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Reflections

Hold up our mirror to your business, as we share fresh Bank Your Moment® insights

A future euphoric exit event requires this critical step

Making the decision to sell your company one day is certainly an important one. An equally important decision is will you be able to sell your company…meaning can you successfully withstand an acquirer’s probe, known as due diligence. We find in working with clients that many are well-run companies but are not exit ready. They need help in identifying what gaps exist that will keep them from achieving their euphoric exit event and a key step as part of this is to conduct a due diligence dress rehearsal.

Use time as a friend in conducting your company due diligence dress rehearsal to ensure you can smoothly and successfully undergo third party scrutiny. With our clients, we look to conduct a due diligence dress rehearsal 1 to 2 years prior to beginning the exit process. The reason for this advance prep time is it’s common to find issues that may require upwards of a year to address.

Here are some examples of dress rehearsal items you’ll want to ensure you’re ready for acquirers to probe:

  • Are your company ownership legal documents accurate and current? Same with all legal documents associated with any real estate you own that will be included in the company sale?
  • If you lease real estate in the operation of your business, are you clear on what your lease agreement calls for in transferring the lease to a new company owner?
  • Are your legal documents current pertaining to proof of protection and ownership of company name, brand names, trademarks, website domains?
  • If your company has intellectual property such as patents or trade secrets, are these well documented and protected and able to be transferred to the acquirer?
  • Are your company financial statements all accurate and current for at least the past 3 years?
  • Is your company profit & loss statement formatted to your industry standards? (example: gross margin can be calculated differently industry to industry)
  • Are all customer and vendor agreements/contracts properly executed (both parties signed)?
  • Do any customer or vendor agreements have “change of control” clauses that you have to adhere to prior to selling your company?
  • Are all your company procedures and policies well documented as they relate to fulfilling your product or service? If you produce a widget, are all bills of materials accurate?
  • Are all employee documents ready for third party review – employee handbook, benefits plans, employee offer letters/agreements, organization charts, etc.?
  • Are company operating systems scalable and with proper security protections? Are all licenses current for software being used across the company?
  • If your company has product inventory, are inventory controls and reporting effectively in place?
  • Is your company sales opportunity pipeline being used by your team and reflective of both current and future growth opportunities?

These are just some examples of areas that you’ll need to have ready for an acquirer to probe during their due diligence. Leverage our Yosemite Associates Business Diagnostic Due Diligence Dress Rehearsal Tool to facilitate your dress rehearsal. There are many exit planning steps you’ll want to take to reach your future euphoric exit event. Make a due diligence dress rehearsal one of these critical steps.

Answering these questions can help you prepare for a better future company sale

As we close out the year, here are some great questions to discuss with your team. The best leaders ask the best questions, so begin the new year on a more strategic footing by thinking about:

  • What changes occurred in our market this past year and will they continue in the new year?
  • Will any of the changes in our market (that have or will happen) impact our value proposition (the value customers get from using our product or service)?
  • Where are we unique versus our competition and does our marketing and sales messaging communicate this effectively? Does each member of our sales team effectively deliver the right messaging about our competitive uniqueness?
  • Looking at our revenues for the year just ending, which of our products or services increased over prior year, which were flat and which might have declined? Do we know the reasons behind each that could impact the year ahead?
  • Looking at our gross margins for the year now just ending (by individual products or services), did our margins increase, decrease or were they flat? Do we know the reasons behind each that could impact the year ahead?
  • Looking at our revenue by customers, which tier of customers grew, declined or were flat? (example: Tier 1 our top 50 customers, Tier 2 our 51st thru 250 customers, Tier 3 our 251st thru 500 customers). For the year ahead, how will we deploy our resources to each tier and what is our growth protection for each tier?
  • Should we make any price changes to our products or services in the new year?
  • Looking at our market, which subsectors do we see growing, decreasing or being flat? As a result, should we shift any of our sales or marketing resources?
  • What changes should we make in the new year that will help us drive up the overall value, or net worth of the business? (Beyond just driving up revenue and profit – i.e.: reducing customer or supplier concentration issues, improving systems, increasing customer stickiness, building sales pipeline, etc).

We could certainly continue with great questions to discuss with your team but here are some to begin the discussion. Leverage your internal data to help answer these questions and see what new thinking comes out of your dialog. You can be sure that you will come up with value creating ideas that will help build a stronger company which will then enable your preparation for a future euphoric exit event.

Ensure company incentive plans enable a future successful company sale

Many private company owners and CEOs reward some, or all, of their employees with a monthly, quarterly or annual incentive plan. If you offer some sort of employee incentive, ask yourself, do my employees that have an incentive plan know what the plan is based on, what they need to do in order to get a maximum payout?

Too often the answer to this question is No. It’s because ownership is nice to have an incentive plan in place but it’s purely subjective so the employees don’t know what actions or focus they should have in order to achieve it. This is a missed opportunity by ownership to get employee actions and behaviors aligned with what it takes to drive improvements in the business and create short and long term value in the business. It’s also a missed opportunity to ensure readiness to one day show a potential acquirer that your incentive plan is well though through and is helping drive progress in your company.

The ultimate reason, and benefit of putting an incentive plan in place, is to help drive desired behaviors by participants. To do this, the plan should be linked to what the company is looking to accomplish strategically, something more objective than purely subjective. Then, when the day comes that you want to sell your business to a third party, you’ll be able to show them that your company has many good disciplines in place, including an effective incentive plan for driving desired employee behaviors. As part of an acquirer’s due diligence, they will assess whether your incentive plans are well thought through and linked to the strategy of the business because this is a plan they will inherit. If the plan is well designed, it will help underpin their interest and excitement for acquiring your business. If not, it could give them pause due to the risk they might have to incur by addressing a gap in your incentive plan as they make changes they believe are needed. When an acquirer sees risk in doing a transaction, it gets reflected in a lower purchase price and/or a different deal structure. Certainly, any gap in your employee incentive plan alone isn’t going to deter the quality of their offer to acquire your business, but if other factors also arise during their due diligence, collectively these could impact their offer.

Ensure therefore that you are getting the near-term benefit of the money you are paying employees for incentive plans and in doing so, you’ll be getting ready to check one more box for a future acquirer as they will look to see that you have good disciplines in place related to your employee compensation. Get maximum value from the incentive plans you provide your employees and help enable the future value of your business in the eyes of an acquirer.

Optimize your P’s and optimize your future company sale

As the advisor to our clients in helping them achieve their future euphoric exit, we regularly wear the glasses of a future potential acquirer in looking at their company. A key part of this view is constantly evaluating the company 4 P’s so that we help ensure they are optimized in advance of an attempt to exit. Here are the P’s and think about each as it relates to your company:

Purchasing – ask yourself, how competitive is our company related to our Cost of Goods sold, purchasing our raw materials and supplies that go into our product as well as the labor needed to make it? Your future acquirer is going to look closely at your Gross Profit and they will know what the norm is in your industry and they will compare yours to the norm. To excite them, you’ll want to show that your team is very efficient, effective and competitive in the purchase of raw materials and application of your direct labor and this will be reflected in a strong Gross Profit.

Pricing – ask yourself, how good are we at establishing and implementing an effective pricing strategy to ensure we are getting optimal price for the value we are delivering to customers? Do we base our prices on our costs or on the value the customer derives from using our product or service? Are we able to command even the slightest of premium in our pricing versus competition? Having a well thought through pricing strategy and being able to show a future acquirer that your company can periodically raise prices with no or minimal customer attrition will go a long way in exciting them.

Productivity – ask yourself, do we track how efficient we are in producing our product or service? Do we know whether we become more or less productive as our volumes increase or decrease? Do we know whether our business is more productive this year than it was last year? A future acquirer will delve in to this area also starting with your Gross Profit. To excite them, you’ll want to show that you measure your productivity and that as the business grows it improves.

People – ask yourself, will my team be viewed as solid in the eyes of an acquirer and will the right members of the team be remaining with the business once it’s sold? Will the acquirer see that ownership isn’t needed for the business to continue growing? Excite your future acquirer by showing that you have the right people, in the right roles, with the right backgrounds/pedigrees and with the right focus.

Use time as a friend to ensure your 4 P’s are ready to impress a future acquirer. Doing so will greatly increase the likelihood of reaching your euphoric exit event as the acquirer will be willing to pay a premium for a business with all 4 P’s being solid.

 

This is a key question to ask well in advance of selling your business

We often hear private company owners and CEOs talk about finishing a year and they refer to whether they grew their revenues or not. And although this is important, it’s not indicating whether their company actually increased in value or not.

In prior posts, we’ve shared that private company sellers are often surprised to learn that 80% of the valuation a third party will place on their company one day will be driven by the intangibles of their company and 20% on the tangibles. The tangibles are your financials (revenue, profit, cash flow) so whether you strengthen these year over year is certainly important but not the majority basis for what the acquirer will be willing to pay you for your company.

The intangibles, or 80% of what they will base their offer on are things like:

  • How strong is your culture (team/organization)? And how strong is your organization without you as the owner or CEO if you’re not remaining after sale?
  • What is the future growth trajectory for your company and how exciting is that trajectory?
  • How predictable are your revenues? Do you have great visibility to future revenues?
  • How scalable is your business? Are your systems and infrastructure able to support growth or will large investments be required?
  • How unique is your product or service offering versus competition?
  • How efficient is your company at producing your product/service?
  • Has your company created any valuable intellectual property?

As we are now closing out 2023, ask yourself, did my company create greater value in the year? If you grew revenue and profits over 2022 then you improved the 20% of your business that an acquirer will assess. But ask yourself about the intangibles, the 80% they will base their offer on, did you strengthen these?

Good exit optimization planning begins with understanding what intangibles a future acquirer will want to see with your particular business. Use time as a friend, especially in getting ready for a new year, to identify which intangibles are going to drive your future payout and ensure you are taking steps to improve these areas and get you on your way to a future euphoric exit.

Often an under leveraged position in helping you grow the value of your company

Every department leader on your team is important to the near and long term success of your business. But the one person we find most often under leveraged in building the long-term enterprise value of a company is your finance partner, be that a controller or CFO. When this position is staffed properly and given the right focus, it can make all the difference in the world between a euphoric exit event and a disappointing one.

Ask yourself, am I getting enterprise value enabling results from my Controller/CFO?

To help you think about this further, here is a list of things your finance partner should be doing for you to build enterprise value:

  • Ensuring your financial statements are reported accurately, in a timely manner and to industry norms (i.e.: calculating your company gross margin consistent with how they are reported in your industry).
  • Providing you with proforma financial statement projections (forecasting) looking out 12 months, using historical performance as an indicator of future results. Weak finance partners will only tell you what happened in your business, strong finance partners will work with your Sales and Operations leaders to develop proforma forecasts to tell you what will happen using historical performance as the basis for their projections.
  • Providing you weekly (or minimum monthly) a 13 week rolling cash flow projection for your company.
  • Serving as a key member of your leadership team in building an annual operating budget that is linked to your company strategic plan. And will bring forth meaningful financial data to help facilitate strategic thinking and planning dialog amongst your leadership team.
  • Negotiating key terms with partners such as banks, health and benefits providers, facility and equipment leases. These negotiations can save your company meaningful dollars which can positively impact cash flow and create long-term enterprise value.
  • When the day arrives that you want to meet with potential acquirers, your controller or CFO will play a key role in conveying confidence, knowledge and experience related to the financial performance of your business – one of the first members of your team that a potential acquirer will evaluate is your finance partner and this role is often the one your potential acquirer will spend the most time with through the due diligence process. Is your financial partner experienced and skilled enough to play this key role through due diligence?

Certainly, your Sales and Operations leadership are important in their roles to help you build your business. But often overlooked in their value creation role is the controller or CFO. Give thought today as to whether you are benefiting from the right finance partner and all that they can do today and will do tomorrow when it’s time for you to sell. The right finance partner can help make or break your future euphoric exit event.

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.

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Use Greenpoint Testing to Achieve Your Desired Exit Valuation

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During this up to hour-long online testing, you'll see questions such as the following.

Sample Question 02

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During this up to hour-long digital Q&A, you'll see questions such as the following:

Sample Question 02

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Be Ready for The Probe of Due Diligence

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During this up to hour-long digital Q&A, you'll see questions such as the following:

Sample Question 02

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