Reflections

Will additional capital today enable your future company sale

Ask yourself these questions:

• What is the general valuation of my company today if I were to try and sell it to a third party?
• What is the general valuation amount I’d like to receive one day for my company in a sale to a third party?

If there is a negative gap here, could raising outside capital be an effective strategy to help you accelerate closing of the gap? Consider whether your current business model (what you sell, how you sell it) is working well and whether just putting fuel in the tank would accelerate the financial performance of your business…to close the valuation gap you may have.

Here are additional food for thought questions if you have a negative gap from the first two questions:

• What is the primary barrier to accelerating your business performance and growing your valuation?
• Is this primary barrier something that could be addressed by having additional capital?
• Is your business model proven and showing good promise so that you could excite a third party to loan you capital or take even small equity in your business to provide you the desired capital?
• Do you have a business plan documented that articulates the opportunity ahead of you, what you’d use the additional capital for and what type of performance your company could realize with that capital?

If the valuation you’d like to receive one day isn’t looking in the cards for your business, then considering taking in outside capital could be a strategy to employ. Staying the course and investing in your own business might get you to one level, but what level could you bring your company to if you supplemented your capital with that of a third party? Talk with your CPA or give us a call and we can help you think through whether raising external capital is a way to accelerate your path to a future euphoric exit event.

Know if acquiring before you exit might accelerate the value of your company

Acquirer’s generally prefer to acquire scale. When you speak with active acquirer’s, you’ll often hear them articulate a minimum amount of annual revenue and profit they’d like a business to have before they want to invest their time in acquiring it. They want to acquire something that helps move their needle and generally they will have minimum financial performance levels in mind.

The minimum thresholds for acquirers in the small to middle side of the market is at least $5M, even more like $10M of annual revenues and at least $1M and preferably $2.5M of bottom line profits. As these numbers get larger in scale, the acquirer is willing to pay a reward for that scale. As an example, let’s say you’re doing $10M annual revenue/$2.5M annual net profit and in selling you might get an acquirer to pay you a 5x multiple of your net profit, or $12.5M. Jump that revenue to $20M and the profit to $5.0M and that 5x could jump to a 6x or 7x (or more depending on many factors) which would deliver a much higher payout for you because the acquirer is rewarding the greater scale.

You have two ways of accelerating the scale of your company. Do it organically or do it inorganically. Organically means you invest the time and money into your own company to build the revenue and profit and inorganically says that although you continue to build your business, you invest in an acquisition to accelerate the building of that scale. Here are questions to ask yourself if you’re wondering if it makes sense to consider acquiring a few years before you might consider selling:

• What is the general valuation that an acquirer might place on our current business given its size? (if unsure, give us a call and we can help you get this answer)
• Are our current revenue and profit numbers annually of the scale that acquirer’s in our industry find attractive?
• Do we know of competitors or complementary type businesses that might be for sale and that could add value to our business by bringing them together?
• Do we have the appetite for not only running our business but taking on the task of acquiring and assimilating another?
• If we acquired and accelerated the revenue and profit scale of our business, would we be rewarded by potential acquirer’s for building that scale in our particular industry?
• What is keeping our business from doubling in size? Could we double in size if we invested in ourselves or could we do it faster if we acquired a complementary business?

Many other questions we could help you think through here but the bottom line is this. What would you like to receive one day as a payout when you sell to a third party? If the gap between your desired payout and what your company valuation would be today, perhaps that gap can be filled more quickly by bolting on an acquisition.  Call us (949.874.0787) and we can help you assess whether it makes sense to go on the acquisition hunt to accelerate your path to a future euphoric exit event.

Price strategy is often under leveraged in private businesses

Ask any mergers & acquisition professional what’s the fastest path to building your company valuation and their answer will always include a reference to pricing strategy – be able to show that your company has some ability to periodically raise prices and minimize attrition.

Too often in privately held companies the leadership mindset is; “our market is too competitive and we can’t raise prices”, “we’re not a big enough player to be able to set prices so we have to follow others”, “we’re afraid we’ll lose customers if we try to raise prices”.

These might be true, but are you asking the right questions internally of your team to determine if even some small aspect of your business could initiate a price strategy that helps improve company profitability. Sit with your key managers and ask these questions:

• When is the last time we looked at the competitive landscape to understand who in our market is setting the pricing? Who is the player that seems to adjust prices first and others then follow?
• Are we looking too broadly at the pricing of our competitors in our market or are we effectively looking at pricing by market segment, customer type and by our individual products or services? In other words, are we getting granular enough in understanding the pricing in our market or are we making broad assumptions?
• Are we leveraging our customer buying behavior (by using our internal data of their purchase history) to see if we have packages or bundles they are buying? Is our pricing set by individual pieces of these packages are do we price to reflect the value they are deriving from the package?
• Are we leveraging our customer buying behavior to see any cyclicality or surge buying behavior? Are we charging the same price all year long when we might be able to raise prices during the times of the year when surges occur?
• When is the last time we evaluated the “next best alternative” that a customer has to our offering – in other words, do we truly know what other products or services our customer is comparing us to and do we understand where they view us as equal, lesser or better than that alternative – does our price strategy accurately reflect this view?
• Are we clear on the top 3-5 criteria our customer is using in selecting a product or service of our type? Every customer goes through a decision check list in their minds (or formally) before selecting your product or service. Are we clear on what their list is and how we stack up and are we pricing ourselves accordingly?

Setting pricing strategy begins with asking the right questions. And it’s well worth your time and that of your team to sit and think tank these questions.  Help your financials today and show your future acquirer that you are smart about your pricing and that you have some degree of smart pricing that they could benefit from if they acquirer your business. This could help be the difference between an ok future exit or a euphoric one.

Know who is ultimately making the acquirer's purchase decision

A common mistake made by sellers of private companies is they don’t understand early enough in the exit process who at the acquirer will be making the ultimate go or no go decision to buy their business.

Here are two common scenarios;

• the acquirer is a strategic player in your industry (maybe a direct competitor) and sees value in adding your business to theirs. Your point of contact is that company’s CEO or it might be a divisional or group President and they are very excited to acquire you.
• The acquirer is a private equity firm interested in adding your business to their portfolio. Your point of contact is a Principal or Partner of the firm.

Will the ultimate decision to acquire your company be made by your point of contact?  The answer in many cases is no. The CEO of the strategic acquirer may report to their company owner or to a Board of Directors (or shareholders). The divisional or group CEO you’re working with has a boss either at their corporate level or at the Board Chairman level. Then there is most likely a CFO, finance committee or M&A committee that will have a great deal of sway in the deal. And for the Private Equity firm, that Partner has other Partners and most likely a deal committee that must approve all deals. And with these scenarios, if either requires external financing to support them acquiring your company, their financing partner will have a go or no go say.

The reason it’s important to know who ultimately will make the acquisition decision is that the people you need to initially excite to acquire your business may not be the ones you have to ultimately convince to acquire your company. This means that through the entire exit process (or campaign as we manage it with our clients), it’s critical to build and deliver an exit narrative that will be compelling for all acquirer decision makers and in sharing of numbers and information about your business, it’s important to prepare and share this information knowing how it will be viewed by not just those you’re working directly with, but those they must in turn work with behind the scenes. You want to help them sell the deal to those they need to convince. Your point of contact is your sponsor, but you want to help them in turn excite and convince those that will have the final say.

Getting to your euphoric exit event won’t come without pre-planning. Ensure your exit planning campaign includes understanding the decision making chain of the acquirer as it could be the difference between not having a successful exit event or having a euphoric one.

Preparing to sell your company, follow the T.O.P.S. formula

Learn from those that have gone before you in selling their business. This is not an area that you want to reinvent the wheel and can learn a great deal from sellers that have had great exit events and those that have not. Those that are euphoric with the sale of their company have many aspects of their business readiness in common….this readiness commonality between these businesses creates a formula that every private business owner and CEO should know and use to guide their business.

Visit our brief video here (T.O.P.S. Formula) to learn the formula for building the valuation of your business to position your company for a future euphoric exit event.

Ensure a great culture to enable your future business exit

We are all seeing companies handle remote working in a variety of ways. Although we see many recalling people to the office for at least a few days a week, we’re also seeing many still retain some degree of remote working.

If your company is supporting any degree of employees working remotely, ask yourself these questions: How would I describe the work culture I want for my company? And what impact is remote working having on that desired culture?

One dynamic to have in mind is being pointed out in a variety of recent studies on remote working. When employees are working in the office, they are surrounded by co-workers and as a result they are exposed to a variety of viewpoints and opinions on daily matters. In this office environment, they can’t shut these viewpoints out and must learn to process and manage them which means they may remain more open and flexible in their own thinking. But remote workers are not getting this direct exposure as much and unintentionally they are creating what experts call their own echo-chambers. This chamber could lead to myopic thinking and less of a willingness to be open to new thinking. This can impact your culture because it could make an employee less flexible in thinking an issue or opportunity through, less receptive to any sort of change and less willing to have productive brainstorms.

When the day comes that you want to sell your company, know that acquirers will assess what they deem your company culture to be. They will assess whether they like the culture you’ve built of whether there is risk in their assimilating it into their own. Manage your culture, don’t let it manage you. Discuss with your key leaders what your target company culture is and whether any remote working is enabling or disabling the very culture you’re looking to build and maintain.

When looking to sell your company, the difference in valuation could be significant

It’s common to hear an owner or CEO express their belief that their company is the best versus the competition in all or some aspect of what they provide to the market. Hopefully this is true for your company but here are a few important things to think about:

• How are you determining that you are the best, what tangible information are you basing this on?
• How do you know that a competitor hasn’t caught up? Market competition changes over time, when was the last time you looked externally to confirm your belief?
• If challenged (one day by an acquirer), what tangible proof can you share to confirm the “we’re the best” claim?
• Are your customers rewarding you either in giving you a greater percentage of their available business and/or rewarding you in paying a premium for your product or service as their way of showing they place tangible value on you being the best? Or are you deeming your company the best in an area but it’s not translating to value your customer is willing to pay for?
• In the area you are the best, what could you do to evolve this further to make your company the ONLY, not just the best?

Acquirers regularly hear Seller’s claim to be the best in some aspect of their company. They are willing to accept this but not only on face value. If you want to impress an acquirer and get them to pay a premium for your business one day, find a way to be the only or sole source provider to your customers in some aspect of what you offer the market. Doing so with a meaningful revenue and profit and projecting a future where you can show this can scale and be defensible to benefit the acquirer, will put you well on your way to achieving your future euphoric exit event.

Talk with your team….change the paradigm from being the best to being the only.

Make sure you’re ready to excite an acquirer even through due diligence

We share with clients that they have two decisions to ultimately make. The first is do they want to sell their company. The second is can they sell their business if they desire to do so. People are surprised to hear the number of privately held businesses that the owner wants to sell but actually isn’t able to.

One of the reasons for not being able to sell a business is the sellers inability to successfully withstand the acquirer’s due diligence process. Here is the latest article by Larry O’Toole related to ensuring you can be euphoric one day from the sale of your company by successfully supporting an acquirer’s due diligence. (Read Due Diligence - Ensure Your Company Is Exit Ready)

Three questions every company owner will face one day

Let’s start with the good news. Many business owners possess the dream of one day selling their business and achieving a euphoric outcome. Now the bad news, many of these same business owners lack having a solid plan for making that dream a reality and never achieve it.

We regularly see that well run and successful businesses today do not always translate to “exit ready” businesses tomorrow. Exit ready means delivering on the owner’s dream relative to what they hope to one day achieve from selling their company. The gap is because not enough thought has gone into what we call, the Ownership Exit Triangle.  This triangle is the starting point for facilitating critical questions a company owner should be answering to help lay the critical foundation to achieve their desired future outcome.

Here is a brief, but helpful video to help you think about the 3 key questions you’ll want to think about in advance of selling your company one day. (Ownership Exit Triangle video)

Productivity initiatives within your company can help increase company value at time of sale

There are two gifts that executives don't often fully leverage in building the long term value, or net worth, of their company. One is pricing strategy, the other is driving productivity initiatives.

Both of these can help your company today, and at time of your future exit, because when done well they will greatly strengthen the valuation that a third party might be willing to pay you for your business.

Here is a short but effective whitepaper to help facilitate a dialog with your leadership team about where there may be productivity opportunities within your company. As you think about strengthening your business margins today and over the long term and the positive impact this could have on your future exit event, begin today leveraging what productivity initiatives can do for your business. (read whitepaper)

Address potential future due diligence headaches well before attempting to exit

A step we take with our clients, as we guide them on their journey to experiencing a euphoric exit event one day, is to conduct a due diligence dress rehearsal at least one year prior to beginning the sale process. There are common challenges that arise during any due diligence process as an acquirer kicks the tires of a company they are looking to buy, and all can be either avoided or better managed to reduce the stress on you, the seller.

One such challenge that commonly arises in due diligence by an acquirer is your company’s handling of State income and sales tax reporting for the various States that you might conduct business in. And where it can get gray is what is the definition of “conducting” business and does it expose you not just to paying income tax in that State but potentially sales tax as well. An acquirer wants to understand this because if it’s found that there is an issue and any State or States challenge you, it could lead to a future risk or liability to the acquirer under their ownership.

An example of this is let’s say your company sells a product to a business in another State, such as a distributor or a service type partner. This of course opens you to paying an income tax in that State but how about having to pay a sales tax? State tax authorities look to see what they call a “nexus” or connection between your company and their State tax paying requirements. Generally, the income tax you owe is clear but what can be gray relates to how your company is handling the sales tax.

A good due diligence dress rehearsal will find such potential hangups that could concern a potential acquirer. Use time as a friend today to find such potential hangups and address them so they don’t bog down your ultimate due diligence process. If you’re thinking about exiting in the next 1-2 years, think about conducting a due diligence dress rehearsal. We can help by visiting our Business Diagnostics page on our website where we have a helpful tool to get you thinking about successfully preparing for due diligence. (Due Diligence Dress Rehearsal Diagnostic)

To achieve your euphoric future exit event, know the order for engaging advisors

We find that too often private business owners don’t know when the optimal time is for engaging with M&A professionals to guide them in selling their company to a third party. It surprises many to hear the order of priority in establishing these M&A partnerships. Here is what we recommend to private owners thinking of selling their business:

In advance of selling your company, here are the professionals we suggest having on your team to greatly enable getting you to a successful, even euphoric exit event:

• Exit planning advisor – at least a year in advance, even better 2 to 3 years prior, engage an advisor to help guide you through the entire exit preparation process (or as we call it, the exit optimization process). There are many aspects to preparing your company for an optimal exit and this advisor is the first to engage as they are experienced to take away your uncertainty as to what preparation steps you should be taking to lead to your euphoric exit event. This advisor will also help you thru the process of when to engage the following set of advisors to have on your exit optimization team.
• Tax planning advisor – at least a year prior to selling your business, you’ll want to ensure you have an optimal tax efficient structure in place (business and personal) to help minimize the federal and state taxes you’ll owe on the sale of your business. A tax advisor will tell you that they need at least a year in order to give you the greatest number of options for getting a tax efficient structure in place. And depending on your personal situation, in addition to tax advisory there maybe the need for engaging with an Estate Planning advisor and they too should be engaged at least a year prior to starting the exit process.
• M&A lawyer – next in priority of building your exit team is your M&A lawyer and this is approximately 6 months prior to beginning the sale process that you want to be interviewing for your M&A legal partner. Not your business lawyer, but your M&A seasoned legal partner. You’re not just hiring a lawyer to help you get all the legal documents in place, you’re looking for a seasoned M&A lawyer that keeps you from getting sued post-closing of the transaction. Any M&A lawyer can get the documents you need in place for a deal to close, but what you want is the M&A partner that is highly experienced to ensure that all the transaction related documents are negotiated and drafted to keep you from post-closing lawsuits that can commonly arise in M&A transactions.
• Investment Banker/Business Broker – also about 6 months prior to beginning a formal sale process, you’ll want to be interviewing for your partner who in essence will run the auction process for your business. A seasoned broker (generally for smaller businesses) or Investment Banker (for businesses with more size) is licensed to represent your company in the sale process. This partner will guide you through the process of building your Confidential Memorandum that will be used to solicit interest from potential acquirers and will manage the entire process through to receiving offers. One of the reasons you want your M&A lawyer in place ahead of engaging your banker/broker is engaging them is going to require you signing an engagement agreement with them. You don’t want to sign these unless you have your M&A lawyer on your team first to review and negotiate your banker/broker engagement agreement.

Getting to a euphoric exit event requires having a solid team of seasoned M&A professionals around you. You can avoid making deal mistakes by engaging with professionals that have done many deals and know what pitfalls to help you avoid. These professionals can help you by making the deal process less stressful and ultimately have a much greater likelihood of success.

Build alignment and increase chances of a future euphoric exit event

Building a company to one day achieve a euphoric exit event for owners is tough enough when all owners are aligned, close to impossible when lacking alignment. We meet with many company co-owners and a common issue we come across is they are struggling in getting alignment around important near-term decisions. These decisions might relate to areas such as making investments in systems, equipment or hiring of key people. When we come across this with co-owners, our message is that in most cases the reason they are struggling with these important near-term decisions is they lack alignment around what the longer term plan is for the business. Lack of alignment around what the end game is for owners with their business will absolutely lead to disagreements related to near-term decisions the ownership team needs to make.

If you find yourself in this situation of regular disagreements with your co-owners, ask yourself are we aligned first about the long term? If not, this is the place to start to build alignment and doing so will make the near-term decisions much easier. And, you’ll be on your way to accelerating the overall shareholder value of your business which will increase the likelihood of a future euphoric exit event for all.

Ensure your business is ready for this key due diligence step

Company owners often think of due diligence as a time for the lawyers from the acquirer to probe your business. Although this is certainly part of the exit process, it’s not all of it. What surprises the seller often is when they hear their potential acquirer is requiring to speak to a variety of the selling company’s customers ahead of the transaction officially closing. Ask yourself this question, when I sell my business one day, am I highly confident that I will be able to present a good cross section of my customers that I know will speak highly of my company?

In many transactions, acquirers like to speak to customers of the selling company anywhere from 2 to 10 weeks prior to the official closing of the transaction. The acquirer prefers doing these as early as possible in the due diligence process but as the seller, you will want these voice of the customer calls to be made much closer to the final transaction closing date. The timing of when these calls will be conducted is generally a deal negotiating point between acquirer and seller.

At least 1-2 years prior to selling your business, you’ll want to give thought as to who you will one day present to the acquirer for conducting their voice of the customer diligence work. Have you established a strong relationship with customers so as to give you the confidence they will speak highly of your company when the acquirer speaks with them? The acquirer will ask your customer questions like; why do you select this company to do business with? How is this company better than alternatives you have available? Do your plans include continuing to purchase from this company going forward? Where would you like to see the company improve or possibly expand their products/services?

The bottom line is this. Preparing for your future euphoric exit event takes years to do properly as there are many facets to the preparation. One of these relates to establishing a strong working rapport with a cross section of your customers so that when exit due diligence time arrives, you’ll be confident in your preparation for this key step. Being ill-prepared for this step could be a reason they decide to back away from the transaction or try and negotiate a lower valuation…both bad outcomes but with the right exit preparation planning, can be easily avoided.

Avoid the disappointment many sellers experience

You dream of one day selling your company. Part of that dream is what it will mean to you in terms of financial independence. Ask yourself, then why is it study after study reports that the vast majority of private company owners that sell their company aren’t happy with the outcome?

There are several reasons for this and our many prior blog posts identify them. But one particular reason is as the final date approaches for selling the company, the seller starts to see specifically what the Net proceeds are going to be that they will receive as a result of the sale and they are negatively surprised by the amount being much lower than they dreamed of.

You can avoid this typical surprise and disappointment by well in advance of starting the exit process developing your Gross to Net Proceeds Model. Here are some of the key elements you will have in your specific model:

Gross Proceeds – this is the amount you hope to receive from a third party. Your model can be built to allow you to change this to various scenarios.

Minus: (these are the costs/dollars that will be taken out of the Gross Proceeds to result in your Net)

• Deal Costs – costs such as hiring an investment banker to represent you in the sale, hiring an M&A attorney and getting transaction help from your CPA or other advisors
• Loan/Debt Paydown – acquirers generally won’t assume debt you have on your business. Typical agreement language will say the acquirer is buying your company “on a debt free basis”. So any debt on your business will be taken from your gross proceeds.
• Co-owner/Shareholder Payments – if you have co-owners or shareholders, what amount of the proceeds from the transaction will go directly to them
• Employee Incentives – many private company owners have plans to reward all or some of their employees upon the sale of their company. This amount needs to be subtracted from the gross proceeds you will receive
• Taxes – calculating your Federal and State tax liability can be a meaningful reduction to the net amount you will personally receive

Every company sale is unique but the items above are the most common ones every business owner will experience. Contact us to help build your specific Gross to Net Proceeds Model or contact your CPA and engage their help. Don’t wait until you’re in the middle of a transaction with a third party only to find out you’re not going to be happy with the net proceeds you will personally enjoy. You want to be euphoric one day from the sale of your company, take this important step early on in your exit process.

Don't just prepare to sell your business one day, prepare to optimize it

Studies show that the majority of business owners that sell their company aren’t ultimately happy with the outcome. What is the primary reason for this? The answer most often is the owners had the wrong mindset related to what exit preparation means.

Our guidance to clients desiring to one day be euphoric from the sale of their business is to think exit optimization. Here is a great short video (Exit Optimization Video) to help you see the better pathway to your optimized, future euphoric exit event.

An important planning dimension to selling your business

If you’re thinking of one day selling your business to a third party, ask yourself this question. Am I currently working a plan that will ensure that in addition to my company being ready, I will also be personally ready?

Business owners and CEO’s often do most of their thinking related to their company exit readiness but where their planning often falls short relates to their personal readiness. Their personal readiness means personal financial readiness and their personal mental state readiness to separate from their business and pursue something else in their life.

Watch this short video (Ownership Exit Triangle) that will help you give thought to what we call the Ownership Exit Triangle. This video will facilitate your thinking around a critical dimension of effective exit planning.

Be more than satisfied with your future exit, be euphoric

Study after study shows that the majority of private company business owners that are fortunate enough to sell their company to a third party aren’t happy with the outcome. Put yourself in the elite group of owners that are euphoric with their exit event.  Here is a short video (achieving your euphoric exit) by Larry O’Toole designed to help business owners and CEO’s think about the formula for building company valuation to help make you euphoric upon your exit event. Use time as a friend and start ensuring your pathway to euphoria one day.

Know what scale means for your future exit event

We meet with many private business owners on a regular basis to discuss their future exit options. A common part of this dialog is our sharing what qualities their company should possess in order to attract the greatest amount of interest from third parties one day and the greatest valuation. Each industry has uniqueness in this regard but one quality the vast majority of acquirers find attractive is your company having scale.

Company scale relates to the size of your business revenue and profit. Acquirers know that buying a business is hard work so to make this hard work worthwhile, they like there to be some level of minimum size, or scale, to the business. Are there exceptions to this? Certainly there are, but they are the exception not the norm. The norm is acquirers know it’s just as difficult (and sometimes more difficult) buying a $2M annual revenue company than it is to buy one generating $20M of revenues. At the end of this hard work, they’d much rather be owning and working with the scale of that $20M company than the significantly smaller one. And, acquirers will very often reward the scale by applying a higher exit multiple to the transaction. As an example, the $2M revenue company might receive a 4x exit multiple (4x your company’s prior 12 months of EBITDA profit). But the very similar in nature but much larger $20M revenue business will be rewarded for their scale with perhaps a 6x exit multiple. Both companies serve in the same industry, serve similar customers, offer similar products/services but the exit multiple applied by the acquirer will be different simply rewarding the larger financial performance scale.

Each industry has uniqueness in terms of what scale means, give us a call (949.874.0787) and we can provide more industry specific guidance. Learn today what scale means in your industry and use time as a friend to build toward this scale so that you will be euphoric when your company sale event occurs one day.

Consider how evolving technologies could impact your future company sale

When thinking about how to get an acquirer one day to make you euphoric by paying a premium to buy your business, a key factor to think about years in advance relates to de-risking your business.

Acquirers take multiple factors into consideration when placing a value on your business. One of these factors relates to what risk they perceive there to be in owning it.  These days, a key area of risk an acquirer considers relates to how evolving technologies might change your industry and its potential impact on your company. Watch Larry O’Toole in this short video as he discusses technological trends and the potential to protect and grow your business valuation.