Reflections

Doing so can help you see how to build the value of your business prior to exiting

One of the steps we take early on in engaging with new clients is sharing with them samples of CIMs (Confidential Information Memorandum). This very simply step a year or more before trying to sell your company can help trigger fantastic ideas for generating greater value, or company worth, with your business.

A CIM is the document that will ultimately be developed that will articulate for potential acquirer’s what your business is all about and why it’s an exciting investment opportunity for them. We refer to the CIM as your silent salesperson as a potential acquirer will receive the CIM (after signing a confidentiality agreement) and they will go through it in detail to determine what interest they will have in acquiring your company and what valuation they may place on it. Certainly, your broker or banker who is representing you in the process will be talking with potential suitors and adding valuable color to the CIM, but the document itself has a very important job to do in exciting an acquirer.

Well in advance of having the CIM written about your company, review a few solid examples. Doing so will help you in thinking of ways that you’ll want to present your business one day. The types of data and information you will want to effectively portray in your CIM that will tell your compelling company story. In my years as an operating CEO, we periodically reviewed CIMs of businesses and invariably doing so gave us great ideas for how we should mold our own business so that it would shine one day when we developed our CIM.

Contact us and we can share great examples of CIMs (company names redacted) that have helped prior sellers get the euphoric exit outcomes they desired. Don’t reinvent the wheel in selling your business one day, learn from others that know how best to prepare you and your company for your euphoric exit event.

Clearly know which one you will be before attempting to exit

The first owner, or seller, is one that wants to sell their business, step aside and let the acquirer do with the business as they wish. The second type is one who wants to remain involved with all or some aspects of the business and does care what will be done with and to the business going forward under new ownership. Here is the key point…know very clearly which of these you will be and remain consistent in your thinking through the exit process.

Although this seems obvious, it’s not for many sellers. Their mindset when they begin the process of selling their company can evolve as the day approaches where they will no longer have control of their business. This evolving, new thinking can begin to slow down the exit process, bring unnecessary stress to you as the seller and create frustration for the acquirer as they begin to hear new thinking that is counter to what they first heard when the engagement process started.

Avoid this common, and very unnecessary issue, by ensuring you are asking yourself all the right questions early on in the exit process to ensure you will be mentally and emotionally prepared for the exit process. Get advice from those that know this process well to help ensure this issue doesn’t arise during your exit process.

Knowing this revenue number can help you greatly at time of company sale

When you go to sell your business one day, an acquirer is going to ask you what the growth outlook is for your business. You are certainly going to have an answer for them and you will want to be able to convey it in a way that gives them great confidence in your outlook. To give them this confidence, you’ll want to show them that you have a good revenue forecasting model/discipline in your business and it includes regularly identifying what your revenue “go get” is. When they see this type of discipline, they will be more confident in your revenue outlook for factoring into the valuation they will place on your business.

As part of your revenue forecasting, the Go Get revenue is that revenue which you still need to get in order to deliver on your full year revenue target. A way to think about it is:

• Take your Year-to-Date revenue (that which you’ve already invoiced for in the year)
• Add to this number your order backlog (Purchase Orders you have in hand but have not yet fulfilled on or invoiced for but you will be in this year)
• Add to these two numbers the value of new orders that you confidently believe you will secure as a result of current proposals in the hands of potential customers and proposals you are highly confident customers will be coming to you for yet this year. For the purpose of forecasting this year only, just include in this number the value of orders you believe will be fulfilled and invoiced in this year.
• Total these 3 numbers above
• Take this total and subtract it from your full year revenue budget or target that you set for the full year

The difference is your Go Get revenue. Meaning, you don’t yet have clear line of sight or very high probability awareness as to where this revenue amount is going to come from and yet you still need to find it to make your revenue target for the year. The smaller this go get number, the much more likely you are to deliver on your full year revenue. The higher this go get number is, the more aggressive selling steps your team may still need to take in order to deliver on your budget for the year. Discussing this number will help facilitate good strategic selling deployment with your team.

This basic concept can help you build a strong revenue forecasting discipline in your company. Building such a discipline will help you one day build the confidence of your future acquirer because they will see that you have a good internal revenue forecasting tool and discipline that bridges to how you then deploy your sales team to deliver on your revenue targets. This will encourage them that under their ownership of the company, this discipline is in place and will increase the likelihood that your team knows how to deliver on its revenue targets and this confidence will factor into the valuation they place on your company.

These will help you build your company valuation long term

In a presentation this week to the Consumer Technology Association, we shared the top questions that sellers of businesses wished someone had asked them years prior to selling their business. We want to share here these value creating questions for all to think about:

• Am I clear on what will make me euphoric at time of an exit event
• Can my business continue to flourish for an acquirer without me at the helm
• What will my company performance data convey to a potential acquirer
• Is any portion of our revenue highly predictable
• How sticky is our business with customers
• Can we prove a strong growth outlook for the acquirer to benefit from going forward
• What will my exit narrative be one day and will my financial results support it
• Can my company successfully undergo an acquirer’s due diligence
• Do I have seasoned deal partners helping me get to a euphoric exit event

You’ll want to think about all these questions well prior to your exit event. Don’t just hope for a future euphoric exit event, use time as a friend to plan for it. Give us a call and we can add color to any of these questions to help you think it through for your business. Call 949.874.0787.

Knowing the difference can help you sell your business for a premium one day

Too often business owners/CEOs confuse their team working hard with their team working smart. One is motion, the other is progress. And motion isn’t what will excite an acquirer one day to pay a premium for your business, but progress will.

Leadership teams that let the business manage them are what we refer to as playing whack-a-mole. Their day is comprised of playing defense, which is whacking at each problem or opportunity as it pops up, but not having enough time to play offense which is working on making things more strategic and better.

Effective leaders are those, that despite having to deal with daily challenges and opportunities that arise unexpectedly, still know the value of having a strategic plan that will guide them in knowing which areas of their company they need to focus on in order to make progress. And having a plan that you’re working too won’t eliminate days of whack-a-mole, but it will add more days of thinking and acting strategically which is where you’ll be building the value, or net worth, of your business.

Ask yourself, is my business managing me or am I managing it? And if it’s the former, think about stepping back and developing a more strategic pathway for your business. Doing so won’t eliminate whack-a-mole, but it will help reduce it and will give you the confidence that you’re building a business that will excite an acquirer to make you euphoric with the sale of your business one day.

In God we trust, all others bring data

Economist, Clive Humby, is noted for saying that “data is the new oil” within our businesses. And there is no more important time to have accurate and effective data than when you want to sell your business to a third party. Acquirer’s will have many questions when probing your business for potential acquisition, and the vast majority of their questions, they will want to have answered supported by your data.

Imagine yourself buying a company. You’ll ask many questions and the majority of the answers you will hear you won’t want to take on faith alone. You’ll ask to see data that backs up the claims the seller is making and for the answers they are providing to your questions. When selling your business, take time well before starting the exit process to ensure your internal data is available to support the due diligence by an acquirer. You will want to review your own data trends (financials, customer, vendor, operational and employee related data) to fully understand what it’s conveying about the strengths and even challenges within your company.

We help our clients leverage their data, their oil, to help optimize the exit plans for their business. Contact us and we’ll help you think through how to dig for the oil in your business.

Think about what company size means before selling your business

Size does matter when it pertains to selling a business. Technology companies are an argument against this common phrase but all others it does apply. What few private business owners realize is that acquirers very often reward sellers for building scale, scale of revenue and profits.

Both strategic and financial acquirers (i.e.: private equity) will often reference that they like their target acquisitions to be achieving a minimum level of profitability annually. The starting point for many is a minimum of $2.5M of EBITDA (Earnings Before Interest, Taxes, Depreciation, Amortization) and some even $5M or more. Below these amounts they may not your company having enough scale to invest their resources in to acquiring it. But as the EBITDA grows incrementally, acquirers will reward you for that scale so you want to think about achieving a minimum threshold before attempting to sell your business to get a premium valuation. As an example, if your EBITDA today is $1.5M, you should build a plan to get this to the first threshold of at least $2.5M. Doing so will increase the number of acquirer’s that will have interest in considering an acquisition of your business and it may get them to pay a slightly higher exit multiple than if you’re still doing $1.5M annually. And the same applies to building a plan to get your EBITDA to the annual $5M level. And if you today are doing $7M of EBITDA, build a plan that will get you to the next important threshold in the eyes of acquirer’s of $10M because this will move you in to an entirely different valuation category in their eyes.

Put on the glasses of your future acquirer when thinking about what level of scale you want to achieve with your business before attempting to sell it. Think about how they will view your business in relation to these EBITDA incremental thresholds of $2.5M, $5M, $10M then jumping to $20M. You will be rewarded by the acquirer for having greater scale and you’ll see this in the exit multiple they will be applying to the valuation of your company. As you do strategic thinking to develop your plan that will deliver a euphoric exit event one day for your business, have these important EBITDA thresholds in mind because it could be the difference between an unhappy exit outcome and a euphoric one.

Exit preparation includes having effective narrative around each

We share with new clients that a successfully run business today doesn’t necessarily mean an exit ready business tomorrow. The reason for this is many private business owners believe that if they have good revenue and profit the potential acquirers will line up outside their door. They may in fact line up with interest to acquire your company, but to open their checkbooks and pay you a premium for your company will take much more than just historical revenue and profits. There are several other areas you’ll need to be prepared to excite them to get them to pay a premium. In addition, here are 3 critical  questions the potential acquirer will ask and you’ll want to be well prepared with effective answers:

• Why are you selling now? They aren’t asking to be kind or to warm up the conversation. They are asking because they truly want to understand your motivation to ensure it doesn’t include things like you believe your company has reached its peak or you see a potential issue brewing within your industry or your company and you are concerned there could be challenging times ahead. They also want to ensure that you’ve fully thought through the idea of selling so they don’t waste their time applying their resources to the process only to have you change your mind.
• Why is your company unique versus competitive alternatives? Make sure you have positioned your business, well in advance of selling it, to be able to exhibit and articulate a unique position in the industry. Whether the uniqueness is in the product or service itself or the intellectual property you own or how you fulfill on providing your product or service to your customers, be prepared to articulate this clearly. Don’t assume the potential acquirer will know why your business is special.
• What is the future outlook for your business? Acquirer’s will want to know that under their ownership, your business will flourish in a way that enables their company. An acquirer isn’t going to pay you a premium for your historical performance as they will assume you’ve already rewarded yourself for that. But they will pay a premium for a business with a proven successful track record and good visibility to future positive performance. Ensure that years prior to attempting to sell, you build a good sales opportunity pipeline for your business. And build a discipline in using the pipeline to track opportunities you have visibility to, the associated potential revenues that might be attained and even win/loss rates as you've pursued the opportunities.

There are certainly many questions you’ll be asked by a future acquirer. These 3 are main staples so you’ll want to ensure you are well prepared to articulate effective answers. Doing so can be the difference between selling your company and selling your company and being euphoric with the outcome.

Having the right communications plan is important to seller and buyer

In working with our clients, the final stage of preparation for achieving a euphoric exit event includes knowing when and what to communicate with their employees. Doing so too soon, too late and/or having the wrong messaging can negatively impact the final days of you owning your business and your acquirer getting off on the right foot.

Although with each company there are nuances as to how employee communications should be handled related to a sale, there is a general rule of thumb to have in mind. Do not communicate too early. The reason for this is as soon as you communicate that you’re selling your company, your employees may feel unsettled and will have many questions, many of which you may not be able to answer. Questions like; who will the acquirer be, will we keep our jobs, will they make any big changes and a host of other questions will arise. Early in the exit process of courting potential suitors, you won’t have the answers to these questions and your inability to answer them for employees will only cause more concern and uncertainty for them. While you think you’re doing your employees a favor by being transparent about your exit plans, you’re potentially doing them a disservice by queuing up a topic that will naturally cause them to become uncomfortable and your inability to comfort them will only cause more issues.

Don’t reinvent the wheel on this topic of selling your company and ensuring effective communications with employees. There are many aspects to when you communicate, how to communicate, who to communicate to and what the message should be.  And this even extends beyond employees and moves to effective communications with customers and suppliers. Reach out for guidance from those that have developed and implemented these types of communications plans before. As part of our overarching help to clients to achieve their euphoric exit event one day, this communication planning is part of the guidance we provide. Give us a call and we can help you give quality thought and action to this important part of your exit event.

Wear the glasses of your future acquirer in assessing the quality of your revenues

Not all revenues are of equal value when it comes to the view your future company acquirer will take as they determine what value to place on your business. A few years prior to an exit, put on a potential acquirer’s glasses and ask yourself and your leadership team these questions:

• Is our overall company financial performance reliant on one or a multiple of revenue streams? (e.g., one product or service or multiple ones?) Sometimes a single source of revenue can be viewed as higher risk to an acquirer versus seeing a diversified portfolio.
• What is the predictability of our revenue stream(s)? Acquirer’s assign higher valuations to those businesses with more predictable revenues. Think about what you could do to take all or some of your revenue and move it to being highly predictable such as through multi-year customer purchasing agreements, preventative or predictive type services you could offer or even a software application that you could get subscription and maintenance fees from.
• Do we have good diversity of customers, so your revenue isn’t too heavily reliant on a small number of customers? Generally, acquirer’s will see risk when more than 15% of your revenues are coming from a single customer.
• Do we know the gross margin performance related to our revenue stream(s)? An acquirer will want to understand the profit margin you get specific to each revenue stream. If your company revenues come from multiple products or services, be able to present your future acquirer the gross profit you derive from each.
• Do we have good line of sight to future, ongoing revenue growth? Acquirer’s will many times wonder if you are wanting to sell your company because you believe it’s nearing the end of its growth potential. To reduce this concern, be able to show that you have a sales opportunity pipeline filled with remaining growth potential so that under their ownership, the positive performance of your company can continue.

The bottom line is this – don’t be focused on just the total revenue of your company but pay equal attention to the quality of it. Acquirer’s will assign very different valuations to two businesses with similar total revenue levels but the one with a higher quality of revenues is likely to receive a much higher exit valuation. This could lead to one seller being unhappy with the outcome of selling their company and the other being euphoric. Get the plan in place today to be one of the euphoric sellers in the future.

Ask great questions today to help build your future company valuation

Peter Drucker is known for many great quotes. My favorite is, “business executives don’t make mistakes by making bad decisions, they make mistakes by not asking the right questions up front”.

It’s for this reason that we created Yosemite Business Diagnostics. Here are 3 typical questions most business owners and CEO’s ask themselves:

• Could I sell our company and command a premium valuation?
• Could I sell our company and withstand the acquirer’s due diligence?
• How does our company compare to best in class?

These are questions that our Business Diagnostic tools can help you answer. Visit our site today and start asking new questions to build the value, or worth, of your company to help you prepare for a future euphoric exit event.(Visit Yosemite Business Diagnostics) After completing any of these Business Diagnostics, contact us for a complementary review of your results and customized tips for addressing any identified gaps.

Understand all the contract language your company has signed up for

Ask yourself this question – Are there any clauses in any agreements that we have signed over the years with customers, suppliers or partners that may impact our ability to sell our company?

A common question we get from new clients is where do private company owners get negative surprises during the due diligence process with an acquirer? One such area pertains to the acquirer reading through all of the contracts you have executed with third parties and finding language that could impact your sale:

• Right of First Refusal – this clause may allow a third party to have the first consideration to acquire your business before any other entity can be approached. This would preclude you from talking with any other party until you get a release from the party you’ve accepted this language with.
• Change of Control – this clause may require you to get prior written consent from the party you have this contract with which puts them in the position to approve or disapprove your ability to sell your company. Or this language may only require you to give them advance notice of your plans to sell your company but doesn’t give them right to approve or disapprove such plans.
• Sharing of Intellectual Property – this clause may require you to share any IP that you’ve created with a third party that you’ve accepted this language with. This would concern your potential acquirer if they are placing value on your IP and find out in reviewing an executed contract that you have to share that IP with a third party.

Prior to engaging brokers or bankers and certainly prior to engaging third parties in discussing the possible sale of your business, ensure your team hasn’t executed any contracts or agreements with language that might impact your ability to sell your company or at the very least raise a concern with a potential acquirer.

Develop a plan for preparing your business for an optimal exit event, one that will make you euphoric with the outcome. Conducting a contract review is a critical step in your exit preparation.

Managing risk is key to one day receiving a premium valuation

In a recent podcast, retired General Stanley McChrystal shared his definition of Risk. He offered that Threats x Vulnerabilities = Risk.

As business leaders this formula applies in our world as well. Ask yourself this question – what threats to my business am I aware exist and where is my company vulnerable to them? The answer defines your known risk.

This is important to identify for both an obvious reason but also a less obvious one. The obvious one is it makes good business sense to work with your team to monitor threats and vulnerabilities and take steps to negate or minimize them for the purpose of protecting the value, or worth, of your company. The less obvious reason is when the day comes to try and sell your business to a third party, they may be aware of potential external threats a company like yours faces and will expect to hear your insights, even your plans, about how your company is already or is planning to address them. Not being able to articulate your plans to address the threat(s) could negatively impact the valuation they place on your business.

Here are steps you should think about taking soon:

• Meet with your leadership team and brainstorm the threats and vulnerabilities you have line of sight to either currently underway or could have a high probability of happening in the foreseeable future.
• Talk with your advisors and get their external perspective on threats they believe a company like yours could face.
• Talk with select customers or suppliers and see what their perspective is regarding threats in your industry.
• Follow one of your industry think tanks as they are very good at predicting industry threats and opportunities.

Use time as a friend in monitoring the risks to your business. And determine those that you should take action soon and those that you should be monitoring closely – both great steps in the early stages of ensuring your company is prepared to one day help you be euphoric from its future sale event.

Protect company value by ensuring retention of your key people

As an owner or CEO of a business, ask yourself this question – are we taking the right, proactive steps with our team to ensure we retain our key people?

Too often in today’s labor environment, employers are finding themselves playing defense and feeling the pain of good people leaving and then scrambling to try and find a solid replacement. Now is the time to go on the offense and ensure you are building a culture that will be the place your key employees want to remain with.

What are the great questions you should be asking yourself now that will help you go on the offense? To facilitate a healthy dialog with your leadership team, here is a template to use today. (click here for Employee Retention - Great Questions Every Leader Should Ask) 

Building the value, or net worth, of your business takes time and getting good people around you. When the day comes that you might want to attract a third party to acquire your company, you’ll want to present a solid team that they will see value in making a part of their organization. This doesn’t happen by chance, it takes good planning and attracting and retaining the right talent. Use time as a friend and ensure you’re on the right path today in building your organization to support a euphoric future exit event.

The key to a euphoric business exit is supporting the right narrative

Ask yourself this question – what narrative do I want to convey one day to attract a buyer for my company and am I building my business and its performance in a way that will support that narrative?

Let’s first define narrative. It is what your overarching message will be that you will use to attract and excite an acquirer to be willing to pay a premium for your company. As an example – “here at XYZ company we have built a solid business foundation that includes a unique product/service) offering that commands a high degree of customer loyalty and this is manifested in a high degree of predictable, profitable revenue streams. Our market is large and continues to grow and we are well positioned to continue our strong performance.”

When the day comes that you might want to express this type of narrative, you want to be able to show the data to back it up. In this example narrative, did you build a business that offers a unique portfolio, can you prove high customer loyalty, does your data show you do in fact have predictable revenues and does it show that you in fact offer profit levels at or preferably above the market norms for your industry?

What you want to avoid is waiting for a few more years to go by and decide to sell your company only to realize your narrative isn’t as powerful as you wanted it to be. Or that you realize you didn’t deliver the performance and results that would back up your desired narrative with supporting data.

This is why we work with business owners a few years prior to actually beginning the sale process. We help them think through what an exciting narrative will be for their most likely future acquirer and help them develop the strategy that will get their business to support delivering on that narrative. Use time as a friend in this critical aspect of preparing a business for a future euphoric exit and start giving thought to your future desired narrative today.

Yosemite Associates has launched its latest business diagnostic

Ask yourself this question about your company – if I decided to sell my company to a third party, would my business get through their due diligence process successfully?

Deciding to sell your company one day is a major decision. But an equally important decision is will you successfully work through the acquirer’s due diligence process, or as we fondly refer to it as the proctology exam? This catches many sellers off guard as they don’t realize how in depth the acquirer most likely will want to probe into their business. As we convey to owners and CEO’s, getting an acquirer initially excited to acquire your business isn’t the hardest part. The hardest part is ensuring as they probe what your business is all about, that their excitement is maintained or even builds through their due diligence.

We work with our clients in various ways including helping them conduct a due diligence dress rehearsal. We do this at least 2 years prior to their starting the exit process. This way any issues identified can be corrected and results can be realized from the improvement before the selling process gets underway.

At Yosemite Associates, we use a variety of tools, including our on-line suite of business diagnostics to help our clients build the value, or worth of their company. Our latest diagnostic, Probe, is now available for all to benefit from so you can conduct your own confidential due diligence dress rehearsal and be ready one day to maintain acquirer excitement as they consider buying your business. (Click here for Probe)

Building this muscle today could reward you at time of exit

When the day comes you want to attract and excite an acquirer to buy your company, know that they will be asking you for your forward-looking growth projection. They are most interested in knowing this because they will base some of their valuation not just on how it has performed historically, but even more so on how it might perform under their ownership. To be prepared for this, you will want your team to be able to build and present an effective forecasting muscle.

We say this because acquirers often view the seller’s projection with skepticism and will trim it down in building their valuation model. To avoid them doing this to you, you will want to prove to them that your company has a successful historical track record of planning, forecasting and achieving your growth projections. Showing an acquirer that your company has a good muscle and discipline of forecasting your business and achieving your forecasts on a mostly consistent basis, may give them confidence to accept all of or at least a majority of your forward-looking projection.

To be able to show a future acquirer that you’ve built this forecasting muscle with your business, you will want to use time as a friend and start building it today because this will allow you to improve the capability and ultimately show them a few years of positive track record.

Determine how audacious your strategic plan needs to be

Ask yourself this question – to help you be euphoric one day in selling your company, how audacious does your strategic plan need to be?

There are multiple benefits to having a solid strategic plan for your business and one of these is knowing how audacious your plan needs to be to help you achieve your desired outcome from a future sale. You don’t want years to go by and then decide to sell your company only to find that you didn’t have an aggressive enough strategy to close the gap in terms of what your business is worth today versus what will make you euphoric in the future. And the opposite can happen, you don’t want to take unnecessary aggressive steps with your business that might introduce time, cost and/or risk that aren’t required for you to achieve a euphoric exit event.

The journey with your business to a successful future exit event starts today by deciding what good looks like to achieve your future desired outcome. Determine today’s starting point to identify how small or large the gap is that you face. Doing this will help you determine the magnitude of the time, risk and investment that will be needed to close the gap. Don’t leave it to chance whether you will be euphoric one day from the sale of your company. Get out in front of that planning today and determine the strategy you will need to get you there.

Make sure your advisors are asking you the right questions

Ask yourself this question – do my advisors proactively facilitate dialog that is helping me build the long term worth of my company?

For many private business owners, the answer to this question is “my advisors reactively help me think things through when I ask for their input but they aren’t proactive in bringing their business exit planning experience to me”.

To ensure that you are building a business that will one day attract a high degree of acquirer interest, make sure that you are using time as a friend today to be having the right internal strategic dialog helping you build such a business. At this early time of the new year, think about the value your advisors are bringing to you proactively versus reactively in preparing for a future euphoric exit event. Here is one of our articles to help you think about whether your advisors are being strategic or tactical in their help to you (read article)

Keeping it relevant is key to growing your company valuation

Ask yourself this question – when is the last time me and my team discussed whether our value proposition and unique selling proposition are still relevant? A key part of our job as company leaders is to ensure that these are staying relevant and that nothing has or is changing in our market or with our customers that might require us to make a strategic shift.

 - Value Proposition is the value that your customer derives from working with your company.

- Unique Selling Proposition (USP) is how you provide your value proposition in a unique way versus your competition.

The beginning of a year is a great time to think about whether your team sees changes occurring in your market or perhaps changes with your customer purchasing decision making. You’ll want to determine if any strategic shifts are needed in your business and/or whether it’s just a matter of fine tuning your customer messaging to keep it relevant.

For those wanting to sell their business one day and be euphoric from the outcome, assessing value proposition and USP is a periodic key step needed. Your future acquirer will certainly assess whether they think these are staying relevant, so you too need to monitor and manage this aspect of your business effectively.