Reflections

Build the leverage and build your company net worth

When the day arrives that you engage with a third party to potentially acquire your company, they will look at many aspects of your recent historical financial performance. One such performance area they will probe is your company operating leverage.

The acquirer wants to know about your recent and projected revenue growth and what the cost and expense relationship is with this revenue. They want to know if your revenue growth is driving greater efficiencies and economies which would reflect in better gross or net margin.  A positive operating leverage is when your margin improves with incremental revenue and a negative leverage is when margin decreases with higher incremental revenue.

Here is an example to illustrate how to determine your financial operating leverage. Let’s look at it through your Gross Margin. Gross Margin operating leverage is your incremental gross margin divided by the incremental revenue:

Q1 Revenue: $10,000,000

Q1 Gross Margin $: $4,000,000

Q1 Gross Margin %: 40%

Q2 Revenue: $11,500,000

Q2 Gross Margin $: $4,200,000

Q2 Gross Margin %: 36.5%

Incremental Revenue Q2 versus Q1: $1,500,000

Incremental Gross Margin Q2 versus Q1: $200,000

Gross Margin on this incremental revenue: 13.3% ($200,000/$1,500,000)

This company owner can factually state that their Q2 revenue and gross margin grew over Q1 in whole dollars. But, an acquirer will question why the incremental revenue of $1,500,000 came with a lower gross margin (13.3%) versus the overall gross margin of the business (40% in Q1 and 36.5% in Q2)?

The acquirer will want to understand what’s causing this to determine if it’s a new trend that will impact their ownership. They will look at the gross margin and net margin calculations (net margin adds your SG&A costs to the formula).  If they see your operating leverage as positive, it could build the purchase price they are willing to pay you for your company. But if they believe the operating leverage trend will be negative, it could reduce how much they are willing to pay.

Each month, review your operating leverage at the gross and net margin levels and monitor them for trends. Use time as a friend to strengthen your leverage and be ready to impress and excite a potential acquirer.

Managing family member expectations is key to a successful company sale

Recently a company owner called and said he tried to sell his company but after telling his two sons that he had accepted an acquirer’s offer, the two boys quit. They quit because they felt blindsided that their father never spoke with them about exit plans. This caused the acquirer to back away given the important role the two sons played. The owner was now looking for help to reset his attempt to exit.

Key to a future euphoric exit event is preparing your business and yourself personally. Part of the personal equation includes family members that may play roles in the running and/or owning of the business.  If you’re the owner of a company and have family members working at the business or with ownership stakes, ask yourself these questions:

• How might my family members, who are working in the business, react to my wanting to sell?
• Will my family members who are working in the business want to leave when I do or will they want to stay and work for the acquirer?
• How will family members, who don’t work in the business but who do have an ownership position, respond to my wanting to sell? Does their ownership position give them voting rights in a sale?
• Would any of my family members be capable of taking over the company from me? Would they want to? Are they expecting to take over?
• Have I spoken openly with my family members to share my thoughts related to a future exit and solicited their thoughts?
• Have I talked with family members about what a sale of the company might mean for them and solicit their thoughts?
• Would it be an exit option to have members of my family, who are working in the business, acquire my portion of the company? Could we structure a way for family members to purchase my stake in the company?

Use time as a friend in communicating effectively with family members to prepare for your future exit event. Don’t get close to exiting only to find out that this topic hasn’t been effectively addressed.  Selling a company is stressful enough without adding the unnecessary pressure of dealing with family members that have not been well prepared along with you. Start that dialog today and get any issues on the table so you can manage them now and not while also trying to sell to an acquirer.

Selling your company one day could be enabled by doing less today

When owners and CEOs think about building the net worth of their company, they often think about adding to their business, not subtracting. They think about adding more capital, more space, more talent and/or more products or services . But sometimes less is more.

As Steve Jobs was quoted as saying, “I am more proud of what we didn’t do than what we did do.”

So before taking steps to add to your business, discuss these thought provoking questions with your key managers and see what progress driving dialog these could facilitate:

• What processes in our business are the most labor intensive? For each, when were these processes designed and are they still efficient and effective?
• Are we applying labor to activities that were once of value but perhaps are not any longer? Could we redirect labor to activities of greater revenue or profit importance?
• What are our top 3 expense categories? Have we identified productivity improvement initiatives we could take this year to reduce the expenditure (or hold them flat while we grow)?
• What is our annual expenditure for office/facility space and related utilities, insurance, etc? Before we consider adding more, are we optimally using what we have?
• Do we optimally manage the utility expense of our equipment? Do we regularly calibrate our equipment and ensure effective preventative maintenance protocols are in place?
• Are Lines of Credit or short/long term loans being optimally leveraged? Have we investigated any streamlining or new sources of funds that could be more optimal for us?

Before thinking about what to add to your business, ensure first that you are not missing opportunities to subtract first. The profitability of your company might be accelerated more by investing time and energy into initiatives that help you reduce labor, reduce raw materials, reduce space, etc. Meet with your team and brainstorm how less might be more on your journey of building your long-term company net worth.

Give thought to how your age might impact selling your company

A company owner recently commented, “I’m 32 years old now and I’d like to sell at 37 and move on to something else in my life”. On the surface this sounds fine, but to most acquirer’s, this might trigger a red flag.

At time of selling your company, the acquirer will want to know what your personal plans are for going forward. Are you planning to leave immediately, leave after a transition or do you want to continue on working with and for the acquirer? If the seller is around 60 years of age or older, the narrative is easy. It can be they want to leave at time of transaction or soon after simply because they want to retire, take financial chips off the table and perhaps spend time with their family. This type of narrative makes sense to an acquirer.

But what if the seller is much younger, say 55 and under? Now the narrative might be more challenging. Challenging because an acquirer will question a seller of this young age that doesn’t want to keep investing time and money into their own company. If this seller doesn’t want to keep investing in their company, why then should the acquirer want to? The acquirer will wonder what the seller knows about their business that is causing them to want to leave it.

Every seller is a case study of one when it comes to developing your personal exit narrative. In your case, think about your age and what it means for the future narrative of presenting your company to acquirer’s for a sale. You want to use time as a friend to plan for your narrative to ensure it helps you manage to your euphoric exit event.

Use time as a friend to get prepared personally

When it comes to preparing for your future euphoric exit, there are 2 key elements:

• Preparation of your company
• Preparation of yourself

In preparing yourself for a future sale of your business (or in the event of your untimely passing prior to a company sale), here are key questions you’ll want to have answered – answering these questions is all part of building your estate plan:

• Is the legal structure and ownership structure of my company up to date?
• In the event of my untimely passing, does my spouse/family know who to contact about the legal and tax aspects of the company?
• In the event of my passing, does my spouse/family know what I want to have done with the company and all business assets?
• Does my spouse/family know their role and rights as it relates to the company in the event of my passing?
• Have I met with a tax professional to ensure upon selling my company or upon my passing that my assets will be managed in a tax efficient manner?
• Have I identified my cash flow needs after selling my company and do I have plan to meet those needs? Or in the event of my untimely passing, is there a plan for providing the cash flow needs for my family?

Use time as a friend to develop your plan with an estate planning professional. Selling your company one day is a process that will keep you busy and it will be stressful enough without also having to rush building an estate plan at the same time. Building your estate plan years prior to an exit event will allow you the time to give the plan the needed quality time to optimally think it through.

Alignment is key to build company net worth before selling your company

Ask yourself this question – are the key managers in my business aligned with me and with each other in terms of what I want us to accomplish with our business?

At the outset of our engagements with new clients, one of the early discussions we have with key leaders in the business is to determine their alignment around company direction and daily in working with each other. Frequently we find lack of alignment which means these teams are often confusing motion for progress.

Check the alignment with your team by using this template (team alignment template). Use this template to facilitate productive dialog with your key managers. Taking this step and building alignment is a step toward driving progress and ultimately building company net worth.

Engaging your team is key to moving your business forward

When the day arrives that you want to sell your business, there are three key areas of your business the acquirer will look to understand. They will assess your historical upto the current performance, future potential performance and strength of your culture and organization. And it’s your culture and organization that are key to helping you deliver on past, current and future performance.

So, if your organization is key to your business performance, then what steps can you take to help increase your team’s engagement? Ask yourself these questions to help identify ways to get your team more engaged in helping you build your company net worth:

• Have we met with key supervisors and managers across our company to discuss what we want to accomplish this year, what we want to get better at?
  • Have we shared how each department can support what we want to accomplish?
  • Have we reviewed what metrics are important for each department to monitor?
  • Have we refreshed our key metrics to help facilitate continuous improvement dialog?
• Do we meet monthly as a senior team to review the progress we are or aren’t making on what we want to accomplish this year?
  • Do we bring facts and data to these monthly meetings versus just having emotion based discussions?
• Do we periodically (i.e.: quarterly) meet or communicate with all employees to let them know where our company is making progress and where we may need their help in facing challenges?
• Do we review our employee compensation plans, specifically bonuses, to ensure they are linked to supporting what we want to accomplish this year?
• Do leadership and department managers encourage our employees to share ideas for improvement in how we serve our customers and how we better produce our product/service?

Building your business is a team sport so as the coach of your team, identify steps you can take continuously to engage your people to care about what you’re trying to accomplish. Ensure your employees aren’t confusing motion for progress…meaning, ensure they know what you’re trying to accomplish and bridge for them how they can help. Giving this the attention it deserves will have you well on your way to building company net worth and more likely to achieve your future euphoric exit event at time of sale.

Know which type of acquirer may be best for your company at time of sale

A common question we get from company owners is who is most likely to have interest in acquiring their business? The first part of our reply is you want to build a business that will be attractive to the largest number and type of potential acquirers simply because this will generally get you the best competitive offer. The second part of the answer is explaining what 3^rd party options they may have.

Venture Capital – the name implies their focus, which is on businesses that are “venturing” into the market so their interest most often is on investing/acquiring earlier stage,  less mature companies. VC firms many times invest/acquire pre-revenue or early revenue businesses that need capital and outside expertise to help them scale. And these days, many VC firms are technology focused and want to acquire software or tech oriented businesses.

Private Equity – the name implies their focus, which is they take an equity stake most often in private companies that are more mature and established in the market. Private Equity firms are also called financial sponsors because they are strong at bringing capital to help an established company scale to new heights. They leave the early-stage businesses to the VC firms and the PE firms focus on companies with established products/services, customers and revenue streams.

Strategics – the name implies their focus which is they strategically understand and operate in your industry. Strategics are well-established companies and are often direct or indirect competitors to your company. They look for businesses that will enable and complement their products/services and/or customers/markets. It’s often said amongst acquisition professionals that your best offer may come from a Strategic acquirer because they can factor synergies into their valuation model. Over the last few years however, Private Equity has sharpened their pencils to compete with Strategics so they too are making strong offers for solid businesses.

A note on PE that has invested in a business that serves in your industry, these are called Quasi Strategic acquirers. Meaning they are a PE group but because they already own a business in your sector, they also act as a strategic acquirer because of the potential synergies that may exist with your company.

For most sellers, they won’t be attractive to all 3 of these potential acquirer types. Early-stage companies will most often be attractive to VC and potentially a Strategic. More mature, established companies are more attractive to PE or Strategic acquirers. Knowing which of these will be in your future is important to begin identifying now because it will help you in making important business decisions today. Decisions you’re making in the near term related to your company will increase or decrease the interest a future acquirer may have in your business. Start giving this thought today and ensure you’re building a business with optimal attractiveness to future acquirers and increase the likelihood of achieving your future euphoric exit event.

Rethink your metrics to gain strategic insights

When you look one day to sell your company to a third party, they will look at your financial, customer and operational data to see what strategic insights they can gain. They will be looking for the opportunities and risks associated with owning your business. Prior to them doing this analysis, benefit yourself by doing that analysis years prior.

A common issue we find in working with new clients is they have become stale in terms of how they look at their business performance. We find they are looking at the right things but not perhaps in the right way and this is causing them to miss key strategic insights that could help build the net worth of their company. Ask yourself these questions about your key metrics:

• Do we look at performance metrics both in percentages AND in whole dollars or units?
• Do we look at our sales performance on a portfolio consolidated level AND by individual sku (each of our products or services)?
• Do we look at revenue dollars by products/services AND by units? Your dollars could be increasing or decreasing but your associated units or weights could be doing the opposite and this could be caused by a variety of reasons such as price changes.
• Do we look at revenue and profit performance of our product and service revenues by month AND at performance trends over multiple years?
• Do we look at our revenues by customer (by specific products and services they purchase) by month, by quarter AND over the course of multiple years to identify trends?
• When is the last time we reviewed our key metrics and updated the targets we’ve set for each?

If it’s been awhile since you evaluated the strategic insights you are getting from monitoring performance metrics, refresh them today. Doing so today will help you gain insights that can help you improve your business and get you ready to attract and excite a future acquirer to pay a premium for your company.

Most attorney’s can get a deal done, the right attorney keeps you from getting sued post transaction

One of the key decisions owners of private companies must make in selling their company is what deal attorney they should partner with. The selection is critical, not just in helping you negotiate key elements of the deal but also in ensuring you’re protected years after the deal is completed. Selecting your future deal attorney is as important as your decision in selecting a broker/investment banker or even selecting the acquirer that is best for your business. Here are questions to ask when interviewing your potential legal partner in doing a transaction:

• What size of company do you generally represent in transactions?
• What experience do you have in doing transactions in my industry?
• What do you see as your role in helping me get a deal done?
• What are the key deal points you would be negotiating for me?
• What are the common pitfalls you come across in transactions?
• What are examples of key decisions you’ll be asking me to make during the process?
• How does your fee structure work for representing me?
• How do you work with our broker/investment banker?

The “when” to selecting your deal attorney is also an important decision. Our guidance to our clients is to engage your deal attorney early in the process so they are on board as you even negotiate Non-Disclosure agreements with a potential acquirer.

Your team for getting you a future euphoric sale event should include an experienced exit planner, like Yosemite Associates), a tax advisor and a deal lawyer. Use these questions to help you screen the legal partner that you believe can help you get a great deal done.

Could raising capital enable your company to a future exit event?

At some point in owning your business, you might consider raising capital to help accelerate your growth. Your options could include getting a loan from family/friends or a bank but often times these options have limitations that lead you to finding a capital partner that is seasoned at partnering with businesses to fuel their growth.

If you’re thinking about whether raising money from a capital partner makes sense, here are some initial questions to consider:

• Have I identified what good looks like for my business years from now (i.e.: what type of exit I’d like) and how does raising capital from a third party help me accelerate achieving that desired exit?
• Is the dollar amount I would want to raise enough to attract a capital partner or is it too small for what they would find of interest?
• Have I developed a plan for what I would do with the money raised? Can I show a capital partner that I know how to deploy the funds?
• Can I show a capital partner that my existing business has as solid track record of performance to give them the confidence I will deploy the invested money effectively and with a high probability of delivering a solid return for them?
• What decision making authority related to running my company am I willing to give up to a capital partner?
• In taking my company to the next level of growth, what experience do me and my team lack but could fill the gap with a capital partner that brings money and expertise to the table?
• How would a capital partner work with my team or do I want my team insulated from a partner?
• If I have a capital partner, will I be able to continue blending quality of life and quantity of life (i.e.: taking vacations whenever I want) in running my business or will their expectations change my quality or quantity of life balance?
• What specifically am I looking for in a partner – what experience and capabilities would I want them to have and what role do I want them to play? What successes within my industry do I want them to have to build my confidence that they are the right partner with a solid performance track record?

These are just a few of the questions you’ll want to ponder before you consider going this route. Raising external capital to fuel your company sounds great and it very well could be but it also comes with challenges and risks. Go in with your eyes wide open and begin by answering these questions for yourself. Think about what good looks like one day when you sell your business and then determine if you need a capital partner today to help you get there.

Most owneres focus on their company readiness and neglect their personal readiness

It’s not uncommon for acquisitions to go south because a Seller realizes just days or weeks from a deal being completed that they aren’t prepared personally to let their company go. An exit planning professional will ensure your company is ready to command a premium but will also ensure you are ready as the owner/Seller to successfully move on to a new phase in your life. This readiness relates to your personal financial and mindset readiness. Here are great questions to think through that will have you preparing personally for a euphoric exit event:

• Am I clear on what Net amount I will want to receive from an acquirer – have I conducted a Gross Proceeds to Net Proceeds analysis?
• Do I have a tax efficiency plan for the proceeds of a future sale and is my estate plan updated?
• Where will my personal monthly cash flow come from once I no longer receive a paycheck?
• Where will me and my family get our health insurance from?
• What will my calendar look like once I no longer have my company?
• How will I introduce myself when meeting someone new and they ask what I do?
• What will keep me from getting bored once I go from the busy schedule of owning my company to not having any company meetings to attend?
• Will I need to be mentally challenged once I sell my company and if so, how will I address this?
• Do I have hobbies that I will want to invest my time, money and energies in?
• Is there an organization (i.e.: philanthropic) I will want to support with my time and money?
• How does my spouse/family or partner spend their time today while I’m working and will the change in my life impact their schedule or routine?

As you invest energy into ensuring your company is prepared to one day support a successful exit event, equally prepare yourself personally. Use time as a friend to ensure complete readiness professionally and personally to increase the likelihood of achieving your future euphoric exit event.

Year end financial decisions can enable a smoother future due diligence at time of company sale

Your business is closing out the books for 2023. Decisions are being made related to your income statement and balance sheet. Avoid a mistake often made during this process. The mistake is reflecting revenues or expenses in this latest year end inconsistent with how they might have been reflected in prior years.

Let’s fast forward to the day when you’re selling your company and a potential acquirer is doing their due diligence probe. One of their steps will be to analyze your financials and looking at year over year performance comparisons. If over the years you have been inconsistent in how certain revenues or costs are reported, this could cause year over year variances that can raise unnecessary questions by the acquirer. An inconsistent accounting methodology year over year can cause frustration and delays during due diligence. When this occurs, it can lead to the acquirer asking your team to recast financials so that all years are consistent or they may take it upon themselves to do so and all this adds unnecessary time and stress to the due diligence process.

An example of inconsistent accounting methodology relates to accruals, such as your company vacation accrual account or an employee bonus accrual. At year end if you have a negative or positive accrual, how you adjust for this can impact that years results and in some cases could be meaningful. You certainly need to adjust the accrual but you want to follow the same methodology from prior periods to avoid causing future due diligence confusion..

To avoid having this future due diligence disruption, meet with your financial team now as they are closing out the books for last year and discuss accounting methodologies to ensure consistency with prior years. Taking this step now can help you avoid a future due diligence headache.

Ensure your team is focused heading into the new year

A common issue we see with many privately owned businesses is they are trying to do too much. They have lots of ideas for things they’d like to work on, but they are missing two vital considerations. The first is they haven’t linked which of the things they want to work on will actually build the long-term value, or what we call the company worth, of the business. This could lead to your team working hard but confusing motion for progress. This leads to initiatives that may be nice to have but are they truly of strategic value to the enterprise.

The second issue we find is just the sheer volume of too many actions initiatives being worked on. This leads to the team many times not accomplishing many of them, and/or not accomplishing them well. When this occurs, the team gets frustrated and this then creates its own set of issues.

Setting the initiatives that your team should work on should flow in the following way:

• What do I need to build or accomplish long-term with my business that will make it attractive to a future investor or acquirer, identifying the value drivers. (such as building an exciting growth path and sales pipeline, having a plan for strong profits/cash flow, developing unique intellectual property and competitively unique capabilities, building a strong team, etc)
• Once you have #1 in place, you identify where does your company have gaps in delivering on the value drivers. What are the initiatives my team should work on to fill any gaps we have between where we are today and where we want to be in the future in terms of company worth.
• Once the gaps are identified, then establish which initiatives that need work will require cross functional or cross-department resources. You want to avoid having your functional departments each having so many initiatives they need to work on that they don’t have time to commit resources to supporting cross functional department initiatives. So any gaps your company has that require cross functional resources to address, these should get priority. These initiatives are oftentimes of more strategic importance to the company.
• Once you see what resources will be required by each department in supporting company-wide growth or improvement initiatives, you can then see what resources are available to work on improvements at the department level. These department level initiatives are often times more tactical in their importance to the company.

Meet with your team and discuss these four points. In addition, assess the past year and what you accomplished and why and then discuss what wasn’t accomplished and why. The learnings from this can be applied to helping set the focus for the year ahead. As the leader of your business, ensure your team is excited to be working on the initiatives you’ve identified, not frustrated by them because it’s another year of trying to do too much. Driving the right focus will get you on your path to your future euphoric exit event.

Promise yourself you’ll get your exit plan in place this year

Ask yourself this question – do I have an exit plan in place to help ensure that I’ll be euphoric when the day comes that I want to sell my business?

Owners of private companies should have a plan for how to optimize the future sale of their business and ensure they are ready both professionally and personally. Use time as a friend to get your plan in place and here is a sample of a plan snapshot (Yosemite Associates Exit Plan Snapshot Example). Exit planners like ourselves help owners prepare such a plan that can be summarized like this template with all the underlying supporting documentation.

Don’t let another year go by without getting your plan in place. Contact us (949.874.0787) to learn more about what steps you can take to get an effective exit plan in place this year and begin preparing for your future euphoric exit event.

A future euphoric exit event requires this critical step

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

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

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

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

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

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

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

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

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

Ensure company incentive plans enable a future successful company sale

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

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

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

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

Optimize your P’s and optimize your future company sale

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

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

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

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

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

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

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

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

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

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

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

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

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