Go to the Light – Start Exit Planning Now

“I don’t know where I’m going, but I’m making good time.” – Quote from a former client.

I just completed a series of discussions with some mature business owners on potential exits from their businesses. As usual, I tend to take away common themes and I thought of this quote from a former client. He used it to describe people he had encountered who were so absorbed in what they were doing, they thought they were making progress.

Through his eyes, he thought they were lost. The latter tended to describe these owners. Each had a valid reason to address the need for exit planning – age, paradigm changes, timing – these were all present and culprits in raising the very thorny question as to “What’s next?” There is an abundance of tools to help an owner through the exit process, but getting started – now there’s the rub.

I hear loads of excuses as to reasons to delay. Many who advise in this space have what are perceived of as ulterior motives – money managers who want owners to sell so they can manage their liquid assets, life insurance sales people who want to make sure owners and their families have the annuity or insurance to cover them as they go on their journey, etc. Unfortunately, while well intended, they give the owner an out by raising questions regarding true intent. I have had some success in this space because I do not care what the result is, I just want to make sure that an owner has all the facts before they make their decision. But I will admit, it is a tough battle.

Having said that, I believe the major reasons for delay are psychological. Fear is often downplayed and yet I think it is one root cause of most owners becoming part of the majority who either have no exit plan or start to plan too late. In his 2000 Year Old Man albums, Mel Brooks cited fear as the great motivator for everything from transportation to the development of the handshake and dancing. One problem for the owner is often the absence of someone they can confide in to discuss their fears. Often seen as the patriarch or matriarch, showing fear is often perceived by them as a sign of weakness. So, they seek solace in finding a solution. This keeps them busy and avoids the need to discuss the obvious – starting an exit plan.

The absence of a “life” after the business is gone is also an issue. Often left with little time to develop hobbies or other interests, the lack of something to go to leads the owner to complacency about staying where they are. Making the business stronger is a great defense and considered “progress” perhaps ignoring at times risks like the paradigm shift which may be too great to overcome.

So, to owners, I say start the process now. Have others tell you it is too early, but I never think it is. My advice has always been not to get into a business without knowing how you will get out. Also, find an advisor you can trust. They do not have to be skilled in the exit process, but they have to be capable of listening and telling you things you may not want to hear. With some guidance, you will know where you are going and have a successful completion to your journey.

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Seller’s Due Diligence – An Emerging Tool in the Sales Process

“A lack of transparency results in distrust and a deep sense of insecurity” – Dalai Lama

I hope this quote doesn’t set too serious a tone for this blog, but much like the probable impact of the most recent election, change is in the air. Over the past couple of years, we have seen a concept emerge which, as one of my favorite clients would say, is “counter-intuitive.” That concept is referred to as seller due diligence (also at times referred to as a Quality of Earnings report) and it is increasing in popularity in mid -market M&A transactions. In the past, we were often approached by investment bankers or companies considering a sale to perform either an audit or a review. But more and more, that request is being modified to incorporate a seller’s due diligence report. But what is it and how does it work? First a little primer.

Accountants are guided by professional standards as to how and what they can say in a report. When it comes to financial statements, the most common accountants’ reports are called audits or reviews. Now the accountants out there will beat me up a bit for my layman’s description, but a review says nothing has come to the accountant’s attention that leads them to believe the financials are not fairly stated. This is often referred to as “negative assurance.” (We are accountants and not literary geniuses.) In an audit, which is more expensive and requires a lot more work, the accountant states in their opinion the financial statements are fairly stated. So in both cases, the focus is basically on the fair statement of the financials and those horribly worded phrases called footnotes. It is more that the numbers appear OK versus what do they really say.

In a due diligence report, there is more color as to the why. For example, an audit or review will show that margins this year may be lower than last year but there is no explanation as to why. A due diligence report would cover this as well as trends, details on balance sheet components and other analysis of the business. So right now, you might have two questions:

  1. Why not get a due diligence report vs. an audit or review?
  2. Why show a potential buyer your weaknesses by providing such a report? Keep in mind, this type of report highlights both the good and the bad.

To answer the first question, the audit and review both provide some assurance that the numbers are fairly stated. There is no such assurance (even limited as in the case of a review) in a report on due diligence. More and more, we are being asked to do both a review and a sellers’ due diligence report.

As to the second point, most transaction professionals will properly advise their clients that big checks are not written by buyers without a due diligence report, so why not make it easier for a potential buyer to understand the inner workings of a target. Being prepared on your own terms for this process is becoming a “best practice” for companies seeking substantial investment or a full exit.

So if you are contemplating this type of transaction, consider a seller due diligence report. I just completed a deal and am convinced its use helped to both identify a serious buyer more quickly and significantly expedite the whole transaction process.

E’commerce – Are You A Tech or Consumer Products Company?

“Is it live or is it Memorex?” – from a classic commercial aired in the 1970’s

We continue to see a proliferation of e ‘commerce startup companies that believe they are part of what is broadly referred to as the tech space.  When describing themselves, they tend to focus on their “secret sauce”; perhaps an algorithm that uses big data to more efficiently determine either buying habits or needs that drive demand to “their marketplace.” A good friend of ours had a saying that “education is wasted on the young.” No truer words were ever spoken about this space. With the emphasis on tools, techniques and the manipulation of data, one can understand the case for saying your e ‘commerce business is a tech company. Many conversations seem to focus on having the better mousetrap versus satisfying customer needs. This quandary brought to mind the classic commercial noted above. So is e ‘commerce tech or consumer products? Let me offer some observations from my experience:

First and foremost, an e ‘commerce model is at its heart a consumer products model. That model has many components including the ever daunting logistics of dealing with consumers and products. More than any other model, your success will be determined by your execution. It is important to “go to school” on this aspect of your marketplace and learn from others who have gone before you. While the tools may enable you to overcome some of the barriers to success, it is the consumer and their needs that will determine the ultimate success of your business.

Next, like it or not this model is more administratively complex so plan for a higher level of administrative costs. Please do not try to compare your operational needs with those of tech companies such as ones offering Software As A Service.  Logistics, inventory and accounting will take a great deal more time and money and having someone on your team has who has relevant experience is critical.

Product is hard and people are fussy. You need to make the hard decisions on balancing returns, credits and complaints with good business sense. Keep in mind that today, solid quality customer service is table stakes in this game. We can thank the likes of Zappos and Amazon for setting the height on that bar.

Do not get hung up on being all things to all people. Products come in a number of shapes, sizes and colors. The standard multiplier effect can turn a simple business into an inventory nightmare. Work on SKU discipline from the beginning and take quick action if your predictive model is not working.

Finally, nexus is not your friend or a cool new car model. It means you are doing business in another state giving you the opportunity to have the privilege of paying both sales and income taxes in a number of jurisdictions. Carefully plan your “expansion” with the right professionals.

The good news is there are plenty of experienced people in the consumer products space. As the saying goes “everything old is new again.” Your technology enabled  consumer products company can be a success with the right team and approach.

For Mature Companies Only – Part One

Commander #1:  We’ve analyzed their attack, sir, and there is a danger.  ShouldStar Wars I have your ship standing by?

Grand Moff Tarkin:  Evacuate?  In our moment of triumph?  I think you overestimate their chances.

From the movie, Star Wars

This is the first of a two-part blog – it focuses on why mature companies should be concerned about startups playing in their space – “disruptive technologies” as it is often called.  The second part (what to do about it) will be covered in my next blog.

I had the chance to spend some time on this topic at our Client CPE event late last year.  I see the issue arise constantly with my more mature clients – yet, some seem oblivious to it much like Tarkin felt about the Death Star.  So, let me provide you with a few ideas to whet your appetite:

  1. This is not just technology, so you have to wake up.  It is not AOL buying “then media giant” TimeWarner in the dot com boom.  This is Chobani, figuring out a way to market a food staple in a different fashion and in 5 short years, becoming the industry leader.
  2. The age of innovation is here.  Remember, startups seek to be a disruptive force.  They focus on changing customer behavior in big markets, especially basic products.  Few industries or businesses are immune – especially if your product involves a recurring purchasing pattern in a large market.
  3. Competition may not be coming from the obvious place – your industry.  Do you think Borders or Barnes and Noble were focused on Amazon as competition when they sought to expand in the 90’s?  This disruptive approach seems logical – a new approach to a market coming from someone not blinded by the way things are today.
  4. Disruptive technologists focus on challenging major assumptions.  Many of us grew up in an era where floating your resume was a risky proposition – your boss might find out and fire you.  Today, we have the equivalent of our CV’s posted on LinkedIn and we can now look to hire someone who is currently employed versus searching through resumes of those looking for their next opportunity.  Our bosses are not only aware of it – they encourage it.  This is the famous “paradigm shift.”
  5. Finally, there is money… lots of money… in the billions sitting on the sidelines waiting to fund the next disruptive force.  Startup entrepreneurs are working every day to study their markets and refine their pitch to investors – much like mature owners honed their sales pitch in the early days of their careers.  And, they do so with the same level of intensity and tenaciousness their predecessors had when they formed their business.

All of this sounds a bit ominous, but it doesn’t have to be.  The mature business has a number of real advantages and with an approach that takes into consideration this changing landscape, they can retain their position of leadership and continue to grow and prosper.  But, you will need to read my next blog to find out how.