Reflections

Will your financial narrative excite an acquirer to buy your company

Ask yourself this question – in looking at my company financial performance, what story or narrative does it convey?

When the day arrives that you elect to try and sell your company to a third party, there will be 3 specific narratives the potential acquirer will be listening for. The first relates to the narrative around what your company is and why it’s special. The second relates to why you’ve decided to sell the business. And the third is the narrative that your financial performance will convey and does this narrative support or conflict with the other 2 narratives?

Specific to the narrative that your financials are conveying, here at a very high level is what a potential acquirer will be looking for when they have the opportunity to review your financial performance (of the last 3 to 5 years will be what they want to look at):

• What is the general historical trend of the financial performance of the company and certainly what is the most recent trend….growth, flat or decline?
• What is the general revenue and gross profit trend of each of the key products and services your company provides? A potential acquirer wants to see more than just the consolidated performance of your company, they will want to see it at a more granular product/service level.
• How are your company gross margins trending in relation to your sales? If your company revenue is growing, are gross margins remaining strong or has growth required you to give up margin or do your margins increase with efficiencies that can be gained from greater sales volume?
• How have your fixed, variable and Sales, General & Administrative costs trended in relation to your revenue? Are you able to increase sales at a faster rate than you have to add costs (i.e.: adding more labor or material costs) or are you experiencing efficiencies and economies so that your costs are not rising as rapidly as your revenue is?
• What is the trend related to the working capital requirements of the business? Is your company needing to tie up more working capital, same or less as it relates to your sales trend?
• Is your business experiencing positive operating profit leverage on each incremental dollar of sales? Meaning, for every dollar of incremental sales, is the incremental profit greater than the average profit performance of the general business or are incremental sales driving lower or greater incremental profit?

These are just some of the initial questions any potential acquirer will want to understand and their assessment of your financial performance will convey a story or narrative about your business. Obviously, this narrative is extremely important as it relates to exciting the acquirer to not just make an offer, but make you an attractive offer. Begin today looking at your financials with this future narrative in mind. Doing so will allow you to make decisions and improvements in your financials to better position you one day to deliver an exciting narrative to acquirers knowing that your financial results will back up your compelling overall narratives.

Don’t be surprised by this adjustment when selling your business

In a recent blog, we covered some typical adjustments you can expect that will impact the gross payout you receive from an acquirer versus the net amount of dollars you actually receive.  Another important and typical adjustment you should be aware of, well in advance of exiting, occurs with the purchase price the acquirer pays you and it’s called the Net Working Capital (NWC) adjustment. This NWC adjustment can impact the actual purchase price you receive the day your transaction successfully closes with the acquirer.

Due diligence is the opportunity for an acquirer to conduct a deep dive into your company so they can fully understand everything they need and want to know about owning your business.  One area they will probe will be to understand how much working capital your business needs on an average basis to successfully operate it. They will take your historical financials (generally at least 3 years) and look to see what this amount is and they will then negotiate with you as to what the amount of NWC the business needs to have on hand the day they complete the acquisition. The outcome of this negotiation will be to set the target, or what is referred to as the “peg” rate for what the NWC should be on day of transaction successfully being completed. You therefore also want to conduct such an analysis to be clear on what the NWC needs are of the business because both parties will negotiate this peg amount and it can impact the final purchase price. If on the day of completing the transaction the actual NWC amount on hand is below the negotiated peg rate, then the seller will have to accept a lower purchase price to make up for the gap. If, on the other hand, the NWC on hand is above the negotiated peg rate, then the seller will receive a greater gross payout.

This NWC adjustment for some sellers can be a large number and can have a meaningful impact on the proceeds received for the sale of their company. It’s for this reason that you will want to be on top of this analysis and well prepared to negotiate the peg amount with the acquirer. Managing this important adjustment can be the difference between being unhappy or euphoric with the amount you are paid for your company.

Use time as a friend to effectively think through these deal related questions

Private company owners are often stressed going through the process of selling their business but for too many, it’s more stressful than it needs to be. This is because many decisions they face through the exit process weren’t given the proper early thought and pre-planning that they should have gotten so certain key decisions become more rushed. Here are some examples of decisions you’ll be making when selling your business to a third party:

• Do you want the acquirer to continue using your company name or tradenames?
• Is there a family legacy aspect to the business that you want the acquirer to protect going forward?
• If you own your company facility/facilities, will you expect the acquirer to acquire or lease it/them for a minimum period of time?
• Will you accept an acquirer that elects to relocate your business?
• Will you have any requirements that an acquirer maintain all or some portion of your workforce?
• Are you looking for an all cash payout for your company or will you accept some portion of payout in an earnout structure (a portion of your proceeds received only upon achieving future company performance milestones) or accept a portion of the payout in the form of equity issued to you by the acquirer (i.e.: stock)?

These are just some examples of questions you’ll want to give yourself time to think through and not be rushed in making. Selling a business is stressful enough so avoid making it more stressful by thinking through key, obvious questions that you’ll have to have answers to before negotiating with a third party to acquire your company. Use time as a friend in getting prepared and increase the likelihood of achieving your future euphoric exit.

A critical step in building the future valuation of your company for a successful exit event

Ask yourself this question - who I do have in my network of family, friends and colleagues that helps me keep my strategic level of thinking from getting stale?  

It makes sense that over time our network becomes filled with individuals we enjoy being with as we share common interests and even values. But it also makes sense that this network could mean we have surrounded ourselves with a network of like-minded individuals, those who drink from the same Kool-aid so to speak as we do, and this is where the cognitive rut resides. It’s in this rut where can hold ourselves back personally and professionally and it can certainly impede building the long term net worth of our company as our historically innovative and fresh thinking may be getting stale.

It’s called a cognitive rut because no one within our network is challenging our thinking anymore or helping us vet issues and opportunities with fresh new thinking. Being in a cognitive rut means we don’t have people in our lives who will:

• Ask us questions but frame them in insightful ways that enable or even force us to think differently
• Be willing to discuss our questions and tell us what they truly believe and not just what we might want to hear

If you’re already in a cognitive rut or want to ensure you never are, here are options to consider:

• Stay within your current network but reinvigorate the dialog by infusing new topics you’re discussing. In other words, freshen the dialog with new topics. Maybe it’s the topics that need refreshing more than the network.
• Expand your network to include individuals that can help you generate new thinking and help you challenge paradigms and perspectives that could be holding you back. Join an area Think Tank group, connect with a local University that conducts research in your industry or join a business owner group.
• Review the books, articles, podcasts, blog posts, etc., that you’re following to determine if they are stale or too like-minded with your own and complement them with new sources that might provide you alternative ideas.

Avoiding a cognitive rut is a gift we owe ourselves personally and professionally. And for those company owners that one day want to achieve their personal euphoric exit event, avoiding the cognitive rut will pay handsome dividends when the acquirer sees the innovative, strategic business you’ve built and that they can now benefit from. Preparing for your future euphoric exit event requires you take many key steps years prior to selling your business and having the right network around you today that helps keep your thinking fresh is one of these key steps.

Your future euphoric exit event depends on the process you elect to run

As a company owner/CEO, here are your future exit process options. You can run a process that has you conducting a:

• Private auction - focus your company sale with a single acquirer
• Select/Targeted process - discuss the sale of your company with a small, very select group of potential acquirers to then narrow down to the one to focus on
• Broad process - reach out to a large number of potential acquirers to ultimately find the one you want to focus on

Now if your exit options include setting up an ESOP or selling to your management team, or taking your company public, then your exit process will vary. But if your exit option will be to sell to a third party (strategic and/or financial buyers), then you have the three options listed above.

Each of these exit process options has its pros and cons. And every company is unique so the right exit process for one may not be optimal for the next. It’s important that you learn about each of these as they apply to yourself personally, your team and which will lead to the optimal valuation and deal structure. Work with your exit planning professional or give us a call to help you think through which option will help you achieve a future euphoric exit.

Your personal readiness is as important as your company readiness

You might be surprised to learn that it’s not uncommon for acquisitions to grind to a halt and even get derailed because the seller learns too late that they weren’t prepared personally to sell their company.

Private business owners think in terms of making sure their company is prepared to attract and excite a third party buyer but too often don’t invest the time in the preparations that need to take place for the company ownership to be personally ready. Ask yourself these questions as you prepare yourself personally for selling your business:

• Today my day and week is filled with meetings and activities related to my business, so what does each day look like once I no longer am responsible for my business….will I get bored quickly or do I know specifically how I will replace the time not just weeks after a transaction, but years after?
• You know what your typical calendar and schedule looks like today as you own your company, what will your calendar look like the day after you sell your business and do you like how that calendar will look?
• Today, when you meet someone new at an event or a dinner party and they ask you what you do, you reply that you own XYZ business. Once you sell your business, how will you convey what you do? Will you convey “I sold my business and now retired, I sold my business and now manage my investments, I sold my business and now focus on philanthropy activities, etc., etc.”
• Today your business most likely provides you mental stimulation and challenge, if you like this aspect of your life how will you replace this once you no longer own your company?
• How will your “new life” post selling your business impact your family, a spouse? Today they have their life and routine, how will your change of routine affect them?
• Upon selling your business, you won’t have a paycheck from your business so your cash flow for paying monthly bills will change and even access to your health benefits will change, have you thought about how both of these will be replaced?

These are just some of the questions we help our clients think through as they invest the needed time to prepare not just their company for exit, but themselves personally as well. Achieving a euphoric exit event one day doesn’t just get defined in how much you receive valuation wise from a third party and the deal structure they offer but it also includes how you will personally feel after the transaction. Avoid putting these questions off too long because for some they can take a while to truly think through effectively.

Have at least minimum disciplines in place to support a great exit valuation

The performance of your business at any point is time is the culmination of decisions you’ve made and operating disciplines you have in place at your company. And it’s the combination of these that one day might excite an acquirer to pay you a premium for your company. Let’s therefore think about some of the minimum disciplines you should have as they are most likely the ones an acquirer will hope that you have built in to the operating muscle of your company.

It’s common for larger businesses to acquirer smaller ones. One of the concerns the larger company often has is that basic operating disciplines may be lacking and have to be introduced to the smaller acquired company. They might see having to introduce these more common desired disciplines as risky, time consuming or costly to get in place and therefore could impact the valuation they place on your company. If your future acquirer will be a larger company, prepare today to show them at time of exit that they don’t have to worry about, or at least minimally worry about, assimilating your company into their own. Here are the more common disciplines the larger acquirer might hope you have introduced at least to a minimally acceptable level:

• Have a documented strategic plan, or at a minimum, documentation of where you are taking your business and what initiatives you're working on to get you there.
• Have a monthly (minimum quarterly) discipline of effectively reviewing your progress against what’s in your strategic plan as well as the discipline of leveraging your financials to fully understand your profit and loss, balance sheet activity and certainly cash flow management.
• Have good bookkeeping, general record keeping and overall solid financial management, accuracy is key.
• Have good documentation of your operating procedures – accurate bills of materials if you’re producing a widget and good procedures documentation if you’re a service provider.
• Have a good discipline related to the compensation program for your team. A comp & benefits program that is market competitive – not too far below market levels and not too far over either.

Each industry might have others to add to these, but these are the primary ones to ensure you have in place. Think to yourself, if you were acquiring another company what basic operating disciplines you’d hope the seller has in place to give you the confidence to pay them for their company.  Getting these basic disciplines in place before you attempt an exit, could be the difference between receiving a poor or just ok valuation offer from an acquirer versus receiving an offer that makes you euphoric.

Avoid committing "assumicide" as you prepare your business for a future euphoric exit event

When we assume, we commit “assumicide”. And to achieve your future euphoric exit event with your business, the last thing you want to do is make assumptions about your readiness to excite an acquirer that don’t actually play out when exit time comes.

Business owners often make assumptions in areas of their company where they have blind spots. These are aspects of their business that are ripe for improvement but that they are blind to seeing or are aware of, but turn a blind eye to them. Here are some of the most common blind spots we come across early on when engaged by new clients. Ask yourself if any of these are potential blind spots in your company:

• The belief that when the acquirer sees your strong revenue and profit, they will overlook anything else of concern and still want to pursue buying the company with a strong offer.
• Minimizing the impact you have on your business as its owner. Ownership believing they can step aside and the acquirer will know how to fill any void created in experience, knowledge, industry expertise or even where all the ideas come from that help move the business forward.
• That weak members of your management team won’t negatively impact the valuation placed on buying the business. The belief that a weak senior member of your team won’t be seen by the acquirer during their due diligence or if they are aware, they won’t let it impact their valuation.
• Organization culture issues that you as ownership know exist but have turned a blind eye to and the belief that an acquirer won’t see it as a problem.
• Lack of having any sort of documented strategy for the business and the belief that the potential acquirer will still be willing to pay you a premium for the business.

These are just a few of the common assumptions that we see private company owners making and turning a blind eye to. Ask yourself, where could the blind spots be in my business and if I uncover and address them, could I accelerate the valuation that an acquirer might place on my business one day? Don’t assume you don’t have blind spots, engage with third party expertise in this regard to help you take an independent look at your company.  Address any blind spots today and enable your euphoric exit event tomorrow.

Will additional capital today enable your future company sale

Ask yourself these questions:

• What is the general valuation of my company today if I were to try and sell it to a third party?
• What is the general valuation amount I’d like to receive one day for my company in a sale to a third party?

If there is a negative gap here, could raising outside capital be an effective strategy to help you accelerate closing of the gap? Consider whether your current business model (what you sell, how you sell it) is working well and whether just putting fuel in the tank would accelerate the financial performance of your business…to close the valuation gap you may have.

Here are additional food for thought questions if you have a negative gap from the first two questions:

• What is the primary barrier to accelerating your business performance and growing your valuation?
• Is this primary barrier something that could be addressed by having additional capital?
• Is your business model proven and showing good promise so that you could excite a third party to loan you capital or take even small equity in your business to provide you the desired capital?
• Do you have a business plan documented that articulates the opportunity ahead of you, what you’d use the additional capital for and what type of performance your company could realize with that capital?

If the valuation you’d like to receive one day isn’t looking in the cards for your business, then considering taking in outside capital could be a strategy to employ. Staying the course and investing in your own business might get you to one level, but what level could you bring your company to if you supplemented your capital with that of a third party? Talk with your CPA or give us a call and we can help you think through whether raising external capital is a way to accelerate your path to a future euphoric exit event.

Know if acquiring before you exit might accelerate the value of your company

Acquirer’s generally prefer to acquire scale. When you speak with active acquirer’s, you’ll often hear them articulate a minimum amount of annual revenue and profit they’d like a business to have before they want to invest their time in acquiring it. They want to acquire something that helps move their needle and generally they will have minimum financial performance levels in mind.

The minimum thresholds for acquirers in the small to middle side of the market is at least $5M, even more like $10M of annual revenues and at least $1M and preferably $2.5M of bottom line profits. As these numbers get larger in scale, the acquirer is willing to pay a reward for that scale. As an example, let’s say you’re doing $10M annual revenue/$2.5M annual net profit and in selling you might get an acquirer to pay you a 5x multiple of your net profit, or $12.5M. Jump that revenue to $20M and the profit to $5.0M and that 5x could jump to a 6x or 7x (or more depending on many factors) which would deliver a much higher payout for you because the acquirer is rewarding the greater scale.

You have two ways of accelerating the scale of your company. Do it organically or do it inorganically. Organically means you invest the time and money into your own company to build the revenue and profit and inorganically says that although you continue to build your business, you invest in an acquisition to accelerate the building of that scale. Here are questions to ask yourself if you’re wondering if it makes sense to consider acquiring a few years before you might consider selling:

• What is the general valuation that an acquirer might place on our current business given its size? (if unsure, give us a call and we can help you get this answer)
• Are our current revenue and profit numbers annually of the scale that acquirer’s in our industry find attractive?
• Do we know of competitors or complementary type businesses that might be for sale and that could add value to our business by bringing them together?
• Do we have the appetite for not only running our business but taking on the task of acquiring and assimilating another?
• If we acquired and accelerated the revenue and profit scale of our business, would we be rewarded by potential acquirer’s for building that scale in our particular industry?
• What is keeping our business from doubling in size? Could we double in size if we invested in ourselves or could we do it faster if we acquired a complementary business?

Many other questions we could help you think through here but the bottom line is this. What would you like to receive one day as a payout when you sell to a third party? If the gap between your desired payout and what your company valuation would be today, perhaps that gap can be filled more quickly by bolting on an acquisition.  Call us (949.874.0787) and we can help you assess whether it makes sense to go on the acquisition hunt to accelerate your path to a future euphoric exit event.

Price strategy is often under leveraged in private businesses

Ask any mergers & acquisition professional what’s the fastest path to building your company valuation and their answer will always include a reference to pricing strategy – be able to show that your company has some ability to periodically raise prices and minimize attrition.

Too often in privately held companies the leadership mindset is; “our market is too competitive and we can’t raise prices”, “we’re not a big enough player to be able to set prices so we have to follow others”, “we’re afraid we’ll lose customers if we try to raise prices”.

These might be true, but are you asking the right questions internally of your team to determine if even some small aspect of your business could initiate a price strategy that helps improve company profitability. Sit with your key managers and ask these questions:

• When is the last time we looked at the competitive landscape to understand who in our market is setting the pricing? Who is the player that seems to adjust prices first and others then follow?
• Are we looking too broadly at the pricing of our competitors in our market or are we effectively looking at pricing by market segment, customer type and by our individual products or services? In other words, are we getting granular enough in understanding the pricing in our market or are we making broad assumptions?
• Are we leveraging our customer buying behavior (by using our internal data of their purchase history) to see if we have packages or bundles they are buying? Is our pricing set by individual pieces of these packages are do we price to reflect the value they are deriving from the package?
• Are we leveraging our customer buying behavior to see any cyclicality or surge buying behavior? Are we charging the same price all year long when we might be able to raise prices during the times of the year when surges occur?
• When is the last time we evaluated the “next best alternative” that a customer has to our offering – in other words, do we truly know what other products or services our customer is comparing us to and do we understand where they view us as equal, lesser or better than that alternative – does our price strategy accurately reflect this view?
• Are we clear on the top 3-5 criteria our customer is using in selecting a product or service of our type? Every customer goes through a decision check list in their minds (or formally) before selecting your product or service. Are we clear on what their list is and how we stack up and are we pricing ourselves accordingly?

Setting pricing strategy begins with asking the right questions. And it’s well worth your time and that of your team to sit and think tank these questions.  Help your financials today and show your future acquirer that you are smart about your pricing and that you have some degree of smart pricing that they could benefit from if they acquirer your business. This could help be the difference between an ok future exit or a euphoric one.

Know who is ultimately making the acquirer's purchase decision

A common mistake made by sellers of private companies is they don’t understand early enough in the exit process who at the acquirer will be making the ultimate go or no go decision to buy their business.

Here are two common scenarios;

• the acquirer is a strategic player in your industry (maybe a direct competitor) and sees value in adding your business to theirs. Your point of contact is that company’s CEO or it might be a divisional or group President and they are very excited to acquire you.
• The acquirer is a private equity firm interested in adding your business to their portfolio. Your point of contact is a Principal or Partner of the firm.

Will the ultimate decision to acquire your company be made by your point of contact?  The answer in many cases is no. The CEO of the strategic acquirer may report to their company owner or to a Board of Directors (or shareholders). The divisional or group CEO you’re working with has a boss either at their corporate level or at the Board Chairman level. Then there is most likely a CFO, finance committee or M&A committee that will have a great deal of sway in the deal. And for the Private Equity firm, that Partner has other Partners and most likely a deal committee that must approve all deals. And with these scenarios, if either requires external financing to support them acquiring your company, their financing partner will have a go or no go say.

The reason it’s important to know who ultimately will make the acquisition decision is that the people you need to initially excite to acquire your business may not be the ones you have to ultimately convince to acquire your company. This means that through the entire exit process (or campaign as we manage it with our clients), it’s critical to build and deliver an exit narrative that will be compelling for all acquirer decision makers and in sharing of numbers and information about your business, it’s important to prepare and share this information knowing how it will be viewed by not just those you’re working directly with, but those they must in turn work with behind the scenes. You want to help them sell the deal to those they need to convince. Your point of contact is your sponsor, but you want to help them in turn excite and convince those that will have the final say.

Getting to your euphoric exit event won’t come without pre-planning. Ensure your exit planning campaign includes understanding the decision making chain of the acquirer as it could be the difference between not having a successful exit event or having a euphoric one.

Preparing to sell your company, follow the T.O.P.S. formula

Learn from those that have gone before you in selling their business. This is not an area that you want to reinvent the wheel and can learn a great deal from sellers that have had great exit events and those that have not. Those that are euphoric with the sale of their company have many aspects of their business readiness in common….this readiness commonality between these businesses creates a formula that every private business owner and CEO should know and use to guide their business.

Visit our brief video here (T.O.P.S. Formula) to learn the formula for building the valuation of your business to position your company for a future euphoric exit event.

Ensure a great culture to enable your future business exit

We are all seeing companies handle remote working in a variety of ways. Although we see many recalling people to the office for at least a few days a week, we’re also seeing many still retain some degree of remote working.

If your company is supporting any degree of employees working remotely, ask yourself these questions: How would I describe the work culture I want for my company? And what impact is remote working having on that desired culture?

One dynamic to have in mind is being pointed out in a variety of recent studies on remote working. When employees are working in the office, they are surrounded by co-workers and as a result they are exposed to a variety of viewpoints and opinions on daily matters. In this office environment, they can’t shut these viewpoints out and must learn to process and manage them which means they may remain more open and flexible in their own thinking. But remote workers are not getting this direct exposure as much and unintentionally they are creating what experts call their own echo-chambers. This chamber could lead to myopic thinking and less of a willingness to be open to new thinking. This can impact your culture because it could make an employee less flexible in thinking an issue or opportunity through, less receptive to any sort of change and less willing to have productive brainstorms.

When the day comes that you want to sell your company, know that acquirers will assess what they deem your company culture to be. They will assess whether they like the culture you’ve built of whether there is risk in their assimilating it into their own. Manage your culture, don’t let it manage you. Discuss with your key leaders what your target company culture is and whether any remote working is enabling or disabling the very culture you’re looking to build and maintain.

When looking to sell your company, the difference in valuation could be significant

It’s common to hear an owner or CEO express their belief that their company is the best versus the competition in all or some aspect of what they provide to the market. Hopefully this is true for your company but here are a few important things to think about:

• How are you determining that you are the best, what tangible information are you basing this on?
• How do you know that a competitor hasn’t caught up? Market competition changes over time, when was the last time you looked externally to confirm your belief?
• If challenged (one day by an acquirer), what tangible proof can you share to confirm the “we’re the best” claim?
• Are your customers rewarding you either in giving you a greater percentage of their available business and/or rewarding you in paying a premium for your product or service as their way of showing they place tangible value on you being the best? Or are you deeming your company the best in an area but it’s not translating to value your customer is willing to pay for?
• In the area you are the best, what could you do to evolve this further to make your company the ONLY, not just the best?

Acquirers regularly hear Seller’s claim to be the best in some aspect of their company. They are willing to accept this but not only on face value. If you want to impress an acquirer and get them to pay a premium for your business one day, find a way to be the only or sole source provider to your customers in some aspect of what you offer the market. Doing so with a meaningful revenue and profit and projecting a future where you can show this can scale and be defensible to benefit the acquirer, will put you well on your way to achieving your future euphoric exit event.

Talk with your team….change the paradigm from being the best to being the only.

Make sure you’re ready to excite an acquirer even through due diligence

We share with clients that they have two decisions to ultimately make. The first is do they want to sell their company. The second is can they sell their business if they desire to do so. People are surprised to hear the number of privately held businesses that the owner wants to sell but actually isn’t able to.

One of the reasons for not being able to sell a business is the sellers inability to successfully withstand the acquirer’s due diligence process. Here is the latest article by Larry O’Toole related to ensuring you can be euphoric one day from the sale of your company by successfully supporting an acquirer’s due diligence. (Read Due Diligence - Ensure Your Company Is Exit Ready)

Three questions every company owner will face one day

Let’s start with the good news. Many business owners possess the dream of one day selling their business and achieving a euphoric outcome. Now the bad news, many of these same business owners lack having a solid plan for making that dream a reality and never achieve it.

We regularly see that well run and successful businesses today do not always translate to “exit ready” businesses tomorrow. Exit ready means delivering on the owner’s dream relative to what they hope to one day achieve from selling their company. The gap is because not enough thought has gone into what we call, the Ownership Exit Triangle.  This triangle is the starting point for facilitating critical questions a company owner should be answering to help lay the critical foundation to achieve their desired future outcome.

Here is a brief, but helpful video to help you think about the 3 key questions you’ll want to think about in advance of selling your company one day. (Ownership Exit Triangle video)

Productivity initiatives within your company can help increase company value at time of sale

There are two gifts that executives don't often fully leverage in building the long term value, or net worth, of their company. One is pricing strategy, the other is driving productivity initiatives.

Both of these can help your company today, and at time of your future exit, because when done well they will greatly strengthen the valuation that a third party might be willing to pay you for your business.

Here is a short but effective whitepaper to help facilitate a dialog with your leadership team about where there may be productivity opportunities within your company. As you think about strengthening your business margins today and over the long term and the positive impact this could have on your future exit event, begin today leveraging what productivity initiatives can do for your business. (read whitepaper)

Address potential future due diligence headaches well before attempting to exit

A step we take with our clients, as we guide them on their journey to experiencing a euphoric exit event one day, is to conduct a due diligence dress rehearsal at least one year prior to beginning the sale process. There are common challenges that arise during any due diligence process as an acquirer kicks the tires of a company they are looking to buy, and all can be either avoided or better managed to reduce the stress on you, the seller.

One such challenge that commonly arises in due diligence by an acquirer is your company’s handling of State income and sales tax reporting for the various States that you might conduct business in. And where it can get gray is what is the definition of “conducting” business and does it expose you not just to paying income tax in that State but potentially sales tax as well. An acquirer wants to understand this because if it’s found that there is an issue and any State or States challenge you, it could lead to a future risk or liability to the acquirer under their ownership.

An example of this is let’s say your company sells a product to a business in another State, such as a distributor or a service type partner. This of course opens you to paying an income tax in that State but how about having to pay a sales tax? State tax authorities look to see what they call a “nexus” or connection between your company and their State tax paying requirements. Generally, the income tax you owe is clear but what can be gray relates to how your company is handling the sales tax.

A good due diligence dress rehearsal will find such potential hangups that could concern a potential acquirer. Use time as a friend today to find such potential hangups and address them so they don’t bog down your ultimate due diligence process. If you’re thinking about exiting in the next 1-2 years, think about conducting a due diligence dress rehearsal. We can help by visiting our Business Diagnostics page on our website where we have a helpful tool to get you thinking about successfully preparing for due diligence. (Due Diligence Dress Rehearsal Diagnostic)

To achieve your euphoric future exit event, know the order for engaging advisors

We find that too often private business owners don’t know when the optimal time is for engaging with M&A professionals to guide them in selling their company to a third party. It surprises many to hear the order of priority in establishing these M&A partnerships. Here is what we recommend to private owners thinking of selling their business:

In advance of selling your company, here are the professionals we suggest having on your team to greatly enable getting you to a successful, even euphoric exit event:

• Exit planning advisor – at least a year in advance, even better 2 to 3 years prior, engage an advisor to help guide you through the entire exit preparation process (or as we call it, the exit optimization process). There are many aspects to preparing your company for an optimal exit and this advisor is the first to engage as they are experienced to take away your uncertainty as to what preparation steps you should be taking to lead to your euphoric exit event. This advisor will also help you thru the process of when to engage the following set of advisors to have on your exit optimization team.
• Tax planning advisor – at least a year prior to selling your business, you’ll want to ensure you have an optimal tax efficient structure in place (business and personal) to help minimize the federal and state taxes you’ll owe on the sale of your business. A tax advisor will tell you that they need at least a year in order to give you the greatest number of options for getting a tax efficient structure in place. And depending on your personal situation, in addition to tax advisory there maybe the need for engaging with an Estate Planning advisor and they too should be engaged at least a year prior to starting the exit process.
• M&A lawyer – next in priority of building your exit team is your M&A lawyer and this is approximately 6 months prior to beginning the sale process that you want to be interviewing for your M&A legal partner. Not your business lawyer, but your M&A seasoned legal partner. You’re not just hiring a lawyer to help you get all the legal documents in place, you’re looking for a seasoned M&A lawyer that keeps you from getting sued post-closing of the transaction. Any M&A lawyer can get the documents you need in place for a deal to close, but what you want is the M&A partner that is highly experienced to ensure that all the transaction related documents are negotiated and drafted to keep you from post-closing lawsuits that can commonly arise in M&A transactions.
• Investment Banker/Business Broker – also about 6 months prior to beginning a formal sale process, you’ll want to be interviewing for your partner who in essence will run the auction process for your business. A seasoned broker (generally for smaller businesses) or Investment Banker (for businesses with more size) is licensed to represent your company in the sale process. This partner will guide you through the process of building your Confidential Memorandum that will be used to solicit interest from potential acquirers and will manage the entire process through to receiving offers. One of the reasons you want your M&A lawyer in place ahead of engaging your banker/broker is engaging them is going to require you signing an engagement agreement with them. You don’t want to sign these unless you have your M&A lawyer on your team first to review and negotiate your banker/broker engagement agreement.

Getting to a euphoric exit event requires having a solid team of seasoned M&A professionals around you. You can avoid making deal mistakes by engaging with professionals that have done many deals and know what pitfalls to help you avoid. These professionals can help you by making the deal process less stressful and ultimately have a much greater likelihood of success.