Insights – old - Investment Grade Advisory

Wesley Legg 18, Oct, 2021

General

A Great Company and a Great Life Begin with the Right Team

There has been speculation that Apple is looking to get into the automotive industry. Exhibit number one for the speculators is the fact that Apple has been on a hiring spree for auto industry talent. In fact, Apple’s poached so many car battery engineers from A123 Systems, that A123 sued Apple claiming foul play. So what exactly is Apple doing? Are they looking to make an Apple branded automobile, are they working on operating systems that would play in another maker’s car? I certainly don’t know the answer to that question, and I suspect neither does Apple.

You may remember Jim Collins’ findings in the research he and his team published in “Good To Great”. One of the key elements for taking a company from good-to-great was getting the right people in the right seat on the bus. That wasn’t really a profound idea, but what was more interesting to me was the “First Who…Then What” concept. The key point there was that the “who” questions come before the “what” questions.

In other words, build the right team, give them leadership and general direction and you’ll have a better “what”, i.e., vision, strategy, organizational structure, etc. I’m willing to bet Apple is putting the “First Who…Then What” idea to the test. Assemble a great team, put them on the bus and then decide the destination.

Recruiting, training and retaining the right talent takes focus and intentionality. Yes, it is a big investment, but it will cost you real money if you don’t make it a key discipline for your company. How much will it cost you? Go to Caliper Corporation’s “Cost of Turnover Calculator” to explore the cost of turnover for your company. You might be surprised to see the practical costs of hiring the wrong person or losing the right person, and this is before considering opportunity costs not measured in the Caliper’s formula.

The benefits of hiring and associating with the right people are endless. The right people will bring the same passion you have to the business and steward it with the same rigor. They’ll find a way to capitalize on opportunity and navigate the times of challenge. It will not only lead to great business, but also a great life. Finally, having the right team can pay big when you bring on an equity partner or make your exit.

Finding companies with strong management teams is the strategy of most smart investors, including Warren Buffett. If you want take it from me, take it from him, “When you are associating with the people you love, doing what you love, it doesn’t get any better than that.”

Duane Donner 13, Oct, 2021

General

What Is a Competitive Advantage and Do I Have One?

The value of a business depends on its ability to generate and sustain returns on invested capital (“ROIC”) and the capacity of the business to grow over time. Therefore, understanding and predicting what drives and sustains ROIC is critical to evaluating investments and business strategies. The ROIC of any company or industry can be explained by its competitive advantage (or lack thereof). But what exactly drives a company’s ROIC, and how can managers measure and manage it over time?

If a company earns a high ROIC, it either charges a price premium or produces/distributes its products more cost effectively than its competitors. To analyze the potential sources of competitive advantage, we can disaggregate the equation for ROIC to determine whether a company’s ROIC is driven by its ability to maximize profitability or optimize capital turnover.

Exhibit A: Return on Invested Capital Tree

Exhibit A shows how the components can be organized into a tree; each of these components can be further disaggregated to enable a line item by line item analysis of a company’s ROIC. After determining the drivers of a company’s ROIC, we can combine this with an analysis of industry structure and a qualitative assessment of the company’s strengths and weaknesses to determine its competitive advantage over its competitors.

It is important to remember that industry dynamics is a chief driver of competitive behavior, and therefore greatly influences the performance and returns of its constituents. ROIC varies greatly among industries due to differences in inherent industry characteristics, which highlights the importance of benchmarking companies against competitors. Exhibit B below compares the returns on capital and operating margin of select industries, with the size of the bubble indicating the number of constituents in each industry.

Exhibit B: Industry Structure Comparison

Source: NYU Stern School of Business

Though the performance of companies in all industries will vary with the business cycle, companies in commoditized industries will rarely reach the levels of those industries with more defensible structures. The Internet & Software industries, for example, often offer innovative products that are either protected by intellectual property rights, generate recurring revenue through subscription based services, and/or involve high switching costs for customers. These competitive advantages create a moat around these companies protecting them from competitors.

In the Apparel industry and other consumer products industries, certain companies have developed long-lasting brands that have customer loyalty and make it difficult for new competitors to compete. By contrast, more commoditized industries such as Oilfield Equipment and Services, or the Water Utility industry at the far end of the spectrum, offer undifferentiated products and services which prevent constituents from building a sustainable competitive advantage.

In summary, there are a lot of factors that affect a company’s ability to create and sustain a competitive advantage. Investors tend to reward companies generating outsized returns versus competitors with higher valuations. While we can measure a company’s ROIC and its various components, a company’s performance always needs to be viewed through the lens of its industry structure and combined with a qualitative analysis of competitive position.

Wesley Legg 4, Oct, 2021

General

Strategy or Execution, What’s More Important?

A lot of emphasis is put on having the right strategy in business. Strategy is important, but I wonder if we spend too much time talking about vision and fresh ideas and not near enough time on good ole fashion execution. Sun Tzu, author of The Art of War wrote, “Weak leadership will destroy the finest strategy – while forceful execution of even a poor strategy can often bring victory.” In other words, bad decision managing destroys even the best decision making. When you don’t achieve the results you desire, don’t be too quick to blame the strategy, but instead first put a microscopic eye on the execution.

I recently heard a great presentation from Dan Barnett, CEO of The Primavera Company. The presentation was called Make or Break Execution: The Core of Success. A “make or break” is the one thing your company must do extraordinarily well to achieve your vision. Dan started his presentation by saying every company has a make or break and the best business leaders drive toward their “make or break” with great focus and detail. Dan isn’t talking about reviewing results a month after the fact to see how your company performed. By then it is too late to change the past and likely too late to shape the near future. What if you could see how you’re tracking toward your “make or break” results on a regular and real time basis and with enough lead time to see the problems standing in the way of desired results?

Getting the results you desire doesn’t just happen. If you need to lose 100 lbs in 5 months, it is going to take more than a good exercise and diet plan. Reaching your goal will take executing the plan with disciplined activities. If you have the proper plan and you’re executing the plan, you don’t even have to get on the scale. You’ll know you’re going to achieve your results by measuring your activities.

Let’s say you’ve asked a weight loss expert to review and hold you accountable to your weight loss plan. They review it and approve the plan, but the way they decide to hold you accountable is to meet you at the end of every month to record your weight. If at the end of the month you’ve lost no weight, there is nothing your accountability partner can do to help you make up for that lost month. You now have only 4 months to lose 100 lbs, a much lower probability. What if instead of checking the scale every month, you’re required send your weight loss expert a daily report of your exercise activities and everything you ate? Assuming you’re honest about your exercise and eating, they can now give you near real time feedback and have better insight into whether or not you’re going to achieve your goal. This is a key way to ensure you are enhancing the value of your business on a daily basis.

The same concepts can be applied to business. For every inch of strategy and vision/goals, you need miles and miles of solid execution. Good results come from doing the right activities. Yet we’ve all been guilty of painting a vision without devising a plan, devising a plan and not executing or holding other accountable to do the same. When we don’t get the results we want we wonder what happened. Fulfilling a vision requires you to determine what activities it’s going to take to meet your goal and measuring those activities on a daily/weekly basis. This simple, but important discipline will provide clarity for you and your team and keep everyone focused on the things that matter most.

Wesley Legg 28, Sep, 2021

General

Am I Enhancing or Hindering the Value of My Business?

Unlike listed public companies, private businesses don’t get a daily ticker tape telling them what they’re worth. But imagine you did. Would that daily feedback from buyers and sellers make you think differently about how you operate your business? While I know public company CEO’s don’t always agree with the market’s perception, the good ones are focused on increasing value for their shareholders and know ultimately the ticker tape is the scorecard. Private owners would be wise to do the same.

Private company owners should focus on increasing enterprise value, not just the day-to-day bottom line. An enterprise value focus may sometimes negatively impact short-term profitability for the purpose of minimizing risk and increasing long-term profitability. For that reason enterprise value should be the focus, whether you plan on selling today, tomorrow, or never.

Valuing your company

I know, you still are curious about what your company is worth. Be leery of general rules of thumb or an internet tool that spits out your value after only a few questions. Determining valuation is very technical, but is also part art. A lot goes into valuing a company, and there are a lot of nuances. Most, but not all, companies trade on a multiple of EBITDA (Earnings before Interest, Depreciation and Amortization). Determining the EBITDA and the appropriate multiple is the trick. Companies can also trade on a multiple of revenue, asset value, or a combination of valuation techniques. A reputable and experienced M&A advisor, especially one with relevant industry expertise can usually give you a good idea of the valuation of your company. However, while an experienced professional can provide a good valuation opinion, the only way to know the true value of your company is to sell it and see what buyers are willing pay. And the only way to know to assure that you get the highest valuation for your company is to run a competitive market process. While it is helpful to understand the value of your company, it is more important, especially for those not intending to sell short-term, to understand how a buyer would go valuing your company. With this buyer perspective, you can better know how to increase the value of your company when and if you do decide to sell.

What Buyers Want

You may think what a buyer wants is obvious – growing company with good profitability. While that is part of the equation, it is not nearly that simple. A growing company with good profitability relative to what? An intelligent buyer is not going to be looking at your company in a vacuum. They will view your company alongside other opportunities, comparing the risk and expected returns of each one. The expected return is a function of the predicted future performance of the business and price paid to obtain the business. Said another way, the higher the risk to future performance the less a buyer will be willing to pay, if they want to buy the company at all. Also, not all buyers are the same. Expected returns can vary depending on the buyer’s perspective. In the case of a strategic buyer (versus financial buyer), expected returns can be higher if they expect to gain synergies in the acquisition, like lowering cost or leveraging their distribution.

Companies that provide a buyer with a lot of confidence in their future performance get a higher valuation relative to their peers, assuming all things equal (i.e. similar size and market external market conditions), and that they run a competitive market process. As you might expect, the past performance of the company and current financial metrics will be examined carefully when a buyer is considering purchasing a company, but there are many qualitative factors also being examined both consciously and even subconsciously. These qualitative factors include the quality of the management team, financial controls, market share, competitive advantages, customer diversification, the company’s market, the defensibility of the pro forma, quality of employees, documented processes and procedures, a solid strategic plan, just to name a few.

If you want to know how to increase the value of your company, you should seek to gain understanding on how buyers would view your company. Determine the current value enhancers and detractors, and understand what you can improve and/or change that would increase your value. Again, a reputable and experienced M&A advisor can give you great perspective on what buyers are looking for when purchasing companies like yours. They can do this because they talk to buyers on a daily basis, and whereas you may only do one or two major transactions in your lifetime, they do transactions for a living.

Chris Weingartner 22, Sep, 2021

General

Risks of Selling to a Competitor

For many owners, deciding to sell their business is one of the biggest decisions they’ll make in their lifetime. The company’s value represents the amassing of their life’s work. Successfully selling the business at a premium price is crucial for owners to finance their dreams or fund their retirement. Finding the right buyer or investor will help you obtain premium valuation, but that person could be a competitor.

A quick Google search for “Risks of Selling to a Competitor” returns a litany of articles containing advice and personal stories, both good and bad, from entrepreneurs who were faced with this issue. Owners are wise to be familiar with these risks, and mitigate them as much as possible.

However, these risks must be weighed against the knowledge that oftentimes a competitor or strategic acquirer is the buyer willing to ascribe the highest valuation for the company. The reason for this is simple. Strategic buyers, buyers operating in the same industry and space, often can realize the most synergies from the acquisition. These synergies can including economies of scale, acquisition of talented employees and intellectual property, cross selling opportunities, and geographic expansion.

There are several key considerations that any seller and their representative should be taking to protect the existing operation and assets of the company, in the event a transaction doesn’t go through or the competitor doesn’t end up as the eventual buyer:

– Send Blinded Teaser – In order to protect and mask a company’s identity when first approaching a strategic buyer, teasers are created that reveal enough about the business to enable your competition to know if they’re interested or not, but not enough to identify what company is being sold.

– Execute a Non-Disclosure Agreement (NDA) – Ensure that any material shared will be used only for the purpose of evaluating a prospective transaction. NDA’s and Confidentiality Agreements protect the company from having its employees hired away, intellectual property replicated, customers poached, and suppliers undercut.

– Share Information Two Ways – While your competitor isn’t for sale, it is important for them to share important information with you for multiple reasons. First, viewing their financials can confirm they have the financial ability to undertake the acquisition. Second, understanding their operations can validate that the operational synergies they’re hoping to achieve are realistic. Finally, through sharing material both directions, it ensures that the other company has “skin in the game” to uphold and adhere to the NDA.

– Provide Requested Detail Gradually – There is no need to open up all company records the moment an NDA is executed. The seller will know better than anyone what they’re comfortable sharing at each stage of the process, and the advisor should completely honor and trust their intuition. Think of it as dating. You want to release the least sensitive information first to continue confirming interest and the buyer’s desire to acquire. You typically don’t get married after the first date.

– Blind Sensitive Material – Vendor and customer lists, pricing sheets, and other competitively sensitive material can be sent over with key items redacted. Customer concentration is a big concern of all buyers; you can easily send your top ten list over without the explicit names associated with each amount.

– Implement a Breakup Clause – As you get to the point where you are close to signing a Letter of Intent (LOI), consider including a binding breakup clause with the LOI that results in financial consequences to the buyer if they walk away from the deal without cause. This ensures they’re not entering into the no-shop diligence phase with the intention of just walking away after they’ve gathered intelligence.

Overall, the key consideration is risk mitigation. An experienced advisor will ensure that the correct amount of information is shared to keep competitive buyers interested without exposing their client to any potential pitfalls or threats.

Wesley Legg 13, Sep, 2021

General

How Do I Know When to Sell My Company?

Have you ever visited a friend or family member who lives in a city with major traffic congestion? I live in a smaller city. When hunger strikes my wife and me, and there is no desirable food in the pantry, we get in our car and we go out to eat. That decision is not so simple in congested cities. When visiting family in Atlanta for instance, every discussion about going somewhere turns into a 15-20 minute intense strategy session. We debate when and how to go, not based the internal desires of the group, but on one very powerful external factor, TRAFFIC.

Most business owners plan to sell their company when they are ready. That usually means it is based on an internal desire or factors, such as owner energy, business performance, business lifecycle, retirement, personal needs of the shareholder, etc. These are all internal factors that should definitely be considered when deciding when to sell. However, like traffic in the example above, there are powerful external factors that should be considered as well. Some of those external factors include:

– Government policy

– Capital markets

– Macro-economic forces

– Industry life-cycles

– The company’s life-cycle

– Personal needs and desires of the owner

Each one of these factors is important to consider, but credit markets have historically proven to be one of the most powerful external forces in both inflating and deflating valuations.

There are two reasons why:

Rate of Return

In the world of investing, return is commensurate with risk. The greater the risk, the higher the need for return. Economic risk is measured by determining the rate of return required for an equivalent investment facing an equivalent level of risk. This rate of return is called the “discount rate”. The capital used to buy a company is typically a combination of debt and equity. Equity can be in the form of either company stock or cash, and debt is borrowed money the acquiring firm/company pays interest on.

Each source of funds is obtained at a different cost, so the “weighted average cost of capital” is used to determining the discount rate. As interest rates go down, present values go up, making valuations higher. A small change in the discount rate can result in large changes in valuation. Summed up simply, when paying higher interest rates, the investor requires a higher rate of return, which makes valuations go down, and vice versa.

Money Supply

Money supply also heavily influences business valuations. When the economy sputters, the fed lowers interest rates to stimulate the economy. When money is cheap and the economy bottoms out, capital markets begin to loosen the purse strings. Early investors buy cheap, but more money competing for a limited number of assets drives valuations higher, and investors, emboldened by their access to debt and lower discount rates, start to take on more risk.

Early investors start to see good returns and those on the sidelines, not wanting to miss out, come in to drive valuations even higher. Sometimes, fundamentals yield to speculation and for a period “the sky is the limit.” But then, fundamentals return, companies default on their debt, capital markets get scared and stop lending, and in a small fraction of the time it took to inflate, asset values crater.

Conclusion

Market cycles are real and are primarily driven by the availability and cost of debt. Market cycles have historically lasted on average 5-8 years. When markets are on the upswing, valuations rise as investors are willing to take more risk and pay higher multiples. When markets crest and move down, investors pay less if they buy at all. Understanding this external force is important when deciding when to sell or recapitalize your company. That said timing your transaction at the peak of the market is tough.

Timing the market can be compared trying to take the perfect picture while riding the London Eye (the giant Ferris wheel). You know you can get the best picture of the London skyline at the peak, but if you miss your opportunity because your batteries went dead or you got distracted by an incoming email, you have to wait a long time before that same opportunity comes back around. It is the same with selling all or part of your company. If you miss the upcycle, you may have to wait 5-8 years to see a similar valuation for your business. Like navigating traffic in Atlanta, the risk of missing your optimal selling window warrants strategic planning.

If you would like to discuss optimal timing for your company, we are happy to talk with you. Please schedule a time.

Mike McCraw 8, Sep, 2021

General

Do You Have a Lifestyle Company?

A lifestyle company is a business operated with the purpose of providing a level of income or particular lifestyle for its founder. There is nothing wrong with having a lifestyle company, but the founder/entrepreneur must understand that the “lifestyle company” mentality does not fully align with building enterprise value or creation of a sellable company. Again, there is nothing wrong with either approach, but be sure to understand the pros and cons to make thoughtful choices.

A lifestyle company might be sellable, but below are some “lifestyle company” choices that could negatively impact your ability to sell your company and achieve maximum value:

– Your business would not be sustainable without you. You have not developed a solid team or business processes that would allow the business to move forward without your involvement.

– You have not properly managed your financial accounting. When making financial decisions and preparing annual financials, you are more focused on limiting your annual tax burden than increasing revenue.

– You manage your company year to year with little to no long-term planning. At the end of the year, you are thankful to have made it through another year and do not strategically plan for the next one, five, or ten years.

– You do not invest in the future growth of your business. This indicates you are not seeking to grow your business or not willing to make the investments necessary to do so. You draw and spend all profits and do not reinvest into the business.

– You mix personal and company assets. Examples of this include: your company paying a relative that does not contribute much/any to operations or your company owns a recreational property (beach condo, hunting club, etc.). If you decide to do this, be sure to track these expenses, so they can be added back in the event of a sale.

The way you run your business leads to a certain destination. The destination is not the problem; the problem is arriving at a destination that you didn’t want or didn’t intend. To learn more about what will diminish and more importantly what will create significant enterprise value in your business, contact Investment Grade Advisory.

– Guest Article by Mike McCraw

Wesley Legg 30, Aug, 2021

General

What Are Addbacks and How Do They Affect My Company’s Value?

In founder or family-owned businesses, it is common for owners to run personal/non-company related revenue or expenses through the business or to expense certain items that would normally be capitalized. While these practices may come in handy during tax season, they can seriously impact a company’s valuation.

If you are a business owner considering an exit or recapitalization, we strongly recommend that you a) gain an understanding of what add-backs/adjustments are, b) understand how they impact valuation and c) begin the process of identifying and tracking them within your business.

What are addbacks/adjustments?

Addbacks and adjustments come in many forms (typical items and examples are shown below), but generally they can be described as any item on the income statement that is non-core, one-time, or personal in nature. Put simply, addbacks and adjustments are items that should be “added back” to net income and/or zeroed out on the income statement due to one of the previously mentioned reasons. A good rule-of-thumb is to imagine that your business was acquired by a publicly traded corporation or private equity group – any item the acquirer a) would not expect to be part of the business going forward or b) would not include on the income statement is likely an adjustment.

What should I do about addbacks/adjustments?

If you plan to pursue an exit or recapitalization, you should identify any potential addbacks or adjustments to your financial statements and begin tracking them regularly. This can be done however it is easiest/most efficient for you and your team, but we recommend the following:

– Record addbacks on a monthly basis – When looking back quarterly or annually to identify addbacks, it is easy to forget when/where these items appear on the income statement, and you might forget about some items entirely. You reduce the risk of leaving out some items and as a result, leaving additional value on the table, by recording addbacks each month.

– Record the exact dollar amount, and which account it affects – This is particularly true if only a portion of an account is added back. For example, if $20,000 out of a $30,000 “Travel and Entertainment” (T&E) expense was for your family’s vacations, that $20,000 could be added back to EBITDA; however, it may be helpful for buyers to know where that $20,000 was originally recorded. By doing so, they can see that the T&E line was artificially inflated.

– Keep notes explaining why the item is an addback – If you find yourself in a discussion over whether certain addbacks are reasonable, it will be beneficial to keep careful notes on why you chose to add back the expense. For example, if you add back “marketing expenses” of $50,000, a buyer may question this choice since marketing expenses are considered normal business practices. However, if you are able to explain that these expenses were related to a marketing campaign for a trial product that was discontinued (and therefore, will not be incurred again next year), the buyer is more likely to agree with your rationale.

How do addbacks/adjustments affect valuation?

Since companies are often valued based on a multiple of EBITDA, the primary way addbacks and adjustments affect valuation is when they alter EBITDA. If making these alterations to the income statement leads to large fluctuations in EBITDA, the company’s valuation can vary accordingly.

Hypothetically, if you receive an offer for your company based on a multiple of five times trailing twelve months (TTM) EBITDA and your company’s unadjusted EBITDA is $4 million, the buyer has essentially valued your company at $20 million.

Now assume that your company has the following addbacks for the past 12 months:

– Your family’s travel expenses: $20,000

– Donations to a local charity: $5,000

– Salary that you pay your son (who does not work for the business): $75,000

– Fees paid to a law firm you hired during a legal dispute: $100,000

– Implementation/installation fees for a new on premise software system: $20,000

– Renovation to your new office: $30,000

Some of these expenses may seem immaterial on their own, but if combined, they increase your EBITDA by $250,000. At a 5x multiple, this translates to a $1.25 million bump in your total valuation.

Conversely, if your business earned $500,000 of that $4 million in EBITDA from a one-time special project, some buyers might argue that EBITDA should be adjusted down to $3.5 million (therefore reducing total valuation to $17.5 million).

Note: While all of the examples mentioned above may rationally be considered adjustments or addbacks, it is important to keep in mind that once valuation discussions begin, buyers may disagree with certain adjustments or even make adjustments of their own. Addbacks and adjustments are often evaluated on a case by case basis, making it important to carefully track and provide explanations for each item.

Addbacks and Adjustments in Negotiation

When positioning a company for a recapitalization or sale, the seller wants the highest EBITDA or multiplier they can defend. The buyer wants to pay the lowest value possible to mitigate risk and maximize financial returns. When negotiating a deal, both sides will position what should be an addback and/or an adjustment. This is an area where an experienced and reputable M&A advisor can provide tremendous value. An M&A advisor’s experience allows them to not only have the advantage of seeing what are customary and non-customary addbacks and/or adjustments, but also the knowledge and experience to appropriately defend the position of the seller or buyer with data and financial analysis.

Are you considering an exit or recapitalization and have questions about addbacks affecting your company’s valuation? Contact Investment Grade Advisory; we will gladly discuss your concerns and ways you can increase your company’s value.

Chris Weingartner 25, Aug, 2021

General

Five Checks to Determine if Your Financials Are in Order

When selling a company or seeking investment, there is no larger deterrent to a premium valuation and a smooth closing than messy financials. For growth companies running at full speed, maintaining accurate and up to date financial statements can easily slip to the bottom of the task list. While it is a common mistake, poor financial reporting will hinder your ability to make informed decisions on managing and growing your company. It will also destroy buyer/investor trust in your company as a potential investment.

The Five Checks

Financial reporting may be a problem for your company if you have any of the following issues:

You do not have up to date monthly financial statements readily available

You do not track financials monthly and/or you are several months behind in reporting. Strong financial departments often produce monthly financials by the 10th of the following month. Closing later in the month reduces the usefulness of financial reporting.

You are not able to track revenue with expenses

You are not sure if your expenses are generating sufficient revenue to achieve profitability goals. Properly recognizing revenues and expenses in the month they are earned (known as accrual accounting) gives a better picture of profitability than cash-based financial reporting. Cash based financials can hamper management’s ability to make decisions.

Your financial statements are difficult to follow

Someone outside of your accounting team cannot easily understand your business model and financial position from looking at your financials. Clean reporting is organized by business unit or division and is consistent over time. Instead of making users scratch their heads, clean reporting enables high-value conversations around the business.

Your financial team does not have clearly defined processes

Lacking a standard set of procedures, such as bank account reconciliations and a monthly budget meeting, your financial reporting may contain significant errors. A written set of financial controls creates peace of mind.

You run personal expenses through your business

Lastly, running significant personal expenses through a business can further complicate matters, as buyers want to understand solely the costs to operate a business. The more of these non-business related expenses that flow through the P&L, the less credit a buyer will be willing to give to the seller for each addback.

Without clean financials, prospective buyers/investors cannot conduct the level of financial analysis required to determine if they want to move forward with an opportunity. If you are unable to provide monthly financials, buyers may be forced to pass or delay a decision. Without confidence in financials, buyers often hedge their offers downward to compensate for the risk of the unclear and inaccurate financials. The duration to close a transaction may also be elongated, as significant effort must be exerted in the diligence phase to validate the accuracy (or get as close as possible) of the unkempt numbers.

Maximizing Value

For business owners seeking to maximize their valuation and minimize the stress of financial due diligence, we advise being sure you can answer yes to the following four questions:

– Do I have audited and GAAP compliant (or at minimum prepared and organized per industry standards) financials?

– Are monthly income statements, balance sheets, and cash flow statements are readily available?

– Does my company regularly update and track performance against a budget/forecast?

– Have I established monthly financial Key Performance Indicators that are used to track and evaluate performance?

If you can answer yes to all, breathe easy as you have positioned yourself well. If your answer to any of the questions were no, we can help understand your current operations and set you on a path to success. Schedule a meeting today!

– Guest Article by Chris Weingartner

Zane Tarence 18, Aug, 2021

General

Five Things to Consider When Selecting an M&A Advisor

There is much to consider when deciding to pursue a merger or acquisition. Anyone contemplating a transaction should be consulting with, and ultimately engaging with an M&A advisor. When choosing an M&A advisor there are at least five things to consider:

Trust

This is the foundation of relationships, and the relationship with your advisor shouldn’t be any different. Whether you are pursuing a sale or purchase, it is likely to be a once-in-a-lifetime process, so you want to ensure you trust who is guiding you through the process.

Experience

Experience is of course key. The M&A advisor you work with is there to create value with a competitive process, and it is best if the advisor has expertise in your industry. An industry expert will better understand the key drivers of your business, the market dynamics and the potential buyers. Be sure to inquire about their deal experience to learn more about how many deals they have closed and what experience they have in your industry and with businesses similar in size.

Process

Understanding the process and how it’s run is also important. The process takes a lot of discipline, and you don’t want your advisor cutting corners. Great advisors don’t skip steps and are diligent about representing your company well and working hard throughout the entire process.

Team

You’ll also want to understand what the team looks like – their experience and backgrounds. Make sure you know who will be working on your deal and get commitments to that effect. Running the process requires a focused team of professionals, so you need to know that your deal is getting the time and attention it deserves.

Fee

Price is always a consideration, but you should look at this in the context of the service you are being provided and the value being created by the process. You want to make sure the advisor is properly aligned with the result you desire. Reputable M&A advisors make the vast majority of their fee after you’ve succeeded in an acceptable transaction.

Many M&A advisors take a transactional approach to their engagements. While it is a transaction, we have seen Founders Advisors leverage a relational approach. This involves really understanding the goals and objectives of the client by getting to know their company and listening to their personal desires. Not all advisors operate this way, so be diligent while interviewing M&A advisors to ensure a great fit for you and your business objectives.