Lipstick on a Pig

What a classic business owner’s decision:

COO to OWNER: “Our sales are hanging in there but not growing. Tariffs are cutting into our margins, and as current owners you prefer not to make significant capital investments.”

CEO to OWNER:  “Should we update our strategies and grow the company with minimal investment, or should we ‘put lipstick on a pig,’ and attempt to sell the company now before the picture looks even worse?

OWNER: “How much will the lipstick cost?”
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Owners of privately held companies ask this question all the time; sometimes annually for decades. We’ve assisted many of them to develop ownership scenarios. Along the way we’ve developed a different approach not just to lipstick, but to the overall cosmetics of  a potential acquisition.

Of course the typical “sell or hold” analysis looks at scenarios from the financial perspective. But what if that approach moves to the background, in favor of different stakeholder perspectives? Customers. Suppliers. Employees. The management teams.

The first three want continuity. Customers want support for the products they’ve purchased. Suppliers want to continue as a part of the supply chain that’s taken years to embed themselves in. And sure there will be duplicate jobs eliminated, but the employees hope they can just keep doing their jobs after the merger with minimal hassles changing health plans, payroll systems and time clocks.

Then there’s the perspective of both management teams. The team about to be acquired is already chasing aggressive financial goals. They’re gritting their teeth anticipating that sales and profit goals will be ratcheted up by the new owners. The acquiring management team is wondering how realistic the financial forecast are, and how to avoid the “post-acquisition stall” as they learn intricacies of the business they will soon own.

Here’s where the lipstick and cosmetics come in.  They’re usually applied with a PowerPoint deck, printed and bound, and laced with bullet points about the bright future the company faces.

We’ve had better luck with a different approach. It doesn’t increase the EBITDA multiple, but it often adds enough confidence for potential buyers that the deal goes through:

  1. Keep the financial calculations still in the background.  They can cloud the bright future.
  2. Morph the due diligence data into a higher-altitude information suite which the acquiring team will use for evolving the strategic direction. This also serves as the front-end of a strategic planning process.
  3. Then take the SPOT process seriously.  Not the way we learned it — by listing every strength, problem, opportunity and threat that we could think of, with some INTP in the room assigning probabilities to the opportunities.

This “lipstick” is a more transparent color: List and document the core strengths of the business, with annotations about which strengths really deserve investment (“which by the way is the reason that we’re selling the business, because at our age, we’re just not comfortable investing more capital or taking on more debt.”)

Keep the list of problems short, just summaries of struggles that are already nagging, the headwinds. And the threats can be limited to those that are about to raise their ugly heads, not disaster scenarios and intricate what-if’s.

  1. Opportunities are the core of this more transparent cosmetics approach. They build trust that will keep the deal momentum moving forward. Document and dimension the opportunities for growing into new customer segments, for extending product lines, for more relevant services and for efficiencies that investment will trigger. There’s an NDA in place, so go with full disclosure. Tell the opportunity story at a high altitude, not backed up and obscured with too much detail.
  2. Now the INTP’s can bring the financials forward again. They will look different with full disclosure about what investments are needed and what growth opportunities are real.
  3. If the management team to be acquired can be this transparent about the bright future, setting the strategic direction in a collaborative way becomes the first official act after the close, rather than increasing goals, merging health plans and changing payroll systems. It’s a process flow that offers continuity to customers, suppliers and employees at least for a while. They breathe deeply and keep the wheels of commerce turning, uninterrupted.
  4. As the management teams morph into an appropriate reporting relationship, the acquired team will learn about the new capital request forms (now on a digital platform). Someone appoints a few managers with thick skin to serve as an “air traffic control” function, as David Kerstein did when Bank One acquired two Texas Banks. The ATC served to set the pace for merger activities, one more mechanism to avoid a business stall with overwhelming distractions from well-intentioned staff groups in the acquiring business.

The first two phases of strategic planning take place before the sale and become the picture of a bright future that can be trusted. The third phase of planning takes place soon after the close. The others follow at a metered pace. That’s how value transfers seamlessly.

With this approach, the primary difference between holding and selling a business can often be the willingness to make additional growth investments and the timing of those investments.  If there’s a strategic plan in place, that’s the only difference, whether it is implemented by the current owners with minimal investment or by new owners who bring financial, human and technology resources to invest.

Rob Eskridge, President
Growth Management Center
gmc@agendas.net http://agendas.net/

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