Thoughts on Preparing Your Company for a Capital Event
The Boy Scout axiom to “be prepared” can be applied to many aspects of life including business and even more specifically positioning your company for a capital event or sale. The truth is many important initiatives designed to make your company more attractive and valuable to a buyer cannot be accomplished last minute. At Exit Strategies we often engage and work with a client multiple years before they enter the private equity marketplace. In these instances, it’s astonishing how dramatically the final price and terms can be impacted by simple initiatives deployed well in advance of the sale.
Clearly all capital events are not the same and no single preparation protocol fits all types of transactions or companies. First let me state what should be obvious. Taking the time to prepare for a sale is not an absolute recommendation for every situation. Life doesn’t always allow for us to prepare as much as a good Boy Scout would care to. When you don’t like the feel of the market floor under your feet and you decide an exit is in order, a few years of preparation could be catastrophic. A devastating medical diagnosis without a viable succession option may make delaying a very, very costly strategy.
Dressing Up For the Dance: Create a Dance Card/Checklist
Getting dressed up for the dance includes a lot more than getting yourself in the right emotional space, putting on the coffee and getting the conference room ready for the big meeting. A preparation checklist is a good idea. It looks different for every company. Here are a few items that appear most commonly on these types of checklists:
- Sales & Marketing Fitness
- Momentum & Trends
- Management Team & Human Assets
- Product & Service Development
- Legal House Keeping
Financials: Good Numbers Aren’t Good Enough
The numbers need to make sense to a professional financial analyst. Private equities are the very definition of smart money. When your financials don’t make sense at a first look you’ve made a bad first impression and created some bad reflexive reactions in the process. Some of these reactions include a heightened sense of risk and intensified sense of diligence that is rarely a positive force in the deal. Financial clutter is tantamount to showing a home for sale that’s dirty and filled with junk. A lack of accounting clarity fuels valuation conservatism.
A Few Basic Financial Housekeeping Suggestions
- If available use CPA audited financials
- Forecast realistically with clear visibility into future growth. Do not try to forecast unrealistic growth, this will just slow down the process and reduce credibility
- Be honest about problems and concerns, all businesses have some!
Sales & Marketing Fitness
Clearly a major pillar that often supports great financials is sales and marketing fitness. What is the condition of your sales and marketing effort? Is your sales and marketing effort fit enough and efficient enough to take advantage of existing and emerging market opportunities? Does your sales and marketing organization have the heft, the essential mass needed to support the scaling growth your buyer almost certainly will aspire too? Is your sales and marketing infrastructure solid, can it be built on or is it in transition and currently unstable?
Momentum & Trends: Catch the Right Wave at the Right Time
Does that new market or product that’s getting real traction need another year to add a very exciting dimension to your business’ value? Is the financial trend line of your profitability incredibly promising over the next two years? Are you growing but a year or two or three away from explosive grow?
Any good surfer can tell you what happens when you’re too early or too late to a wave. Catching the positive waves of momentum in your business at the right time can make a huge difference in optimizing a valuation and sale price.
Management Team & Human Assets: Your Cast of Characters
Do you have a big hole, an empty seat in a senior financial, operational or sales position? Maybe you’ve implemented a short term work around that isn’t so short term any longer. A buyer is not likely to take a charitable view of holes or weaknesses in your senior management team.
Most buyers are evaluating a senior management team not in terms of their ability to manage the business today, but as it scales in the future. These concerns are of course magnified if an owner is planning a rapid exit from the business after the sale is complete.
Some Items to Consider for Your Management Team Checklist:
- If you’re looking to plug an important hole, it’s particularly helpful to look for a top manager whose already taken a business from where your business is today to where your buyer wants to take it.
- It’s also helpful if your hire is over the honey moon period of the roll and executing by the time a potential buyer shows up.
- It’s not always just about upper management. If you have any mad scientists or crazy developers who give you a competitive edge, you should include them in the presentation of your human assets. However be careful not to suggest over dependence on one player, it can and most often will backfire.
- If you have a junior or middle management team that’s particularly strong, talk about them. Investors like to see management depth that translates into stability for the business and the human horse power to grow it.
Product & Service Development
Dressing up for the dance should include taking a look at your product and service offering. What is your level of product and service competitiveness? Can your current offering sustain scalable growth for the business? Does your product or service require retooling and investment? Have you market validated that new product or service?
Some items for your Product & Service Development Checklist:
- Illustrate your pipeline of new products or product enhancements
- Elaborate on efforts to expand markets
- Create a narrative (if one exists) for how your product/service mix supports scalable growth
Legal House Keeping: Clear Your Court Docket
The overhang of pending litigation doesn’t cast a good shadow. Settling significant suits or legal issues is a great way to get dressed up for the dance. Serious unresolved litigation can be a deal killer. If it doesn’t kill a deal it certainly has a chilling effect on valuation and other issues.
Legal housekeeping can also be helpful. This kind of housekeeping might include issues like:
- Trade marks
- Intellectual Property
- Partnership Agreements
- Licensing and Royalty Agreements
- Lease Refinements
- Audit Resolutions
- Employment Agreements
Clearing your legal docket and attending to legal housekeeping issues can make a real difference when the negotiating music starts.
Summary: Why Dress Up For the Dance
If you can’t dance you can’t dance. It doesn’t matter what you wear. In absolute terms it’s tough to argue with this logic. The reality of life and business is not that clear cut. What you wear and how you look are the great tie breakers in life and in business.
Going to the equity dance doesn’t mean you’re going to be asked to dance especially by the right partner. Dressing up for the dance will enhance the possibility of getting an invitation to dance to the kind of music you’ll like or even love!