As I worked with hundreds of businesses as they look at preparing their firms for sale, I developed the acronym FEISTY. To succeed you want your firm to be:
- Financially stable
- Easy to understand
- Industry in favor
- Size is good
- Timing is right
- You can leave the business without blowing it up
You can leave the business without blowing it up
One of the characteristics of successful businesses is that the founder has a good understanding and control of the key drivers of value: purchasing, operations, sales, finance. Even as the business grows to support a large sales team, the owner might still be the relationship manager for key accounts. He might make essential operational decisions like minimum order quantities, inventory levels, and new product release schedules. It is because he has a strong, sometimes intuitive, knowledge of these things that margins are higher, employees happier, and the business more successful than those of competitors.
But this driver of success also comes with a price. A buyer will ask how the business will run if the founder leaves. Will key suppliers lose their connection? Will key accounts consider other firms or renegotiate their contract terms? In short, if the founder leaves the business, will it blow up?
If buyers perceive there is a material risk to business revenues from the owner leaving the business, they may incorporate risk sharing measures into the purchase price, such as earnouts. Or they may decide not to bid on the company at all.
How does a prospective seller address these concerns? As always, by reducing the perceived risk to the buyer. This could take a number of forms, depending on the nature of the business.
Handing off key accounts to other members of the sales team.
Perhaps the biggest risk that concerns the buyer is decreased revenue due to key accounts leaving. You can expect that they will ask for a report listing revenue by customer by product for the last three years. They will use this to focus on key accounts, and then assess the likelihood of those accounts leaving. If the primary contact with key accounts is with the sales team, not with the owner, this concern is much lower.
Replacing oneself through a COO that is groomed to take over when you leave.
If you have two to three years of time, perhaps the most effective answer to the question of how the business will be run is to hire a COO that will take over when you leave. For this to work, the COO needs to have the right skill set, and has to be appropriately compensated, which might well include stock options or some other compensation tied to the company’s’ performance. It’s also something that can’t be rushed. The benefit of having a COO on board isn’t great if he was hired just 6 months ago.
Recording, Routinizing, and Training The Essential Seven business processes.
In every business there are about half a dozen things that the company needs to do well to compete. Let’s call these The Essential Seven. Get these right, and the other parts of the business tend to take care of themselves. Get these wrong, and business is just a headache of constantly putting out fires.
In a founder led business, it’s quite common for The Essential Seven to be done well, and for them to be done intuitively by the leadership team. To ensure that excellence in execution continues after key leaders depart, it’s important to actually write down the Essential Seven, to routinize their execution, and to develop materials to train people to do them when others leave.
Implementing a robust management accounting system.
Once you have The Essential Seven processes being well executed in the firm, you want to implement a management accounting system that allows you to track performance against plan.
This can be very simple. In some businesses a one-page spreadsheet prepared by an assistant and reviewed monthly will do. Other firms tie management accounting into their accounting systems and are able to generate more complex reports in real time delivered to a dashboard on the CEO’s computer. The key point is to track performance against plan for The Essential Seven.
Note that The Essential Seven will be management accounting targets. These can also be financial accounting targets, like gross profit margin. But oftentimes they are things like monthly customer churn, or equipment utilization: things that drive financial results, but are not themselves drawn from financial statements.
Being willing to stay on at the business for two years after the sale as a consultant.
When it is all said and done, perhaps the single best insurance against revenue falling off when the business is sold, is for the CEO to agree to stay on for a while to help with the handoff. That way risks don’t all need to be identified and mitigated before the sale, but can be addressed as they appear during the 12-24 month period after the transaction closes.
Perhaps more than anything else, a willingness to help the buyer succeed in his new business is the best risk mitigation tool a seller can offer a buyer. Not every seller is able to stay with the business, but if you can, you should consider it if you want to get the highest price, best terms, and highest likelihood of close.