Reflections

Cybersecurity planning is an important preparation step

In prior blog posts we discuss third party due diligence and preparedness steps you’ll need to take with your business to be able to successfully withstand the “probe” that your company might one day undergo. Too often company owners believe the tough decision is that of deciding to sell their business…in reality there is an equally important question and that is can your company withstand the due diligence activity of a third party as they probe your business to determine what value to place on it.

These days, due diligence isn’t getting any easier as a potential acquirer must look deeply into your company to determine what opportunities and risks relate to owning it. One such risk these days relates to your company’s cybersecurity readiness. Here are great questions to think about now in this area because they are questions you will likely receive one day from a potential acquirer:

• Have you ever had a third-party IT company conduct penetration testing of your company network and systems? Do you do this periodically to identify any gaps in protection protocols?
• Do you ensure full safeguarding of employee (personal information) and customer data, such as credit card information?
• Do you know what customer and vendor agreements you’ve signed that require you to notify them if a breach occurs and what the timeframe is for notifying them?
• Do you train new employees on the basics of cybersecurity protection at your company?
• Do you have a cybersecurity recovery plan should your company systems/network be breached?
• Have you investigated having cybersecurity insurance and are you clear on what it specifically covers?

Bottom line is this – cybersecurity was barely on any third party due diligence list a decade ago. Today, it’s on every acquirer’s due diligence checklist. Use time as a friend now and ensure you have a protection plan in place. Doing so can protect the worth of your company today and help support the future worth that an acquirer might see in acquiring your business.

Effective segmentation can grow revenue and future company worth

When the day arrives that you want to sell your business to a third party, an important question you will receive pertains to which customer segments you serve today, don’t serve today and which ones could be served going forward as a growth opportunity for them by owning your company. Having the answer, backed up your sales data, could be a key driver to the valuation an acquirer might place on your business. Here are a few questions to discuss with your team today on this important topic:

• Have we identified the various customer segments that exist in our industry today
• Are the customer segments growing at different rates within our industry….which are growing, declining or forecasted to be flat in the years ahead
• Are we focusing our sales and marketing resources on the best growth segments
• Do we see new customer segments emerging that we could consider serving
• Do we know our existing annual revenues by each of the segments we are serving
• Do we know our gross margins for each customer segment we serve and which are more profitable than others
• Which segments don’t we serve and is this by intention?
• Are there underserved or unserved customer segments today that we could serve in the future as a growth opportunity

Too often business executives lump all customers together into one group. This can work if your industry only has a single customer segment but this is extremely rare. The vast majority of industries have multiple customer segments and it’s strategically valuable to know very clearly which ones you serve, could serve more, could serve in the future and those that you deem undesirable to ever serve. At time of your future exit event, an acquirer is going to want to fully understand your customer segmentation especially for purposes of knowing what growth potential is remaining for your business. Start building your company worth today by building your customer segmentation understanding and resource deployment plan. You’ll be glad one day that you used time as a friend now in building this important muscle for your company.

Know the formula for achieving your future euphoric exit event

Too many private business owners believe the formula for achieving a euphoric outcome from the sale of their company one day is to focus on building their revenues and profits. Although this is a good start, realize this is the actual formula; Euphoric Outcome = 20% company tangibles + 80% company intangibles.

The tangibles of your business are the financial statements; P&L, Balance Sheet, Cash Flow statement and when the day arrives you want to sell, an acquirer is going to place 20% of their valuation of your company on these tangibles. The 80% of their valuation is going to be on your intangibles, things like;

• No reliance on you as the owner…it can operate successfully without you going forward
• Quality of revenue from a cross-section of customers versus a concentration on just a few
• A strong team and culture that can continue the success of the business
• Predictable revenue streams that the acquirer can enjoy

Too many private company owners believe the formula for receiving a great payout from an acquirer is presenting a business with great revenue and profit. This is the ante into the exit game. The majority of the valuation is going to be from your intangibles, the things that will enable the acquirer to experience success going forward under their ownership. As you build your business, of course building year over year financial performance is important to one day selling your business. But know that the acquirer is going to really take a close look at the intangibles of your business to determine if it’s worth paying a premium. Use time as a friend to build these intangibles and increase the likelihood of one day achieving your euphoric exit event.

To help you on this journey, visit our video channel with actionable insights on building toward your future euphoric exit event. (Euphoric Exit Event Planning)

It's not about revenue and profit, it's about building company value

Too often business executives think in terms of driving revenue and profit growth but often absent in their thinking is what does this growth mean to building company value, or company net worth?

I can present two companies, both with equal revenue and profit and yet one be worth much more at time of exit in the eyes of acquirer.  The difference is the “intangibles” in the business versus the tangibles seen in the financial statements.

As you make daily, weekly and monthly decisions for your company, think about these decisions as they relate to building worth, not just revenue and profit. Think about things like:

• Are we serving high quality customers, those allowing us to generate higher gross margins
• Do we have products/services and a business model that allow us to generate more predictable revenue streams than pure transaction revenues only
• Is our product/service offering continuing to evolve in a way that we can present ourselves with unique capabilities in the market versus competition
• When we sign customer and vendor contracts, are they inclusive of business terms favorable for our business
• Are we building a management team that a future acquirer will find attractive for adding to their team

Questions like these relate to the intangibles in your company versus the tangibles seen in your financial statements. Realize the basis of the majority of the valuation a future acquirer will place on your business is heavily related to these intangibles. Certainly, great financial performance is the ante into the game of a successful exit to a third party, but to achieve a euphoric above market valuation, is going to require you to check the boxes of the intangibles. Shift your thinking to this business exit strategy today and you’ll be well on your way to creating your future euphoric exit event.

Increase your company valuation by managing business risk

When the day comes that you present your company to a third party for them to consider buying, they will look for two things. The first is how will acquiring your business enable their own. Second, what risk would there be in acquiring your company.

You will want to use time as a friend starting now to prepare your business in a way that helps you present it one day to third parties so that they see acceptable risks in buying it. As we wear the glasses of future acquirer’s for our clients, here is a great template we use to help them think through what kind of risk might be seen in their company. (Business Risk Assessment Template)

Start today on your journey to a future euphoric outcome from the sale of your business. Wear the glasses of a future acquirer today and determine where they might see risk in your business and begin taking steps to reduce or eliminate that risk.

Yosemite Business Diagnostics https://youtu.be/cPJyvdGlUPs can enable you

Periodically it’s very enabling to find new ways to build company value, or worth, by having an outside set of eyes review your business. Many owners and CEOs prefer avoiding the cost and confidentiality concerns associated with this outside assessment. This is why we created Yosemite Business Diagnostics.

We offer three great ways to privately diagnose your business without leaving your office. Visit our Youtube channel listed above to learn more or our website Yosemite Associates | Tools Diagnostics to leverage these tools and the insightful diagnosis it will provide.

Revenue questions to ask today to help build company exit valuation for tomorrow

When the day comes you want to sell your business, the potential acquirer is going to evaluate the future growth potential of your company. During their due diligence probe, they will look to see how effective your company has been historically at making and achieving its revenue projections.

Too often business owners and CEOs set a new year revenue target but don’t truly think it through strategically. So achieving the target becomes hit or miss and may be more related to luck than true strategic deployment of sales resources. To facilitate productive team dialog now, here are great questions to discuss with your team and bring strategic thought to your new year revenue target:

• How will we calendarize, by month and by quarter, our full year revenue target? It’s one thing to project a full year revenue target but when calendarized over the 12 months, you may then view the target very differently. Look at prior years calendarization and ask yourself will this repeat in the new year, or will you want to make strategic sales deployment changes to bring about a change if you don’t like the current calendarization you’ve been experiencing.
  • Also ask - does our product or service fulfillment team understand this calendarization because they will need to know if there are specific months and/or quarters where the workload will require them to be prepared differently? Projected slow months may require prior material/labor adjustments and higher projected revenue months may require early resource planning.
• What percentage of our revenues will come from Existing customers? From New customers?
  • Do we have visibility/access to the number of potential new customers we will need to achieve our New customer revenue growth or do we need to first invest time in finding these new customers which means our revenue from them may come further down the road?
• How will our revenues come in by product or service we provide? Will all have the same level of growth or will they perform differently and how will this impact our consolidated revenue target?
• Are we tracking each month the number of sales calls, sales proposals, site click throughs, etc. that we will need to support achieving our revenue target?
  • What “leading” activities do we need to be taking that will ultimately lead to achieving the “lagging” indicator of hitting our revenue target. (i.e.: we need to make 50 sales calls per week (leading indicator) which we project will lead to 10 requests for proposals (leading indicator) which we project will lead to 2 new orders each week (lagging indicator). Or we need to place 3 new banner ads per week (leading indicator) projecting this will lead to 5,000 click throughs (leading indicator) and will lead to 200 new orders per week (lagging indicator).
• What factor will the economy have on our revenue projection in the new year. Will it be a headwind or a tailwind versus what we experienced last year?
  • Will all of our customers be equally impacted by the economy or will some be affected differently?
  • How about our products or services, will they be impacted equally in the economy or should we adjust some to grow less and others more and therefore what is the consolidated result on your full year revenue target?

As you return from the holiday break, huddle with your team and use these questions to facilitate productive dialog. You asking these strategic questions will help build their strategic thinking muscle as well and as you do this over time, the planning muscle of your overall organization will improve. This muscle could pay you great dividends when your exit day arrives as the acquirer will be impressed by your company having this planning capability, especially if they see the positive results in your financial statements.

Having a solid plan can help you achieve a euphoric company exit one day

As a frequent guest speaker on the topic of strategic planning, a common theme heard from owners and CEOs of privately held companies is they understand the value of having a strategic plan but what they lack is the certainty as to how to effectively develop and execute one.

My guidance is that strategic planning at the core embodies a military mantra – having situational awareness and operational effectiveness. Ask yourself, do I have good awareness of the threats and opportunities outside and inside my four walls and do I have the needed operational effectiveness to navigate all in a way that helps me achieve my end in mind.

So where to begin? With the end in mind.

Ask yourself these questions to get your strategic planning underway:

• What time frame do you want your plan to address? 1 year, 5 years, 20 years?
• Imagine you have reached the time frame you identified, now describe using short statements how your company will be described at that future point in time? (revenue size, profit level, type of organization, market/customer types served, portfolio of products and services offered, market share, competitive uniqueness and valuation you would like to receive if selling toa third party)
• With the future end in mind now better articulated, ask yourself what is the gap between where your business is today in each of the categories listed in the parenthesis versus where you want to be at the future time? Take each item and identify your starting point today and list next to it, what you’ve identified as the future end in mind.

In a future blog posting, we will outline the next step which will relate to your situational awareness as you begin the journey of addressing any gaps you now see between where your company is today versus the end in mind.

Strategic planning is a muscle you want to build for yourself and your team. This muscle is built by following a repeatable, scalable process (or what we call a campaign given the magnitude of it) which we can provide you. Begin with the steps above and circle back here for next steps in the campaign to accelerate the worth of your company and get you on the path to your future euphoric exit event.

Make sure you probe before they do to achieve a future successful company sale

When the day arrives that you want to sell your business, any acquirer showing interest is going to take out a microscope and look into the depths of your current and historical financials. They will probe into great detail to analyze your company financial performance, looking back 3, even up to 5 years in assessing whether they want to acquire your business.

Although this isn’t news to most company owners, what surprisingly is news is the need to better understand your financials prior to exiting than the acquirer will come to know them during due diligence. Acquirers will look for trends, they will do analysis on key financial ratios, they will compare year over year actuals in each line item of your P&L and balance sheet all for the purpose of trying understand where you make money, where you have money and where there is risk in your business.

Years prior to attempting to sell your company to a third party, it’s critical that your team look at the trends and calculate the ratios and compare actuals to prior years so that you benefit from the learnings that will arise to help you in building your business but also to ultimately be prepared to present your business to a third party and avoid having them identify things about your business that you weren’t aware of. Here are a few basic data points you should know about your business today:

• What is the trailing 36 to even 60 month trend of Revenue, Gross Margin, SG&A Expense and EBITDA?
• What is the gross margin trend for each SKU or service your company offers?
• What is the gross margin trend for market segments you serve, even for customers?
• What is the trend of key ratios in analyzing your balance sheet?
• What does your financial data convey about where your company makes its money, perhaps loses money or is breakeven?
• How does headcount and associated labor cost correlate to your revenue growth?

Certainly could go on further with such questions but you get the idea. These questions are not ones you want an acquirer asking and you either have to research the answers at that time or the acquirer conveys their disappointing valuation for your business as a result of what they are seeing in your financial statements. Work with your financial manager, controller, CFO or CPA today and start conducting an ongoing and regular deep financial probe of your business. Doing so today will help you greatly at time of exit and could lead to the acquirer offering you the value for your business that will make you euphoric at time of sale.

Enable your future company sale with this discipline

It’s common to hear a company owner or CEO boldly say, “I’m planning to grow my business 10% for next year”, or it could be 5% or some other growth number but when asked where specifically the revenue growth will come from, the answer is not as confident.

Every business should have the discipline of planning the details that underpin revenue targets. Developing such a discipline could pay you dividends in the future when you want to impress an acquirer showing that your business has effective planning disciplines in place.

Here is an effective template, (Revenue Walk), to help facilitate planning discussions with your team about the year ahead. This template can be customized for any industry and business and it can expand in complexity as you get accustomed to using such a “revenue walk” concept. You’ll see this template also helps you think through the corresponding gross margin related with your revenue detail.

Don’t go into the new year with a vague and unsubstantiated revenue target. Build this planning discipline to identify the “walk” from last year’s revenue to the next. When the day comes you want to exit, having planning disciplines like this in place will help build the value of your business in the eyes of the acquirer.

Understanding how a future acquirer will value your business is key to a euphoric exit outcome

There are multiple ways of valuing a business but for most acquirer’s, it’s the future value of the cash flows of your business that will be the starting point for how much they are willing to pay you for your company. The misconception by many private company owners is if they have good revenue and good profit then an acquirer will pay them a premium at time of acquisition. Although having historical and projected strong revenues and profits is a great ante into the game of selling your business, it’s not the only thing that will determine whether the acquirer will be willing to pay you a premium.

Every industry is unique so ensure you understand how a future acquirer within your industry is going to place a value on your business. This isn’t something you want to wait to find out only to learn you missed key value, or net worth, drivers in the eyes of an acquirer. Begin thinking and planning today for what the future of your company cash flows will mean for your exit event. Let time be your friend in this regard as you can take steps today to improve your future cash flows and increase the likelihood of one day achieving a euphoric exit event with your company.

Knowing where you play can be key to a future successful company sale

Every industry has an ecosystem, do you know what yours is and where your company is positioned within it?

James Moore originated this strategic planning concept of a business ecosystem in the early 1990’s and initially it was intended for the high tech industry. But today, every business in every industry has an ecosystem. A business ecosystem is comprised of the network of suppliers, distributors, customers, competitors, etc that are involved in the delivery of a product or service. The idea is each entity within the ecosystem affects and is affected by the others and this ecosystem becomes a constantly evolving network.

The reason it’s important to identify where in your industry ecosystem you play is in each ecosystem there are those entities which are considered high value, essential players and others that are of lower value, less essential and could be more easily replaced. Building your company to be a high value, essential entity with your industry ecosystem could mean the difference of millions of dollars to you as the owner/CEO at time of company sale to a third party.

As a very broad example, there is an ecosystem within the technology industry where there are entities within it that focus on hardware and others on software. Early on in this ecosystem, the hardware players were considered high value entities but over time, it’s the software companies that have taken over as the higher value entities and in many cases relegating the hardware providers to more of commodity status. All the players in an ecosystem play a role otherwise they’d be knocked out. But the key is knowing whether the role of your company is playing a high value or lower value role.

When the day comes that you look to attract a third party to acquire your company, you will want to be able to articulate where within your industry ecosystem your company participates and that you’ve built a business that is in what is considered to be a higher value area of the ecosystem. Doing so could be a major difference in determining whether you are euphoric with the payout you receive for your company. We help clients determine this for their business and help them drive up valuation, talk with us (949.874.0787) to help get you started in answering this question for your company.

Achieving your future euphoric exit event starts today

Ask yourself this question – do I know what the future tax bite will be when I sell my company? If the answer is no, now is the time to meet with a seasoned business tax advisor to discuss this.

A common complaint heard from company owners, that have sold their business, is they reached the day of the transaction event only to find out the taxes due had a far greater impact on the gross to net payout amount than they had anticipated. They express that they would like to be able to turn back time for the purpose of developing a better tax efficiency strategy.

Learn from this mistake that too many have made. As part of your exit preparations, which we help owners do at least 1 year prior to selling their company, include discussion with a tax advisor to see what tax efficient strategies they might help you get in to place. The less time you give them for doing this, the fewer the options they can offer you.

Don’t let the tax man be the reason you aren’t euphoric one day with the sale of your company.

Having the right blend is key to a future euphoric exit event

As company owners and CEO’s we certainly have great passion for our business, which of course is important for leading our team and building long term company worth. When the day comes to sell our company, we have to know that the acquirer will come in initially with a dispassionate view of our business and it’s our job as the seller to move them to becoming passionate.

Initially however, when the acquirer first arrives on your doorstep to evaluate whether they’d be interested in buying your company, their view of your business will be very different than yours. Their view will very often be one of a dispassionate, show me why your company could be of value to them, type attitude. This very often leads to you as a seller having the belief that your business is worth much more than the acquirer believes.  It’s key therefore as we run our business, years ahead of an exit, that we leverage our passion but also ensure we build a business looking through the lens of a future acquirer. Here are some key, dispassionate questions an acquirer will have one day for you:

• What is the financial performance of your business recently and the past 3 years and is it consistently positive year over year or is the performance inconsistent?
• How strong are the prospects for future growth/profitability if under their ownership? Are you proving to them that you have solid line of sight to continued growth?
• What types of risks will there be for the acquirer if they own your business? Are you presenting a business to them with multiple areas of risk to them or have you prepared a business that they will see possesses low risk to them? High risk in the eyes of an acquirer often translates to lower valuation.
• How predictable are the revenues and profits of your business? Transaction based businesses often times garner lower valuations than those with highly predictable ones.
• How easy or complex will it be for the acquirer to assimilate your business? If they want to keep your company as a standalone business, is your team strong enough to stand on its own and continue growth? Or if the acquirer wants to blend your company in to theirs, will they see a clear and low risk pathway to doing so?

Don’t let your personal passion blind your view of your business. As you run and build your company, do so regularly looking at it through the lens of yourself and a future acquirer. Doing so could help you build great worth in your company and enable you being euphoric one day in attracting a third party to acquire it with a great valuation.

Want to sell your business one day, start by asking these questions about your company

As we look to close out the year, business owners and CEOs should be in the midst of planning their strategies, supporting initiatives and budgets for the new year ahead. A high value exercise this time of year is to ask yourself, “what strategic questions do I have about my business?.” Download here the strategic questions we believe company owners and CEOs should be able to answer on their path to building company worth and toward being euphoric one day with their exit event.

Preparing your organization culture is key to preparing for a future euphoric exit event

As private business owners and CEOs we know our market, customers and products and services but how well do we know our organization culture. Too often executives miss the connection between a great culture and great company performance. Read here our latest article on organization culture and steps you can take to ensure it’s enabling value creation in your company.

Most exit options for company owners lead to the same path

It’s not uncommon to hear a private business owner say that selling one day to a third party isn’t an option of interest so preparing for such an event isn’t on their radar screen. For these owners, their thoughts are to transition their company to a family member or perhaps transition it to a member of the management team. These are certainly both very viable options.

Here is what you should keep in mind….either of these scenarios still have one thing in common. And that is at time of your transitioning to a family member or to your management team, a valuation will need to be placed on the business. Just as if you were selling to a third party, transitioning ownership to family or not, most likely you’ll need a valuation placed on the business for various reasons including handling of your personal taxes.

So start thinking today about how to maximize the future value, or worth, of your business because most exit scenarios that you may want to consider will require placing a formal valuation on the business. Optimizing this can take years of solid planning and execution so begin your journey today to plan for your future euphoric exit event.

Should I consider selling my business even during a recession?

Most would think the answer is no because either the recession is negatively impacting your company performance and/or acquirer’s aren’t looking to conduct acquisitions to reserve their cash through what could be a difficult time for them. And if they are acquiring, they are looking to do so on the cheap which of course won’t serve your best interests.

However, each company is a case study of one and your situation might allow for it to make sense to explore an exit even during a recession. If your company is a solid performing business, has unique competitive advantages, has an exciting future growth trajectory and you’re prepared to successfully withstand a third party due diligence, then businesses like this can sell at any time and even command a premium valuation. But if your business is struggling or performs inconsistently in recent years and doesn’t offer a truly unique business to an acquirer, then most likely a recession is not a time to consider exiting.

Our advice to clients is to build a business that could always attract an acquirer in the event that either you wake up one morning and decide it’s time to exit or you are approached by what you deem to be a very strong partner for your business and want to take advantage of their being in an acquiring mood. So for some businesses, they will be able to command a premium valuation from attractive acquirers even during a recession but others may not. If you’re considering trying to exit in the next 12 months, speak with an investment banker or give us a call and we can outline specific questions and steps you could take immediately to help you answer this question specific to your company.

Future acquirer's will factor this into the valuation they place on your company

You’ve built and continue to lead a successful company that could allow you the potential one day of selling to a third party. When that day arrives, will an acquirer view you personally as being essential to the ongoing success of the business or will they see that you’ve built a team around you, allowing you to step away at time of sale? The answer to this question will have significant implications on how much the acquirer is willing to pay, even if they will be willing to pursue the acquisition at all.

Ask yourself these questions –

• Am I able to take at least a two-week vacation and not need to have frequent communications with my team back at the office?
• Do I have key managers in place across my company that I have confidence in the decisions they make on their own when I’m out of the office?
• Have I prepared and empowered key managers to make important decisions for my business in my absence?
• Are my key managers clear on what level of decision making authority they have in my absence?
• If customer issues arise when I’m out of the office, is my team capable of managing them effectively without me?
• Are top customers and suppliers willing and confident to work with key managers on my team in my absence or do they only want to deal with me?
• Are the innovations that occur in my company, such as launching new products or services or making meaningful improvements, all driven by key managers on my team and if I leave the company one day, these innovations will continue?

If you answered “yes” to all of these questions, then you have the potential for showing a future acquirer one day that your business can continue on successfully without your leadership. If you answered “no” to any of these questions, it’s important to get to the root cause. Being able to show that you’ve built a team that can operate the business successfully in your absence will be key to building the valuation of your company in the eyes of a potential acquirer. As we frequently comment, you want to be euphoric one day when you sell to a third party and your role within your company will be a critical factor of success in achieving such a desired outcome.

Rethinking how your company provides customer discounts can have positive financial impact

Ask yourself this question related to your customer pricing – “when is the last time we reviewed the effectiveness of our pricing and specifically as it pertains to pricing discounts we offer?”

The fastest path to growing your profit margin is through price increases. Now most people would say that raising prices is very difficult and quickly move on from further thought on the topic because it is so hard. But rather than thinking about raising prices, give thought to reducing the degree of discounts.

For many businesses, the typical scenario is we provide our customers a price for our product or service and often times they come back asking us for “more”, or a discount. In return, very often our sales team is programmed to reply with a discount offer of 5% or 10% and hope this pushes the customer to purchase from us. But why is it that we think in terms of 5% or 10% type increments, why not 2%, 2.5% or 3% or 7%? Many times, the customer is asking for better pricing simply because there is no downside to doing so and when you reply with 5% or 10% they then act because you check a box for them. But will they say no if you offer an additional 2.5% discount versus the 5% or will they accept this to check a box, tell their boss that they didn’t accept your initial offer and got a better price from you. But instead of you giving away 5% profit, you gave away half of what you traditionally would do. They win by getting the better price they needed and you win by keeping more of the margin in your pocket.

At time of a future sale of your company, the acquirer will want to understand your price strategy and how it impacts the gross margin of your products and services. They will look to see if your gross margins have increased or decreased over the past few years and when they see you increasing your margins, this builds company value in their mind and may get them to pay a higher price for your company. Periodically revisit your pricing strategy and specifically your discounting strategy.  As a boss early in my career told me at Black & Decker, “don’t be predictable with your pricing as over the long term it will make it easier for to competitors to compete against you”.