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Reflections

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

How the pandemic is changing acquisition due diligence - use time as a friend to be prepared

Even if you're not thinking about selling your company for several more years, understand that COVID-19 is going to have a lasting impact on acquisition activity and the process itself for years to come. And you don't want the day to arrive when you want to exit only to find out that you weren't prepared for these changes and the ultimate company proctology exam known as due diligence. Let's review below some of the current known impacts from COVID on the acquisition process that could take you time (months or even years) to get prepared for. Using time as a friend now could better enable you in your dream of commanding a euphoric valuation outcome at time of exit one day.

How COVID is impacting due diligence:

- The due diligence process was already onerous, this pandemic is only making it more so. In addition to acquirers needing to become intimately knowledgeable about your business before they are willing to let you cash their check, now they need to dive even deeper to better understand how you've been navigating COVID. All this simply means don't expect that due diligence somehow will be easier, it won't be.

- Data was key before, more so now. When you look at a typical due diligence check list from most acquirers, you'll see it's filled with requests for you to provide them all types of data. Now with COVID, this data scrubbing is only getting more intense. Data related to your customer buying behaviors, your cash flow, your operating efficiencies, etc. And getting your data in good shape for sharing during due diligence can take months, even years to get right.

- Customer stickiness takes on a whole new meaning now. Even before COVID, acquirers wanted to understand how reliant your customers are on your company for a solution. The more reliant your customers are on your company, generally the higher the valuation you might expect to see from the potential acquirer. COVID is exposing this stickiness factor even more. During due diligence now, you can expect to see a very deep dive by the acquirer to truly understand all aspects of your customer buying behaviors and which behaviors temporarily changed and which may have changed permanently. Use time as a friend now to be analyzing this to understand it clearly. Even if you're not planning to sell your business for several years, you'll still be asked how COVID changed your customer buying behaviors THROUGH and AFTER the pandemic. Start monitoring it closely NOW.

- The mergers and acquisition world is now using the word RESILENCE very commonly as a result of COVID. The due diligence process months from now and even years from now will still include a deep dive to understand how resilient your company products/services were for your customers through the pandemic. Most importantly, they will look to understand how quickly you felt the pandemic, how resilient your products and services were during the pandemic and how rapidly your business returned back to positive growth levels. Use time now to be analyzing this resilience and monitor it closely as the pandemic continues to play out.

- During any due diligence, acquirers deep dive in to your financials to understand the financial performance of your business and to do so, they want to understand the normal operating aspects of your business separated from "one offs" that may have helped or hindered your financial performance. COVID is one such "one off" that you will one day want to be able to show the acquirer your "operating results" apart from COVID specific elements. 2020 COVID financial impact from things like government funds you tapped in to such as Payroll Protection Program will be considered a one off and should be identified uniquely versus the normal operating financials of your business. Costs you incurred during COVID that are one off items such as cleaning supplies and labor used to clean your facility above your normal cleaning expense, paying HR and Legal advisors to navigate COVID, lost productivity such as facility closure, etc. Capture all these separately now because during a future due diligence the acquirer will ask for clarity of your operating results versus these one off expenses and you won't want to rely on memory in addressing their questions.

- This pandemic has been so impactful on our economy and each of our businesses that acquirers are going to come out of it assuming your company captured a playbook of learnings for use when the next crisis hits. In the recent past, we had the financial melt down of 2008, twelve years later we have COVID....fool me once shame on you, fool me twice, shame on me. There will be a third crisis in the foreseeable future and acquirers during due diligence will expect to see that you've captured your playbook of learnings, what actions you took that worked well and which that did not.

- Lastly, COVID is changing how the due diligence process itself plays out in terms of a time line. Historically, the acquisition process got underway with the acquirer visiting your facility(s), having a presentation from your management team, tours and then beginning data sharing. COVID has now moved this around given facility visits have been deferred. More acquirers are getting comfortable with moving site visits and face time with people to later in the process. The process is starting with Data (see above) and only upon this exciting the acquirer, will they look to wait to schedule site visits. This raises the importance of your data even more because it's now the first taste the acquirer may get of your business versus prior to COVID they'd be able to sit with you and see your passion for your business. Now your data has to set the hook to get their interest. And also note that the first time an acquirer may want to meet you and your team could be moved to video as they begin to learn about you and your culture. Even after this particular pandemic has passed, this change in the due diligence process itself may remain in place as acquirers won't want to incur up front costs of time/travel to first sample what your company has to offer them.

Bottom line here is this, even if you see selling your business over the next few years versus now, you need to use time as a friend to be prepared to optimize your outcome. You don't want your dreams of a euphoric company sale to be dashed due to not being well prepared...start now!

To protect and build company worth

"The smartest person in the room is the one asking the smartest questions". This is a variant to the quote by Confucius and one every business leader should embrace. Given we are still well within the grasp of uncertainty due to Corona-geddon, now more than ever we need to be asking smart questions of ourselves and our teams. Here are the smart questions to be asking now (read article and do your company scoring).

Don't assume a crisis will only hurt your company value and your net worth

Even if a crisis, like COVID-19, negatively impacts the revenue, profit and cash flow of your business, don't assume that it still doesn't give you the opportunity to help build your company valuation for the long term. Specifically, building a more effective company organization culture.

A crisis affords your company the air cover to make personnel changes to reduce your cost structure. And if labor cost cutting is needed, then make changes that also help you improve your long term organization culture. Think about your culture today, and if you know that you have toxic employees that are hurting your culture and therefore company value or worth building, use the cost cutting need through the crisis as a time to make needed changes with these particular employees. And it's important to think in the opposite sense, if you know you have positive aspects to your organization culture, ensure that any labor cost cutting is minimal in those areas where you want to nurture and protect your culture. You want to avoid labor cost cutting in a way that eliminates certain employees from your organization that underpin a positive culture.

For legal purposes, you certainly have to develop a labor cost cutting plan that is fair in terms of the employees selected to participate in any downsizing, but as you develop this plan, have your future desired state of your organization culture in mind. Developing your labor RIF during a crisis could be the opportunity you've wanted to protect positive aspects of your culture and accelerate improving your problem areas. Your company culture will be a huge contributor one day to the valuation you might receive from an acquirer. Use the crisis as a time to enable your culture and enable your company value, or company worth as we refer to it!

Business leaders that build company value learn from the tough times

Early in my career, I had a boss say to me that the experience that truly separates strong leaders from weak ones relates to the storms that have been navigated. Her comment was that many leaders are just fine when everything is running smoothly, but when a problem hits the business or the entire industry, the really good leaders don't hide under their desks. They have the confidence to step up and lead effectively. And in so doing, they protect and even build the current value or net worth of their company and know how to build a future euphoric exit valuation for ownership.

COVID-19 is separating strong leaders from weak ones. And the strong ones look around them to see where there are more junior executives in their career and see a crisis like this as an opportunity to help them develop and grow from the experience to be gained. As the owner or CEO of your business, ask yourself the following question. Do I have key managers on my team that I could broaden their responsibility now, and provide them an opportunity to grow in their experience as a result of this crisis?  Could you put them on a particular project, give them a particular challenge, expand their authority, any steps that can expand their horizons and their experience? There will be another crisis, whether specific to your business, your industry or perhaps of a global nature and you want to have an even stronger team around you then. 

As the expression goes...don't let a good crisis go to waste. Although there is much that is bad that occurs during a crisis, identify where you can create some good. And a key area of creating good is within the development of your organization. And doing so is enabling the value or worth creation of your company which at the end of the day, is your highest priority as the owner/CEO.

Periodically checking in with your key managers can protect and build company value

I learned over the years as CEO of various businesses that I should never assume that the key members of my team were fully aligned with me and eachother. Periodically, we would do a sanity check in this regard because when we were aligned, we made progress. When we were not aligned, we simply had motion and motion without progress can hinder or even hurt your company worth.

Find your own formal and informal opportunities to monitor your team alignment. Use this helpful template in checking your team alignment today to ensure you're on your way to building your company value, or your company worth as we refer to it! (Leadership Team Alignment)

Capturing your Corona-geddon learnings in your playbook

Businesses have much they can learn from the military. One key learning is to know how to maintain situational awareness while maintaining operational effectiveness. Enabling us to do so is having an effective playbook in place.

As business owners and CEO’s, having an operational effectiveness playbook in place has the following benefits:

  •  It captures our learnings from prior times of crisis so we don't repeat mistakes we've made but do repeat what worked well
  •  Helps remind us what steps we should take to protect the worth of our business and which steps to even build it
  •  It allows us to spend less time wondering what setps we should be taking, more time executing
  •  Builds our team confidence that we can handle a crisis
  •  Prepares us for a future due diligence where future stakeholders will expect a playbook to be in place

Hopefully your business has been working a playbook that you developed after the 2008/2009 financial crisis. But if not, now is the time to build your playbook that captures learnings from this crisis. Doing so will help you capture the best and worst of the steps you’ve been taking and when the next crisis hits, you will be much better prepared to act decisively.

Don’t let a crisis take your hard earned worth away. Have an effective playbook that helps you minimize or protect your losses and even help remind you of steps you could take to build the value and net worth of your business.

A Sales deployment plan is needed now more than ever

Whether it's a time of crisis or normal times, every business owner should have the confidence that they are providing deployment guidance to their Sales team. As a boss early in my career once said...."when your sales team pulls out of their driveways in the morning, make sure you know whether they are turning to the left or the right. If they decide, it might not align with your strategy and it therefore could hurt the business value you're trying to build".

During COVID-19, every business owner/CEO should have the confidence that their sales team has the right focus. Here are some steps to take to have this confidence:

1.) Have your team look at your customer sales data for the last 60 days to see if any new buying trends are emerging. Don't assume that your customer buying patterns from 2019 still apply today. Your data could indicate a change in customer buying patterns and if this is occurring, it could trigger a potential modification to your Sales team deployment.

2.) Look at your customer base and determine if one segment is of higher potential to buy from you than others through the crisis. If this is the case, modify your Sales team deployment to capitalize on this. You don't want a team stuck in an old comfort zone of who they were calling on when a change is needed soon.

3.) Determine if there is a new product or a new service that your existing customers, or potentially new ones, might need from you during this crisis. If so, deploy some or all of your Sales team to engage in selling the new product/service. You don't want them focused on selling things that customers might have little interest in during the crisis so redeploy them to the emerging opportunity.

4.) Look at your sales commission plan and ensure it's driving the desired deployment focus for your team. Your commission plan was appropriate for pre-crisis, but is it driving the right sales behavior and deployment during the crisis? You might have a commission plan that rewards revenue to existing customers and your opportunity might be with new ones. Or your sales people might be driven to sell a certain product/service due to the commission plan but during the crisis it's not desired by your customers. You may need to adjust the commission plan to drive them to sell a new product/service or to find new customers in new market segments. And continue to monitor whether any commission plan modifications you've made should stay in place once the crisis subsides or perhaps a permanent modification is needed.

Bottom line is during a crisis you want to ensure that every one of your resources is properly focused. And because cash is king and you want every revenue opportunity you can find, review your sales deployment strategy to determine if adjustment is needed now. Doing so might not only protect the value or worth of your business but it might also build it.

Financial Controllers tell you what happened -- CFO's can tell you what may happen

Whether your business is operating through a crisis or not, every owner and CEO, no matter the size of business, should always be thinking in terms of how to strike the right balance between looking in the company rear view mirror and looking out the front windshield. One without the other would indicate you aren't doing all that can be done to protect and build the value, or worth, of your company.

Too often, small to mid size businesses have financial managers or controllers that are very good at maintaining company books. They are qualified and ready to deliver monthly financial statements and answer questions that arise about prior performance of the business. But where there is often a gap is the experience to take the company performance, and not just coach the leadership team about where to focus in finding opportunities to improve the P&L, balance sheet or cash flow, but to be able to build models that project the impact of how past performance will play out for the future performance of the business. Doing so will enable ownership and the leadership to see specifically where inaction based on addressing an issue from prior performance will play out negatively going forward.

A good financial partner (whether he/she be on your staff, at your CPA firm or as an advisor to your company) can take your historical company performance and build models to project out in to a future period what actions or inactions might look like in your financial performance. If your company has been experiencing increasing material or labor costs as a percentage of your revenue, you will want to see what this continued trend might mean over the next 6 months in terms of monthly performance. Your inventory may be growing more rapidly than revenue would normally dictate or your accounts receivable may be changing in its aging, both putting new strains on the working capital requirements of your business. You may be weathering this fine today but as it continues or even worsens, what will the impact be? A good financial partner should be able to project these types of issues for you in a way that you see what's coming as you look out your front windshield.

As you think about how to protect your company value or worth today and look for ways to build it to one day receive a euphoric exit valuation, ask yourself if you're getting the right blend of looking backwards with your business performance and looking forward. If yes, you're already taking great steps with your company but if not, now is the time to rethink this part of your business. Doing so can pay great dividends for your business and you personally in the years ahead.

Ensure you have the right decision making muscle in place

A great way to think about your business is it represents today the outcomes of all the decisions you've made up to this point. The greater the performance of your company, obviously you've made some great decisions. And now most importantly, the future valuation or future net worth of your company is reliant on the decisions you're making today and tomorrow so you want to continue to fine tune and sharpen your company decision making muscle. Here are a few steps you could consider taking now to help build this critical muscle in your company:

- Before focusing on making a decision, first ask yourself if you have the right people helping you make the decision. Too often ego drives decisions and leaders feel it will reflect poorly on them if they turn to others for insights before making a decision. The first step great leaders take in making a decision is asking themselves, am I the right person for making this decision and if so, who around me perhaps has experienced this issue before and I can quickly learn from them to avoid making mistakes they might have made?

- Learn to size up the magnitude of a decision and then assign appropriate time and energy to it. For those decisions that are not of great financial magnitude, low impact on customer experience and little or no impact on the future worth of your company, either delegate it or give it little time. But for those that are of higher magnitude, ensure you are giving it due attention it merits. Doing so can help you Bank Your Moment.

- Build the muscle of running certain decisions through models. Think about a decision in terms of running the potential impact through a model of your P&L and even your weekly cash flow projection tool. Doing so in my past helped me make a lot of important business decisions as the models helped me and my teams think through our various scenarios and the impact on our performance.

Great leaders know the power of great decision making and know the value of building the decision making muscle of their team. Sit with key members of your team and brainstorm the decision making model for your company. Even the smallest of improvements could build great future value and the net worth of your company.

Read the story to protect and possibly build company worth

If you're a business owner who is fortunate to be listed as an essential business and remaining open during this pandemic, make sure you are looking closely at your incoming order book for the last 60 days because it's telling you a story that is worth listening to and it could be a different story than it was telling you just 90 days ago. Here are some things to think about doing:

- Make sure you are looking at new order "dollars" and "units". If you supply a widget of some sort to your customers, don't just evaluate your incoming new business as it pertains to dollars, also make sure you are fully understanding what is happening with widget units being sold. If you're just looking at dollars you are only giving yourself and your team just one important dimension. Your revenues may be down like so many are experiencing, but are all your widget units down equally? Perhaps some products of your portfolio are up or are down much less than others, make sure you know what's behind this because knowing this could give you opportunities to take steps to either minimize the negative results you're seeing or it might give you ideas for how to identify some offsettng growth opportunities.

- Evaluate what combinations of products your customers are buying. if your product line is such that people buy various SKU's from you, make sure you monitor how this has changed in the last 60 days. And if your customers often buy combinations of products from your portfolio, evaluate whether these combinations are the same now as they were back in February. Customer's buying new combinations could be strategically meaningful for your business and you won't see this if you're simply monitoring dollars.

- Because cash is king, look closely at what is also occuring with gross margins of your product offering as this is a critical dimension to add to monitoring dollars and units. Are unit sales and gross margins trending together or is there a new story being told that you need to understand?

- Monitor your customer credits and returns to add to the story your order book is telling you. You may be analyzing your dollars, units and gross margins but also make sure you're looking at what credits and returns you're experiencing that may be very different than you were seeing just 60 days ago. You don't want to analyze the sales of your widgets to think you're gaining strategic insights only to realize what's being returned has it's own message that you need to factor in. 

As we look to protect and possibly build our company worth during this pandemic, monitoring our order book is essential but doing so should include dollars, units and gross margins because one without the others could mean you're only getting a partial story.

Protect and build your company value and your net worth even during a crisis

At a very high level, we should think about our company's operating in one of 3 phases. There is a Normal phase, a Crisis phase and a Catch Your Breath Phase. 

The Crisis phase is when you feel your business is in an out-of-control free fall, you're faced with more uncertainty and unknowns and surviving is the focus.

The Catch Your Breath phase is what I call the period following the free fall and although it's still a time filled with much uncertainty and a fuzzy forward looking crystal ball, it's a time where you feel the free fall has been stemmed even if just for a brief period of time.

Then there is the Normal phase, or in the case of COVID-19 it will be a time of a New Normal for most businesses. This is a time when stability is returning and you feel as a company leader that you have returning certainties for your company and industry.

For many business owners now in the latter part of April, 2020, most are now in the Catch Your Breath phase of the business cycle. Now we don't know if this is simply an eye of a bad storm and more free fall will start again or whether we've seen the economic worst the pandemic will create and we will start to move toward better times but at an unknown pace. Whichever it is in your mind, being in this phase is an opportunity to step back and assess what you just came out of and what it could mean to your company worth going forward. Here are a few recomendations to be taking during this Catch Your Breath phase:

- Learn from your customer purchase data over the past 60 days. Analyze your customer data specific to the last 30 and 60 days because what you knew about your business at year end 2019 may be very different now. Look for any new customer buying trends by product/service type and look to see if your customers are buying a different mix of your products or services. This short term change in their buying behavior needs to be understood in terms of whether it will have longer term implications for your business.

- Revisit your company proposal/quoting strategy. Is the strategy you used prior to COVID-19 hitting still effective now? Perhaps your customer proposals focused on delivery prior to COVID-19 and now your customers care more about about price and cost savings. Or perhaps your company proposals focused on you being the low cost supplier and now customers are more concerned about getting the products than they are the cost.

- Revisit your lost proposals since earlier this year. Don't assume the company that won the award is still able to fufill on the contract given how COVID-19 has hit them. Reach out and see if you can re-engage on work that you thought you had lost.

- Start asking new questions of your partners, suppliers and customers. Now is the time to make sure you're getting a broad view of the market and your industry and what changes might be temporary and which may become permanent. Some companies have stale dialog with their outside partners and customers so they don't learn any new insights. Rethink the questions you're asking of suppliers and customers to see what new insights you can gain during this uncertain time.

If you're in the Crisis phase as a business, then there are survival related steps you should be taking to protect the value or worth of your business. But if you are like many business owners in late April, you may not like where you are year to date but you at least feel like you're catching your breath. Use this time to think about steps to be taking to not just protect the value and worth of your company but to see opportunites to build it so one day you too can be euphoric with the exit valuation you receive.

Capture the costs now before you forget them

When the day comes you want to talk with an investor or an acquirer, a key question asked about your profitability will pertain to the costs your business incurred in recent years that won't repeat once the new owners take over. This is what helps you arrive at the Adjusted Profit number for your company and it's often this number that the investor or acquirer bases their purchase valuation on. These costs are often referred to as "one off costs", "owner benefits" or "addbacks". The concept is that these costs get reflected in your net profit at the end of a year but because the new owner won't incur them, they should be added back to your historic profit performance to arrive at a higher or adjusted profit number. You don't want to find yourself having to think back over the prior few years to try and recall what these one off type costs were because you will forget some and this will only serve to help the investor or acquirer since the profit of your business is higher when adjusted properly but they won't be basing their valuation on what should have been a higher profit amount.

Now is the time to be remembering and documenting the costs your business is incurring due to this pandemic. This is a one off or perhaps once in a many year event so you don't want a few years to go by and having a dialog with an investor or acquirer and forgetting to adjust your 2020 profit to separate the one off COVID related expenses from the normal operating expense of your business.  Here are a few ideas to get your thinking started:

- Lost productivity due to work stoppages (staffing shortages, employee meetings to discuss COVID matters)

- Purchasing of supplies (extra cleaning supplies above the norm, masks or gloves for employees)

- Cleaning staff (expenses above the norm in terms of more staff, overtime hours)

- Pricing discounts offered to help key customers thru the difficult time

Brainstorm with your controller/CFO to ensure you capture all COVID costs now and if you need ideas, speak with your accountant. Don't put yourself in the position of having to think back a year or more to capture every COVID related cost. Capture them now while fresh on your mind because doing so can mean receiving a higher exit valuation for your business when that exciting time is upon you. When it does, you want it to be filled with euphoria and not regret.

Understanding the last 45 days can lead to building your company value

At this point with Coronageddon, everyone has far more questions than answers. But business was always more of an art than a science which means we need to continue to navigate the unknowns. The fact that there are now more unknowns today than perhaps two months ago doesn't change the need for every business owner to view cash as king but to now add data as the partnering queen.

Now is the perfect time to invest a deep dive in to your data to see what it's telling you about the last week, last 2 weeks, last 30 or even 45 days. The pace of change has gotten crazy fast, so fast that the what you knew to be true about your business back in January or even mid February, has now potentially dramatically changed. And of course a major question is, has it changed permanently or just temporarily? Regardless, you want to know the answer to help navigate at least the near term.

Starting today, challenge if what you knew about your business back in January is still true to this day and leverage what your customer purchase data is telling you:

1.) What is occurring with your new orders...which sources are down, which might actually be flat or up? For those that are up, can you do more to build upon that even more? For those that are down, are you clear on the reasons why? Don't assume it's because the customer's business is down...could it be they need something different or faster than you have made available and they have had to make a quick switch to another source?

2.) Where new orders may be holding steady or even up, what is the profile of these customers/sources and could you find more of them in the market and now would be a good time to introduce your company to them? We all know that online is the market to be playing in...if you're not, can you quickly navigate your way to particpating somehow?

3.) Is there a change geographically where your orders are/are not coming from versus prior to COVID-19?

4.) Has there been a mix shift in terms of what customers are buying from you? What of your offering is down, flat or perhaps even up? What is up, can you build upon it?

5.) Are customer buying patterns now different in terms of the volumes/units...are they buying larger volume in a single purchase than prior or have they adjusted downward and do you undersatnd what's driving this new behavior?

6.) Are customers buying new packages or bundles of what you offer? Perhaps prior you seldom saw a customer buying Part A and Part D together from you on a single order but now they are. Look for any changes to the combination of what customers are/are not buying to see what you can learn.

7.) Talk to your sales people, your customer service people...talk to your customers and see if they are needing a new product or a new variation of an existing product and they would like to get it from you. A few clients I'm helping have done this and sure enough it uncovered some quick bolt on products they can add to their offering and customers are jumping on it.

Again, challenge your paradigms about what you confidently knew about your business just 60 days ago. Look at your data in smaller chunks...see what trends may have changed in just the past two weeks versus the prior two weeks. It's not a time to be looking just at a full quarter or the past 12 months of your data given how things have changed in just a few weeks. Drill in to the last few weeks and see what trends might be evolving. The more you learn, the more you might be able to protect or build your company value or worth today and the future exit valuation you might receive from an acquirer.

 

Thinking about moving from protecting to building your future company exit valuation

No one's crystal ball can tell us with any degree of confidence when business will get back to "normal". As business owners and CEO's, despite having our days right now filled with tactical matters related to COVID-19 such as personnel items, customer requests for extended terms, supplier challenges, monitoring cash, etc., etc., we also have to find time to think about how our business will respond when our industry begins to recover.

Being prepared for how your particular industry will come out of this event could be the difference between losing or building your longer term company value or company worth. And as I recommend to business owners and CEO's frequently, always look for opportunities to put on the glasses of your future investors/acquirers and look at your business through their lens. Months or even a few years from now, your future investors and acquirers will ask you how you performed through this event but even more so how you bounced back. How your company bounced back could be an opportunity to build your business valuation in their eyes.

Start thinking now about how your industry, how your specific business is going to recover. Is it going to come back very slowly so that it could take months or even a year or more to get back to pre-2020 levels? Or is your industry or business one that will roar back like a lion and will do so relatively quickly? Thinking this through and doing your own projections will help you determine what level of inventory you may want and when, your labor requirements, etc.. What you want to avoid is your industry rebounding more quickly than you are prepared for and therefore not able to meet demand. Many companies aren't losing their customers through the COVID-19 event potentially as their purchases may have decreased. But it's when they are ready to buy again, will you be a partner they can turn to or will they have to turn to others and therefore you will lose business that could have been yours?

In prior Reflections on this site, I've referenced the need to do modeling of various scenarios for your business. Now is a great time to do that becausse you want to be ready to be the kitten or the lion in terms of being ready to participate effectively as a leader in your industry when things start to recover. Talk with your team and think about whether your business needs to be ready for a kitten or lion event. Getting this right can be a great company valuation builder not just in the near term but long term as well.

Leaders versus managers and the impact on your future company valuation

When COVID-19 is a bad memory, it will be evident which businesses had strong leaders and those which did not. Strong leaders are stepping up and providing leadership to their teams in 3 key areas.

1.) Communicating effectively with their employees. And this doesn't just mean sending out memo's just wishing everyone well. This means connecting through phone, video, social media, etc. and hearing employee thoughts, concerns, ideas and assuring them that leadership is on the job. This isn't a time to be a dictatorial leader but one that is engaging with and for the team.

2.) Leading the team to ensure the company remains financially stable in managing cash. Strong leaders are maintaining a proactive position in monitoring cash with their teams. Given revenue impact, what will the impact be on receiveables? Strong leaders are monitoring whether their normal percentage of "current", 30-60 days, etc. are remaining the same or looking for the earliest hint that receiveables are moving to the right. And if they are, leading the team to take counter steps to maintain the health of the business or at a minimum, minimize the damage.

3.) Providing leadership to have an effective blend of strategically playing defense and offense. What defensive steps are needed to protect the business? What strategic initiatives were underway prior to COVID-19 that the team could defer for now to free up resources and which strategic initiatives should remain full steam ahead? What new opportunities have arisen from COVID-19 that your team could take advantage of?

The bottom line is that strong leaders are ensuring their teams remain engaged as best as possible and looking for opportunities to keep protecting and building their company value or business worth through this crazy time. For some, their company's will come out of this in a weaker and lower valuation position and others will have built their company valuation and be better prepared to one day be euphoric at time of exit!

Business owners should have both defense and offense in mind

This week included many phone call meetings with my various clients as we discussed addressing the rapidly evolving COVID-19 challenges. Our focus was on their people, cash and near term forecasts. And as part of the forecasting, we did scenario planning which included brainstorming around playing defense and offense.

Defense had to do with looking at inventory management and raw material purchases to ensure they are brought in line with forecasts. Defense also had to do with identifying discretionary spend that could be eliminated or deferred. And lastly, defense included tapping in to available lines of credit to various degrees depending on the particular client so that if things get worse before they get better, these companies would have cash on hand to manage through it.

We also made sure that our meetings this week included steps for playing offense. And the greater the balance sheet strength of the client, the greater the offense that can be played. Here are some of the very basic steps that are being taken now by those with a balance sheet and cash position to leverage:

1.) Reach out to customers and let them know the operating status of your company. All across the country there is great inconsistency from city to city regarding how quarantines and lockdowns are being implemented. If your company remains open because you're excluded from local government requirements, let your customers know. If you have customers in other States, they may hear on the news that your city is in lockdown and may assume incorrectly that you're closed for business. If you're open, let your customers know it.

2.) Review all current open proposals/quotes that are currently pending with customers. A review of each to determine which went to customers that might be struggling and a modified proposal that includes better pricing or better terms could help them through their difficult time. The best time to build a long term relationship with an existing or new customer is when they are facing a difficult time. Partners that help them through this may have a strong partner for years to come.

3.) Review recent "lost" proposals/quotes and determine which are worthy of revisiting immediately. They may be worth revisiting because the company that was awarded the order might have to close given their local quarantine requirements or they might be cash challenged and unable to fulfill on the contract in a timely fashion. Odds may be low that you could change the award decision, but all it takes is one to make this strategy pay off for you.

4.) Review your current strategy for new proposals going out during this challenging time. Your strategy pre-COVID-19 may have focused on price or delivery or terms, or specific features of your capabilities. But things are currently very different in the eyes of your customer. Rethink immediately what may have changed on their end and perhaps your proposal should change to reflect their new thinking. For some right now, access to product is even more important than pricing. And for others, it's more about payment terms right now then it would have been just a few weeks ago.

As a business owner/CEO right now, don't play the role of a turtle only. Yes, protect your business value and net worth by playing needed defense. But don't miss opportunities to play offense. Balancing defense and offense will help your company come out of this crazy time either with less damage to your company valuation or best case actually with a greater foundation for building it.

COVID-19 reminds every business owner that CASH is still king!

Even the most junior business person knows that cash flow is everything to a business. But now that the Corona Virus is sending chills through the economy, it's critical that every business owner and CEO do an immediate indepth review of their cash position and projections.

With most businesses looking at supply and labor challenges, it's critical that leaders sit with their teams and discuss cash flow. The following are just a few steps to take:

1.) Develop a cash projection tool for your business if one doesn't already exist. Contact me and I'll send you a template if you need one. But this tool should enable you to project out for the next 4, 8 or even 12 weeks what the incoming and outgoing cash needs of your business will be under various scenarios.

2.) Immediately identify high risk customers that you might already have in your Accounts Receivable or soon might have given product/service you plan to deliver in the days ahead. Think about which customers might be hit by this virus extra hard and realize they will most likely slow down their payables to you. Consider those you might have to reach out to and open immediate dialog.

3.) Look at possible scenarios that are looking more likely for your business as it relates to employees working from home and/or not being able to produce anything for your business and what this will do to your near term revenues. Your revenues and costs may get out of whack in these next few weeks so you'll want to get out in front of this now.

4.) Look at your available line(s) of credit and determine if you may need to tap in to one now. If credit markets tighten, your lender may reduce the amount you think you have available so you may want to grab some cash now in the event the worst case scenarios hit your business.

5.) Look at your upcoming projected costs and determine which non-essential ones you can eliminate or at a minimum defer. 

Bottom line (literally) is to immediately huddle with your team and discuss your cash requirements. Get in control of this otherwise it will take control of you and your business and do damage to the value or worth of your overall company. Future acquirers will want to see that you managed through this storm effectively because it will show them your team has the muscle needed and it could help boost the exit valuation they place on your business.

Having a contingency plan can be the difference between enabling or disabling your company value and net worth

Business is tough enough but never more so than when a challenge such as COVID-19 arrives. And although this pandemic brings its own specific challenges, in general it's similar to other events that cause a business to be challenged with revenue and ultimately cash flow. For this reason, every business owner should always have a contingency plan in place to turn to when times like this arrive. The ultimate purpose of such a plan is to help you prepare your business to weather a downturn such as an upcoming reduction in revenue and ultimately cash flows.

A boss said to me early in my career, the time for creating a good contingency plan is when you don't yet need it. This is because you will not feel stressed or panicked in developing or executing on your plans. You will have clarity of thought and you'll have the time to think through your plans from various angles. Ask yourself now, does my business have a contingency plan in place if an event such as COVID-19 gets worse? If the answer is no, then there is immediate need to develop one.

First thing to do is identify what are the triggering events for your particular business that will give you an early warning indicator that special steps need to be taken. Discuss with your team what leading business indicators will tell you that actions need to be taken soon. For example, if your new business quoting/proposal activity drops to a certain level, this could indicate that in the coming weeks or months that your revenues and then cash flow will be challenged. Or if your backlog of new orders falls to a certain level, this could be a triggering event that lets you know action needs to be taken to eliminate or minimize the negative business impact that is brewing. For some businesses, there is a single triggering event to monitor and for others, it's a series of events such as if BOTH new quotes/proposals AND your order backlog fall at the same time, these two together will let you know definitive actions need to be taken.

Once you have your triggering event(s) identified, next is to identify what steps you will then take with your business to protect it. What I generally did with my businesses is have 2 or 3 levels of actions identified within the contingency plan. Level 1 was basic steps, even easy steps that we could take to reduce our cost structure and help our future cash flow. These might include reducing all non-essential travel, deferring some non-essential expenses or looking at use of temporary labor and reducing it and even revising our forecasts to ensure our material costs were being planned properly. Then identifying Level 2 steps become more challenging but more impactful. These might include freezing all new hires, freezing all travel, cutting back on material purchases, and even knowing what parts of our workforce might be layed off or furloughed. And if you get to a Level 3, these steps become very painful and much more impactful. Work with your financial partner to model these various Levels of contingency plan so you can see where the steps will deliver the protection your business needs. You and your team will get quite innovative when you have a healthy dialog around where your business could cut back if the triggering event or events come to fruition.

But the bottom line is we always had a contingency plan to open and review for the ideas we came up with back when we had clarity of thought. You don't want to be thinking through your actions when you are already at the point of needing them. Have your game plan ready to go and doing so can help you protect and ultimately build your company worth. And as I said to a business owner recently, future acquirers will ask you to review in detail how your business did during a prior downturn and from this it can build or reduce their confidence in your team's ability to manage through a storm. And if the future acquirer doesn't believe your company can handle a storm, their offer valuation will reflect this and you won't be happy, never mind euphoric at time of exit!

Build your company value or worth by showing you have a robust sales pipeline underpinning future sales growth

Two of the clients I'm working with have been prepping for the past 2 years and it's now "go time". Meaning, they have been working our 5 step campaign and are now ready to begin the process of talking to potential acquirers. Both company owners are quite happy that they started their sales and marketing teams on building and managing an effective sales opportunity pipeline back now for two years. The simple reason for this is the acquirers are coming in assuming that the sellers believe their businesses have reached their maximum growth potential and the owners are selling so as to avoid the pending downturn. This is the skeptical view of most potential acquirers so it's important that they be presented with a robust sales pipeline to show that there is plenty of growth runway left for your business. Both these businesses are now presenting robust sales opportunity pipelines and it's impressing the acquirers.

I've heard business owners say that when it's time to sell, they can "whip" together a sales pipeline and present that to the acquirer. The reason this approach is ineffective is because you won't be able to show a successful track record of your team managing opportunities and closing them successfully. Managing an effective and growing sales pipeline will prove to an acquirer that your team has the discipline and the muscle to identify opportunities and turn them in to revenue. Lacking such track record, the acquirer may discount any future growth you might be projecting and this discount will manifest itself in the purchase price they are willing to pay for your business.

So ensure today that your sales and marketing team is capturing your sales leads, tracking them effectively as your team moves them from suspects to propsects to customers and then monitoring win/loss data. As each quarter passes, you want to see this pipeline growing and you want to see your win rate either increasing or remaining at a healthy level. The more track record you can show, the greater the liklihood that the future acquirer will believe what your team is forecasting for future growth of the business. And this in turn may result in the acquirer willingness to place a greater valuation on your business and make you as the owner more likely to be euphoric at time of exit!

Wearing future acquirer glasses might help you build your company value

This week a client called to discuss a new piece of capital equipment his team was considering. He wanted my input on whether making a 6 figure investment would help build his company's future value. After a brief overview of the equipment and how he was thinking about the return on investment he might realize, I shared that he was doing a great job of evaluating the investment opportunity through his pair of glasses. But then we switched to wearing the pair of glasses that his most likely future acquirer would be wearing. And although this particular client is still 3 to 4 years away from exiting, we are preparing now to ensure he has a euphoric exit outcome and making this investment decision required we factor this future exit event heavily in to our thinking. We pulled out the prior prepared list we have of his most likely potential acquirer's. In looking at this, it was clear that this particular piece of capital equipment was one each of these potential acquirer's had plenty of at their existing facilities. This then could mean they wouldn't see value creation in this particular piece of equipment so this client wouldn't be rewarded for the investment unless of course it helped generate revenue and margin that he wasn't generating today. This then led to a discussion about alternative production paths the client could take that would allow him to capture the new business growth but eliminate the need for the large capital outlay. And sure enough, his team came up with an idea that would work.

This is an example of something I frequently recommend to clients. When considering important business decisions about new facilities, new equipment, hiring of new executives, etc, etc, after you've thought about the decision through your glasses, put on the glasses of those that might one day consider investing in or acquiring your business. How will they view the investment you made years earlier and will it help further excite them about your business and therefore help build your company value? Always have both pairs of glasses in your pocket, knowing when to wear both can help you on your journey of one day being euphoric at time of selling your business. 

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