CEO Advisor Newsletter February 2022
12 Ways to Prepare for Selling Your Business
- For many entrepreneurs, the thought of building a successful company and eventually selling it for tens or hundreds of millions of dollars represents the entrepreneurial dream. You can increase the likelihood of achieving this goal by taking specific steps now to prepare your company for a successful sale.
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- 1. Increase Your Growth Rate
- A key metric of value, especially for technology companies, is to break out of 10% growth per year and increase your growth rate to 30% - 50% per year. This may take a very different approach than you have used in the past and you may need the expertise of a business advisor to get there. Prior to and during an M&A process, it makes strategic sense to increase your sales efforts, which may mean hiring additional sales reps and increasing your investment in growth initiatives.
- 2. Growth of Your Sales and Profits
- Focus on substantially ramping up Revenue and Profit. Along the lines of Growth Rate is increasing your Sales (Revenue) and Net Profits to bolster value. EBITDA (earnings before interest, taxes, depreciation and amortization) is primarily used as the key metric in mergers and acquisitions (M&A) for valuation purposes. The higher your EBITDA and the higher your multiple, the higher your valuation will be at your exit.
- 3. Recurring Revenue Model
- A recurring revenue or subscription model will allow you to obtain a higher EBITDA multiple and thus a higher valuation. Software-as-a-Service (SaaS) can be challenging to generate substantial Net Profits, but can be extremely effective in building value toward a lucrative exit. Many businesses, software or otherwise, can adopt a recurring revenue or subscription model to achieve a more forecastable and stable revenue stream.
- 4. Focus on Your Financials
- An audit or accounting review of your financials is likely to be required as part of an M&A process. You should consider having your financials audited, or at least have them reviewed, by a reputable auditing firm as part of your preparation prior to an exit. An accounting review or full audit will give your buyer confidence in your Financial Statements and will educate you on what a GAAP audit/review looks like. The importance of proper financial reporting cannot be overstated. For M&A purposes, focus on what the acquirer is looking for to get a transaction completed.
- 5. Prepare Thoroughly and Create a Powerful Presentation
- Any prospective buyer is going to look closely at the growth potential of your business and need to first understand the business model, unit economics, sales strategy, management team, products and services and historical financials and projections for the next three years. Preparation of a Data Room of information, including a powerful presentation is key to presenting value to buyers.
- 6. Create a 3-year Financial Projection
- It will be necessary to create a 3-year financial projection. Make certain the financial numbers you project are aggressive, but achievable. Hitting your financial projections will be absolutely critical once you begin the M&A process, including during the Due Diligence process. Achieving your financial projections is great while in the M&A process; missing financial projections can halt the process or seriously jeopardize your valuation and require you to renegotiate your sale price or terms.
- 7. Create a SWOT Analysis
- Define your Strengths, Weaknesses, Opportunities and Threats. Your prospective acquirer will attempt to poke holes in your business, since they will want to get the best price possible. Be prepared to focus on your strengths and opportunities and defend your threats and weaknesses.
- 8. Address the Skeletons in Your Closet
- Head off any blemishes or issues prior to the Due Diligence process. If there are any potential or real fires, put them out prior to commencing an M&A process. Address these issues head on in a proactive manner and be transparent with anything that a buyer may consider as "hair on the deal." There is absolutely no reason to apologize for anything that happened in the past. Put your emotions aside, be objective, explain your issues and move forward.
- 9. Increase Your Visibility
- Prior to and during your M&A process, you should maximize whatever opportunities are available to increase the visibility of your business. Maximizing visibility might mean attending and speaking at trade shows, writing guest columns on blogs and issuing press releases about strategic hires, new products and company achievements. More importantly, keep the sale of your company 100% confidential and do not discuss it with your employees, clients, vendors and especially your competition.
- 10. Identify Potential Acquirers
- Create a list of all of your potential acquirers. Be sure to include the obvious (similar businesses) and the not so obvious (businesses that would benefit from your services). Treat this as a targeted sales list, as this is extremely important. First make sure you are 100% prepared to start the M&A process as you have one chance to make a good impression.
- 11. Cut the Fat
- Prudently look at your expenses and eliminate unnecessary costs and expenses to improve Gross Margins and EBITDA. Every dollar added to EBITDA will be worth many times that amount in value. This may require tough decisions so work with your M&A Advisor to make the best decisions to maximize your value.
- 12. Hire an M&A Advisor
- An M&A Advisor will provide a wealth of expertise and do a lot of the heavy lifting to prepare for and pitch your company to interested buyers. For starters, an M&A advisor will help you prepare a management presentation for your business. They will also help you better understand and present your financials, and prepare all of the information needed to start the M&A process. Once you are ready to go to market, the M&A Advisor will prepare and finalize your targeted acquisition list, make calls to all prospective buyers and set up meetings, secure a Letter of Intent (offer), organize and manage the Due Diligence process and coordinate with your corporate/transaction attorney for the legal documents through to closing. Your primary role is to stay focused on your company's performance during this complex process.
- CEO Advisor, Inc. has the expertise and experience as an M&A Advisor. Mark Hartsell, MBA, President has forty years of experience, including thirty-five years of experience in mergers and acquisitions.
- Contact Mark Hartsell, MBA, President of CEO Advisor, Inc., for a free initial business consultation at (949) 629-2520, by mobile phone at (714) 697-3370, by email at MHartsell@CEOAdvisor.com or visit us today at www.CEOAdvisor.com for more information.
The Value of a Board of Directors
- A strong, well-managed Board of Directors can add tremendously to a company's value and assist it's CEO in many ways. But many CEOs don't capitalize on the true benefits a strong Board can provide to a growing company. In most cases, entrepreneurs choose Board Members from among their friends and family, or someone they are comfortable with that will vote the CEOs way.
- Too many CEOs want a Board that they can trust to support their decisions and help maintain their control over the business. However, as businesses grow, CEOs need more than just loyalty from Board Members. Recruiting Board members that fulfill fiduciary duties, while diving in and playing specific roles in driving the business forward is a critical step that requires special expertise.
- We've identified seven capabilities and contributions that Board Members should bring to a business:
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- 1. Strategic Focus - While it may not be the task of Board Members to actually produce the company's Strategic Plan, it certainly is the responsibility of the Board to provide direction, and to approve and support it. Too many CEOs try to tackle far too much and need to be kept on focus within the Strategic Plan.
- 2. Recruiting Talent - If your Board Members are well-connected, especially within your industry, they will be familiar with top talent. They should introduce, advise and assist you in seeking out top talent. Nothing is as important to the success of a business as the quality of its management team and employees.
- 3. Key Business Relationships - Board Members should be acquainted with executives and key managers in your target markets. Introductions to potential clients, vendors, resellers, distributors and funding sources is an important factor that helps determine the success of many businesses.
- 4. Fundraising - Board Members should be integral to the fundraising process and should represent real dollar value (by increasing the value of the company in the many millions of dollars in some cases). This includes formal introductions to fundraising sources, attending meetings or conference calls for fundraising, and helping the CEO close rounds of funding by speaking with investors to secure an attractive Term Sheet and during the due diligence process.
- 5. Personal Competencies and Special Expertise - When selecting Board candidates, many CEOs look to executives from within their own industry. It is very important that you recruit and maintain Board Members from multiple disciplines, with expertise in your industry, as well as, fundraising, finance, operations, marketing, etc. to have a well-rounded Board.
- 6. Short and Long Term Planning - While it is the responsibility of the Board and Management Team to prepare the company for the future, it is also the responsibility of the Board not to lose track of the present. Board members must be involved in achieving results today that will support both present and future goals and prepare for an optimal exit.
- 7. Succession Planning - Very few businesses have a Succession Plan, whether it is the selection and grooming of follow-on executives or the identification and planning of an exit strategy. Unfortunately, most owners or CEOs choose Board Members based on expected loyalty or accept Members appointed by investors/stockholders. In doing so, they squander a chance to form and utilize a powerful business asset, while ensuring the company’s future to achieve its goals.
- In summary, seek advice in recruiting a Board of Directors as a useful force for achieving the business' goals. There are many business issues to navigate and pitfalls to avoid, so seek experienced, professional advice to take your business to the next level.
- CEO Advisor, Inc. can research, formulate and recruit a Board of Directors that can create tremendous value, while adding depth to your senior management team.
- Contact Mark Hartsell, MBA, President of CEO Advisor, Inc., for a free initial business consultation at (949) 629-2520, by mobile phone at (714) 697-3370, by email at MHartsell@CEOAdvisor.com or visit us today at www.CEOAdvisor.com for more information.