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October 26, 2016

Upon selling a company, management teams and their owners often attempt to increase exit value by adjusting EBITDA for the full-year benefit of operational and other initiatives.  However, in order to maximize the value of these initiatives, sellers should begin implementation in advance of the sale process so the benefits can be demonstrated in a meaningful way.  A&M’s Rino Nori and Jeff Schlosser explain what companies should do well in advance of a sale process to maximize their exit value.

Timing and measuring improvement initiatives

Management teams, owners, and investment banks often try to present their target assets to prospective buyers in the best possible light.  The strength of the management team, market position, recent successes and potential future opportunities are often highlighted.  In addition to these qualitative investment highlights, bidders are often asked to value the company based on EBITDA that has been adjusted for non-recurring, out-of-period, or non-operating items.

In presenting adjusted EBITDA, sellers are increasingly attempting to capture value for the full-year impact of operational or other improvement initiatives.  However, these initiatives often fall into the following categories: (i) they are not implemented, (ii) they were recently implemented and the track record for their success is limited, or (iii) unforeseen adverse side effects diminish their effectiveness.  Sophisticated buyers and their advisors are often quick to highlight these shortcomings and discount their bid accordingly. 

Well-planned and careful implementation of operational improvement initiatives is important, but the timing of execution is also important. Initiatives should be implemented several months before a sale process occurs such that the results can be sufficiently demonstrated and valued.  As a rule of thumb, the impact of initiatives should be transparent in at least one or two quarters of actual results

Once the initiatives are implemented, the Company should have a process in place to monitor and measure the financial success of the initiatives.  If being asked to place value on the initiatives, bidders will “want to see the evidence” in the financial results. Are the initiatives working? Have input costs decreased as planned? Have back office savings occurred?  Are there any adverse effects?  What metrics have improved?  Which ones have declined?  Are the improvements temporary? Are there remaining capital costs? Is a simple full year extrapolation of the cost savings justified, or is a more detailed approach warranted?

Types of initiatives

Many of these initiatives are often classified as Performance Improvement activities, typically focused on supply chain or back office costs. Another area where sellers look to capitalize on potential future EBITDA is on the revenue side, specifically related to “pipeline” revenue. These areas are further described below, but as mentioned above, are often aspirational at best, vaguely defendable, or complete fantasy.

Supply Chain Performance Improvement

Supply chain performance improvement projects often focus on reducing costs and improving efficiencies. Examples include:

  • Direct and indirect material cost reductions
  • Direct labor reductions
  • Manufacturing overhead cost reductions
  • Operational efficiencies that compound the reductions in labor, raw material, and overhead costs
  • “Make vs. buy”

The seller must demonstrate not only if the projects are planned, in flight, or complete, but must also be able quantify the benefit and how those dollars flow into the financial statements. Too often, supply chain performance improvement projects are loosely tracked and there’s often little to no coordination with the finance team to ensure the benefit can be identified and correctly attributed to the initiatives that created them.

In the case of “make vs. buy” decisions, a seller must illustrate that the “total cost” of production has been factored into to determining if the initiative is beneficial.  For example, even though input costs per unit (material and labor) often seem lower than buying a finished good from a supplier, what is often forgotten is the “total cost” of production – fixed and variable overhead, inventory, cost of capital, scrap, etc.  The seller must demonstrate complete knowledge of what goes into their decisions including a complete cost waterfall in the comparison of sourcing alternatives.

Back Office Performance Improvement

Back office performance improvement projects typically focus on the following:

  • Headcount reductions
  • Outsourcing of certain functions or parts of functions (e.g. Payroll, HR, Accounts Payable)
  • Systems integration / ERP / CRM implementations

The seller needs to demonstrate why the actions are being considered/executed upon, not just how. Cuts too deep in headcount or taking on expensive systems implementations prior to a sale can often lead to a nasty surprise post-close when the new owner recognizes what they bought needs significant further investment, CapEx or additional headcount to be viable. Sellers should carefully plan and implement major outsourcing initiatives and ensure they communicate what those operational changes mean for the business as a whole. Sometimes actions taken and completed in this area can have a lag effect and manifest later as a real operational challenge – sellers should make sure their story about why they chose a certain direction includes assurances on avoidance of disruptions in the future.

Revenue-related initiatives

Another area a seller can maximize value is with revenue-related initiatives. Very often these initiatives come in 3 forms:

  1. Revenue upside on current customers
  2. Revenue related to “new projects”
  3. Revenue related to “new products”

Current customer revenue trends are easy to highlight to bidders, through trends within the historical financial statements, existing purchase orders, or other methods. However, future growth is often more difficult to demonstrate and quantify.  Proving additional upside with existing customers is often a challenge.  However, providing actual evidence that upside revenue is forthcoming – email confirmations, contract extensions, RFP results, etc., will help bidders get more comfortable with future upside.

Demonstrating new project revenue is also tricky – usually related to an RFP that the seller has responded to or potentially has even “won”. Customers notoriously bid out volumes that are also aspirational and/or optimistic.  A seller must demonstrate that it isn’t necessarily banking on the full order volume materializing, or banking on winning an entire bid.  The assumptions, until they are real, must be balanced and realistic.

Finally, sellers must demonstrate that future revenue related to new products is materially free of execution risk.  New products are often delayed, do not perform as promised, are more expensive to produce, require regulatory or other 3rd party approval, and/or experience other uncontrollable factors. The bottom line is sellers must demonstrate that revenue growth from new products is viable and backed by customer demand.


Sellers want to maximize exit value and will often try to do this by asking bidders to pay for the full benefit of certain initiatives. However, the burden of proof usually remains with the seller.  Careful and early preparation is key.  Buyers who can confidently determine where and when the benefits from performance improvement initiatives will be realized WILL pay for some of it at close.  Knowing how to prepare, what questions will be asked, what the burden of proof is going to be – these are the key skillsets required prior to and during the transaction to ensure maximum transaction value.