June 2024 Newsletter
Prepare Now for a Future Sale of Your Business - 10 Critical Steps
- For many entrepreneurs in America, 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.
- Your three main critical goals are to, 1) Increase profits, 2) Build value in the business and 3) Mitigate risk to future buyers. This requires a lot of expertise, experience and hard work, and CEO Advisor, Inc. is an expert in this process.
- 1. Increase Your Growth Rate
- A key metric of value, especially for technology and many other companies, is to break out of 10% growth per year and increase your growth rate to 20% - 30% per year. This may take a very different approach and mindset than you have used in the past, and you may need the expertise of a business advisor to get there. Prior to and during a mergers and acquisitions (M&A) process, it makes sense to improve your sales strategy and very prudently invest in growth initiatives, while staying very focused on running your business.
- 2. Grow Both Your Sales and Profits
- Focus on substantially ramping up both Revenue and Profit. Profitability increase your Sales (Revenue) to bolster value. EBITDA (earnings before interest, taxes, depreciation and amortization) is primarily used as the key metric in mergers and acquisitions for valuation purposes. The higher your EBITDA and the higher your EBITDA multiple, the higher your valuation will be at your exit.
- 3. Create a 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 initially, 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 – a key driver of generating value in your business.
- 4. Focus on Your Financials and Execution
- An Audit or Accounting Review of your financials or a Quality of Earnings report 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 accounting firm as part of your preparation prior to an exit. A Quality of Earnings report, Accounting Review or full Audit will give buyers confidence in your Financial Statements and will educate you on what Generally Accepted Accounting Principles (GAAP) Accrual basis accounting practices look 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. CEO Advisor, Inc. can assist you in the needed preparation and gaining the expertise you need.
- 5. Prepare Thoroughly and Create a Data Room of KPIs, Metrics and Company Information
- Any prospective buyer is going to look closely at the growth potential of your business. Buyers need to first understand your business model, 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 thirty to forty key documents is key to presenting value to buyers. CEO Advisor, Inc. is an expert in preparing a company for sale and creating a professional Data Room.
- 6. Create a 3-year Financial Projection
- It will be necessary to create a 3-year financial forecast. Make certain the financial forecast you project is 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 forecast is great while in the M&A process; missing your financial forecast can seriously jeopardize your valuation and may require you to renegotiate your sale price or terms.
- 7. Address the Persistent Skeletons in Your Closet
- Head off any issues during the preparation prior to selling your company. 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." Resolve lawsuits if possible, increase sales, turn losses to profits, and fix other issues that will scare away buyers or diminish your value. CEO Advisor, Inc. is an expert in this area. 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 with a definitive, proactive plan to exit and sell your company.
- 8. Optimize Sales Management and Your Sales Team
- Prior to and during your M&A process, you should maximize sales opportunities to increase the sales growth and value of your business. Maximizing your sales strategy, sales management and practices and execution is central to the improvement of your business and making your business more sellable and valuable. Have your Sales Pipeline up to date at all times and focus on strong sales management on-going.
- 9. 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 like CEO Advisor, Inc. to make the best decisions to maximize your value. Profitable companies attract buyers and high purchase prices. Low profits or losses repel buyers or fetch low-ball offers.
- 10. Hire an M&A Advisor
- An M&A Advisor will provide a wealth of expertise, mange the entire sales process 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 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.
- Keep the sale of your company 100% confidential and do not discuss it with your employees, clients, vendors and especially your competition. Your primary role is to stay focused on your company's performance during this complex process of preparing to sell and the sale process. With a competitive sale process and the proper expertise and experience on your team, you can look forward to achieving your life's goal.
- 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. This is one of the most important decisions you may make in your life. Contact Mark Hartsell, MBA, President of CEO Advisor, Inc. at (949) 629-2520, by mobile phone at (714) 697-3370 by email at MHartsell@CEOAdvisor.com or visit us at www.CEOAdvisor.com for more information.
- This is one of the most important decisions you may make in your life. contact Mark Hartsell, MBA, President of CEO Advisor, Inc. at (949) 629-2520, by mobile phone at (714) 697-3370 by email at MHartsell@CEOAdvisor.com or visit us at www.CEOAdvisor.com for more information.
FTC's Noncompete Ban Could Reshape the U.S. Workplace
Source: Yahoo Finance
The Federal Trade Commission’s decision this past week to outlaw nearly all noncompete agreements is a high-stakes shift in US law that could restructure the balance of power between businesses and workers. The rule means it will become easier for millions of US workers to leave their existing jobs to work for a competing company or start their own
Companies say it will become harder for them to protect trade secrets and confidential information.
A legal battle is already underway to decide whether this change will be allowed to take effect at the end of August or early September. "If the rule is permitted to stand, it will mark a significant departure from hundreds of years of jurisprudence and law in the US," Alston & Bird’s labor and employment law head Chris Marquardt told Yahoo Finance.
The rule applies to employees and independent contractors across industries, from doctors and engineers to fast-food workers and salespeople. With few exceptions, it also applies retroactively.
There are some exceptions. One is for noncompete employment agreements already reached with company CEOs, presidents, and senior business executives who have "policy making" authority and are paid more than $152,000 per year. But new agreements with those executives will not be permitted in the future."That's a really narrow exception to the rule … it is only going to apply to a handful of people, probably within large organizations," Marquardt said. Not all industries will be subject to the rule, however. Some banks, certain nonprofits such as healthcare providers, and stockyards will not have to comply. On Wall Street, that could mean traditional banks might be able to maintain more control over departing workers than, say, private equity firms or hedge funds. A different exception permitted by the FTC allows the use of noncompete agreements to protect a company’s interests in the event that the company is sold.
Bosses are not letting the rule go through without a fight. In the days following the FTC’s announcement, there were two lawsuits filed in Texas federal district court, including one by the US Chamber of Commerce. They argue that the FTC’s nonelected commissioners, who voted 3-2 down party lines to approve the rule, had no authority to strip workers and companies of contractual rights. Instead, they argue, only states are empowered to regulate such agreements between those parties.
Some states have banned them altogether. California, for example, outlawed noncompete agreements based on concerns that they prevent worker mobility and keep people from innovating and from leaving companies to start their own. Studies to determine whether that's true "are not fully baked," said Kate Perrelli, co-chair of Seyfarth’s national trade secrets, computer fraud, and noncompetes practice group.
The Chamber claims the FTC rule will force businesses and workers into pricey and ineffective court battles. Employers, it says, will sue to protect their confidential information, and highly skilled workers may claim the agency illegally usurped their right to bargain for increased compensation in exchange for noncompete agreements.
James Witz, co-chair of Littler’s unfair competition and trade secrets practice group, said his business clients have expressed concern that the rule will put their most valuable know-how at risk, along with their ability to protect their investment in employees. Witz’s co-chair Melissa McDonagh added that clients are also worried the rule is too ambiguous about whether alternative trade secret protections like nonsolicitation and nondisclosure agreements are legal if the FTC deemed them overbroad.
Those and other so-called restrictive covenants can dissuade workers from sharing secret company information with competitors. Perrelli said she would not be surprised if a judge temporarily blocks the rule from taking effect while the challenges play out in court. "And then it will make its way up and probably end up at the Supreme Court," Perrelli said.
Either way, employment attorney Roger Feicht said the rest of the business world needs to start rethinking their employment agreements. "Regardless of the size or sector, businesses must be ready to comply with the rule if it survives legal challenge,” he said.
Companies say it will become harder for them to protect trade secrets and confidential information.
A legal battle is already underway to decide whether this change will be allowed to take effect at the end of August or early September. "If the rule is permitted to stand, it will mark a significant departure from hundreds of years of jurisprudence and law in the US," Alston & Bird’s labor and employment law head Chris Marquardt told Yahoo Finance.
The rule applies to employees and independent contractors across industries, from doctors and engineers to fast-food workers and salespeople. With few exceptions, it also applies retroactively.
There are some exceptions. One is for noncompete employment agreements already reached with company CEOs, presidents, and senior business executives who have "policy making" authority and are paid more than $152,000 per year. But new agreements with those executives will not be permitted in the future."That's a really narrow exception to the rule … it is only going to apply to a handful of people, probably within large organizations," Marquardt said. Not all industries will be subject to the rule, however. Some banks, certain nonprofits such as healthcare providers, and stockyards will not have to comply. On Wall Street, that could mean traditional banks might be able to maintain more control over departing workers than, say, private equity firms or hedge funds. A different exception permitted by the FTC allows the use of noncompete agreements to protect a company’s interests in the event that the company is sold.
Bosses are not letting the rule go through without a fight. In the days following the FTC’s announcement, there were two lawsuits filed in Texas federal district court, including one by the US Chamber of Commerce. They argue that the FTC’s nonelected commissioners, who voted 3-2 down party lines to approve the rule, had no authority to strip workers and companies of contractual rights. Instead, they argue, only states are empowered to regulate such agreements between those parties.
Some states have banned them altogether. California, for example, outlawed noncompete agreements based on concerns that they prevent worker mobility and keep people from innovating and from leaving companies to start their own. Studies to determine whether that's true "are not fully baked," said Kate Perrelli, co-chair of Seyfarth’s national trade secrets, computer fraud, and noncompetes practice group.
The Chamber claims the FTC rule will force businesses and workers into pricey and ineffective court battles. Employers, it says, will sue to protect their confidential information, and highly skilled workers may claim the agency illegally usurped their right to bargain for increased compensation in exchange for noncompete agreements.
James Witz, co-chair of Littler’s unfair competition and trade secrets practice group, said his business clients have expressed concern that the rule will put their most valuable know-how at risk, along with their ability to protect their investment in employees. Witz’s co-chair Melissa McDonagh added that clients are also worried the rule is too ambiguous about whether alternative trade secret protections like nonsolicitation and nondisclosure agreements are legal if the FTC deemed them overbroad.
Those and other so-called restrictive covenants can dissuade workers from sharing secret company information with competitors. Perrelli said she would not be surprised if a judge temporarily blocks the rule from taking effect while the challenges play out in court. "And then it will make its way up and probably end up at the Supreme Court," Perrelli said.
Either way, employment attorney Roger Feicht said the rest of the business world needs to start rethinking their employment agreements. "Regardless of the size or sector, businesses must be ready to comply with the rule if it survives legal challenge,” he said.
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