Reflections

The timing to sell your business is a key part of an exit preparation plan

In working with clients to help them prepare for their future euphoric exit event, a key part of the discussion and planning relates to the “when” should they consider selling. At the highest level, there are two options related to exit timing. The first is obvious and that is as the company owner, when do you want to sell your business. The second is less obvious to many owners and that is the timing to sell your business related to when acquirers are most active and interested in buying your company. In the perfect world, you sell when these two intersect.  Meaning, you sell when you are ready personally and it happens to coincide with acquirers being the most active acquiring companies within your industry. But for most sellers, these two often don’t coincide.

Our advice to clients is you should build a business that is ready to exit when you want or when the right acquirer comes knocking and is ready and able to reward you with a premium offer. You want to avoid being that seller that regrets missing the cycle of acquirers being active but didn’t sell because you weren’t personally ready to part with your company. Then the day comes you are ready to sell only to find that acquirers are not as active and certainly not paying the premiums they once did.

In your exit planning, give quality thought to the timing both as it relates to your personal desire but also monitoring the cycle of acquirer activity in your industry. Timing of your exit can mean the difference between a euphoric exit for you, your family and shareholders or one that is less rewarding.

Leverage this template to facilitate healthy dialog with your sales team

In our discussions with private company owners, a discussion topic early on relates to the effectiveness of their sales teams’ process and overall capabilities. When the day comes you want to sell your business, the sales capability of your company will be evaluated closely by the potential acquirer. Given this reality, use time as a friend to build a solid sales engine to impress your future acquirer.

One of the ways to impress them is to show that your sales team has an above market performance win rate. And there are two win rates you will want to track and share with them. The first is what percentage of orders you get when trying to sell to new customers and the second win rate is what percentage of orders you win when pursuing work from existing customers, those you’ve done business with before. The general norm for many industries is the win rate of your sales team when chasing new customers should be north of 30%.  Meaning, out of every 10 new customer opportunities your sales team pursues, you win at least 3 of them. When chasing repeat work from existing clients you’ve done prior business with, that win rate should be north of 70%, or 7 of every 10 opportunities that your team pursues.

Attached is a helpful template (Steps To Improve Our Win Rate) for facilitating a great discussion with your sales team. Use this to explore steps the team could take to improve your company win rate. Building this capability today may reward you handsomely when the day comes you want to attract and excite a third party to acquire your business. Having a strong sales engine takes time to build, use time as a friend and ensure you’re building that sales engine today.

Knowing the difference can have a big valuation impact when you sell your business

If I asked you to name the brand names that come immediately to mind when I mention commercial airlines, you might reply with American, United, Delta and Southwest. In this answer, you “recalled” these brand names as they were top of mind for you. Then if I asked, have you heard of Alaska, Frontier or Allegiant, you might say yes, which means you “recognize” these brands but they weren’t top of mind. Building your company brand to be “recalled” can be the difference between an ok exit event one day versus achieving a euphoric one.

So ask yourself, if someone asked a target customer in my market sector about the brands that they “recall” pertaining to the products and services we provide, would they recall ours? If no, would they “recognize” it when our brand is brought to their attention? If you are unsure, might be an opportunity to do some market homework about your brand. If the answer is yes, discuss with your team how to protect and nurture this great brand position you’ve built in the market. If the answer to being “recalled” is no, brainstorm with your team how to address this.

Ask any third party acquirer if they generally see more value in “recalled” brands versus “recognized” and the answer will be a resounding YES. This is because a recalled brand has invested successfully in capturing the heart/mind of a target customer and that will benefit future growth. Now of course the built-in assumption here is that the customer’s recall is a positive image of your business and if not, this also gives you an idea of identifying steps your team should be taking to leverage the good news of being recalled, but improving the image.

This is a great topic to discuss with your team. The difference between recall and recognize can be very impactful to the valuation you might receive one day from a third-party acquirer. Use time as a friend to know where your company/brand stands in this regard and begin taking steps to either protect it or build it.

Avoid these common deal killers when you sell your company

Studies related to private company merger and acquisition activity continue to show that the majority of sellers who try to sell their business, aren’t successful in doing so. In fact, various studies show that roughly 80% of private sellers who want to sell, aren’t able to do so.

There are multiple factors why deals don’t get done and here are a few that often surprise sellers to hear:

Seller Valuation Expectations – this is when the seller believes their company is worth much more than a third party believes it’s worth. This is a reason many acquirers don’t like to be the first one to make an  offer for a private company, because they will be the first to potentially call the baby ugly and offend the seller with their valuation offer. The seller is unable to then find an acquirer that is willing to pay what they want for it.

Seller Gets Cold Feet – this occurs when a seller begins to negotiate a sale with a third party but through the offer, due diligence and legal document negotiations, the seller realizes they aren’t ready to part ways with their baby. Realities hit them of how their life will change once they sell their company and they realize they aren’t actually ready to separate from their company.

Acquirer Retrade – this occurs when the seller and acquirer agree on an initial valuation and deal structure for acquiring the business but after conducting some or all of their due diligence, the acquirer conveys they plan to change their initial offer, obviously not as favorable as what was first agreed upon. This retrade can offend/upset the seller and end further discussion.

Deal Fatigue – this occurs when either or both parties get tired of the exit process taking too long. This can happen when the seller isn’t able to keep up with the acquirer’s due diligence requests (i.e.: providing requested data or documents) and/or when the seller finds the acquirer not applying enough resources to getting the deal done in a timely fashion and believes it’s taking too long and they tire of the process.

Final Agreement Deal Terms – this occurs when the beef is getting put on the legal contract bones of the deal. The initial offer is generally broad, vague in some areas and non-binding to both parties but it gets both parties to agree at a high level to do a deal. Once due diligence gets underway, both parties begin working on the final legal agreements including the Sale & Purchase Agreement (SPA). This agreement addresses the details of the transaction and it’s during these negotiations of the SPA that the parties find they can’t agree on final deal terms. So, although both parties initially were able to agree on broad deal terms, once the details are negotiated the parties find they are not aligned on specifics and the deal falls apart.

The key here is knowing that all of these common deal killers can be avoided with the right level of exit preparation. Contact us and we can help you think through what steps to be taking today so you avoid ever experiencing these issues when the day comes you want to experience your euphoric exit event.

Effective segmentation can drive up company value at time of sale

When the day comes that you want to attract and excite a third party to acquirer your business, it will be critical that you show them that your team deeply understands the various customer segments in your market place that you serve today, even those that you may not yet serve but may provide a future expansion opportunity. You serve a clustomer when you group all your customers into a single cluster and treat them as if they all have common buying needs. Over time, this is a dangerous and growth limiting assumption to make. You serve customers when you segment them according to how their needs may differ from each other. Segmenting your customers by their unique needs is the optimal path to exciting a future acquirer.  Your business is ideal for conducting customer segmentation if any or all of these apply:

• We have customers that use our product/service differently than others do
• We have customers that purchase our product/service differently than how some others do
  • where they buy from, such as direct versus thru middleman
  • have a different purchasing process, such as the timing of their purchasing need or their process for how they find/select/buy our product/service
• We have customers that vary by geography or even culture (i.e.: domestic versus international)
• We have customers of different sizes (i.e.: small mom & pop versus larger corporations, public companies versus private)
• We have customers with varying needs in terms of the support they need from us (i.e.: sales support, technical support, customer service, etc)

These are just a few of the ways that companies will segment their customers. Help strengthen your business today and prepare to impress your future company acquirer by talking with your team about the effectiveness of your customer segmentation planning and build the future value of your enterprise.

When selling your business, it’s most often the jockey that drives company valuation

In the M&A world, professional acquirers think in terms of each business having 3 critical components.  They evaluate your business for each of these and study after study shows, of the 3 it’s the jockey that most often is the critical underpinning to the dollar and deal structure they offer.

Jockey – an acquirer wants to know who is/are the brains, the talent and the experience behind the success of your business. And they will look to the history on this and apply it to what talent and experience they will be acquiring. If any or all of this talent and experience that underpins the success of your company will be leaving or has a risk of leaving upon the acquisition occurring, then the dollars and deal structure they are willing to offer you will be less attractive. If the jockey (a person or team) is remaining, the value they assign along with the deal structure they offer maybe much more attractive.

Horse – an acquirer wants to know what your special sauce is related to your products or services. How unique is your offering in the market, what value do you deliver to customers that is better than alternatives they can purchase, these are key questions an acquirer will have. The greater your uniqueness in the market, the greater the offer will be from the acquirer. We say to our clients, to command the highest valuation one day from a third party, let’s not just have a unique offering, let’s find ways to have the only offering.

Race – an acquirer wants to know what markets you serve and what position you have in these markets. They will look to see what the market dynamics are projected to be going forward in terms of growth trends for the markets you and/or they could serve. It’s one thing for your successful business to have operated within your market historically but they will determine what the market dynamics will be going forward for them in owning your business. Selling your business at a time when these market dynamics are showing continued tail winds for an acquirer to enjoy, the offer they make you will be stronger.

So, of these 3, studies show the majority of times it’s the jockey that the acquirer is basing their offer on and is the difference between a poor to great offer. The horse and race are certainly important and to some acquirers maybe more important in setting their valuation, but the jockey is most often the lead driver. If an acquirer simply wants your company for its products/services and doesn’t see need in you as the seller or your team, then to them the jockey is less important. But this occurs in a minority of the transactions.

Ask yourself, in selling my company one day, which of these 3 will be a key driver to the offer I receive? If for my company it is the jockey that they will see as key, how will my company present in this regard to give the acquirer the confidence that our talent and experience will remain post acquisition? To achieve your future euphoric exit event, think about your business and how future acquirer’s will view your company jockey, horse and race.

It’s time to ensure your strategic plan will support a future euphoric exit

For many businesses operating on a calendar year, it’s this time of year that ownership/leadership should be thinking about their strategic plan. And not just their plan document but more importantly the process (or campaign as we refer to it) that goes in to developing the plan. The right strategic planning campaign involves the right degree of strategic thinking first…then proceeds to developing the strategic plan.

At our guest speaking events we often reference General/President Dwight D. Eisenhower and his famous quote, “Plans are nothing; planning is everything”.

We agree wholeheartedly with him. The strategic plan could be nothing if two key elements are not in place:

• A plan that lacks meaningful “thinking” is nothing. Too often executives look to check a box and rush to get a document in place that they call their strategic plan. But if ahead of documenting a plan there was an absence of asking the right strategic questions to facilitate strategic thinking, then the plan itself maybe nothing.
• A plan that is lacking continuous monitoring to ensure performance progress and that allows for updating based on new learnings, such as market/customer changes, is nothing. Plans of this type are stale as soon as the ink dries.

When the day arrives that you want to excite a third party to acquire your company, you’ll want to be effectively prepared for an early due diligence question they will have – do you have a documented strategic plan for them to review? They are asking to see your strategic plan for two simple reasons. The first is they are checking to see what discipline you have internally for conducting effective planning and second, they want to see your team’s ideas that you’re pursuing to keep the business growth robust for the period ahead under their potential ownership. For these two reasons, you not only want a plan document in place but you want the planning muscle also in place to impress them and give them the confidence that paying a premium for your company may be warranted.

As you think about 2024, don’t just check a box. Think about how to strengthen your teams strategic planning muscle. Starting to strengthen this part of your business today will pay you great dividends in the future.

For those wanting to sell their business one day, it's critical to answer these

When we meet with potential clients a common question is what specifically will our deliverables be if they engage us? This of course is the right question to ask and our answer is simple. We prepare you to achieve a future euphoric exit event.

Our specific deliverable is to guide company ownership through development and execution of a plan that will help greatly increase the likelihood of achieving a future euphoric exit event. And at a very high level, here are the 4 areas that we help owners discover and prepare for. And these are the 4 areas that every company owner should think about today in preparing their business for a future successful exit event:

Exit Target - ask yourself - 

• what is my desired gross valuation at time of exit that I want to receive from a third party?
• what is my desired timing for an exit to occur?

Valuation Gap - ask yourself -

• do I know what my business might be worth today to a third party?
• how does the current valuation of my business compare to how much I’d like to one day receive….how large is this gap?

Valuation Drivers - ask yourself –

• do I know what the top 5-7 “must have’s” that future acquirer’s will base their valuation heavily on when they look at my business?
• what is my company status/readiness to deliver on these “must have” valuation drivers?

Strategic Plan/Priorities - ask yourself –

• is our current business strategy audacious enough to close any valuation gap we might have in terms of what the business might be worth today and what ownership hopes to receive for it one day??
• is our team working on ensuring the “must have’s” will be in place when the acquirer’s come to consider buying our business, are these part of our strategic priorities?

There is no mystery to what it takes to prepare an owner and their company for a euphoric exit event. What it takes is addressing these 4 areas and using them as the basis for your exit preparation plan. Don’t reinvent the wheel here, get guidance from an exit planning organization so you can focus on getting to your euphoric future event.

Understand your 30-40-30 profit rule before selling your business

“Assumicide” is when we  make an assumption about our business that our financial data doesn’t back up. Ask yourself….in looking at my detailed financial data, do I see clearly which parts of my business might be losing money, breaking even and those areas where we make money? Don’t assume, leverage your data to know.

When the day comes that you want to sell your business to a third party, their due diligence will have them looking for the answer to this question. And the answer they find will play a large factor in whether they want to acquire your business and if yes, how much they will be willing to pay.  To ensure you’re prepared to excite the future acquirer, make sure today that you’re not just looking at your financials at the consolidated company performance level and assuming where you do and don't make money, but at a granular level, by markets, customers, products and services to understand true profitability.

Ask yourself, within our Markets, Customers, Products or Services that we sell:

• What areas are we losing money?
• What areas are we only breaking even?
• What areas are we making our profits?

Your company consolidated profit performance is therefore the net result of these three. For many businesses, the general rule is 30%-40%-30% respectfully to these three categories. Your company will have its own mix but imagine the net worth you could build into the future of your business if you know this level of detail and manage your business to eliminate or reduce the areas of loss or breakeven and protect and optimize where you truly make money.

Use time as a friend to identify this level of detail today. Meet with your controller or CPA on this critical analysis and ensure you’re on the path to your future euphoric exit event.

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.