money
Although the owner often regards their company as their home, in essence the owner and the company have separate legal statuses. Lending money to the company and using the company account as a credit institution for the owner is perceived negatively by investors. Taking sums from the company account for one’s own needs is inadmissible. Despite this, it is not rare to hear that mixing household and company money is an advantage of family companies, because, in contrast to rigid corporate formalities, it is a simple and effective method of improving liquidity.
Regardless of this opinion, investors who are interested in buying the company will quickly notice such a practice. In their assessment it will testify to low accounting discipline in the company and will probably result in a lowering of the company’s market value. Free shopping in the company shops by members of the owner’s family will be assessed similarly.
That is why, before proceeding to the sale of the company, such behaviour has to be discontinued.
While one is at it, the company should also be cleansed of every kind of connection between the owner’s private life and their company. All items unconnected with the company’s activity should disappear for ever from the company’s accounts, and likewise the use of company cars by persons who are not employees of the company, or their use for purposes unconnected with the business. Although this does not sound very attractive to owners, separating the company’s finances from the family’s finances will result in an increase in the company’s value.
Area four: financial indicators
Typical entrepreneurs are interested above all in buying so-called healthy companies, which they will not then have to restructure. In order to measure the financial condition of one’s confectioner’s shop or bakery, financial and quantitative indicators have to be introduced. In financial jargon they are called KPIs, from the words: Key Performance Indicator.
Their development and monthly calculation can be commissioned from the bookkeeper. Thanks to this the owner has a chance to observe and improve the quality of the finances in their company constantly, every month, in accordance with the principle: „what is measurable is manageable”. I assure you that the first thing the experts working for the buyer will do will be precisely to calculate the financial indicators and to check the golden balance-sheet rule.
In this issue we have discussed four of the thirteen areas in which the company’s value is concentrated.
Given time and determination, one can build up significant value in these areas or, looking at it from the other side, protect the bakery from an undeserved fall in its value in the eyes of investors.
In the next issue I will discuss the further areas of the company’s value.
Wojciech Moszczyński
owner of the consulting company SPC Equity Council
Wojciech Moszczyński — graduate of the Department of Econometrics and Statistics of Nicolaus Copernicus University in Toruń; specialist in econometrics, finance, data science, and management accounting. He specializes in the optimization of production and logistics processes. He conducts research in the area of the development and application of artificial intelligence. For years he has been engaged in the popularization of machine learning and data science in business environments.
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