An Ounce of Preparation = A Pound of Reward

As printed in the November, 2001 PetroGrowth Advisors Newsletter

It is always amazing how old truisms or their adaptations are still valid in today's business world.  The most telling phrase is "An ounce of prevention (read, preparation) equals a pound of cure (read, reward)".   In most transactions, the companies that have properly prepared their companies generally receive a better offer whether they are selling their company or seeking financing. Sometimes, this preparation could determine whether or not you even get an offer. 

 

While your company's preparation can take different forms, most acquirers or banks have an established list for their due diligence. It includes:

• Good corporate records and lien search.  Have you run a Credit Search on yourself lately? It takes time to clean up these reports.

• Third party engineering reports.  Some financing sources won't even look at you until this is done.

• Third party accounting.  While an audit would be great, any outside review also add credibility. This can take significant time so start early.

Physical inspection.  How do your properties or yard look? Remember, first impressions make a huge difference. Securing a Phase I would be even more impressive.

 

Each of these can be perceived as painful and, on the surface, costly. Most company owners are protective of having outside people in their business, but it is definitely better to have it done on their terms as opposed to later when bank auditors or buyers are in your office. The cost of some of the above services are also amazingly low - when compared to the benefit you can receive later. For example, doing an audit for $20,000 a year will ultimately be rewarded by a better sales price or better financing terms. If your benefit is as low as $100,000, that audit was a great investment!

 

But the key is timing.  If you wait until you have to have the above items, the cost and challenges will increase significantly. Starting early and showing some foresight will allow you to concentrate on the actual transaction when the time comes.

 

Case Study: American Energy Services  PetroGrowth Advisors recently advised American Energy Services ("AES") with its merger into Q Services. Being involved with AES over the past two years, PetroGrowth Advisors was able to assist in preparing AES for the process that resulted in the company receiving significant value in its financing and merger transactions. According to Lew Niewoehner, CEO of AES, "When we first started, we knew we would have to pattern ourselves after our larger competitors since our customers would be comparing us to them. That meant paying extra attention to the back-office parts of the company." These include:

• Third party audits for the company since its inception.  The resulting solid accounting records and procedures allowed for customized financial reports and ease with due diligence.

• Well consolidated company.  After completing several acquisitions, AES had coordinated its operations and had sound tracking mechanisms for its assets and financials. Most critical was blending the various cultures to form a unified style.

• Budget process.  Utilizing a ground-up budget, AES had a good understanding of its markets and its future performance. This was critical in educating banks and transaction partners.

• Clean, well organized locations.  Again, this sounds insignificant, but first impressions do count.

 

The preparation done by AES set a tone for the company's professionalism and quality. Niewoehner adds, "It's not enough to be good operationally. Your company has to look the part and be packaged correctly." As PetroGrowth Advisors brought in potential suitors and financing sources, there were minimal questions on the financials or management capabilities of the company. All of which lead to a successful transaction which achieved the objectives of the owners.