From Cost Burden To Strategic Advantage
We’ve all been there. We want to put our house on the market, sell it quickly, do it without any headaches and get full-price offers from multiple buyers. In other words, we want the money and we want it fast so we can move on to the next phase of our life. Even though this article isn’t about selling your home (let’s leave that to your local real estate agents), it is about selling another big part of your life—your business.
Getting Your Business Ready to Sell
Smart home sellers usually have a plan to sell their home. They may chat with real estate agents and do some online research to prepare their home for sale. They look at the best features of their house, and perhaps repaint, lay new carpet or even replace some fixtures and appliances. It’s been proven that those important steps enhance the value of the house and get it sold quickly and for maximum dollar.
Because of the competitive nature of the promotional products industry, rising costs and shrinking margins, you might be thinking of joining the consolidation trend that has been going on in our industry for the past several years. Maybe it’s time to sell your business and use the money to buy that beautiful lakefront home you’ve always wanted. If you got a few bucks left over, you can even buy a sailboat to tie to the dock behind the house. All that luxury costs money, so you’ll need to maximize your sale price for your business. But your business isn’t in perfect shape.
In fact, it needs some fixing-up before you can sell it. You can try to sell it “as-is,” with all its problems and defects, but you won’t get what you think it’s worth and it will take longer to unload. After all, you want all the money you can get (and fast) so you can afford that lake house with the boat dock, remember?
So, much like getting your house ready to sell, you should get your business ready to sell by taking a close and honest look at what needs to be fixed and what areas need to be enhanced to maximize its “curb appeal” and value to a prospective buyer.
Compliance Can Be A Key Factor In Your Deal
In this new age of product safety and compliance, all of us have (hopefully) learned that our clients want and need to buy products that have been designed, made and tested to meet the strict product safety and environmental regulations that govern the consumer products space. The Consumer Product Safety Improvement Act (CPSIA), California’s Proposition 65, the Canadian Consumer Product Safety Act and other regulations have changed the way we source and market our products.
Social responsibility and environmental stewardship are other areas that aim to protect the people who make our products and protect the earth when it’s time to dispose of those products.
Much like prospective home buyers insisting that their new home have a large, formal dining room that will seat at least eight guests, many business buyers now include compliance as a key feature on their “must have” checklists when seeking out merger and acquisition targets for their companies.
Why would compliance be such an important factor when identifying an acquisition target?
• Buyers don’t want to buy risks; they want to be assured that the business will not come with potential lawsuits, product recalls or negative publicity;
• Buyers don’t want to do a major “remodel” of the business by having to implement major changes and invest in new testing and factory audits, and possibly having to overhaul the company’s supply chain;
• But buyers do want to immediately integrate the new business into its existing operations and begin selling the new product line to its current customers without any delays or disruptions caused by issues such as product and vendor compliance problems.
Prevent Due Diligence “Surprises”
Much like when a prospective home buyer has a professional home inspection done to look for defects such as leaky roofs, cracked foundations, poor plumbing, faulty electrical systems, mold or pests, a careful business buyer will conduct his or her own due diligence to minimize risk in buying a business so it won’t come with financial, legal and business liabilities that can diminish the value of the company or result in legal and/or financial exposure to third-parties such as governmental regulators, clients and consumers.
In the area of product safety compliance, here are some of the things a potential buyer will want you to produce for careful examination:
• Policy and procedure manuals, and written processes for product quality, safety, social compliance, environmental and supply-chain best practices; and other documentation including the following:
º Proof of implementation and validation of these policies and procedures;
º Vendor and factory agreements, terms and conditions, indemnities, insurance certificates, and other documents that impose responsibilities and duties on your vendors and suppliers;
º Signed Vendor Compliance Acknowledgements with clients;
º Product evaluations, risk assessments, product specifications, bills of materials and current safety testing;
º Vendor vetting and social accountability audits with completed corrective action plans;
º Product Inspection Specifications and reports.
• Staff training manuals and records to ensure that key members of your internal team are adequately trained in the company’s compliance policies and procedures. In addition to your compliance managers, the following management and staff teams should be well-versed in product and vendor compliance processes:
º Owners and senior management;
º Sourcing, vendor relations, operations, production and warehousing;
º Account managers, sales and customer service teams;
º For supplier companies: customer service representatives, art and order entry.
• Complete buy-in by your external stakeholders, vendors and service providers; these valuable partners should be very familiar with your company’s compliance program and its requirements and objectives:
º Key suppliers, vendors and factories;
º Third-party test labs, auditing and inspection firms;
º Outside legal counsel, accountants and consultants.
Create A Marketing Message With Compliance
When selling a home, what do sellers typically do? They not only fix up their homes, plant new flowers in the garden, get rid of the clutter and haul away the old junk from the garage, but they always have their agent post attractive photos and tell a good story about the home’s best features online and in sales brochures, right? Of course! So, when it comes time to sell your business, you too must tell a compelling story about why a buyer should buy your company instead of your competitor’s.
What are some of the best features of your business? Do you have fantastic products, great customers, double-digit growth, excellent profits, low or no debt, dedicated and loyal employees and an industry-leading compliance program to protect the company, its clients, employees and the public from liability, injury and reputational harm? Then promote these reasons as to why the buyer should buy it.
By promoting your company’s best qualities, including its excellent track record for product safety and vendor compliance, you enhance the attractiveness or “curb appeal” of your company to potential buyers, and can improve your chances of surviving the due diligence phase of the transaction without having to discount the price due to the lack of a compliance program or, even worse, after the buyer’s discovery of potential liability for product safety defects and violations for products you’ve already put out in
A Post-Close Short Story
More than a dozen years ago, I was associate general counsel and compliance officer for
a publicly-traded marketing and promotions agency in Los Angeles. We had just closed on the acquisition of a promotional products supplier based in Southern California. A few weeks into the integration of the new company, “Jeff,” who was one of the prior owners we kept on a contract to run his old company for us, called me and informed me that he’d received startling news.
There were numerous consumer complaints that the promotional flashlights the company sold to a national brand were overheating and melting during consumers’ use of the items. Because of a design defect in the flashlight wiring that caused an electrical short (and serious overheating to result), we now had on our hands a national recall of 450,000 defective flashlights from virtually every home improvement and hardware store in the U.S. The recall took more than six months to execute and cost our newly-acquired company hundreds of thousands of dollars in recall costs, plus the reimbursement of the cost of the products sold to the client. Luckily, no consumers got hurt and no one sued the company, or the costs could have been much higher.
Due to the timing of the deal, the flashlights had already been shipped to the end buyer when we closed on the purchase of the supplier, but the sellers had previously agreed to indemnify the acquiring company against all liability from products made and sold to customers prior to our closing. It was too late for us to review the product and to do testing prior to shipping.
Of course, this happened in the early 2000s, which was well before the passing of CPSIA and other safety regulations. I’m still not sure we would have found the defects in the item, but the moral of that story is that product safety (and potential liability) suddenly became a mergers and acquisitions issue for us, and we were forced to strengthen our due diligence review process after that recall. As for the sellers, well, they had to cough up the money for the recall and other costs related to the fiasco. Ouch! So much for buying that beautiful lakefront home with a dock for the sailboat.
Leeton Lee has been in the consumer products industry for nearly 25 years, starting as in-house legal counsel at The Walt Disney Company where, for seven years, he oversaw
the business and legal affairs of various Disney retail and marketing units and helped establish Disney’s highly respected Corporate Product Integrity Department.
After Disney, he served in various general counsel positions and has created and managed product compliance departments for other leading marketing and promotional products companies. Lee serves as a product safety consultant to the promotional products industry through his company ComplyBox, and is co-chair of PPAI’s Product Responsibility Action Group (PRAG). He holds a bachelor’s degree in business from Pepperdine University, and a law degree from Loyola Law School-Los Angeles.
Make Compliance Part Of Your M&A Strategy
1 Plan early to get your “house” in order before putting it on the market.
2 Conduct an objective analysis of your company to see what needs to be “fixed” to shorten your selling time and to maximize your value.
3 Use advisors, such as legal counsel, accountants and consultants, to help you fine-tune your strategy and coach you on the steps needed to become a sound and attractive investment for a buyer.
When potential buyers see a well-run and well-protected company, they will have greater confidence to pay top dollar for it. Don’t give them any excuse to offer less than your asking price due to flaws they may find during their due diligence. Business investors are usually not out looking for ‘fixer-uppers,’ they want to make a good ROI from day one. Help them to minimize their risk and help yourself to maximize your sales price.
More On Selling Your Business
Find previous PPB articles on selling your business by adding these story titles or author names to the search bar at pubs.ppai.org:
"Prepping Your Company For Sale" by Jamie Watson, MAS, CPA
"What’s a Good Deal?" by John Schimmoller, CPA
"Positioning Your Company For Sale", by Jeffry C. Meyer, MAS, CPA
"What’s Your Company Worth?" by Jeffry C. Meyer, MAS, CPA
Learn More At PPAI’s Product Responsibility Summit
Learn more best practices in product responsibility, plus ways to enhance your company’s program, at the seventh annual PPAI Product Responsibility Summit, September 18-20 in Newport Beach, California. The Summit offers two days of insightful education, plus an optional tour of the Port of Long Beach. Check out the education programming and register at www.ppai.org/summit.