So, you want to sell your PCO business?
A three-point checklist to prepare your company for investors
One of the impacts of the COVID-19 pandemic during 2020 and 2021 was the business challenges it posed, leading many business owners to plan to sell their PCO to investors. However, I found a significant gap in investor requirements and seller expectations when interacting with potential sellers and buyers.
Over the past two decades, I went through several rounds of investor due diligence and one full transfer of ownership, which taught me the basics of stake divestment. Though potential investors evaluate businesses through accounting and legal due diligence, those two aspects are only parts of the overall evaluation. Any new business owner looks for a return from their purchase, and thus a PCO’s fitness to be a running concern in the future is the most important aspect of a stake sale.
Here are the primary aspects you must be ready for during due diligence.
Statutory compliance: Your company must be compliant with national, state, and local laws, which you must prove through licenses, license renewals, and with the status of any government notices and litigation. No investor will buy a non-compliant business though it may appear successfully through business numbers.
Accounting information: Your company’s accounting MIS reveals its financial health and is the most determinant of an investor’s decision to buy your company. There is no substitute for in-depth data on your business income, expenses, operating margin, overhead costs, and net profit. Investors rarely buy loss-making businesses as many Indian enterprises have awaited buyers in the past few years.
Customers: As a business fully depends on its customers for its income, you must not be surprised to find investor representatives interact with your customers to ascertain their satisfaction and continued patronage of your services. Be prepared to share details of any disputes with your customers that can impact a future company owner.
Employees: Employees are an affected party to a company’s sale to new investors. Due diligence generally involves employee interviews. Investors look for the continuation of key employees of an enterprise and would also like to know how happy they are working in your company.
Vendors: Suppliers to your organization are also stakeholders to its future, and investors will approach them to find out your buying patterns and payment record.
Assets: You must have detailed information on fixed assets and consumables as of the due diligence date, which you can share through inventory statements.
Deciding to sell your company may be easier, as preparing it even for investor verification is tougher. However, very few small businesses are likely to go through the process successfully. Whether or not your plan to dilute your stake in your business, operating your company through systems and processes enables you to manage it efficiently and later transfer its ownership at a good profit.
Here is my three-point checklist to decide whether you have everything to facilitate your company’s sales.
Information source: The most important requirement of an investor’s due diligence is information. You have addressed the most important concern if you can share your company’s business reports that give a clear picture of its status.
Modern businesses rely on software and digital data; hence you must invest in a suitable Enterprise Resource Planning (ERP) software to have a single instantly accessible data repository. On the other hand, MIS that relies on paper, office suite software, and multiple business applications is inefficient and could put off investors.
In large deals, investors commonly look for software like SAP ERP to ensure that the investee has a minimum level of system compliance and is fit for further evaluation. In the coming years, the pest management industry will also see the advent of standard ERP software that will help sellers and buyers transact smoothly. Both know that the use of such an application guarantees competence and professionalism.
Documented business practices: Like required in quality management systems (such as ones that follow the ISO standards), good businesses too must have fully documented business practices. Though PCOs like to work informally, investors won’t trust any undocumented.
The business must operate through policy, procedure, and instruction manuals that must be available, accessible, and current. More importantly, employees must know the company’s documentation and work according to it, which you can evidence through periodic audits and corrective and preventive actions after the audit’s completion.
Not just quality auditors but due diligence auditors also like to understand the processes for handling exceptions. A good enterprise has deviation procedures for exceptions and documents them till resolution. On the contrary, bad businesses have poor system compliance and excessive exceptions, which hinder the stake sale.
Financial evaluation parameters: There is no standard metric that determines saleability, but buyers’ common criteria include sales, operating margin, and net profit. However, additional parameters like market share, competition, customer loyalty (% of customer renewing contracts), debtors, creditors, doubtful debtors, employee productivity, industry growth prospects are also important that an investor may investigate.
I know PCO business owners who think they have a profitable enterprise without MIS to back up such a claim. Others expect hefty valuations from their business without any basis for optimistic expectations.
Most Indian PCOs would have difficulty preparing for due diligence by investors, let alone successfully go through the process. In this century, the purchase of a few PCOs by an MNC emboldened the Indian industry that they have a sizeable valuation in their enterprise. However, the Indian market has very low merger and acquisition (M&A) activity in the pest management industry.
I don’t know if we shall have heightened investor interest, including PCOs listing on the Indian stock exchange. As of March 2022, no PCO has been directly listed on the Indian stock exchanges. Further, the low sales are a disqualifier to approach the exchanges for small and medium enterprises (SMEs).
Indian or foreign PCOs must approach their business from the eyes of an investor, which will help the former better manage their business. If you assume that a due diligence auditor will verify your systems and processes someday, you will likely ensure that you operate better. With more effective management, your enterprise could become more profitable and sustainable.