Reflections

When selling one day, the difference can put your company worth on steroids

Each company has two options for evolving their product or service offering.  The first is to react to a need that the customer has conveyed they have or that we’ve identified they have. The second is to know your market and customer well enough that you can put yourself in their shoes and anticipate a need or want, one they haven’t even recognized yet.

In going the reactive route, you’re playing the game as your competitors do and you’re working hard at trying to be the best. In going the anticipate route, you are working equally hard but this time you are looking to be the only.

So ask yourself. Is my team focused on delivering only what the customer knows they want or need or do we expend equal calories looking for ways we can anticipate a need? Are we looking for ways to do what our competition does but be better or are we expending equal energy looking to be the only? A business good at reacting to customer needs may command a good exit valuation but one that has a track record of also being able to anticipate customer needs and be the only one meeting them, that company valuation will be put on steroids.

Putting metrics in key areas of your business can enable or disable your company worth

When you look to sell your company one day, the potential acquirer will ask you for what financial and non-financial KPI’s you and your team monitor. In asking this, they are looking for a few things. First is they want to see if you have built the internal discipline to monitor progress versus having a team that just works on motion. Second, they want to see how your company has progressed over time with select KPIs and do they see continuous performance improvements. And third, they want to see how your company compares to like companies in your industry so they will use your KPI’s to compare to industry benchmarks they might have.

We recommend to clients that they have KPIs in place. But, here are the rules of thumb:

• Number of KPIs – avoid having too many. No individual on your team should be monitoring more than 5. Collectively your team might be monitoring 15 KPI’s but one person might champion 4 and another 5, another 3, etc.
• Ownership of KPI’s – who is the champion or person that you deem the owner of monitoring each KPI and do they know they are the owner. If a KPI lacks a champion, it’s questionable whether that KPI is effective.
• Types of KPI’s – put KPI’s in place that help you see whether you’re making progress in your strategic plan. If you’re tracking KPI’s that aren’t linked to your company strategy, you run the risk of monitoring noise versus progress.
• Understanding of KPI’s – don’t commit assumicide in giving a KPI to an individual or a team only to miss that they really don’t understand how the particular KPI is calculated. We see this regularly in working with new clients. An employee, even at a senior level, is given a KPI but when you query whether they truly understand how their daily job and decision making directly influence the KPI, they don’t know. The KPI is given to them from say finance or HR or operations so they have visibility to the KPI but not full understanding of the formula behind how it’s being tracked.
• Embracing KPI’s – another place we see assumicide is when an owner or CEO assumes that an employee who has responsibility for a KPI embraces it. Meaning, they might fully understand how it’s calculated but they don’t agree with how it’s calculated. You might have an employee with a KPI related to order fulfillment or to new customer leads and they understand how the KPI is calculated but when asked whether they agree with the calculation, they don’t. They believe there is flaw in how the calculation is being done and therefore they don’t embrace the accuracy or effectiveness of the KPI.

KPI’s can be a great tool for helping build the long term worth of your company. But they must be well crafted and well managed. If they aren’t, they might be delivering the oppositive effect than what you want and could be damaging company worth. Conduct an audit of the KPI’s in your company to determine if they are enabling or disabling your progress.

Titled Strategic Planning That Grows Company Worth - The Campaign

Looking to strengthen the strategic thinking, planning and execution muscle at your company to build the worth of your company? If yes and if you want to join the elite group of business owners that achieved the pinnalce of success and commanded a euphoric outcome, then this video series is designed for you. To view the second video in this series titled, The Campaign, click here to view video

For those not yet seeing the Introductory video of this series, click here (Introduction Video - Strategic Planning That Grows Company Worth) to begin your new journey of having a more effective plan for your business. This first video in the series provides a fresh way to look at what a strategic plan actually is. Yosemite Associates is working in concert with Synthesia.io (Visit Synthesia) to bring the Yosemite strategic and exit planning tools to life using advanced AI marketing technology.

Focusing on 3 areas could have you on a path to a future euphoric exit

Preparing your business for a future successful exit requires you to get many pieces of the puzzle placed properly. But all the puzzle pieces needed to sell your company aren’t all equally weighted. There are 3 that rise to their own level of worth creation and therefore warrant special attention.

Predictable Revenues – there are generally two types of businesses. Those that are confident that future orders are coming but not sure when. The other is a business that knows clearly when the orders are coming. These businesses have a go to market model that makes it very clear when the orders are coming. The predictable revenue model will command a higher valuation at time of company sale than the transactional revenue one. Here are just a few ways companies build predictable revenue models – establish customer purchasing agreements, receive customer provided forecast, offer a product or service that is subscription, license or recurring revenue model based.

Pricing Strategy – too many businesses are lacking in a well thought through pricing strategy for their portfolio. Some either lack a strategy entirely or their pricing strategy is a one size fits all. An effective pricing strategy is one for each part of their portfolio and for each customer segment. Putting your company worth on steroids occurs when you can show that your business (for some or all your products and services) commands a unique position in the market and customers see a unique value that they are willing to pay you a premium for and even willing to periodically absorb price increases without causing significant attrition.

Customer Stickiness – too few leadership teams spend time discussing how to increase their stickiness (or customer loyalty). The expression is don’t look to be the best at something, look to be the only. What services or products does your company provide today that make customers sticky with you and what additional ones could you provide to increase that stickiness? Customer stickiness isn’t a nice to have, it’s a must have for driving up the worth of your company. So don’t leave your stickiness to chance, have a plan for building it.

Ask yourself – is my team working on the right puzzle pieces for building the worth of my company? Spending time on these 3 worth drivers will pay you the greatest current and future dividend. Use time as a friend in preparing your company for a future euphoric exit event – ensure the preparation includes addressing these 3 investments that deliver the best returns.

Knowing the difference can help build your company worth

Ask yourself this question – is my company CFO or controller a coach or a cop when it comes to working with my department managers and supervisors? One helps you build your company worth, the other could be impeding it and you may not realize the difference until you try to sell your company.

Most department managers and supervisors got their jobs because of a technical or department specific expertise that they have. But many lack a true understanding of managing budgets and don’t understand the connection between the decisions they frequently make and the potential impact on your financials. Then arrives your controller or CFO on their door step or in a meeting. Is this ensuing interaction a positive and enabling one or is it a demeaning and frustrating one? The coach can help educate and build someone up, the cop may apply pressure that makes them feel inadequate.

The CFO or controller coach can help build your company worth but a CFO or controller cop can hurt it. The cop hurts it because people are afraid to make decisions knowing the chastising or questions they might receive or managers/supervisors won’t want to proactively come forth with financial questions or looking for advice because the cop will view them as weak in their roles. Now in a turnaround situation, I may want a cop running my financial group for a period of time but in normal growth times for a company, I want a talented and firm handed financial leader on my team but one that helps people understand and respect the financials, not fear them.

As you are thinking about this for your company, you’re also thinking about your culture. Coaches can help build great company cultures, the cops unfortunately can hurt them. We greatly value and respect what law enforcement does for us daily in our lives, but inside your leadership team and company, it can be a different story.

Use time as a friend in ensuring your company is prepared to support 3^rd party due diligence

Too often owners of private companies decide to sell their business only to find out too late that they aren’t ready to support the probe, aka due diligence, that the third party acquirer wants to conduct on their company.  We work with company owners to help them conduct a due diligence dress rehearsal at least one year prior to attempting to exit and preferably two years prior.

There are several areas that the potential acquirer will probe and one of these is the legal documents related to the forming and running of your business. It’s common to have these properly put in place when the business is formed, but years later they are no longer current and before they can be shared, they need updating.

Below is a general (non-exhaustive) list of entity documents that you should gather for entity maintenance purposes and ultimately for sharing with the acquirer:

• Articles of Incorporation (including any amendments)
• Current Statement of Information
• Entity filings in each jurisdiction with the corporation has qualified to do business
• List of fictitious business names (copies of all registrations) or trade names used by the corporation
• Bylaws (including any amendments)
• Shareholder Agreement (or Buy-Sell Agreement)
• Capitalization schedule/table
• Stock ledger
• Founders Agreement (or similar agreements)
• List of all directors and officers (including titles)
• Copies of board of director and shareholders minutes or written consents for the current year and prior three years

You don’t want to try and do a deal with a third party only to find any of these needed legal documents are missing, incomplete, or out of date.  There are several areas of your company that will need a dress rehearsal for due diligence, but if you’re looking for a place to start, start with the legal documents. In other blog posts, we share the lists for other areas of your business to prepare for due diligence.

Not all investments are going to reward you at time of company sale

Ask yourself this question, what is my company’s highest level strategic need that will help me accelerate growing my company worth and how could a technology enable it?  Too many company owners and CEO’s today are more focused on a technology but not first on the strategic business need or opportunity that needs to be addressed.  Only until you know what your strategic need is that will build your company worth, should you then focus investment dollars and your team’s time on embracing a new technology. Technology can be a great tactical solution, but it should be linked to solving a strategic need the business has.

We also see owners/CEO’s investing in a technology only to find later that there were less expensive and less complex solutions. But because they didn’t frame the company opportunity or challenge properly on the front end, they too quickly went down the rabbit hole with a technology. The risk then becomes that the technology takes money and time but doesn’t enable the business at a strategic level so it doesn’t build company worth in the eyes of a future acquirer. Acquirer’s look closely at capital expenditure investments made when doing their due diligence and it will negatively impact their purchase price if they see your company making technology related investments that don’t truly enable the business in their eyes.

There has been no better time in the history of doing business than now for leveraging what technology can do to enable your company. But the technology isn’t your starting point, strategic thinking and planning to identify the strategic opportunity or challenge is the place to start.

Reward your future self at time of company sale by ensuring alignment today

Ask yourself this question – if I ask each member of my senior leadership team to write down what they believe are our current top 5 priorities to grow and improve our business, will they each write down the same answer?

Too often the answer heard from company owners and CEOs is no. Missed opportunity for creating company worth.

What is team alignment? It’s you and your key managers being on the same page regarding where team energy and focus should be and you’re discussing regularly the underlying actions to address them. If the team is not aligned, then you need to wonder what each person is making their priority. And as well, you need to wonder about the employees within each of their departments because they won’t be aligned with their peers either.

If your team is lacking this strategic priority alignment, here are the most common reasons we see causing it:

• Lack a strategic plan – the leadership team is tactical and working on tactical matters but there is uncertain connection to the strategic value for the organization. The dialogs frequently but the dialog is often tactical versus strategy.
• Chase squirrels/shiny objects – the members and team often get distracted by the shiny object syndrome so priorities are always changing.
• Incentive plan alignment – the key members of your team have incentive plans that reward them for working on different priorities versus sharing incentives to help align them.
• Lack of peer respect – senior team members that don’t respect each other will look to avoid interaction, not encourage it. If they want to limit their interactions, then it’s highly unlikely they are strategically aligned on priorities and have set their own.
• Owner/CEO not giving importance to alignment – at the end of the day, it’s the role of the owner/CEO to ensure there is team alignment. If they don’t give this priority, generally neither will the team and functional heads will work in silos.

At your next leadership meeting, do the simple exercise of asking each person to write down on a post-it note what they view as the company’s current top 3 to 5 highest level priorities and then have them hand those notes to you. If there is misalignment, then this is your starting point for discussing how to address this. Give a gift to your future self, build and maintain team alignment as it’s your fastest path to building company worth. Give us a call and we can provide you some strategic templates to help evaluate the alignment of your team.

Strong awareness will facilitate operational effectiveness and reward you one day when you sell your company

Ask yourself this question – how good is my team’s situational awareness of what is going on outside our four walls as it relates to what could be threat or opportunity for us?

Having solid external situational awareness is a key element to any strategic plan. Unless me and my team have solid situational awareness, I truly won’t know what brewing threats we may need to navigate and we may be missing opportunities that the market is presenting to us. Said another way, ask yourself could my business be disrupted and could my business play the role of a disrupter? If your answer is I’m not sure, then the root issue might be your external situational awareness has become stale.

Ask yourself these questions to get an idea of how good your situational awareness is with your business:

• Is investment capital flowing into your industry/market or is it outflowing? Investment arms such as venture capital and private equity flow into dynamic and compelling market opportunities and leave those where they believe there isn’t much upside.
• If money is flowing into your industry, do you know where it’s going and how it’s being applied that could indicate threat or opportunity for you?
• How is your competitive landscape changing – new players entering? Existing players expanding or changing their offering?
• If a new competitor emerged, what could they do that would make them a threat to your business? If there is something they could do, could you do it first?
• How are advancing technologies being applied in your industry? New technologies such as augmented and virtual reality, 3D/Additive Manufacturing, 5G (soon to move to 6G), Internet of Things, etc – will any of these change your customer requirements or change how your competitors support your customers?
• Have your customer needs or decision making criteria changed? What they needed from you just a year ago maybe evolving in some way, are you monitoring any changes?
• How is the labor market in your industry changing and how might these changes impact your access to the quantity and quality of labor you’ll need to scale your business? What are your competitors doing to attract and retain labor that you’re both fighting for?
• Your company most likely serves various market sectors/customer types, do you have good awareness on how each specifically is growing/shrinking and what these dynamics are projected to be in the years ahead so you position yourself optimally?

These are just a few questions that leadership teams should discuss on a frequent basis to maintain good external situational awareness. Any changes in these areas could be reason for disruption to your business or opportunities for you to make operational changes that could disrupt competitors. Being a disrupter in your industry could significantly raise your company worth when the day comes you want to exit.

The degree of visibility will greatly impact your future company valuation

When the day comes you want to sell your business, one of the very first things a potential acquirer will look to understand is what is your team’s visibility is to future revenues? When you build a business model that enables you to have very good visibility to the timing and volume of your future revenues, the exit multiple they will pay will be generally higher.  If on the other hand, you are confident in future revenues but not clear on the timing or volume of them, then your exit multiple may be lower.

Companies that build a model where they have very strong future revenue visibility are those that have put customer purchasing agreements in place, support customer programs/platforms where there is known volume needs going forward, or an application that you sell or even a SaaS or DaaS model. These types of business models for some or even just a part of your business can greatly enhance the value of your business in an acquirer’s eyes. If however, your business model is more like a grocery or furniture store or a service business, where you certainly have confidence that customers will purchase but you’re never sure when or how much, then many times the exit multiple will reflect this lower visibility.

Think about your current business model and what visibility it gives you to future revenues. Identify where you might even just have a single product or service that you could move to something more recurring with your customer. Any step you can take to increase the revenue visibility will reward you at time of exit.

Well in advance of selling your company, you should know what your exit narrative will be

Too often company owners decide it’s time to sell and then they engage professionals that identify what the exit narrative will be to convey to potential acquirers. But this shouldn’t be how it’s done. You should first decide years earlier what exciting and compelling exit narrative you want to one day deliver to potential suitors and then build the company and performance to underpin it. This is how you command a premium valuation for your company, this is how you achieve a euphoric exit event.

What is your exit narrative? It’s your story or your message for future potential suitors to hear about what you’ve built, why it’s special and how its future is bright for them to benefit from. And there are multiple narratives you will one day develop as you will have a narrative for fellow shareholders, your employees but ultimately the one for your acquirer.

You work hard, you invest a lot of time, energy and money into your business. The last thing you want is for years to go by and then decide to sell and then hope you’ve built something you can build an attractive exit narrative around. Going this route, you have to hope you built an asset that others will want. But hope isn’t a plan, it’s not a strategy.

An effective exit preparation is to know your industry well enough to know what will attract suitors one day to pay you premium and build your narrative and then build the business to support it.

Don’t bet your future exit event on hoping you’ve built something you can then create a compelling exit narrative around. Build and bet on a plan that allows you to use time as a friend in creating the narrative and the business performance behind it. Going this route will have you well on your way to a much greater likelihood of one day getting the premium valuation that you’ve always dreamed of earning.

There are many emotions when selling your company and selling to a competitor may be one of them

You’ve competed against them for years and you dislike them, even despise them. And it’s common to hear from owners that when the day comes that they look to sell, the last people on the planet they will consider selling to is the competitor.

At an emotional level this makes sense. Competition can be fierce and it can get personal. But what you also have to consider is rising above the emotional aspects and asking yourself….but might that competitor give me the best valuation and might it be the right place for my employees to continue flourishing? Direct competitors are often able to make the strongest offers because they know your company, respect it (even though they might hate it), and there is benefit to them in consolidating competition and there could be the greatest number of synergies that help A+B be a very compelling C.

It’s ok to hate the competition. It’s ok to not consider them as a future potential suitor. But for a moment, remove the emotions and rationally think about where you can get optimal value from selling your company?  If you can get that optimal value from others besides a despised competitor, great. But if you believe that could bring you the highest overall value, then rise above the emotions and do what’s best for you, your shareholders and employees.

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.