Reflections

Protect and build company worth with a comparison to best-in-class and increase the chances of a future euphoric exit event

A question we will ask clients in the early stages of working with them is what is their approach for determining how their company compares to those that are best in class. The answer is most often that they have a general feel for this but don’t have a good way of really knowing what best in class is. Our suggestion is to periodically compare their business, not to itself, but to those best in class.

To help them do this, we offer Yosemite Diagnostics (Yosemite Diagnostic Tools) and specifically our Stethoscope tool . Stethoscope is a health diagnostic tool that guides an owner/CEO through 10 business categories and over 100 thought provoking statements. Each category and related statement is designed to help you ask new, insightful questions about your business and see how best in class companies operate in each.

Protect and build your company worth by rethinking what you’re comparing your business to. Let Stethoscope guide you to new thinking, new dialog with your team and get an overall business health score. And with the score, get practical tips on steps you can take where our diagnostic tool identifies opportunity for improvement.

Let us help you conduct your business health checkup today and receive a 25% “friends of Yosemite” discount. Where you see “enter a coupon”, simply use DIAGNOSE25. And once you've completed it, give us a call at 949.874.0787 and we'll happy to offer additional insights based on the health score you receive. (Start Your Stethoscope Diagnostic Here)

Identifying your model to build company worth

The future acquirer of your business will start by learning about your historical financial performance. But equally, or more important to them, will be your future growth potential. A key part of exciting an acquirer is to show them you have a well thought through growth plan that will continue the success of your business for years to come under their ownership. By asking the right questions, you can identify and summarize your company growth strategy in one word.

Ask yourself this question: To accelerate the growth of my business, do I need to expand my market, increase my product/service offering, expand my company visibility to potential customers or improve my business win rate? These are your four options.

Market: expanding your business to serve a broader or new market is one of the four options your company has. If you currently possess a high market share of the current market you serve, growth may have to be found by repositioning your business to serve a larger portion of your current market or jump to a near neighbor market.

Product/Service: adding a new product or service to your portfolio is a viable option for accelerating growth. If you have loyal customers, this may be a ready-made market for you to introduce additional products or services to. And a subset of this growth option is to update your pricing strategy. Developing a new pricing strategy for your current product or service may be a driver of new growth.

Presence: is your company brand and capabilities visible to all the possible customers that have need for your product or service? If there were just two buyers in the market buying your type of product/service and only one of them knew of your company, then your market presence would be just 50%. If you can get your company visible to the second buyer, you would have a meaningful new growth opportunity. Now extrapolate this same concept to your dozens, thousands or millions of customers. What percentage of potential customers are aware your company exists?

Win: this fourth growth option relates to taking steps to increase the success rate your company has when chasing new opportunities. Out of every 10 opportunities your team pursues, how many do you win? If your win rate is low, discuss with your team what steps can be taken to increase it. Your company may not need to invest time and money in new leads, you may just need a better win rate on the work you’re already pursuing.

Growing your business is a complex matter. But with the right planning process, you can identify which of these growth options would best serve your company and help position you with an enabling future growth model that will excite a future acquirer. Give us a call (949.874.0787) and we can give you tips on how to determine which one of these growth options will help you build the worth of your company.

Knowing this will be key if selling in the next few years

For those owners considering their exit strategy options, having strong Earnings Before Interest Taxes Depreciation & Amortization (EBITDA) is of course an essential element in order to command a premium valuation from outside parties. There are some exceptions to this such as high technology companies, where profit may be less of a driver in the valuation of a company, but for most businesses EBITDA is essential. Thanks to Zachary Scott & Co, they're now bringing much needed attention to EBITDAC, adding COVID adjustments to the equation.

In a normal exit event for a business, adjustments to profitability are taken into consideration. These adjustments fall into the following categories:

• GAAP Adjustments – these adjustments relate to how you may currently be reporting various areas of your financial statements versus what the GAAP (Generally Accepted Accounting Principles) requirements call for. Ask yourself, are my financials to GAAP? If not, discuss this with your accountant to understand how your financials may look different if they were to GAAP.
• Owner Adjustments – these adjustments relate to costs to the business directly related to monies that ownership may be taking out of the business that a future owner may not incur. Things like cars for family members, perhaps a boat, travel, etc, that the current owner may incur but a future owner most likely will not.
• One Time Adjustments – these adjustments relate to costs your business incurs in a given period but will unlikely ever repeat. These could be one-time legal expenses, one-time warranty expenses that were unusual, employee training that is not being repeated, etc. Work with your accounting partner to ensure these types of costs are regularly being captured for future reporting of your adjusted profitability.
• COVID Adjustments – these adjustments relate to two possible areas. The first is what costs did your business incur through this pandemic that are one-offs (or at least until another pandemic hits). Costs related to extra cleanings of your facility, buying cleaning supplies, gloves, hand sanitizers, etc that you normally wouldn’t incur had there not been the pandemic. These costs reduced your profitability and should be reflected in your adjusted profitability.

The other COVID related adjustment is a more difficult one to capture and represent and that is any negative revenue impact your business experienced due to COVID. One could argue that had the pandemic not hit your business, your revenue would have been higher and so too would your profit have been. Some business owners project their adjusted profitability through COVID trying to reflect this impact but of course it’s much more difficult to get an investor or acquirer to embrace this. They can certainly see the facts behind the COVID costs related to cleaning and supplies but less so related to the revenue you believe you lost.

Bottom line is this, if you’re hoping to implement an exit strategy for your business in the next 5 years, being able to represent your adjusted EBITDACA will be essential as those placing a valuation on your business will want to look back at least 3 years and potentially back 5 years which means 2020/2021 will be part of their analysis. As part of presenting your adjusted profitability, be fair to yourself and make sure you are including an effective monitoring and tracking of your annual profit adjustments which now includes the COVID impact.

Successful transitions need a plan

We regularly talk with private business owners that are either considering or are in the process of transitioning their company leadership to a son, daughter or even a third party recruited CEO. In our work, we see the transitions that are going seamlessly and protecting, even building the value or net worth of the company. And we see those that are eroding it. Let us share with you some key thoughts and steps to have in mind to increase the success of your transition.

First is conducting an honest assessment by the retiring owner as to their true willingness to hand over the reins. This includes self-reflecting on questions like these:

• Do I really want to step aside or am I getting pressure from others?
• Am I truly willing to handle over all aspects of the business or do I want to retain certain aspects?
• Can I place full trust in the new leader of my business? If not, then is it the right person or right time?
• Is my business at a place I believe no longer needs me personally and I’m prepared to let a new leader leave their imprint on the company?
• Is the financial condition of my company where I want it to be so that I don’t need to worry about it supporting my financial needs in retirement?
• Can I separate my personal identify from that of the business or are they one in the same? Do I view the business as simply a means to another end or is my business everything in my life?
• Am I ready to start spending time elsewhere beyond my business so I truly allow someone else to take it over without my involvement?

Next is ensuring alignment with the son, daughter or third-party CEO in terms of expectations you might have. Open dialog to drive alignment around things like:

• Have you discussed longer term deliverables you are looking for, even the vision of the business?
• Have you identified what communications and information you want to receive periodically from the new leader of your business? Do you want to receive weekly updates, monthly, etc and what specific types of information will you want to receive from them?
• Have you gotten aligned around what strategic/financial decisions you are empowering them to make on their own? Are you giving them full authority and decision making or are their limits you will place on them?
• If you aren’t going to remain involved, are you providing them with mentoring from a board or an advisor, so they have support to be as successful as possible in their new role?

These types of leadership transitions generally don’t happen naturally on their own. They need quality dialog and effective planning. If you’re an owner thinking about transitioning leadership to another, just know that others have gone down this path before you and there is much to learn from those that have done it successfully. Give us a call and we can help ensure that the transition of leadership continues to build the worth of your company that you have established.

What we did as kids we should do today

We often laugh when young children ask so many questions. We laugh because their “what” or “why” questioning can be incessant and despite our attempt to provide answers, the questions continue. This is their instinctive way of learning. As we get older, this shifts from a focus of asking questions to providing the answers. On the surface this makes sense based on the experience we gain. But at its root, it’s a problem as it pertains to leading our businesses relating to building company value, or as we refer to it, company worth.

The journey of building the worth of your company must include a healthy balance of asking thought provoking questions with your team and having a process for finding the answers. But for too many business owners and CEO’s, their focus is racing to the answers when the first step should be to determine if we’re even asking the right questions.

If we were kids again today but still running our businesses, here are some questions we’d be asking and should be asking now as adults:

• As a result of COVID, is our value proposition (the value we bring to our customers) and our unique selling proposition (how we deliver the value uniquely versus our competition), that worked for us prior to the pandemic, still relevant now going forward?
• What technology trends in our industry were accelerated in terms of being adopted and are we prepared to leverage them?
• What is different now relating to our workforce and have we developed a plan to manage it?
• Have we captured our COVID learnings so that when the next crisis hits, we have immediate access to the playbook we developed in terms of what we did well and what we would do differently in the future?
• Are there new opportunities to build the “stickiness” with our customers (increase our importance to them) – which in turn builds the worth of our business?

These questions could continue, and if we were kids again they would! But for now, you get the gist. Reinvigorate the internal dialog with your team and be the leader that asks great strategic questions of your team and in so doing, build new company worth.

Asking new questions can help

Many private business owners are expressing frustration in terms of finding and retaining talented and engaged workers. This frustration relates to finding new people to support growth and retaining those they’ve invested in their training.

To protect and even build the value or net worth of your company, it obviously takes having the right people, in the right roles with the right focus.  Our guidance to business owners who are struggling with labor is to ask new question to generate fresh dialog with your team that might trigger changes you could make to help address the labor challenge:

• Do we truly understand the root cause of employees leaving? Are they expressing pay is the issue or are there other reasons they don’t feel comfortable sharing with us?
• If retention is our challenge, are we losing the newer employees or are we losing those with 2 or more years of service? If it’s the newer employees, is our new employee onboarding serving us well?
• Do we see the labor challenge across our organization or is it in select areas only?
• Do we see certain managers or supervisors struggling more than others with loss of employees? Might managers or supervisors be lacking good managerial/leadership skills and that is frustrating employees?
• Can we redeploy any employees to move them temporarily to critical areas where labor has been a problem? This may mean making a sacrifice in another area of the business but it may be worthwhile at least for an interim period of time. And this could be your opportunity to increase cross training which will help the business long term.
• When is the last time we reviewed our major workflow processes to determine the most labor intensive ones and identify potential improvements we could make to drive productivity gains? Many processes were designed years ago, are they efficient or are we having to apply labor to outdated processes?
• Are we monitoring available technologies that could help us rethink how certain job functions or processes get done?
• Are we offering spiffs to existing employees if they recommend new employees?
• Are we leveraging local groups that could help us engage with individuals with special needs but they are very capable of performing some jobs we have labor shortages in?

View this as more than a tactical issue. View it as a strategic opportunity to ask new questions about your business.  Getting innovative in labor planning, recruiting and retention is critical to protecting and building your long term company net worth.

Preparing for a euphoric future exit event requires a plan

AES Nation (AES Nation) recently released their survey results of private business owners and “only 12% were highly satisfied with the outcome and less than 50% were satisfied at all”.

This survey result and that of many others recently, including one conducted by BizBuySell (BizBuySell), all are reaching this same conclusion. The vast majority of private business owners are either not getting their businesses sold at all despite their wanting to or they are selling but not happy with the outcome.

At Yosemite Associates we see a common reason for this as we talk with many private owners and are now engaged in helping many of them. It is because private business owners know their company and their products or services but what they don’t know is how to ensure they are preparing it successfully for a future euphoric exit. And it’s human nature to avoid the hard things and allow ourselves to get distracted to return to our comfort zone of what we know. This comfort zone is answering emails, phone calls, attending tactical meetings, and this list goes on and on. These things are in our comfort zone as we know how to approach each. But what most private business owners don’t know is how to approach preparing their business years in advance to achieve a successful exit event.

You don’t want to leave what could be the biggest event of your professional career to hope or chance. This is what the 88% club has done and this is not a club you want to join. You want to join the elite group of the 12% and these are the owners, when spoken with, that had a plan. Their plan helped bridge where their company was when they started their exit preparation activity and how they would navigate it to commanding a premium valuation from an acquirer at a future period. If you’re unsure how to tackle effective exit preparations, reach out for assistance today. Use time as a friend because preparations, to be done right, can take years, not months. Give us a call or talk to your company lawyer or CPA and get their advice. But to do nothing is not a plan and should not be the option you adopt.

Knowing the answer can enable your company net worth

Can you sum up your company revenue growth strategy for the next 12 months in one word?

There are four possible ways to grow a business. Doesn’t matter whether you’re a service business or produce a widget. To answer this main question, ask yourself these 4 supporting questions:

• Market - Is my market large enough to support my desired growth target(s)?
• Product/Service - Is my product/service portfolio offering meeting the needs of all, a majority, or a minority of the total available market?
• Presence - Is my presence (customer’s having visibility to my offering) in the market strong?
• Win Rate - Is my win rate on the opportunities we pursue at an acceptable level for my industry?

That’s it, four revenue growth options for your company. Whether you make swim wear, repair trucks, make computer chips or provide mortgage services, these are your options.

Brief additional color on each:

Market size – consider what market share you believe you have today and consider your desired targeted growth rate in the coming years. Is your market large enough to provide you the available runway to grab more market share or would it require you to have such a high market share that it’s unlikely to be able to do so? Many companies have plenty of runway left within their current served market because their market share is not that high. But some are market leaders and have dominant market shares and further growth runway in their current served market is challenged unless they shift to playing in a larger market.

Product/Service Offering – if there was just one purchasing agent or consumer buying your type of product/service, could they have all their needs met from your company? If the answer is yes, then your product/service revenue opportunity is the same as your overall market size. But if you find that within your product/service category, you don’t have all the styles, shapes, colors, designs, styles, price points, etc., that are needed, then by broadening your offering you might see new growth opportunity.

Presence – if there was just one purchasing agent or consumer for your type of product/service and when they need something from a company like yours they proactively think to call you, then you have a very strong market presence and your opportunity to grow is potentially maximized because buyers are already working with you. But if there were two or more purchasing agents selecting products/services of your type and they all don’t think to contact you proactively, then your presence might be the opportunity for you to build and therefore grow your business.

Win Rate – out of every 10 opportunities for new business that your team pursues, what percentage do you win? Knowing this will help you determine whether your team just needs more leads to pursue or, if your win rate is low for your industry norm, perhaps what you need is not more leads but an improved win rate. Perhaps your team needs to identify steps that can be taken (enhance the quality of your proposal, proposal follow up effectiveness, bundling of products/services, etc.) to increase your win rate and that will enable company growth.

Going through this exercise of discussing these various questions is a great way to facilitate healthy new dialog with your team. Identify which of these four is your highest priority for addressing. You’ll benefit from the dialog and you’ll certainly identify a focused new way to build the long term value, or worth of your business.

Monitor your company revenue at a granular level

When the day comes that you present your company to a third party for possible acquisition, they will of course review your financial statements. A subsequent request they will make is to see your revenue reported at a granular, or line-item level. Not being able to provide your revenue at a more detailed level could frustrate them and could give them a risk concern of not fully being able to understand your business and therefore this could impact that valuation they place on your business. And if this occurs, this will impact your company and personal net worth.

Let’s presume at time of exit that your overall business revenue has been growing year over year and you have strong growth projections into the future. This alone may help draw a potential acquirer to consider buying your business but until they see the revenue detail, they might not be willing to pay a premium. Despite the consolidated revenue growing, they will want to see the details to see whether all your products and/or services are contributing to the growth or whether you have a situation where those growing are offsetting a concerning decline in others. In other words, your acquirer will want to see a complete picture of your revenues.

This practice of tracking, reporting and monitoring your revenue at a granular level is not just a good practice for supporting your future company worth but it’s also a great practice for today and helping you build worth. Ensure you and your team have the complete picture of your revenue performance, not just a consolidated view. And realize that when the day comes to exit, you’ll want to show the potential acquirer at least 2 to 3 years of this revenue detail so you should ensure you begin this accurate tracking now.

If selling one day to a third party is something you’re considering, this detailed revenue tracking is one of several steps you’ll want to ensure you’re taking now so that when you present your company for sale, you don’t just attract acquirer interest, you excite them and give them reason to reward you with a euphoric exit event.

Excite Your Future Acquirer With An Articulated Growth Plan

A common myth among private business owners is if they show their future potential acquirer a solid history of profitable growth, this alone will drive up the exit valuation of their company. Although solid historical financial performance is the ante into the game of a successful exit, it must be supported with an equally exciting future outlook of ongoing, even accelerating growth under the ownership of the potential acquirer.

When you sell your business one day, it’s your job to excite the potential acquirer(s). It’s a mistake just to present your company to them and hope they find something to be excited about. You will have to build the messaging and the supporting case that articulates why your business is still a strong horse to ride for the future. To do this, you will want to be able to articulate very clearly what growth paths your company has remaining. You’ll want to be able to answer questions like:

• Do we have future growth opportunity within our current served market or have we penetrated this market historically to a meaningful level and growth must come by expanding the market we play in?
• What growth opportunity do we have remaining with our existing customers – have we done the best job of messaging our customers with all that we can do for them or do we provide more products or services than our existing customers are aware of?
• Could we generate new growth by introducing a new product or service and leverage existing customer relationships?
• If we feel we have maximized the penetration of our existing customers, have we identified new customers we could approach – and can we do this with our existing product or service portfolio or would we need to modify our offering?
• Do we have an effectively managed sales opportunity pipeline that continues to expand and shows additional growth ideas your company could yet pursue going in to the future?

Business owners are often surprised to hear that the majority of those selling their business aren’t happy with the outcome. Although there are many reasons behind this, we can share from our experience that a leading reason is the business is presented to potential acquirers with a solid history, but lacking clarity related to where the business still has exciting growth runway ahead of it. Position your company as both yesterday and tomorrow’s news and this will enable the potential for a euphoric exit outcome.

Knowing the difference can build your company worth

A business owner said to me he was proud of overhearing a recent conversation between one of his account reps and a customer. He said he could tell that the account rep was managing the call well and that it sounded like the customer was satisfied with the outcome. I asked if he knew why the customer was calling and he said because they were asking about the status of their order. My question was, do you think the customer wanted to make that call in the first place?

The world is rapidly moving from a “fail & fix” mentality to one of “predict & prevent”. Think about this as it relates to your company interaction with your customers and ask yourself these questions:

• What are the main reasons customers call us? Determine which of these are reactive and an opportunity for a customer experience enhancement.
• What services could we provide that would show our customers that our support is proactive in nature versus purely reactive? Can we help our customers avoid headaches or firefighting?

In prior blogs, we reviewed the importance of being sticky with customers because the stickier you are generally the higher the worth of your company in the eyes of an acquirer. Talk with your team about the customer experience you’re providing to identify enhancements that will increase your customer stickiness and increase the worth of your business.

Key questions to ask yourself today

Most of us admire what Steve Jobs built at Apple. Although it’s well known that employees found it challenging to work for him, what they didn’t find challenging was embracing his beliefs. His articulation and daily living of his beliefs is given much of the credit for Apple success. He knew that culture would be critical to future Apple success and knew that as the owner/CEO, his beliefs would set the tone for that culture.

He had 7 overarching beliefs and was able to attract and retain top talent because employees wanted to be part of something special. Beliefs such as, we will make products that change the world and design products that are simple versus complex (remember we used to read user manuals on new electronic products until Apple changed the game). Beliefs like these are what Apple employees rallied around and continue doing so to this day.

Unfortunately, what we often see in working with private businesses is they have stated beliefs/values but what they don’t do is live them every day. They live them when it’s convenient, not when it’s hard. Here are questions to discuss with your leadership team:

• Have we articulated what our beliefs are?
• Do we effectively communicate our beliefs to our employees?
• When we hire new employees, do we effectively orient them to our beliefs?
• Do we identify and praise when we see the beliefs exemplified? Do we react appropriately to modify behavior when we don’t see our beliefs exemplified?
• When we do employee performance reviews, do we discuss their performance in support of our company beliefs?
• Do we align any of our metrics with our beliefs? .ie.: we believe in making quality products or we want to provide an excellent customer experience – but do you truly have visible, effective metrics that convey to your team that you take the belief seriously?

If you want to ensure driving long term company results, think like Steve Jobs did. Think about what culture you want and how your personal beliefs will drive the behavior that underpin your culture. A company worth creating formula is Beliefs drive Behaviors and Behaviors drive Results. Revisit your company belief system and start driving new company worth today.

Remote working policies can impact both

Many businesses are now making decisions related to their employees and remote working policies. These decisions being made will have short and long term implications for your company culture and this could then impact the future worth of your business in the eyes of your potential acquirer.

COVID forced many business owners to make quick decisions about which employees could work remotely. Now the reverse is occurring in terms of which employees to bring back in to working from your office. Here are questions to ask yourself to ensure you protect your company culture:

• Am I clear on what the productivity has been for my employees that have been working remotely versus when they worked from the office? Can I see this productivity in specific metrics for my business?
• Has my team collaborated and worked well as a single team despite some employees working remotely?
• Am I able to build and protect the company culture I desire despite having employees working remotely?
• Do I have newer employees that aren’t yet acclimated to our company culture and working remotely might impede this?
• Am I seeing any signs of remote workers not supporting my desired company culture?
• When restaurants, coffee shops and health clubs are fully open, will this be a potential distraction for my remote workers in a normal work day?

There is no single right answer for which companies should support remote workers and which ones should not. Each owner must assess their own culture and their own productivity measures. As you do this, think about this from your perspective but as well how a future acquirer might view your remote working policies.

A recommendation at this point is to not yet commit to a long term fixed remote working policy.  Let your remote working employees know that this remains a fluid situation and the decision you are making today will be re-evaluated in 3 or 6 months. This will give you more time to understand how markets and communities opening back up will or won’t impact the productivity of your remote workers. Avoid committing to a long-term policy when you don’t have all the needed information yet for making such a decision.

The expression in the Mergers & Acquisition arena is that oftentimes the acquirer invests in the jockey more than the horse. Your employee base is the jockey so be careful making long term decisions related to remote working that could impact your company culture and ultimately your future company overall worth in the eyes of an acquirer. Taking this measured approach could protect and build both.

Ensure you are leveraging the power of having the right pipeline

When the day comes that you might look to sell your business to a third party, a key question on the potential acquirer’s mind will be what growth opportunities does your business have looking ahead to the future? Certainly, they will look to be impressed by your historical performance but what will excite them is your forward-looking growth opportunities.

This week, LLR Partners (LLR Partners - Leading Private Equity Firm) released their report on the power of a sales pipeline for driving revenue and profitability and these of course underpin your overall company valuation. At Yosemite Associates, we couldn’t agree more with LLR Partners on this point as we regularly see acquirers spend a significant amount of time during due diligence doing a deep dive on the go forward growth opportunities of the business they are considering opening their check book for.

Ask yourself these questions:

• Does my business do a good job of tracking our sales opportunities both with existing customers as well as new ones?
• As part of this opportunity tracking, do we know key things like what our Win/Loss rate is and given this metric, how many opportunities does my team have to be actively managing at any given time to support the revenues we desire?

You can attract a potential acquirer to consider buying your business based on your solid historical results. But to excite them to place a premium valuation on your business, this will mean showing them the sales opportunity pipeline you still have available for driving further profitable growth. Start today ensuring you have the right sales opportunity pipeline tool under management with your team and use this as a powerful step in driving up the future valuation of your business.

But you do need to make it very special in key areas – know what they are

Some private business owners are surprised to hear that they don’t need to build the perfect business in order to one day sell to an acquirer and receive a premium payout. It seems counter intuitive to say this but here is the reason. The acquirer wants to know there is runway left with your business to take it somewhere even greater under their ownership. If they believe you’ve maximized it and they don’t have the ability to take it further, then why would they pay a premium for it?

But what you will need to do is build the right parts of your business to attract, excite and command a premium value. The key is determining which parts of your business are most critical for one day commanding a premium exit payout. This is not something you want to guess at. This is a question that can be answered years prior to trying to exit. Questions like:

• Will an acquirer value my capabilities or my customers or both?
• Will an acquirer expect that I’m serving specific types of markets or customers?
• What levels of financial performance at a minimum will an acquirer expect from me?
• What type of sales opportunity pipeline will an acquirer expect to see?
• Will an acquirer need all my employees or just some?
• Will an acquirer want my facility/s?
• Will an acquirer expect that I have specific intellectual property?

This list could continue but the point is, don’t guess. You can get guidance to these questions years prior to exiting and doing so will enable you to know which specific areas of your business you will need to build to strong levels and which parts of your business less so. Look to build a business that will excite a future acquirer (even multiple ones) and know what it will take to do so, don’t guess. Call us (949.874.0787) and we can get you started on the steps to take to greatly enable your journey to a future high company valuation and euphoric exit event.

The right questions can lead to building new company value

Ask yourself - is our company Value Proposition and Unique Selling Proposition still relevant?

Let’s start with definitions –

Value Proposition – this is the value that your customer derives from working with your business. This identifies the value your product or service provides to them.

Unique Selling Proposition – this is how you deliver your Value Proposition in a way that differentiates you from the competitive alternatives.

This question of the month is always relevant but certainly now based on where we are with COVID-19 impacting on our markets. It’s also very relevant because new technologies are evolving and could be changing what your customers expect and desire from you.

In thinking about this question, talk with your team about how your customer’s needs and expectations and even behaviors might be changing these days. And are they changing in a way that is either risk or opportunity as it relates to your Value Proposition and/or Unique Selling Proposition? If your customer (even your customer’s customer) has changing needs and desires, you need to ensure that your messaging to them is remaining relevant and effective versus your competition.

Add this Bank Your Moment-Question of the Month to your next sit-down meeting with key members of your team. You’ll find yourself having a dialog that could identify steps to take to protect and build the value, or worth, of your business.

Don’t make the mistake so many company owners have

Survey after survey of private business owners confirms a common theme. That is the majority of them are not happy with the outcome from the sale of their business. How is this possible when many of these companies were well run? The answer is that just because your company is performing well today for you, that does not directly translate to successfully being able to withstand the due diligence a future acquirer will put your company through.

Here are just a few examples of problems that arise during due diligence of even well performing companies:

• When the acquirer conducts a Quality of Earnings assessment during due diligence, they uncover issues that the seller wasn’t aware of
• The financial statements are not formatted to what an industry acquirer would expect to see. Example: how you calculate gross profit is different than the norm for your industry
• The forward-looking growth projections are not effectively backed up by a solid and proven sales pipeline. The acquirer therefore has concerns about growth prospects of the business going forward under their ownership
• Key employees receive above market compensation, benefits and perks that the acquirer won’t want to continue supporting going forward.

This list could continue on but you get the idea. The solution is conducting a Due Diligence Readiness Assessment at least 1 to 2 years PRIOR to beginning your exit process. This readiness assessment will most likely uncover gaps that could be time consuming to address and/or you’ll want to correct the gap(s) and will need to show sufficient historical performance before the acquirer will believe the issue has been addressed.

We work with clients leveraging our Due Diligence Readiness Assessment tool, contact us today to learn more about how it can help you on your journey to a future euphoric exit.

A Great Metric Could Mean A High Company Valuation

As a company owner or CEO, ask yourself this question – if today you announced to your customers that your business is closing its doors and no longer available to accept new orders, how many minutes, hours, days, weeks, months or years would it take them to find a replacement for what they have been purchasing from you?

Your Shut the Door metric is low if the answer to this question is minutes, hours, days or weeks. Your metric will increase if your answer is months or even years. And generally, the higher your Shut the Door metric, the greater your company value in the eyes of a potential acquirer. This is because acquiring your business would come with a strong predictability of future revenues, and acquirers place great value on this as they determine what to pay to acquire your company.

Give us a call and we can help you get this critical metric in place for your company and we can also help you with ideas for how you can increase this metric for your business.

Will your team excite your future company acquirer?

The title of this post is a well-known expression within the acquisition community. And we’re in a period where this expression is especially true and needs to be on your radar screen as a private business owner and CEO.

To achieve your future, euphoric exit event, you’ll need to present a business to an acquirer that excites them. Having interest in your business is one thing. But to get an acquirer to pay you a premium value for your business, you’ll need to ensure that your business is ready with the right business model (the horse) AND with the right team (the jockey) as well. Acquirers buy company’s looking for capabilities and the talent behind it. Especially today, when access to talent is such a challenge for so many employers. Acquirers will be drawn to your business due to its capabilities but will fall in love with it if your team is one they can build upon.

Here are a few questions to ask yourself about your team and its readiness to excite a future acquirer:

• My team can operate my company successfully even if I’m not available to them for a few weeks or even months?
• My team has key managers with strong backgrounds and job experience to perform their roles effectively?
• My team is passionate about delivering a great customer experience and outcome for those that purchase our products and services?
• My team has the right people, especially in key leadership positions, that can help this company scale to the next level of profitable growth?
• I'd be proud to present my team to an acquirer?

These questions could go on but are just a few to get your wheels turning. If you answered no to any of them, now is the time to step back and think about what’s needed to address the gaps. Use time as your friend in terms of building a solid team that will excite your future acquirer.  You might be focused each day on the horse but make sure you are building the jockey as well.

Key hiring decisions can directly impact your company valuation

During a recent conversation with a company owner, he expressed that he was looking for a Vice President of Business Development. He said he felt the position was needed because his company revenue was of concern in recent years and he felt he needed a new direction. He asked if I thought making such an investment could make sense based on my experience.

I asked how much the investment in this position would be and the answer was approximately $175K annually, including benefits. I then asked if he felt this position investment would deliver a return of at least $1,400,000 in company value in the next 2 or 3 years, which is the time frame he’s hoping to sell his business. The answer was, I’m not sure and haven’t thought about it in that regard.

I explained the reason behind my question. His current company valuation was approximately 8x his trailing 12 months EBITDA. And this investment of $175K compensation would reduce his EBITDA by this amount annually. And if he were selling today, this $175K x 8 would equal the $1,400,000 of reduced payout he might receive from the acquirer.

Now if the individual filling this position could join his team and generate business development opportunities that the company could start benefiting from in its revenues and build greater than this $1,400,000 in company value, then of course it’s a great position to invest in.

The outcome of our discussion is the owner is now rethinking how this investment bridges to his exit plans. So, when thinking about investing in key management positions, give thought to how it bridges to your exit plans and not just what it means for you in the short term. Giving consideration as to how the new hire will impact your exit valuation in the eyes of your future acquirer could be a key factor in how happy you are with the outcome.