CEO Advisor Newsletter November 2021
Optimize the Sale Price of Your Company
The sale process requires sellers and their advisors to focus on critical areas to secure the right buyer, negotiate the sale, command the highest selling price and complete the transaction.
Critical Steps to Optimize Your Sale Price
Secure an M&A advisor from the on-set to greatly impact the success of your sale process. The preparation for the sale of your company is paramount, and an experienced M&A advisor will tremendously enhance your value during this preparation work. The most important aspects of preparation require expertise, planning and proper execution.
We highly recommend gaining expertise early on by assembling your advisory team including a 1) M&A advisor, 2) Corporate/transaction attorney and 3) a CPA or tax attorney. This step is valuable to both increase your business’ value and arm yourself to defend its value during negotiations.
Below are critical areas to optimize your sale price:
Importance of Metrics - Update your key metrics and KPIs such as Customer Churn, Revenue Churn, Growth Rate, Net Revenue Expansion, etc. Deals are made or lost by having strong KPIs and metrics, which have a major impact on value to buyers. Your M&A advisor will be key in producing these metrics and presenting your company to potential buyers in the best light.
Data Room - Set up a professional Data Room with information that a serious buyer would request in order to provide their best offer. This is accomplished by having an experienced M&A advisor to provide hands-on help and guidance to produce and assemble this information.
Accurate Financial Statements - Quality accounting and accurate up-to-date Financial Statements reduces the risks to buyers and will enhance your opportunity for an optimal price. Your M&A advisor should be extremely competent in finance and accounting and provide the advice and expertise to address the buyer’s requests.
Key Man Issues - Over-dependence on one or a few individuals increases the risk to the buyer that the Revenue or operational ability of the company will not continue. Your M&A advisor should validate your Organizational Chart and Management team are solid and attractive to buyers. The need for additions to the Management team or cuts in the staff should be taken seriously.
Client Concentration - Buyers discount the value of companies that are overly dependent on a small number of customers, or one or two very large customers. This is called Client Concentration Risk. No one customer should constitute 25% of your Revenue, and you should have a range of larger, long-term contracted customers in order to present a stable, recurring Revenue stream.
Profit Maximization - Sellers can achieve a much higher valuation by maximizing Net Profit and EBITDA. An upward trend in growth and Net Profit is a major value driver. Remain focused on Sales, limit new hires prior to a sale, and use attrition to your advantage to reduce expenses when possible.
Defer Write-offs and Delay Expenses - Sellers should strive to make their Financial Statements for the twelve months leading up to the sale as clear, attractive and profitable as possible. Be strategic about managing your business leading up to a sale, and your M&A advisor will provide the needed advice and guidance.
Normalize Your Financials - Remove from your Financial Statements a) One-time costs and expenses, b) Discretionary expenses and c) Unneeded post-acquisition expenses to increase the value to the buyer. Provide buyers with your Financial Statements along with a set of adjusted Proforma Financials that optimize your Profit and value in a "normalized" state.
Quality of Earnings Report - Obtaining a trusted third party’s expert opinion on your business’ financial performance and accounting practices is both affordable and prudent for sellers in the middle market and can pay for itself many times over. This does not mean an Audit, rather a simpler, far less expensive Quality of Earnings (QoE) report by a CPA firm. Your M&A advisor can manage this important step for you.
Prevent Trading Down - Once the seller accepts an exclusive Letter of Intent, it becomes harder to head off negotiations for reductions in price especially at the end of the Due Diligence period. Head off any opportunities of buyers trading down on price by preparing, maintaining current KPIs and metrics and attack any weaknesses head-on.
Promote and Divulge all Intellectual Property - Include any intellectual property in the Data Room as trademarks, patents, domain names and any proprietary software will provide value to buyers. This is downplayed in too many deals but can represent substantial value to buyers.
Resolve Legal Suits – Make it a priority to resolve any open or pending lawsuits prior to beginning a sale process. The universal rule is “Don’t spook the buyer”. Buyers have a tremendous aversion to law suits and related legal costs and will greatly exaggerate the risk of law suits, eventually resulting in a discounted valuation or loss of interest entirely. Benign lawsuits can be managed, but major law suits should be resolved.
CEO Advisor, Inc. has tremendous experience and expertise in Mergers and Acquisitions for small and mid-market companies. For a free initial consultation, contact Mark Hartsell, President at (949) 629-2520, email MHartsell@CEOAdvisor.com or visit www.CEOAdvisor.com for more information.
Planning For Success in 2022
- After two long years of uncertainty, November and December should be your planning months to prepare for 2022 and maximize your opportunity for success. Planning, forecasting and goal setting are critical to any company, large or small.
- CEO Advisor, Inc. works with CEOs, presidents and business owners of small and mid-size companies on strategy, growth, funding, mergers and acquisitions and the key to a successful year is up-front strategy and planning.
- Conversely, if you are not committing the needed time and focus on planning, forecasting and goal setting for the upcoming year, you are leaving a lot of money on the table and risk your business and your livelihood near and long-term. A seasoned, experienced business advisor can ensure your success in this process.
- Planning for growth doesn't mean just having a meeting with your staff or updating a brief business plan and going back to your daily routine. Business planning is a critical aspect of your business that enables you to rethink, adjust, plan, research, strategize, prioritize, focus and allocate resources to your largest opportunities, while minimizing wasted time and resources.
- Planning For Growth
- Planning for organic growth, growth by acquisition, growth through funding, or planning an exit strategy and sale of your business takes discipline, expertise, the ability to strategize and mobilize around a focused effort. Execution is the follow-on implementation of your 2022 Plan in a well thought out, concentrated effort. If you are not executing on your Plan, you are wasting time and money, missing opportunities, burning valuable resources and causing irreparable harm to your company, often times on a permanent basis.
- Creating a monthly Financial Forecast of Sales, Cost of Goods Sold (COGS or costs directly related to providing your products and services), Gross Profit (Sales minus COGS), Gross Profit Margin (Gross Profit divided by Sales), Expenses (Overhead), Net Profit and Net Profit Margin (Net Profit divided by Sales) is paramount to effectively running your business.
- Additionally, a monthly Financial Forecast enables you to compare your actual results to your Forecast, proactively make needed adjustments to your business, eliminate wasted time and resources, increase Gross Margins and maximize your Profits.
- Without a monthly Forecast, you are flying blind throughout the year with no metrics or financial goals. This, again, will have you leaving a lot of money on the table that will never be recovered. Forecasting is a straight forward process and a key part of planning for the new year that can be one of the biggest drivers of success and profits. Seek help from a seasoned business advisor to ensure success with this process.
- Goal Setting
- Goal setting should entail all aspects of your business including:
- a) Company goals
- b) Management team goals
- c) Growth goals
- d) Financial goals
- e) Sales goals
- f) Sales per Employee goals
- g) Gross Profit and Gross Profit Margin goals
- h) Net Profit and Net Profit Margin goals
- i) Optimizing Financial Ratios
- j) Customer and Revenue Churn goals
- k) Other measurable goals to grow your business to the next level.
- Without setting measurable goals, you and your employees may spend the majority of 2022 going day to day in a constant cycle of reactive tasks instead of proactively focusing on and accomplishing your goals, executing on your Plan, and maximizing sales and profits and the value of your business.
- Management Reporting Dashboard
- There is nothing more important than fast, easy access to critical business information. A business advisor can assist you in creating a Management Reporting Dashboard to bring the most important and needed information to your finger tips in order to make critical and timely decisions to increase Sales and Profits. Without access to this information, your business is at serious risk.
- When I meet with CEOs of small and mid-size businesses throughout the year, they typically cannot answer the simple question, "What are your goals for this year?" They throw out short answers such as, "Grow the business", or "Sales", but cannot go beyond this and answer the question distinctly with their four to eight primary goals to drive their businesses forward to build profits and substantial value toward an optimal exit in the future.
- This is due to a lack of planning, forecasting and goal setting and is a major deterrent to success and profits. CEO Advisor, Inc. provides expertise and experience to quickly and effectively assist you in planning, forecasting and goal setting for 2022. We address your specific needs with hands-on action, expertise and seasoned advice.
- Contact Mark Hartsell, MBA, President of CEO Advisor, Inc. for a no cost initial consultation at (949) 629-2520, by email at MHartsell@CEOAdvisor.com or visit us at www.CEOAdvisor.com for more information.