There are five important things you need to know when preparing for an acquisition.
Do you know what they are?
Most business owners leave it to chance when they decide to have a liquidity event. The results speak for themselves.
Up to 90% of liquidity events fail. Of the “successful” liquidity events, most business owners fail again. Most buyers walk away with 50% to over 100% of the deal value in their pockets.
Who am I, and how do I know?
I started my eLearning business after graduating from my MBA program. I had no money, experience, or team. The truth is I had no business being in business.
My saving grace was my grit and determination, which had me welcome success.
With success, I received a 7-figure offer from a bright and experienced buyer.
I said “no” to the 7-figure offer and “yes” to mastering the art and science of a liquidity event. Then, two years later, I said “yes” to a 9-figure offer from a different buyer.
Today, I pay it forward. I help business owners through the 90-day Deep Wealth Experience. At the heart of the Deep Wealth Experience is the exact 9-step roadmap that I created for my 9-figure exit.
How did I go from saying “no” to a 7-figure offer and “yes” to a 9-figure deal?
The 9-step roadmap of preparation was my saving grace. Preparation is the key that unlocks deal certainty and enterprise value.
It’s the same 9-step roadmap that has you master both the art and science of a liquidity event.
On the science side, there are five key things you must do when preparing for an acquisition.
What are these five things that you must do?
Preparing For An Acquisition Has You Ensure That Your Business Runs Without You
Teamwork makes the dream work – Bang Gae
When preparing for an acquisition you must ensure that your business runs with you.
Your future buyer’s goal is to reduce risk at all costs. The lower the risk the higher your enterprise value.
When your business doesn’t run without you, your buyer will either walk away or lower the deal value. Neither scenario is great.
What can you do?
For starters, ensure you have a talented and skilled management team. Your
team must have the autonomy to make decisions and run the business.
All too often, even when a business has a management team, all things must run through the business owner. Avoid this fatal mistake at all costs.
With a talented and skilled management team you must do two other things.
First, ensure that Key Performance Indicators (KPIs) are in place for every position. From front line employees to the CEO, KPIs are in place and measured. There is full transparency throughout the entire business. Once KPIs are in place ensure that employees have the autonomy to make changes as needed.
Second, ensure that you document all systems and processes. Documentation saves time and money. When a question arises, people check the documentation first before calling a meeting.
KPIs and documentation ensure business continuity.
When your business runs without you achieve two things.
First, you increase both deal certainty and enterprise value. Second, you can avoid a dreaded earnout.
Do you know the one thing you must do before your start your liquidity event?
Why You Must Perform An Internal Due Diligence Audit Today So You Can Thrive Tomorrow
A winning effort begins with preparation – Joe Gibbs
When preparing for an acquisition, perform an internal audit before going to market.
Most business owners “show up” for a liquidity event without preparation. You sacrifice your health, money, and time when you’re not prepared. You’re running both the business and the liquidity event simultaneously.
Step four of the 9-step roadmap focuses on the mastery of due diligence.
It’s critical that you perform an internal audit when preparing for an acquisition. You’ll save your health, money, and time. You also set yourself up for success.
Every mistake made during your liquidity event threatens the deal and enterprise value.
How do you protect yourself?
First, identify the key employees who will help with the internal due diligence audit. Then, ensure each key employee is sworn to secrecy.
Next, find and hire an M&A lawyer. Yes, you hire an M&A lawyer before an investment banker.
Your M&A lawyer will help you and your key employees with the internal audit. As a result, you get it right the first time and, in the process, save time and money.
When performing your internal audit, you’re doing two important things:
- Finding and removing the skeletons in the closets
- Discovering the hidden Rembrandts in the attic and putting them out for display
An internal audit increases both deal certainty and enterprise value. Remember, your mission is to secure the best deal and not any deal.
Do you know the one area most business owners overlook to their detriment?
When Preparing For An Acquisition Ensure You Resolve All EBITDA Adjustments
Greatness is in the preparation – Jack Hyles
Resolve all EBITDA adjustments when preparing for an acquisition.
What are EBITDA adjustments?
You run your business in a manner that suits you and your lifestyle. As an example, you have seasons tickets to your favorite sports team. So you charge the expense to the business.
It makes no difference to the business whether you have seasons tickets.
Most business owners wait until the liquidity event to “normalize” profits. In the above scenario, you would remove the expense of the tickets. As a result, profits increase.
In a perfect world, your future buyer accepts all EBITDA adjustments. But, unfortunately, problems arise when your buyer doesn’t accept your EBITDA adjustments.
On the flip side, you own the building the business operates out of and charge a low level of rent. Your future buyer will ask that your EBITDA adjustments have an add back to reflect market rates.
What do you do?
Remove all non-necessary expenses years before your liquidity event. If some expenses are lower or non-existent, incur these expenses.
Show up to your liquidity event having as few EBITDA adjustments as possible.
You are not leaving it to the buyer’s discretion of what to accept or not. As a result, you maximize your enterprise value while minimizing risk.
The one downside is higher taxes in the years leading up to your liquidity event. Yes, higher taxes are a bitter pill to swallow. But the expense is a rounding error compared to what you’ll receive.
Do you know the one advisor you should hire today so you can profit tomorrow?
Why You Hire A Tax Advisor Today So You Can Profit (A Lot) Tomorrow
Smart sellers plan for taxes today so they can triumph tomorrow – Jeffrey Feldberg
When preparing for an acquisition, ensure that you hire a tax specialist well in advance.
Too many business owners make the fatal mistake of not considering taxes. When it comes to your liquidity event, it’s not how much you receive but how much you.
Why do you need to onboard a tax specialist as early as possible?
For starters, many tax strategies will only work if they’ve been in place for years. Setting up a tax instrument today will not qualify for savings if your closing is tomorrow.
Your tax advisor requires time to understand your specific situation. With understanding comes clarity. And with clarity comes effective tax strategies.
At the same time, your tax advisor will determine what type of sale is the most beneficial for you. For example, most liquidity events result in either an asset or stock sale.
You need to know which type of sale minimizes your taxes in advance.
Step three of the 9-step roadmap focuses on your Future Buyer. Part of your preparation is determining your deal points and no-fly zones. The type of sale you want will be one of your crucial deal points.
Too many business owners don’t prepare for taxes and suffer the consequences. Don’t become another statistic. Instead, hire a tax advisor as soon as you can when preparing for an acquisition.
Do you know one other overlooked area when preparing for an acquisition?
When Preparing For An Acquisition, Don’t Forget About Your Client Contracts
Success is where preparation and opportunity meet – Bobby Unser
When preparing for an acquisition, renew client contracts for as long as possible.
Let’s revisit step three of the 9-step roadmap, the Future Buyer.
In step three, you learn how to think like a buyer.
Do you know the one factor that determines the likelihood and value of your deal?
The power of preparation is your ability to find and remove skeletons in the closet.
Every mistake you make either lower enterprise value or tempts your buyer to walk.
Your future buyer knows what you did today and yesterday. Your future buyer wants to know what your business will do tomorrow and beyond.
To remove risk for your buyer, you must show and tell your future buyer why your clients remain clients.
Your mission is to have contracts with your clients for as long as possible. The longer, the better.
Speaking of better, it doesn’t get any better when you have exclusive contracts.
Long-term exclusive contracts reduce risk to the buyer and increase certainty. For example, in my eLearning company, we had ten-year exclusive contracts.
When we prepared for an acquisition, we began renewing our client contracts. By the time our buyer arrived on the scene, our agreements had anywhere from six to nine years remaining.
Everybody won. Both the clients and buyer had certainty.
Business owners often overlook client contracts when preparing for an acquisition. The strategies of preparation are the same as the ones for growth.
Liquidity event or not, renewing contracts early is an excellent best practice.
Look after your client contracts today so you can prosper tomorrow.
When preparing for an acquisition, know that the odds are against you. Your future buyer is smart, experienced, and counting on you making mistakes.
Every mistake you make lowers both deal certainty and enterprise value. Unfortunately, neither scenario is a good one.
The great news is that there are five strategies to master when preparing for an acquisition. Moreover, these five preparation strategies are often the difference between success and failure.
My journey began with me saying “no” to a 7-figure offer and “yes” to mastering the art and science of preparation. Then, while running my business full time, I dove into the world of mergers and acquisitions.
After creating the 9-step roadmap, I said “yes,” two years later, to a 9-figure offer.
Today, I pay it forward and help business owners master the 90-day Deep Wealth Experience. The goal of the 9-step roadmap and Deep Wealth Experience has you do two things.
First, you create a blueprint to maximize the value of your business. The strategies of preparation are the same for growth.
Second, you develop the certainty that you will capture the maximum enterprise value.
As you think about preparing for an acquisition, where do you start, and what do you do?
Begin with the first strategy until mastered. Once done, move on to the next strategy until you master all five.
You can do it. I know you can.
Here’s to you and your success!
Your Biggest Raving Fan,