A Great Company and a Great Life Begin with the Right Team
0
Wesley Legg

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.”

Strategy or Execution, What’s More Important?
0
Wesley Legg

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.

Am I Enhancing or Hindering the Value of My Business?
0
Wesley Legg

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.

Risks of Selling to a Competitor
0
Chris Weingartner

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.

How Do I Know When to Sell My Company?
0
Wesley Legg

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.

Five Checks to Determine if Your Financials Are in Order
0
Chris Weingartner

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

Five Things to Consider When Selecting an M&A Advisor
0
Zane Tarence

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.

Newsletter – Sign Up to Receive Future Content

Copyright © 2024 Investment Grade Advisory