By Don Van Winkle
This is about your business and the negative effects of delayed “fixes.” Several years ago my wife and I put our home up for sale. Thinking it would go a long way towards obtaining our desired selling price we embarked on a minor fix up/clean up campaign. You know the routine: new front door, paint, carpet, fence repair, and reattaching a gutter that had come loose six months before. I hired repairmen to do some of the work and performed a few of the projects myself. The house looked great and as we surveyed how good everything looked my wife remarked, “Why didn’t we do this two years ago so we could have enjoyed it?” Her point was solid. The refinements and improvements along with reattaching the gutter gave our old house a new look: cleaner, well kept, cared for, and ultimately worth the selling price we were asking. The untended gutter, however proved to be a problem later when the inspection uncovered possible damage to the foundation.
This easy but neglected repair had allowed un-channeled water to runoff around my home’s foundation. “Foundation compromises are big,” the home inspector advised, and he suspected larger problems would be found in the crawl space. The problem appeared daunting and I kicked myself for procrastinating and neglecting it. Ouch! In the end, and fortunately for me, no structural compromise was found and the sale of my old home was completed and the Buyer was very happy.
Why did I neglect or postpone a straightforward repair for as long as I did? Unfortunately, I had become blind to the unsightly hanging gutter, to the disheveled appearance and the potential foundation problems until I decided to sell the house. How many of us have done that with problem issues in our business?
I am not handy around the house. I enjoy some of the work but “house handy” is not one of my strengths. I am “handy,” however, in terms of maintaining my business and making the requisite repairs, refinements and building for the future. This is natural and fulfilling for me. When I sold my family business several years ago I was so anxious to exit an industry that I had no passion for as well as mitigate family shareholder disputes that I was “fixing the gutters” all the time in preparation for an eventual sale. Ultimately, the attention I focused on “gutter issues” proved beneficial as we sold the Company at an attractive price and I returned to CO.
It is the simple fixes, those that are easiest to put off or ignore, that can undermine the value of your company when left untended. But when addressed, those minor fixes/refinements and the efforts made to posture your business to be an attractive acquisition will yield benefits today as well as added multiples when you sell your Company. Don’t wait! The discipline and corporate hygiene that results will drive current cash flow, corporate maturity and efficiencies. It does not matter if your projected selling date is 6 months or 6 years out: Prepare your business to be an attractive acquisition now. You will look at your business differently. Within the Vistage organization the members routinely ask one another, “Are you working in your Business or on your business?” Fixing gutters—tending to the seemingly minor concerns —is the process of working on your business.
At SDR Ventures, along with “gutter “ issues, we also advise the CEOs we work with to keep an unwavering eye on three key areas of their businesses:
1. Valuation (am I disciplined to focus on my value drivers and am I adding to the value of my Company? )
2. Capital Access (is my Company more attractive to capital providers or less attractive? Are there capital alternatives? )
3. Transition (what is my plan in terms of management succession, a future sale, management buyout, partial recapitalization?)
10 Steps That Will Drive Cash Flow and Shareholder Value Today AND Prepare Your Business To Be An Attractive Acquisition:
1. Clean up books and records. Make them tight and due diligence relevant and accessible. Document processes, contracts, patents. Keep them in a centralized /accessible place.
2. Move beyond the small business/entrepreneurial tendency to expense or write off personal expenses through the Company (quit filling up your kid’s gas tank). Reconstituting personal expenses run through your business is typically discounted in a Buyer’s analysis and the IRS complications are obvious. Don’t give your non-family employees a reason to take advantage of situations based on your behaviors.
3. Diversify and evaluate Revenues and Suppliers. Document the relationships thoroughly. Identify alternative suppliers, new markets, complimentary product lines, subcontracted manufacturing options, etc.
4. Recruit a 3-person objective and dynamic BOD. Authorize them to hold you accountable. Agree that you will disagree and demonstrate that you as CEO/Founder appreciate the insights of others and are open to constructive counsel and disagreement. Assign them the responsibility of representing the interests of your heirs.
5. Run your business like a publicly held firm. Be judicious in having and providing audited financials, quarterly summaries to your bank, accountability to a Board and, as appropriate, transparency.
6. Identify possible acquirers. If they are public, delve into their operating metrics. Track your operating metrics quarterly to the publicly held information. Ask why they track that metric? Become conversant in industry terms, metrics and trends. Become curious about where your industry is going, how it is changing and where the SWOT issues reside.
7. Think “Transferable Value.” Stay focused on creating an entity that will transfer to others and be valuable. Ask the question on all capital expenditures, new executive hires, contractual arrangements, etc. “Will this ultimately enhance or distract from my firm’s transferable value?.”
8. Groom your Senior Management Team. Investigate “appreciation rights” or “phantom stock options” as possible incentives in the event you do elect to sell and they need to be brought into the process. Give your key people the opportunity to drive value and, as appropriate, transition with the acquiring firm.
9. Seek out class legal, accounting, insurance and financing/investment banking relationships.. Be proactive vs. reactive. Chart a course with your Bank to find ways to eliminate or otherwise minimize your personal liability on bank debt. Your firm’s professional demeanor is in part measured by the quality of your professional advisors.
10. Entertain an objective professional 3rd Party valuation. Identify the real value drivers for your firm and use that information to chart your strategic direction for improving the transferable value of your Company.
The process of “fixing your gutters”—preparing your business for acquisition—is critical and you cannot begin too soon. Not only will you derive benefits today through ultimately higher multiples on greater cash flow in the selling process, you will also enjoy the gratification that comes from making your business better than it was before. Your signature is proudly on your firm.
If you would like an expanded checklist of the 10 Steps listed above with real life examples, please send your name, business name, address and phone in an email to me, Don Van Winkle. Email Don.