Reflections

Deal professionals will tell you to avoid them, yet many deals include them

When you sell your company one day, you of course want to receive the purchase price offer by the acquirer in an all cash at closing transaction. Then why do so many deals involve an earnout?

What is an earnout? It’s a mechanism used in mergers & acquisitions where the acquirer establishes a plan for the seller to earn some or all of the purchase price for the company at a future date, based on future performance. In other words, the acquirer is going to take ownership of your business but you’re going to have to meet certain performance requirements before they will pay you all that you expected.

What is an earnout? It’s a mechanism used in mergers & acquisitions where the acquirer establishes a plan for the seller to earn some or all of the purchase price for the company at a future date, based on future performance. In other words, the acquirer is going to take ownership of your business but you’re going to have to meet certain performance requirements before they will pay you all that you expected.

Sounds like this greatly favors the acquirer and not the seller and you’re correct. So then why are earnouts so common?

There are generally two reasons acquirers will turn to using an earnout in their offer. One reason is to bridge a gap between what you believe your business is worth and what they do. The acquirer will make a cash offer for the amount they believe your business is worth but then bridge the gap with an earnout that allows you to potentially earn the difference in subsequent months or even years. Another reason they will use earnouts is if they see a risk in your business and they aren’t willing to accept all of it and want you to continue owning some. They might believe there is risk in your growth forecast or there might be a meaningful customer or contract that is up for renewal in the near term and losing it could impact your business so the acquirer has you share in the risk with the use of an earnout until you know whether the renewal will occur.

Generally, earnouts are disliked because sellers will often tell you they didn’t receive their earnout so the portion of their exit payout was never received. They are also disliked because there could be confusion over how the earnout will be managed and calculated, leading to potential legal disputes post transaction.  But, acquirer’s have to represent their best interest and those of their shareholders and earnouts can be a useful tool for them. But here is the key – as part of your exit preparations 2 or more years in advance of trying to exit, prepare to present a business that has low risk so you can take away the reasons an acquirer will want to use an earnout model.

Contact us and we can help you identify where there is potential risk in your business and help you identify steps you can take to either eliminate or at least minimize it.

When you sell your business, you’ll want to have great clarity on these

When the day comes you begin talking with potential acquirers, a key question they will have pertains to what your “adjusted” EBITDA is (Earnings Before Interest, Tax, Depreciation and Amortization). Your EBITDA will be reflected on your profit & loss statement and the acquirer will want to know if this number is reflective of any addbacks or takebacks that they should know about.

An acquirer will look at the cash flows of your business and will use EBITDA as a proxy for this. And what they will want to have great clarity on is if they own the business, what costs might be adjusted that they may or may not incur if they own it. An Addback is a cost that you’re incurring in owning/running your business that they will not. A Takeback is a cost you’re not incurring but they will. As they analyze both of these as it relates to their potential ownership, they will model what they think your company EBITDA might be under their ownership.

Example of a Takeback:

Facility Rent – this becomes a takeback, or a negative adjustment to your EBITDA (meaning, it gets subtracted from your EBITDA as a negative adjustment) if you are not reflecting market rent in the current costs of operating your business. This is common when a business owner also owns the facility they are operating in. Because they own the business and the facility, they don’t charge the business any rent or they give the company a break on the rent. The acquirer will have to pay a full rent so they would adjust your EBITDA downward in their model given you aren’t accurately reflecting it currently.

Material/Supply Costs – let’s say you purchase a raw material or an important supply from a friend’s company and they are cutting you a deal in purchasing something from them. The acquirer most likely won’t get this friends and family discount as they will have to pay a higher market rate that will be adjusted upward when they take ownership of your company. This would then be a negative adjustment to your EBITDA. If the benefit you are deriving is saving you $250,000 annually, then your EBITDA is then adjusted downward by this same amount.

Example of an Addback:

Owner Compensation – an acquirer will look to see if perhaps as the company owner you are paying yourself an above market compensation level and when they replace you, it will cost them less to do so. This would then adjust your EBITDA upward and help you get a higher valuation because the exit multiple they will pay will then be based on using this adjusted, higher EBITDA number. Note, this can also become a takeback if you pay yourself below market rate and they will replace you with someone that must be paid more.

Owner Perks – perhaps you have a company car for yourself and your spouse and cell phones the company pays for and even potentially a club membership. The acquirer may determine that these types of perks won’t be extended under their ownership and will add this amount to your EBITDA, therefore raising it.

There are many potential Addbacks and Takebacks in any business and a preparation step for any owner is to analyze well in advance of talking with potential acquirers what these are.  Use time as a friend to start tracking these today so you can command a higher valuation for your business. And you want to avoid the disappointment and surprise when the acquirer points out takebacks they have discovered during their due diligence and therefore are going to offer a lower valuation than you were expecting. Call us and we can provide you a schedule of EBITDA adjustments to consider for your business.

A future acquirer will assess your culture, build one that will excite them

When the day arrives that you want to sell your business, owners and CEO’s are expecting the due diligence they will get on their company financials but are often surprised with the aspects that may relate to their organization culture. If the acquirer is acquiring not just your horse (your business) but they are investing in the jockey (the team), then you want to ensure it’s a strong culture that will help excite them.

A common issue we see with clients is their culture does in fact need improvement before it will excite an acquirer. And for those that try to enhance their culture, we help them think about what barriers to change that could impede their progress. Here are the top 3 reasons we see companies being challenged when it comes to trying to strengthen their culture:

• The owner/CEO and even leadership team convey in memo’s and even a meeting what culture changes they would like to see. But then they themselves don’t continue through and actually exhibit the very culture they espouse to want. So the team hears one thing and yet sees another.
• The owner/CEO conveys the new culture they’d like to see but employees wait to see if you’re serious about the changes actually happening. The issue then arises if the owner/CEO doesn’t identify opportunities during the course of a day or week when they see the new culture being exhibited and praise it and when it’s not, address it. Until employees see leadership actually addressing or rewarding behaviors that align with the new culture, they won’t believe it.
• Employees hear what the desired culture changes are but can’t make the bridge from the theory of them to the practicality to their daily job. This could be due to a lack of training/experience or they don’t understand specifically where they should apply it. As an example, leadership may convey they want a culture of “taking responsibility” so the employees understand the concept here but they aren’t sure of what it means in their daily work. Or the employees understand it but not all of them are experienced enough to confidently put it into effect. Until leadership shares what the practical execution is and ensures the employees are prepared/trained developmentally and have the experience to adopt, the change won’t go anywhere.

If you’re thinking about how to enhance your culture, give thought as to whether any of these three are impacting you. We often find that owners and CEOs don’t pay enough attention to their company culture. Investing in this area can be a wonderful gift to your future self as you present not only a better performing business but one that the jockey (your team) will also excite an acquirer. Use time as a friend to enhance your organization culture and enable growing your company worth.

Ask new questions, learn new things…potentially helping your future company sale

Ask yourself these questions – is it possible that the dialog my team is having with our customers has become stale? Is our familiarity with them now serving as a weakness because we assume we know all there is to know? Could we have entered a comfort zone and we’re not learning new things that we should be?

Periodically it’s a great step to refresh the dialog that your team is having with external parties, such as customers and even suppliers. Asking new questions will help facilitate new strategic thinking and strategic dialog within your team, leading to potential new innovations in products and services.

Here are a few good questions to ensure your team is asking and reporting back to ownership/leadership:

About our industry:

• What changes do you see currently impacting our industry and any changes you think might be coming our way?
• Are you seeing new players enter our space – either new competitors for you or us?
• Are you seeing investment dollars flow in or out of our industry and what do you think is driving this?
• Where do you see technology potentially changing how you do things or changing what you may need from us?

About our partnership:

• Of everyone you issue purchase orders to for anything, not just our products/services, are we your best supplier? If yes, what specifically are we doing that you appreciate? If not, where do you see others performing stronger?
• Are there products/services that you believe you should be able to get from us, but we don’t currently offer them?
• Is there a headache or opportunity you are dealing with or see coming that you’d like our help managing through?
• Where would you like to see us investing in ourselves so that we can help you even more?

These are just a few examples of new questions to ask your customers to freshen the dialog. And some could even provide valuable insights from suppliers. In strategic thinking, it’s called having good situational awareness about what’s happening outside your four walls. Don’t assume you know, regularly check by refreshing the questions being asked. Ask new questions, learn new things, facilitate healthy strategic dialog and build your company worth – zero downside and only upside for you.

Addressing each will have you on your way to a future euphoric exit event

How do you sell your company one day and command a premium valuation? On one level, it’s quite simple:

• Identify what good looks like long term – what is ownership wanting to achieve long term from owning the business? What will make ownership euphoric.
• Identify (or build) and protect your unique core competence.
• Develop a strategic thinking, planning and execution muscle amongst your leadership team to close the gap between what your company might be worth today and what you want it to be worth when you exit.

The first is the easiest of the 3 but often not addressed. Unless you tell me where you want to take your family on vacation, how can I help you know what your flight, boat, car or walking options are? How can I recommend what to pack? I can’t unless you tell me what good looks like for your trip and where you want to get to. Without knowing long term what you’re trying to achieve with your company, every day managing of your business is more difficult and you have no way of knowing if you’re closing the gap in its value between today and what you want to receive one day from an acquirer.

The second says if you’re going to work hard and invest time and money into your company, why would you want to build something that others already have. Build something unique, something special and the “special” means you have a core competence that others lack. This will help differentiate you in the market. And spoiler alert, a core competence isn’t necessarily what you’re good at as a company. It’s more than that as it is something your customers see and are willing to pay a premium for. Every company leadership team should identify what their business core competence is.

And thirdly, as a company owner or CEO, there are two options for helping you achieve near-term and long-term results that you’re striving for. Option 1 is hope. Option 2 is having a strategy. Statistically I know which one I would bank on and most people would. But often times, executives lack a good strategic thinking and planning muscle so that leaves them relying on hope. This muscle can be built but it takes focus and consistency, just like improving a golf or tennis swing.

Don’t overcomplicate what is already complicated enough. Owning and leading a business isn’t easy and it’s not for the faint of heart. But if you think in terms of addressing these 3 critical areas, you’ll have it easier than those that don’t and you are far more likely to achieve a euphoric exit event one day. Call us today and we can help you think about how to chip away at each of these must have elements.

When selling your business one day, present a business that doesn’t simply follow the tide

The expression goes – all ships rise in a rising tide. What does your ship do?

When the day comes that you present your company to a potential acquirer, they will quickly look to see if your company performance simply rises and falls as your overall industry does, or whether you’ve built something more special.

Ask yourself – does my business revenue simply follow the rise and fall of what my industry does? Or is my business unique with a portfolio of products and/or services that allow me to perform well despite what my industry is doing – are we growing more than others when the industry is up and slowing down less than others in your industry when there is a downturn.

A business that doesn’t simply follow the ebb and flow of the industry tide will generally be of higher value or worth in the eyes of a future acquirer. When your industry is experiencing a downturn, if you can be up or at least be down less than the general industry, your company worth will be higher than your peers.

You achieve this by doing any of the following:

• Have diversification of end markets so you’re not too reliant on a single sector.
• Have diversity of product/service price points – when an industry tide is rising, buyers will generally be willing to buy a Better or Best solution. When an industry tide is receding, they might move to the Good solution as the Better and Best are deemed too expensive for the time.
• Have a unique selling proposition versus competition and one that your current and potential customers can clearly understand. Having this will allow you to fall less during an industry downturn and rise more when it’s doing well.

When the day comes that you want to sell your company, command a higher purchase price by presenting a company that has historical performance that does better than the general industry during rising and lowering tides. Building such a business will greatly enable you in achieving your euphoric exit event. The right strategic planning and execution can help you achieve this. Call us today for ideas on how to get started.

Your team can fall into a comfort zone and that’s not a good thing

To build the worth of your company so you can experience a euphoric event one day in selling your business, you want to avoid being in the comfort zone. Teams in a comfort zone can kill long term company worth.

Your team is in a comfort zone if they are just doing repeat activities on a regular basis without any regard being given to continuous improvement…doing better today than they did yesterday and doing better tomorrow than they did today. Leaders that keep their teams out of the comfort zone are generally those building the greatest company worth.

What causes a comfort zone in the first place? We’d all agree we don’t want to have this complacency set in at our company so then what causes it in the first place – here are the top reasons:

• The leader/manager isn’t raising the bar for their team. They too are in a comfort zone and not looking to challenge anything or anybody to raise the level of performance.
• Employees are fearful of taking any risk or making a mistake. Employees won’t try new things to improve the business if they are fearful of what it could mean for them personally if things go awry.
• There is a lack of training and development so people get comfortable because they don’t know of any other way.
• Comfort zones often occur in departments or entire organizations where there is a lack of good KPI (key performance indicator) management. KPI’s are a very effective tool for helping to drive performance improvements.
• The culture lacks a mechanism for rewarding or celebrating times when a comfort zone is challenged. Employees may not think their manager/leaders care about driving improvements because when they have been made in the past, there is no recognition. In this environment, why would the employee take the risk.

Sit with your leadership team and discuss these comfort zone enablers. As the expression goes, to decrease the comfort zone in your team you have to increase the discomfort zone. The phrase sounds extreme but look at the reasons above and see if any of them relate to your team. Addressing them today will be a gift to your future self because of the company worth you could be creating.

An under leveraged tool that could help you achieve a successful company sale one day

The expression is, don’t tell me what happened, tell me what is going to happen.

Too often executives spend their time looking out the rear view mirror when leveraging their financial, customer and operational data. The executives that are more often building the worth of their company are those taking this historical data and using it to develop proforma models that help them look out the front windshield of their vehicle as well.

The concept of a proforma model is straight forward. Take 2, 3 or more years of a data set (such as your company profit & loss statement) and from the historical results, project what your P&L will likely look like in the period ahead. Your historical data will convey trends, cyclicality, product/service mix impact, etc. about your business and you can use these to build a proforma P&L statement for your business that gives you insights as to what future performance could be. A strong controller or CFO will be able to take your historical results and provide you with a glimpse into your future…and do you like what you will see? If yes, keep working your plan. If not, identify changes to drive different results.

Certainly, a proforma is a guess, an estimate but it’s a highly educated one. Don’t fly blind in making strategic decisions about your business direction. Leverage your financial, operating and customer data to build proforma models. You’ll find doing so also facilitates great internal dialog with your team as you review the proforma together.

Add the muscle of using proforma models in your business – proforma your financials, including cash flows, proforma what a new product/service launch might look like revenue and margin wise, proforma what a new customer or even a new market sector could look like if you launch/enter it. Developing  such a muscle will have you on a faster path to creating company worth and will be a gift to your future self when  an acquirer rewards you for what you’ve built.

They can greatly enable you achieving your euphoric exit event

As David Herman of Diamond Capital in Los Angeles says, “the investment banker is the auctioneer for your business when it comes time to sell it”.

Although the investment banker adds great value to your transaction, his statement is accurate. The Investment Banker will become the representative who takes the lead role in finding you a buyer for your business, just as the auctioneer does.

A common question is what is the difference between a business broker, that also represents companies for sale, and an investment banker? Generally, the smaller transactions, say $10M or less in total payout value, are in the purview of a broker and larger transactions are the focus of investment bankers.

What could the investment banker do for you in your future transaction that you really shouldn’t do for yourself?

• They will ensure you are ready to successfully support an acquirer’s due diligence
• They will put a “book” together, also referred to as a confidential memorandum or pitch deck that will tell the story of what your company is and why it’s of value to an acquirer
• They will identify potential acquirers and manage them moving through a deal process
• They will play the point role in negotiating the offer you get from an acquirer and if there are multiple offers made, they will help navigate how to select the final one
• They will play point in managing the data room that will be used for the acquirer’s due diligence and will manage all the information flow between you the seller and the acquirer’s team
• They will work with your attorney on preparing various deal documents necessary to complete the transaction

Trying to do these things yourself could have you leaving a lot of money on the table. And it could cause unnecessary stress for yourself and your team and certainly could cause frustration for the acquirer when they see inefficiencies in the deal process as you try to represent yourself.

But, what an investment banker can’t do is ready you and your business to ensure you have a product/service that is unique, a market position that is enviable, a pricing authority that helps you command attractive profit levels, good visibility to ongoing growth and the list goes on. These aren’t 9^th inning steps, as to achieve these things that an acquire will reward you for, it requires preparation steps much earlier than the 9^th.

Give us a call and we can help you think through how best to get your business prepared ahead of engaging a banker. Having the right preparation will be the difference between a successful sale and an unsuccessful one.

Tracking and improving this metric will increase your company worth

When you look to sell your company one day, a basic question from the acquirer will be what percentage of your annual revenue generally comes from existing customers or clients versus new ones?

This metric of new customers buying from your company is called the Vitality Index. It’s simply a monthly tracker of how many new customers are jumping on board your company train. Every industry is different but on average you’ll hear the number of 10 to 15% as an index number. Certainly if you’re a new business in general then of course this number will be higher. But for a more mature business, this range is typical. Meaning, each year we look to generate 10-15% of that year’s revenues from customers that have never purchased from us before. This shows three things. It shows our sales team knows how to prospect for new business, which is a great muscle to have versus just being order takers and living off the annuity of past customers someone else reeled in. It could show that you serve a large market so plenty of new opportunities to pursue. And it shows that the market you’re serving still sees your company having something they want, so your company offering remains very relevant.

Where the index may take on some uniqueness for your particular business is you may decide to add revenues in this number that are from existing customers who have added new products/services that you offer. Meaning, they’ve been a customer but they will now be purchasing an additional product/service from you. It’s ok to include this in your Vitality Index. And some companies will extend the length of time that a new customer is part of this new customer index. One of my businesses, we considered it a new customer for 24 months given the long sales gestation cycle we had in an industry notorious for taking more than a year to onboard a customer. So there is logic to giving your business credit for more than just 12 months. You get to decide how best to define the Vitality Index for your company.

The bottom line here is what is the revenue vitality of your business? The more you can show an acquirer one day that the market still very much wants your product/service and that your sales team has a large market to go searching for new customers, the more this will build the worth of your company in the acquirer’s eyes. Start today by taking the simple step of tracking your Vitality Index and let the strategic dialog with your team flow from there because this metric will facilitate very healthy internal dialog.

Is your team's decision making enabling or disabling company performance

Your company's historical performance is primarily a result of how good you and your team have been at decision making. Strengthening this muscle of decision making will greatly reward you one day at time of deciding to sell your company.

Ask yourself – how good are me and my key leaders when it comes to making timely and effective decisions? Is this a strength of ours or do we have opportunity for improvement? Every hour of every day there are decisions being made in your company, some of them tactical and some of the more impactful and strategic. Decisions being made about products/services you offer, how you price your products/services, scheduling customer order fulfillment, employee matters, vendor activity and the list goes on. Is your team good at making decisions in all these various categories or could any of them use improvement? Here is a list of the most common issues that impede a team's ability to be good at decision making – ask yourself if any of these might be an opportunity for improvement:

• Do any members of my team lack clarity related to what level of empowerment they have in certain decisions I expect them to make? And are they clear on the ownership I give them for making that decision? Employee uncertainty related to what decisions they are empowered to make and/or decisions they are owners of can cause inefficiencies and frustration.
• What decisions being made in my company require two or more people to be involved? And for those that do require multiple people, is this optimal for us? Too many cooks in the kitchen cause frustration, lack of decision ownership and will definitely delay decision making. Certainly, with some decisions you want multiple people involved, but not too many.
• Are members of your team trained and experienced enough to make effective and timely decisions in the areas you’re expecting them to do so? Don’t assume people are confident in the decisions you’re asking them to make. Determine if further training and development could enable them and therefore enable your company.
• Does your team have a good feedback loop on some of the more important decisions being made so the team learns from prior decisions? Looking back on certain decisions and asking what about that decision did we do well and not well in making it and what did we learn that we can apply to future decisions is a powerful step for building this muscle.
• Are the decisions my team is making being made to the desired timeline of the “customer”? Don’t assume that just because a decision is getting made that it is also being made in a timely manner to what the internal or external customer needs. It’s common to hear the comment that the decision was finally made, but it was needed sooner.

Don’t assume that the decision-making muscle at your company is helping to build short and long term company worth. Sit with your leadership team and discuss where improvements could be made related to decision making efficiency and effectiveness – having this discussion could be a gift to your future self as any improvements made might help you build the worth of your company.

To achieve a successful exit one day, strategic thinking is more important than the document

Strategic planning is a tool for identifying where your company is today, where you want it to be tomorrow and what the opportunities and issues are that are keeping you from closing any gap that you have. But to close the gap between what your business is worth today and what you’d like it to be worth tomorrow, it’s not the strategic plan document that will get you there, it’s the strategic thinking that will.

The strategic plan is a document….that document is good or bad depending on just one thing – how good the strategic thinking is that went into it. The plan document just captures the output from the strategic thinking. So, the first question to ask yourself shouldn’t be “do I have a strategic plan”? The first question should be are me and my team having the right level of strategic thought and dialog? Are you and your team discussing the right strategic questions about your industry, your customers and your company? The old adage in business is true….one is better having a great thinking team with poor documentation than a poor strategic thinking team but a great planning document.

Now think about a strategic planning campaign as a facilitator of great strategic dialog with your team. That thinking will lead to ideas for action and of course there is value in capturing it in a plan document that you and your team can use to manage progress. But avoid the mistake of feeling good about having a strategic plan if you’re not confident of the strategic thinking that the plan is based on.

Don’t leave your future euphoric exit event to chance or luck. Build a muscle of strong strategic thinking by starting to ask new, insightful questions that will get you and your team thinking and discussing company worth building activities. Don’t worry about the document, first worry about the thinking.

Having an effective pricing strategy can put your company worth on steroids

When you look to sell your company one day, an acquirer will probe your pricing strategy during their due diligence. If they see that you have a strategic approach that is reflected positively in the gross profit your company earns, this will go a long way in giving them reason and confidence to pay more for your business. But if they see you are lacking good pricing disciplines, it might excite them to buy your company so they can fix and benefit from this, but you can be sure they won’t be rewarding you in their purchase price for this opportunity they can pursue.

Let’s get right to great questions to sit with your sales, marketing and finance teams to discuss:

• As we look at our portfolio of products/services, are we clear on which ones are delivering our target gross profit and which ones are not?
• For those products/services we are not achieving our target gross profit, is it our raw material costs, labor cost and/or pricing that we should address?
• Is our pricing strategy set for each product/service and segment we serve, or do we have a less effective one strategy serves all approach? Optimal pricing strategy is when you set it by product/service and by submarkets because the value derived by your customer is different potentially by submarkets so your pricing should reflect this.
• What is our pricing strategy based on? Do we set our prices based on our costs, on where our competition is priced, or on the perceived value by our customer (in each submarket)?
• Over time, has our product/service pricing become predictable? Do competitors find it easy to predict what our pricing will be and set theirs accordingly or have we done a good job of being unpredictable?
• Who owns establishing the pricing strategy within our company? If it’s not being owned by a particular person or department then it’s very unlikely that your pricing is not optimal.
• Who is the market leader in terms of setting pricing in your industry? Most often in industries there is a company that sets the bar for the other players – is it you, is it someone else that is the market leader as it relates to setting the baseline for pricing?

These are just a few good questions to facilitate a pricing strategy discussion. Use time as a friend to have these types of discussions with your team and leverage pricing to help build the long term worth of your company.

When selling your company one day, gross profit needs to be reported properly

It’s a frustrating day if you look to sell your company and have the acquirer tell you they will need to “recast” your financials (or ask you to do it) before they can make you an offer. The reason for this could be because the way you’ve been calculating gross profit is causing confusion for them. This could be because there is a norm for how gross profit is reported in your industry and you aren’t employing it or because you capture some costs in your SG&A (sales, general, administrative) portion of your P&L that would normally be included in a gross profit calculation.

It's easy to avoid this issue by talking with your bookkeeper, controller, CFO or CPA and discussing how your company calculates your gross profit. And your CPA can wear the glasses of an acquirer and tell you how your calculation of gross profit will be interpreted. You might even have to go to an industry source (or an investment banker that works in your industry) that can help you truly understand what the norm is for your industry.

And make sure when the day arrives that you want to sell, you’re ready for the basic questions the acquirer will ask about your gross profit. They will obviously want to know your company’s consolidated gross profit but they will want to peel the onion back further and understand your gross profit at the product/service level, market segment level and even customer/client level. It makes sense they will want to peel back this far because they want to understand specifically where your company makes its profit. The consolidated number doesn’t tell them where specifically your profits are coming from, something the acquirer will absolutely want to know.

Use time as a friend and ensure that a very critical financial KPI needed to excite an acquirer will be “clean”. Avoid having to one day recast your financials…get them set up properly today.

Build company worth by truly knowing your customers

Want to sell your company one day and command a premium valuation? Ask yourself, how truly knowledgeable are me and my team about our customer needs and wants.

An interesting exercise to conduct with your team is to hand each person a dollar bill. Ask them to study both sides for a minute or two. Then take the dollar away and ask them to draw, from memory, what is on both sides of that dollar.

In trying to draw both sides, employees very often laugh because they remember some things, but forget most of the details that are on a dollar bill. What’s ironic, is a dollar bill is something people handle quite often and should be extremely familiar with, but we aren’t because we take what’s on both sides of the dollar bill for granted.

Now ask yourself and your team, what is it about our customers that we are taking for granted. We interface with them very frequently, but do we really understand them and their needs in working with us?

Here are some great questions to discuss with your team to determine where there could be opportunities to strengthen your customer relationships and find new growth opportunities:

• If we place our customers in 3 tiers of revenue (high, medium, low) do we truly understand how the needs of our tier 1 customers might differ from tier 2 or tier 3?
• Do we do a good job of segmenting our customers (every industry has subsectors) to know how the needs of one segment/sector might be different than another? Do we know these differences and address them effectively in our product/service offering and in our marketing and sales messaging?
• As we think about each customer tiering and segment/sector, when is the last time we assessed to understand their pain points in working with companies providing our type of product/service? Do we really know where they have headaches and those we might be causing and those we could help eliminate?
• What are the top 3-5 criteria our customers (again, think tiers and sectors) think through in deciding whether to purchase from us? Do we understand their criteria, do we address it well and do we effectively message that we meet these criteria?

Don’t commit “assumicide” by assuming you know what your customers/clients’ desires or needs are. Challenge what you and your team think they know about customers and in updating your understanding you will absolutely uncover areas where you could either protect your revenues and/or build the revenues and in turn build the long-term worth of your company.

When selling your business one day, getting a great valuation from a third party doesn't just happen on its own

We meet with a lot of company owners/CEO’s and as you might expect they are very strong in their technical skills and tactical thinking but could and should improve in their strategic thinking. Here is a good set of strategic questions to consider for your business and in addressing some or all of them, you’ll be building the worth of your company:

• Are investment dollars entering our industry or leaving it? If entering, who are the players coming in and what specifically does it look like they are placing value on? If dollars are leaving, are you learning why and what implication this could have on your business long term worth?
• Am I clear on the top things a future acquirer will one day look for when they kick the tires of my company (i.e.: my financial scale, offering uniqueness, predictability of revenue, backlog, strength of my team, particular customer segments we serve, etc)
• Is the strategy I’m engaging to grow my company audacious enough for closing the gap between what my business is worth today to a third party and what I’d like to one day receive for it? Too often owners/CEOs work hard at trying to build their business only to painfully learn one day that the strategy they were employing wasn’t audacious enough for truly getting them to where they wanted to get. And the reverse could happen, your plan could be overly audacious and introducing unnecessary cost and risk to you.
• What is our company primary strategic need this year – is it we need more revenue or we need to do a better job of fulfilling on what we already have in our backlog or is it we need to build a better customer experience? Are your key managers aligned with you on this?
• How unique is our product/service offering versus competitors – when is the last time we assessed this to make sure where we thought we were unique is still the case today. And where we are unique, are we effectively messaging it to our target audience?
• Is our financial and operational performance up to the minimum norms for our industry? Meaning, is your growth rate similar or greater to other players in your industry – is your gross margin on par with the norm in your industry and do you even calculate gross margin to the norm of your industry or do you have your own internal calculation that might one day confuse a potential acquirer? We always say to owners/CEO’s, don’t compare your business to itself, ensure you know how it stacks up to industry benchmarks.

There is no shortage of great strategic questions you want to ask yourself and dialog with your team on a regular basis. Doing so will absolutely have you identifying steps to protecting and building the worth of your company. Don’t delay another day in asking great strategic questions…start now and reward your future self with the benefits that you’ll derive from the healthy new dialog.

When selling your company, you can avoid the top deal stressors by being better prepared

Businesses have been getting bought and sold for thousands of years. But how is it that many company owners/CEO’s are still caught off guard by the complexities of the sale event and as a result, experience a very high degree of unhealthy stress. There is a degree of stress with any transaction, but the degree can be greatly reduced with the proper prior planning. Here are the primary issues that cause sellers unnecessary stress when trying to sell their company:

• In the zeal to want to sell, the time is not invested upfront to get a well negotiated and documented Letter of Intent in place with the acquirer. Kicking the can down the road on negotiating key business points related to the transaction will absolutely raise stress levels as the process evolves.
• Not knowing what you want to do with your life once you sell the company. Some sellers are very clear and excited to move on from their company. But there are many where they and the business are one and separation will be difficult and stressful if not given the proper advance planning.
• Not knowing how your monthly cash flow or healthcare needs will be met post transaction. Sellers can forget that they will no longer receive an automatic payroll deposit each month and they won’t have access to company healthcare benefits and this reality hits during the due diligence phase with an acquirer.
• Being surprised by the acquirer’s depth and breadth of due diligence. We refer to the acquirer’s due diligence process as a proctology exam. Every seller should be prepared for this probe and not be surprised by the depth and breadth of the acquirer diligence.
• Not including a spouse, partner or key family members early enough in the exit planning. Your stress becomes high when you bring them in late to the exit planning process because of the reaction you receive and then of course you’ve introduced unnecessary stress into their lives as well.
• Being surprised by how your employees or customers respond to hearing of the company being sold. Smart acquirers will evaluate this prior to buying your company so you should be well on top of this long before they assess this potential risk.
• Not being prepared for the voice of the customer your acquirer will most likely want to conduct prior to completing the transaction. Sellers are often surprised to learn that a potential acquirer will want to talk with selected customers/clients prior to the deal closing. This is a normal exit process step and there should be no stressful surprise from it.
• Being negatively surprised by the net amount received from the transaction despite the gross amount being attractive to you. Every seller should prepare a Gross to Net Proceeds analysis for a potential transaction. There should be zero surprise what net amount you will receive from the gross amount paid by the acquirer.

Using time as a friend in preparing yourself and your business for a successful future exit will greatly help to reduce unnecessary stress associated with selling a company. The vast majority of what you will experience and what you will be thinking and deciding on through the sale process should not be a surprise. Get external help from those who understand the process so you don’t have preparation gaps that make what should be one of the most exciting and proud moments of your professional career, one filled with unnecessary stress.

Be prepared for the Schedules your team will need to produce at time of company sale

Ask most owners/CEO’s what legal documents will be needed to sell their company and you’ll most often hear reference to the Purchase Agreement (also called Definitive Agreement, Sale & Purchase Agreement or even Equity/Asset Purchase Agreement). This legal document is the main one that will be negotiated between buyer and seller. But what often surprises Sellers is the litany of documents that will be needed to consummate a typical acquisition.

Here is a general listing of just some of the additional documents your lawyer and team will be preparing. The absence of any one of these could delay or put a transaction in jeopardy:

• Environmental schedules explaining all matters related to ground water, air or chemical handling activities at your company
• Financials schedule that explains your company accounting practices – how you recognize revenue, how you track inventory, etc
• Employee schedule that list names of employees, tenure, role, compensation levels
• Employee schedule related to legal matters such as prior or current labor dispute or lawsuits and current status of each
• Employee schedule associated with any bonus or profit sharing plan your company might have in place and how this plan will be addressed post transaction
• Asset schedule that lists all assets being sold with the company and any being excluded
• Liability schedule that identifies any current or long-term liabilities your company has that need to be addressed prior to or on the day of transaction closing – there will also be a schedule related to known liabilities that the acquirer might have to deal with post transaction and how this will be handled (i.e.: employee litigation matters or customer warranty issues)
• Intellectual Property schedule that shows a listing of the IP your company owns and proof of ownership (i.e.: web domains, tradenames, trademarks, trade secrets, patents)
• Permit and Certification Schedule that lists all permits and certifications your company possesses and the maturity/renewal/costs related with each
• Software License Schedule that reflects all the third-party software your company uses and proof of current licensing
• Material Contracts Schedule which will list all meaningful customer or vendor contracts that your company is a party to
• Warranty Schedule showing past and current product warranty matters your company has and is currently dealing with
• Customer Schedule reflecting the major and possibly all your company customers
• Insurance Policy Schedule listing all insurance policies owned by the company and their maturity, renewal, costs associated with each

There will be other schedules as those required are unique to each deal. But in addition to your company needing to be ready to prepare these Schedules, you will also be signing documents relatd to resigning your role from the company if you’re not remaining or if you are, an employment agreement must be negotiated. And you and other key members of your team might be signing non-compete agreements.

Selling a company naturally brings stressors. But eliminate the more obvious stressors by understanding all the various documents you will be generating and negotiating to consummate a deal. Give us a call or talk with your lawyer to see samples of what you’ll want to be prepared for and help your future deal go more smoothly.

Know how the tariffs could impact your future company sale

Tariffs are now a hot topic for many business owners/CEOs. For some businesses, tariffs will be a tactical headache or opportunity and for others they will be a strategic headache or opportunity. Regardless, it’s time for productive strategic dialog.  Here are some good questions to discuss with your team:

• Do tariffs put us at a disadvantage or advantage versus our competition?
• If we have an advantage, how can we fully exploit it? If a disadvantage, are there steps we cold take to minimize the impact?
• Could a competitor take advantage of the tariffs at our expense?
• Have we conducted a cash flow projection to understand the impact of paying the import tariff and the float between paying this tariff and passing it along for ultimate payment from our customer - how will this cash flow timing impact our business?
• Would our customers consider moving to an alternative product where they could avoid the tariff expense? If yes, could we begin to offer such a product?
• Can we speak to any customers and hear their inputs on what the tariffs could mean or already mean for them – having this input might give us ideas of how to manage it?
• Should we raise our unit price to cover the cost of a tariff or should we add a new line to the invoice so customers see we are holding our original price and only adding a new tariff expense line while it’s being incurred?
• Could we offer a sales program that if the customer begins purchasing an additional product from our portfolio, we will reward this new incremental revenue by not passing along the tariff cost on the original product they have been buying from us?
• Could we do a quick product redesign to eliminate or reduce the part/product that is incurring the tariff?
• Could we offset the tariff cost with an internal efficiency or productivity improvement initiative that could lower our cost of goods sold, therefore allowing us to absorb the tariff cost and possible hold or even improve our gross margin?

Asking good strategic questions is the job of any owner/CEO and this new tariff challenge is such a time that requires good strategic thinking. Don’t let the tariff challenge negatively impact your company worth.  Have a healthy dialog with your team now to set your course for managing the tariff environment and possibly protect or build your company worth.

One can support your company worth, the other will increase it

Too often company owners/CEOs think in terms of providing great customer service to their customers. But Customer Service is reactive – it’s awaiting a customer to articulate a need and your company tries to address it. And great customer service these days is the ante into the game. But elevating your thinking to Customer Experience now elevates to anticipating customer needs and separating yourself from the competition – building this muscle can create entirely new company worth. If your team are subject matter experts in your field, you should be able to provide a Customer Experience that goes well above and beyond that of mere Customer Service.

Customer Experience is thinking about every touch point your potential and existing customer has with your company. From finding you, to contacting you, to learning about your products/services, to getting pricing, to supplying/fulfilling your products/services, to billing and for the customer using and even maintaining or disposing of your product or service. The companies that build long term, sustainable company worth and unique differentiation from their competition are those that think in terms of where they can excel in each of these touch points, not just some.

Sit with your team and use some of these questions to facilitate a productive, and potentially company worth building dialog:

• What are all the touchpoints a customer has with our company?
• Which of these touchpoints are we providing a great experience, a not so great one?
• Is there a specific customer touchpoint that is underserved today in our market – meaning our competition nor our company excels so this could be a differentiation opportunity for us?
• Where and how could we do a better job of anticipating our customers’ needs?
• Do we leverage our customer data to truly understand when and why we have to issue customer credits and could we take steps to reduce the occurrence and cost?
• Do we identify why customers call our customer service lines and is this a point of frustration for customers that we could eliminate or reduce? When they do call, are we turning what could be a negative in to a positive experience for them during their call with us?
• Do we identify the most common areas of frustration that our customers experience in working with us (and our competitors) and could we take steps to reduce or eliminate the source reason?
• Could we enhance an aspect of the customer experience we provide and generate new revenue or command higher prices as a result?

Elevate from thinking about responding to customer requests to anticipating customer needs. There is a meaningful difference between these and the latter can absolutely contribute more to building your company worth as you separate your company from the competition.