How to sell your own company well? (part 1)

January 2018 | Przegląd Piekarski i Cukierniczy (Baking and Confectionery Review)

SELLING THE COMPANY

The owner of a prospering bakery or confectioner’s shop must sooner or later reckon with leaving the company. The reason for leaving the company may be age, state of health, or simply the wish to retire in order to enjoy life while strength still permits.

One can consciously leave a company in two ways: either close it down and sell off its assets for a song, or sell it on one’s own terms.

Unfortunately, selling off the company’s assets is the most popular form of the owner’s exit from active business. This happens because most often the owners are unable to sell their confectioner’s shops or bakeries. Entrepreneurs base themselves on the correct conviction that their company rests on them. Their leaving the workshop will unambiguously mean a decline in quality, in the organisation of work, and finally the collapse of the whole bakery together with its sales network.

It does not have to be like that at all! A prospering bakery can be sold for a great deal of money. The condition is preparing for the sale sufficiently early; one has to set out a plan which will bring the bakery or the confectioner’s shop to a level at which its value will increase radically.

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The value of a bakery or a confectioner’s shop is above all the ability to generate cash. In terms of valuation these entities do not differ from other enterprises.

In a bakery and a confectioner’s shop, cash is generated above all by the organised work of the people who manufacture the products and sell them. It should be added that the cash turnover is very fast, as a result of which these entities rarely make use of working capital loans.

If an entrepreneur decides to close the bakery and then sell off its assets, they throw away what is its greatest value – the company’s brand, then the organisation, the organised sales network, the system of deliveries and of collecting returns, the distribution contracts and the accounting system. Selling off a company means giving it away for a fraction of its value. It is enough to consider what cost the most work in building up the confectioner’s shop: buying the machines and the real estate, or organising all of it into one living organism and keeping it in hand for many years? It is obvious that such work must not be wasted. One must not write off as a loss a good brand, punctuality and organisation, the loyalty of the employees attached to the company, the customers and other intangible values, which usually constitute about 80% of the value of the enterprise.

Unfortunately, an enormous number of bakeries and confectioners’ shops collapse because of a loss of profitability. Such companies are not suitable for sale, but for liquidation and the selling off of the components of their assets.

Those companies which are prospering excellently should be sold at the moment chosen by the owner and on the financial terms which they have determined.

Meanwhile the most frequent reasons for the sale of prospering bakeries and confectioners’ shops in Poland are: illness, old age or the sudden death of the owner. It is hard to imagine worse circumstances for a sale. A sudden sale of a company is a very stressful undertaking, which may worsen the owner’s state of health.

Specialised private equity funds buy up such small food manufacturers and, at minimal cost, raise their market value several times over, in order to sell them within a short time.

The question arises: why did the owner not take care of raising the company’s value themselves sufficiently early? Why did they put off the sale of the bakery, although it had long seemed inevitable?

It may seem a truism, but the market value of most family companies can be multiplied many times over by applying simple and effective economic measures.

Often the owners of companies do not know where to begin. There is a series of steps which have to be carried out in order to prepare a company for sale.

I will mention only three which I consider the most important.

• First of all, one has to bring about a situation in which the company is capable of being sold. If the company is its owner, then the owner’s leaving the company means its imminent collapse – the collapse of the good brand, of the organisation of work and of sales. For a potential investor such a company is worth as much as the value of its fixed assets, and only that much. Efforts have to be undertaken with the aim of making the company independent.
• The next step in building up the company’s value is the identification of its barriers and bottlenecks. My experience shows that a simple change in the pattern of operation, the unblocking of some area, can significantly increase within a few months the value of the cash flows, and thereby the value of the whole company. What is interesting is that the owners of companies most often do not see what even novice external consultants notice immediately. This phenomenon is quite well documented and results from the so-called cognitive biases.
• The next, third step is determining the company’s potential. If a manufacturer is working at a fraction of its manufacturing potential, then it constitutes a tasty morsel for speculative funds, because multiplying the company’s value is then very simple. I have mentioned this because it appears from my observations that a great many chains of confectioners’ shops or bakeries possess large but unused potential. They stop halfway along the road of their development and for some reasons do not take the next step. The halting of development is usually not connected with any tangible, identifiable barrier to development, but with the will of the owner.

Building up a company’s value with a future sale in mind is not a comfortable process for the owners. Particularly difficult is the introduction into the company of managers who „know better”… This is extremely uncomfortable and requires great tolerance and patience. Departing from habits and customs, taking decisions which would seem economically irrational, or costly renovations of buildings – this is the road leading to obtaining a high sale price. A sale which may turn out to be the beginning of life at a different level and on different terms. A sale at the time indicated by the owner and at the price determined by them.

Wojciech Moszczyński
owner of the consulting company K12 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.