Reflections

They can greatly enable you achieving your euphoric exit event

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

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

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

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

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

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

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

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

Tracking and improving this metric will increase your company worth

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Build company worth by truly knowing your customers

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Know how the tariffs could impact your future company sale

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

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

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

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

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

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

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

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

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

Use time as a friend to prepare your company sale messaging

When the day comes that you want to sell your company, you will want to be well prepared with how you will answer the most obvious of questions you will get asked. You don’t want to be caught off guard with any of these questions as that could impact your deal overall.

We work with clients to help them think about and prepare for their messaging that will be critical to attracting and exciting an acquirer. Here are the types of questions you’ll want to give thought to ahead of your exit as you will very likely receive all of these and the answers could impact how excited an acquirer gets about buying your business:

• Why have you chosen now to explore selling your company? This is the very first question a savvy acquirer will have as the answer could indicate to them at a high level what might be happening within your business that could excite them or concern them.
• What are the future growth prospects for your company? An acquirer may wonder if you’re selling because you believe you’ve hit the limits of where your company can go and they will then have the risk of figuring out where to take it next. Excite them by articulating where and how your business can continue its growth trajectory.
• Where is your company truly unique versus your competitors in areas that the customer truly sees value in? And in answering this question, ensure your information is current because often times owners/sellers will say they have a competitive uniqueness but lack great external situational awareness and don’t realize competition has replicated or exceeded what was once unique. Don’t assume a potential acquirer will know where you’ve built a unique capability, it’s your job to convey it.
• Are you willing to take some of the proceeds the acquirer will pay to buy your company and invest them back into the business or a new entity they are creating as a result of acquiring yous? Acquirer’s may test this concept to see how confident you remain about the future potential of your business – owners willing to reinvest, even a small amount, send a strong signal of confidence in the future of their business.
• How will your key managers and employees respond when they hear you have sold?
• How will your best customers and suppliers react when they hear you have sold?
• Who on your team of key managers/supervisors is critical to the ongoing success of the business and the acquirer will want to get them locked in to place in terms of working for them going forward?
• Where is the next round of investment required in your company? The acquirer will want to know how much capital, beyond acquiring your business, they might have to put into your business to take it to another level of growth. You have to really think this one through because if you identify meaningful investment needs, it will definitely impact the acquirer purchase price.
• Where do you see risk in your company going forward? An acquirer will want to hear your view of the risk you may or may not see because if there is risk, it could soon become theirs to manage.

Of all of these, the one that sellers of privately held businesses most often fall down on is their inability to message a succinct and logical reason for deciding now is the time to sell their company. The answer to this question has to shut this question down, not provide threads that the potential acquirer can pull on. Give us a call and we can help you think through the compelling narrative for your business because it’s not something you want to do while attempting to sell your business.

Take steps today to avoid being disappointed with the future acquirer’s offer

When the day comes that you want to sell your company, the acquirer will look at your business to identify if they see any risk in acquiring it. There are many areas that could concern them as each company is unique but here are some of the most common ones. Make sure you’re taking steps prior to exiting to ensure your offer price isn’t negatively impacted by any of these:

• Lumpy month over month/year over year financial performance. Acquirers like consistent cash flows, not lumpy ones.
• Poor future revenue visibility. Acquirers like predictable revenue businesses versus ones with uncertain transactional activity. They like recurring revenue models or customer purchasing agreements (as long as the terms of the agreement are favorable) or businesses with a clear history of loyal customer purchasing behavior. When acquirers see a business with low visibility to future revenues, it negatively impacts valuation.
• High potential for loss of key client/customer. Acquirers will evaluate your revenues from top sources and will probe during their due diligence to ensure there isn’t a dynamic brewing that could cause you to soon lose that revenue source.
• High customer concentration…even Vendor concentration. Acquirers will evaluate your company for what risks they see. A key area will be looking at whether your business is too heavily reliant on a single or small number of customers or even vendors. They will fear that a disruption of any sort could be a negative impact to your company’s cash flow.
• Unattractive customer/client or vendor contracts. Whenever signing a contract, also wear the glasses of your future acquirer. Would they like the language you’re signing up for?
• Aging product or service capability. Acquirers won’t place a high value on your business simply because it had a great past. They will evaluate it for what they can do with it going forward. If your product line is getting long in the tooth or a new market trend is emerging that could negatively impact your offering, then this will be of concern to any acquirer.
• Weak company culture or organization. Most acquirers will want some or all of your workforce so of course they will assess this during due diligence. If they believe you have the wrong people in key positions or have underpaid or even overpaid your team, this will factor into their valuation as they may see risk in having to fix this.

There are certainly other factors that can give an acquirer concern, but these are the most common. All of these are in your control to eliminate or at least minimize the risk the acquirer might see, but you will have to use time as a friend to evolve each one in a positive way. Think about your industry and your company to identify where the most common areas of risk could be and develop a plan to avoid them impacting your future exit.

Could having a Board enable you selling your company one day

A common topic we have with new clients relates to whether they could benefit from having a board. The short answer is yes, the long answer is it depends on the specific needs that you and your business have.

First let’s differentiate between the two types of Boards. The greatest difference is the Board of Directors is set up legally for your company and directors have a legal/fiduciary responsibility to represent all shareholders. An Advisory Board has little to no legal connection, the members just serve at your pleasure and just offer advice that you do with what you want. A Board of Directors will have a direct say on many company matters and their decisions/voting is binding. A Board of Advisors is simply there to offer guidance, no requirement to include them in any voting of business matters.

The vast majority of small to mid-sized privately owned businesses can definitely benefit from getting more external inputs. Too often they become insulated in their bigger picture thinking and could benefit from having access to advisors of various experience and technical expertise to help them plan their future. So our recommendation in most cases is for an owner to think about these questions in deciding if a Board of some type can help them build company worth:

• In knowing how to build the company worth of my business, could I benefit from more regular external inputs or am I getting enough quality inputs already?
• Where in my business do I feel like I’m lacking expertise and could benefit from an external advisor or advisors?
• Am I open to an advisor or a group of advisors challenging me or am I not open to this outside influence?
• Do I want to share decision making with members of a Board or do I just want advice and I’ll make the decision?
• What experience and skill sets do you and your operating team lack and you’re looking to get from a board? i.e.: acumen and experience in finance, sales, marketing, technology, HR, IT, legal, tax, mergers & acquisitions, etc).
• Do I need multiple advisors or could I just benefit from having one to help me address a specific gap me or my company has?

Most small to mid-sized privately held company owners/CEO’s can benefit most from an advisory board or at least one new advisor. Going the Board of Directors route would be overkill for most.

Bottom line is this. Having a person or people to help offer tactical and strategic advice can add great company worth. Think about who you have around you today helping you with great strategic questions and great advice based on their experience…if you can benefit from this then perhaps a new advisor or a Board of Advisors is right for you.

Selling your business one day will absolutely be affected by your company culture

In prior blogs, we’ve referenced that your future company acquirer will be placing a big bet on the jockey (your team) even more than the horse (your products/services). Your future company acquirer will be drawn to your company because of the market you serve, your company financial performance and certainly it’ future growth potential. But in evaluating these things, they will also determine if they believe your team (the jockey) has the experience and the culture to enable the future. Confidence in your team and culture will build the worth of your company in their eyes. Concerns about your team and culture readiness to enable growth will very much impact the valuation the acquirer places on your business.

We often find in working with new clients that certainly their business strategy can benefit from some enhancement. But more often their team and culture are what need the greatest degree of attention. A good strategy is great but unless you have a great team and culture to implement it, that strategy will most likely take you nowhere.

To help you think about the strength of your jockey (team and culture), here are questions to consider:

• Are there key people on your team that have the experience to take your team to another level….or do you have key people that have helped you get where your company is today but don’t bring the experience or capabilities to get the company where it needs to go next?
• Would an acquirer look at your leadership team and see people with good backgrounds and pedigrees (education levels, job experience) that fit very well the job they are doing? Or would they see people that really haven’t been well prepared for what they are doing which means they may inhibit the company in the future?
• Does your company track employee attrition by department and is the attrition within industry norms? Too high an attrition could be a red flag for an acquirer that something is amiss with your culture…and quite frankly an attrition that is too low could also raise a question or two.
• Do you and your key managers hold people equally accountable for their performance across the board….or do some department leads hold their people to one level of accountability while others do not? Your star employees will see this and they won’t look to shine any more…and your underperformers will see this and know it’s ok because the company really doesn’t address this across the organization.
• When the future acquirer looks at your performance through the lens of your financials and KPI’s, will they see a good history of hitting set targets? This is often the first place an acquirer will look during due diligence – teams that regularly hit set targets can be a positive indicator of a good culture.
• Do you regularly develop and promote from within your business in filling open supervisory or managerial level jobs? Companies with good cultures are more often than not promoting from within, certainly not on all needs but on many.
• Are your employees, especially key ones, informed of your company direction and annual strategic initiatives and know how their jobs are connected to supporting company direction? Companies with good cultures have employees connected to the strategic direction of the company in some meaningful way.
• Does your strategic thinking and planning include soliciting input from employees – soliciting input from a broad range of stakeholders, including employees, is often a sign of a good culture.

There are many more questions to consider when evaluating your team and culture. Too often company owners/CEO’s believe the future acquirer will focus only on company financial results in setting their purchase price offer. This is a myth. Yes, financials will be important but equally so will be your team and culture. Use time as a friend to ensure you’re building and leading a team and culture that will help you one day achieve your euphoric exit event.

Preparing a company for exit requires more than company readiness

In kicking off a new year, most owners are rightfully giving thought to their business and what they want to achieve to build company worth. Too often forgotten is the readiness of the owner(s).

Here are great questions to ask yourself now, using time as a friend to ensure that you (co-owners) are  ready for a potential exit one day:

• Am I truly going to want to disconnect from my company one day? Often times, owners talk a good game about selling one day, but because they are so connected to their baby and they don’t envision doing anything else, they actually don’t prepare well for an exit because deep down they fear it versus embrace it.
• When company sale time comes, do I know what I want to do next with my life – my calendar today is full with events and meetings related to my business. Am I thinking clearly about what I want my calendar to look like the minute these meetings and events disappear?
• Am I aligned with my spouse/partner/family in terms of what post company ownership life looks like? Too often an owner sells, starts changing their routine and assumes their family is ready to change their routines as well…most often this is a bad assumption. Talk now with family members around what a company sale might mean to them given how it’s going to change your life/routine.
• Is your family clear as to your wishes for the company should you become incapacitated and not able to lead your team prior to an organized exit event? We all want to assume that exiting from our company one day means going out via a euphoric sale to a third party. But have you documented your wishes and plans for the business should something occur prior to selling that forces your family to step in and figure out what to do with your company? An owners sudden and unexpected inability to continue leading their business is not only stressful to a spouse/partner/family on one level but it then becomes enormously stressful for them to determine what to do with the business because you didn’t leave any plans for how to handle such an unexpected, but potential, event. In these situations, the stressor also then translates to your employees because they learn of the sudden uncertainty with the company and their employment.
• Is your financial plan being put in place to help you ensure that you will make enough net proceeds from selling your company one day to pay off any business debts (acquirer’s won’t assume them) and have you built your plan for what cash flows you’ll need and want once the company is no longer paying you or distributing funds to you? Owners can get comfortable over the years paying themselves a good salary and taking distributions as they need to cover life expenses. Once that pipeline is gone, is your plan set as to where those funds will come from?
• Have you thought through the gross amount you will want to receive one day from a third party for your business and what net amount that will actually deliver to you? Conducting a Gross to Net Proceeds Payout Analysis should be done well in advance of attempting to sell. Many owners are often unpleasantly surprised when they see what the Net payout is from a Gross amount that sounded attractive to them.

Start this new year by stepping back and asking key questions like these. The longer you wait, kicking the can down the road on these questions, the more stressful your life and the life of those around you will become when you’re actually faced with having to address them.

Ensure having the right focus to prepare for successfully selling your company one day

People talk about New Year’s resolutions this time of year which for company owners and CEO’s, should include thinking about the focus for the year ahead for building their company net worth.

Whether by yourself or with key advisors or executives on your team, here are questions every private company owner/CEO should be giving strong consideration to:

• Did my team build company net worth (enterprise value) in the just finished year – is my company worth more today than it was worth a year ago? Where did we do well in this area and where did we not so we can address this in the new year?
• Am I clear on what will drive up the net worth of my business in this new year? Strengthening our financial performance is certainly a key element but how about steps we are taking to make our company stickier with customers, increasing the predictability of revenues, improving the productivity of your organization to enhance margins, strengthening the culture of our team, etc, etc.
• Am I clear on what a future acquirer will expect to see when the day comes they kick our tires – am I building a business that will excite them when they start looking closely at it?
• Have I identified with my team our top 3 to 5 strategic areas of focus for this new year? And do these areas bridge to helping us build long term company net worth?
• What is my business worth today (to an acquirer) and is there a gap to what I’d like to receive one day when I decide to sell?
• If there is a gap between what my business is approximately valued at today and what I’d like to one day sell it for, what are the top issues causing this gap? And do my strategic initiatives for this new year help me address these gaps?
• Do I have the right people in the right roles with the right focus for helping me build company net worth?
• Do I have the right incentive plan in place for key managers on my team to ensure they have the right focus in this new year for helping to build company net worth?

These are just some of the questions we help clients think through on a regular basis. Step outside of the daily tactical aspect of leading your team and ask these questions to ensure you’re not confusing motion for actually making progress. We always say that owners/CEOs should use time as their friend in preparing their company for a future exit event that will make them euphoric. Addressing these questions will have you thinking and talking about the right areas that will help you one day achieve your personal euphoric outcome.

To achieve your euphoric exit, make sure you are monitoring your industry M&A activity

When a surfer arrives at the beach, they don’t just gear up and head into the water. They first observe the conditions, or the environment they are considering surfing in. When it comes to preparing yourself and your business for a future euphoric exit event, you’ll want to take the same approach.

Here are some good questions to regularly ask yourself and build the environmental awareness you’ll want for a great future exit event:

• Are companies being acquired in my industry or does it appear that companies are selling to exit the industry?
  • If they are exiting, try to reach some of the Sellers and inquire what dynamic they were experiencing that led them to the conclusion that exiting was in their best interest.
  • If companies are being acquired in your industry, who is doing the buying? Are they Strategic players already in the space that want to expand their penetration and/or financial sponsors (such as Private Equity) wanting to enter the industry you’re in?
• For those acquiring in your industry, what do they find attractive about it? For companies that are doing the acquiring, leverage your network to help you answer the question of why they are expanding/entering your market sector and is it due to dynamics you are or aren’t aware of yourself?
• For companies acquiring, what criteria are they using in making their acquisition decisions? Are they looking to buy scale, specific products/services, capacity, intellectual property, people/talent, geographic expansion, etc.? Knowing this can help you identify what steps you may need to take to address any gaps in the areas you’ve learned acquirers are placing value on.
• Based on the criteria that acquirers are using, how does your company fit those criteria? Are you strong in each of the areas they desire, or do you have any gaps that you’ll want to address before you attempt selling one day?
• Is there an optimal timing window that you should consider selling your company? If acquirers are active in your industry, should you consider an exit sooner as waiting too long might have you miss the window of when premium valuations are being paid for businesses like yours.
• Do you know what the range is for the exit multiples that acquirers are paying for companies in your industry? Leverage your network to find out what the range is and what types of companies are commanding the upper range of the exit multiple so you can be aware of where you’ll need to build your business to also command the premium one day.

In working with our clients, we help them better understand the environment that they are operating in. Having this awareness can be instrumental in helping to build company net worth and in building the awareness that could help you achieve your future euphoric exit event.

There are 3 critical areas you will want to have aligned

Many times, we’ll hear company owners/CEOs comment that they will sell their business only when they are personally ready to do so. On the surface this makes sense. But, to command a premium valuation for your company there is another critical factor and that is what appetite acquirers have at the time for a business like yours.

To achieve one day receiving the highest possible valuation for your company, you’ll want to monitor the alignment of 3 areas – 1.) Your Company Readiness To Attract/Excite Acquirers. 2.) Your Personal Readiness To Sell Your Business. 3.) Acquirers Appetite For A Business Like Yours.

The first two are clearly within your control and the third is not. But key to your exit preparation is monitoring the marketplace you are serving and knowing what the level of acquirer interest is. Our recommendation to owners/CEOs is to build a company that is ready to exit so that when either you wake up one morning and decide you’re personally ready to sell and/or strong potential acquirers come knocking on your door with the desire and available funds to buy a business like yours, you want to be able to jump on this.

What you want to avoid is only waiting for when you’re personally ready to sell only to then realize your business isn’t fully ready to excite an acquirer to pay a premium valuation and/or acquirers don’t have high interest in your market or your products/services at the time. To align these critically important 3 areas, engage with an exit planning professional like Yosemite Associates who can help you think about the alignment of these 3 areas and get you on your path to one day achieve a euphoric exit event.