M&A issues

What No One Talks About in M&A: Culture Integration and How to Deal With It

We’ve talked about M&A before—the pros, the cons, where deals can go off the rails—but now let’s talk about what happens after the deal is closed. What comes next and what M&A issues come up?

Once your deal closes and the dust settles, it’s time for the real work to begin: integration. With any luck, you’ve already done some focused thinking about integrating the two firms. You’ve looked at M&A issues such as aligning billing systems, benefits plans, compensation strategies, etc. and you have strategies for each.

But what about culture? What’s your strategy for culture integration? If your reaction here is anything like, “A strategy for culture integration? Oh, the department heads will handle all of that,” you will probably want to keep reading.

Love and M&A Integration

M&A deals that work well are actually a lot like happy marriages. Yes, there will be some upfront work to do on both sides. But once you’ve skipped down the aisle after saying “I do,” you begin a new phase with its own set of challenges. This is the work of meshing together two lives into a cohesive, long term, happy union.

An M&A transaction can be a bit like courtship (ah, and you thought chivalry was dead): You date around for a bit, decide that you’ve found “the one,” get engaged, and then, you throw a heckuva wedding. And when you wake up after the honeymoon, reality sinks in…the thoughts start flying.

  • Thought Bubble #1: For better or for worse…wait, you didn’t tell me about that billing issue!
  • Thought Bubble #2: For richer or for poorer…what happened to the sales pipeline we reviewed?
  • Thought Bubble #3: ‘Til death do us part…why are all the employees leaving?

And as with any new marriage, there are logistical M&A issues that no one really considers before they sign on the dotted line:

  • How are we going to celebrate holidays? (Is everyone onboard and motivated by how we recognize and celebrate success?)
  • How should we handle joint finances? (Do both parts of this new mixed organization share the same fiscal priorities?)
  • How often do I have to see your family and friends? (What’s our customer relationship strategy?)

I’m not suggesting that the key to successful M&A integration is scheduling time for employees to do a bunch of trust falls and escape room activities. What I’m suggesting is that you consider how culture impacts any business transaction in the same way you consider how to maximize earning potential for shareholders.

Lessons from a Culture Integration Fail

Early on in my career, I worked for a multi-billion dollar firm. With much fanfare, we acquired a smaller firm that was highly respected and well-known in the industry for its creativity in “getting things done” for customers.

Within a year of acquiring the firm, the larger company had overlayed all of their big company processes and requirements onto the smaller firm—squashing the very flexibility and creativity for which they had been known (and for which we had acquired them!). Unsurprisingly, half of the employees were gone within 2 years…as were the customers.

While it’s easy to see the internal (e.g., from the employees’ perspective) impact of cultural M&A issues, we don’t often think about the external (e.g., from the customers’ perspective) impact. However, culture certainly does impact customer experience and this is especially true after a merger. For a case study in how NOT to complete a successful integration, check out the Starwood / Marriott merger. Yikes!

The hard lesson learned here: The reality is that human challenges are often harder to smooth over than system challenges. If you don’t anticipate the cultural challenges, it doesn’t matter how prepared you are on the business side. So, how do savvy M&A dealmakers address the human side?

1. Start early.

By early, I mean during due diligence. Yes, cultural fit is a deal maker or breaker! The very things that make an acquisition target attractive may also be the most fundamental to their culture…and the most different from your organization’s current culture.

Make sure that someone on your team is putting together a culture strategy prior to the close of the transaction. At a minimum, this strategy should include:

  • Key metrics for competitive landscape, demographic, and market trends to discuss with leadership.
  • Outlines for any necessary cultural change initiatives (Tip: stick with no more than 2 major change initiatives during the first year).
  • Ideas for creating employee buy-in and a sense of community.

2. Know thyself.

What is your vision for the joint culture? What changes after the deal? What stays the same?

Keep in mind that this doesn’t have to be all or nothing. There are no rules that say that everyone must conform to a single culture or that culture is immutable. In fact, allowing room for the culture to adapt is crucial for long-term viability.

Why are these firms merging? What is valued in each and how can we take the best pieces of our cultures and bring them together respectfully?

3. Focus on building credibility.

In most cases, there is a fairly steep learning curve that happens after a merger. Like moving from dating to marriage, we need to adapt to daily life and its new rhythms. How can we put in place mechanisms to better understand each other? How do we establish trust?

Remember that credibility is earned, not given. When a large firm acquires a smaller firm (especially if the smaller firm was once a competitor), there can be some apprehension. It’s important to warn employees of the large firm that taking a victory lap is not appropriate.

Past is not prologue. So the acquiring firm should look to create the right environment to nurture a bright future and bring the new acquisition into the fold. This will require transparency in sharing plans, following through, listening when challenges are raised, and addressing the concerns of everyone.

This is a key building block for #4.

4. Communicate.

Communicate early and often. Key leadership (ideally those with credibility) should share the aspirations for the combined entity in a clear, straightforward manner and acknowledge that integration won’t be easy. When talking about challenges, be specific. Show everyone that you are committed to making this work and addressing all M&A issues together.

Employees need to know what’s changing, why, when, and what will happen, both in the overall big picture, as well as on a day-to-day basis. They need to understand what the merger means for them and what the new expectations will be.

Communicating is about way more than printing off new motivational posters with the company’s core values and firing off a few “rah-rah” emails. (GAH!!) Cultural integration requires a change management focus, leadership commitment, transparency, a willingness to listen (and integrate) feedback, and continued communication via as many channels as possible…even when you think you’re done, you’re not. Keep going. Like a marriage, you’re in this for the long haul.

Preparing for a big M&A deal in 2019? Check out our guide for working with a Communications Specialist.

The team at Audacia Strategies is ready to stand shoulder-to-shoulder with you as you make a smooth integration, both in terms of systems and culture. Contact us to learn more about how we can enable your transformation and help you avoid serious M&A issues!

Photo credit: rawpixel.com

business goals

3 Big Investments We’re Doubling-Down On in 2019

January is a good month to take stock—or so my Marie Kondo-loving friends tell me. It really is a great time in the business cycle to think back over the past year, to consider what worked and what could have gone better, and to make business goals for the year ahead.

Here at Audacia Strategies, I’m feeling so much clarity around what types of organizations we serve and where we can add the most value for our clients. Now we can focus on thinking strategically about how to double-down on our biggest investments and accomplishments to bring even more value for our clients going forward.

Here’s a small window into our business goals for the coming year:

The Big 3 for Audacia in 2018

1. We became certified as a women-owned enterprise (WBE): It took the better part of the year to get the paperwork completed, filed, and to receive our certifications (one of our major 2018 business goals). But we are now officially a Woman-Owned Small Business or WOSB (in the eyes of the Federal Government). We are also nationally certified by the Women’s Business Enterprise National Council (WBENC) and received our CBE certification in D.C. We’ll receive additional state-level certifications soon.

Big InvestmentsThese certifications position Audacia to better support clients’ supplier diversity objectives, engage directly with federal, state, and local government initiatives, and support larger-scale projects with diverse financing requirements. Being woman-owned certified also gives us the opportunity to reach a broader audience. We are proud to participate in programs that support and encourage women to own businesses in industries where women have been historically underrepresented.

2. We helped our clients win new business: This is some of the most rewarding and satisfying work we do at Audacia. When our hard work and collaboration results in clients winning new business, there’s no doubt we’re delivering at a high level. This kind of feedback reaffirms that our systems and procedures are working.

For example:

  • We helped an EdTech client land 8 new clients in 9 months by reviewing the market and competitive landscape to develop their product launch strategy, message development, and activate an ongoing marketing strategy.
  • We helped a growing government contractor develop a message architecture and segmented stakeholder messaging strategy to leverage their government expertise to expand into adjacent commercial markets. As a result, they have already inked a strategic alignment contract with a major commercial provider in their space and are in discussions with others.
  • We prepared an established government contractor to attend their first investor conference in their 15-year history. Our team worked to develop investor messaging, (i.e., strategic rationale, value proposition, and investment case development) and an investor presentation for the firm. We trained leaders in Reg FD requirements and presentation delivery. And we equipped key executives to handle “live fire” investor Q&A.

3. We helped our clients get recognized for their innovation: Bringing an innovative product or service to market carries certain inherent risks. But having a strong team behind you to brainstorm ideas, challenge assumptions, and provide an additional perspective can mitigate these risks.

For example:

  • We developed the messaging strategy for an innovative nonprofit in the higher education space. Our client was highlighted as a key innovator in higher education by the U.S. Department of Education.
  • We supported the successful CEO transition of a 55-year old government contractor and the strategy to support the subsequent transformational realignment to more closely align the business with its strategic markets. The firm has achieved higher internal employee engagement and is ready to bring their refreshed message to current and new clients.

Looking Ahead to Our 2019 Business Goals

1. We will forge ahead with additional state-level certifications: This is key as Audacia looks to better support our clients as they, in turn, support their clients. Think: transformational systems implementations. This is not a new business area for us, but these certifications provide a new way for us to enable successful business transformations at all levels.

2. We will continue to support our clients biggest transformational moments/goals/ideas: In 2018 we had the opportunity to support c-suite transitions, mergers and acquisitions, new product launches, and new investor relations strategies. We also expanded and cultivated our network of business partnerships, so that in working with Audacia, our clients gain access to even more strategic resources. We’re going to continue that work in 2019 as we look to help even more companies get the biggest bang for their transformation buck.

3. We will show leadership in promoting corporate responsibility and effective crisis management: Now more than ever, our analyses show investors and stakeholders care about demonstrated success in corporate responsibility. It’s often difficult for firms to evaluate their own cultures and even more difficult to implement change without an outsider’s perspective. If this isn’t on the radar of your leadership, let’s get going and get you on track! This is of special interest for organizations eyeing mergers and acquisitions. Making a strong case in terms of the numbers, may not be enough for investors these days. We’re staying ahead of the game, bringing new service offerings in this area in 2019.

How are you looking to grow and transform in the new year? What big accomplishments and investments from 2018 are you doubling-down on? What business goals do you hope to achieve in 2019?

If Audacia can support you in your business goals, let’s find time to talk about your needs. Your first step is scheduling a 30-minute introductory call with yours truly. Let’s make your 2019 truly transformational!

Photo credit: Cathy Yeulet

reading

Reading, Listening, and Watching—What I’m Loving Right Now

It’s always fun to share and hear from others what they’re reading, listening, and watching. But in the frenzy of launching new products, bringing on new staff, and all the other things that go into growing our businesses, who has the time, right?

Fortunately, as we wrap up loose ends on 2018 and (hopefully) find ourselves with a bit of downtime, we have the headspace to expand our minds. I’ve been gathering the resources for my reading, listening, and watching pleasure on flights and quiet evenings by the fire. As you do the same, I thought you’d find this list beneficial.

Here’s what I’m reaching for in these moments of productive downtime:

Reading

True Story: My husband calls my Kindle my “boyfriend” because it’s always with me—when I travel, when I treat myself to a quiet lunch, and before bed. It’s my go-to. But the truth is a few years back, I noticed my attention span was dramatically shorter. After a bit of introspection, I found that I had stopped reading long-form materials in favor of reading email newsletters, social media, and skimming news articles. I made a commitment to read more and it has brought such joy into my life. I read across the spectrum—fiction, non-fiction, memoirs, cookbooks…you name it, I’ll read it. What should be on my list for 2019?

reading listening watchingHere are some of my favorite books from 2018 (plus, my favorite daily must reads):

1. Bad Blood

Nope, Bad Blood is not the lyrics to that TSwift earworm (you’re welcome!), but a real-life thriller that charts the rise and collapse of Theranos, the multibillion-dollar biotech startup. Wrapped in a page-turning package, there are many lessons to be learned about the importance of leadership, the role of the Board of Directors in governance, and the importance of a moral compass in maintaining the soul of a company as we tread more and more deeply into technology.

And you don’t have to take my word for it. Bill Gates recommends Bad Blood too.

2. The Everything Store

I was a bit “late to the party” in reading this book. It was initially published in 2013. However, it remains an insightful look into how the Goliath, better known as Amazon, came to be. More importantly, it’s a incisive look into the mind of Jeff Bezos—what makes him tick, his management style, and how he has shaped Amazon’s culture and strategy. In a time when we spend a lot of time and spill a lot of ink thinking about Amazon’s unprecedented growth, The Everything Store provides an interesting perspective. I found the book incredibly eye-opening as an Amazon customer, a global citizen, and as a business owner.

3. The Hate U Give

“What’s the point of having a voice if you’re gonna be silent in those moments you shouldn’t be?” — The Hate U Give

Fun fact: My mom spent over 20 years as a children’s librarian and is an absolutely voracious reader, so when she recommends a book, I listen. The Hate U Give isn’t a kids’ book though. It will speak to your teenagers, but it should be required reading for all of us. Profoundly moving, The Hate U Give handles gun violence, income inequality, a history of segregation, activism, and police brutality, while also managing to build in relatable, real-life characters and cozy, quippy family banter. Fans of the signature banter of Aaron Sorkin (see also: The West Wing) will appreciate the crisp dialog. I experienced a full range of emotions while reading this book. It made me think about the role of community, government policies, and how we can all do more to build safe communities. (Full disclosure: I haven’t seen the movie that came out this fall. But, even if you have seen the movie, I strongly recommend reading the book.)

Daily reading: (Note: I am not affiliated with any of the following website or brands, nor am I a sponsor. I’m just a fan.)

  • Axios Newsletters: Bullet points, easy to read, well-researched and cited. A great way to hit the morning headlines from major publications punctuated with outstanding commentary and  insight (subscribe here).

I read these almost every day:

  • Axios AM
  • Axios Edge
  • Pro Rata
  • Axios Sneak Peek (Sunday)

Listening

I’m a HUGE podcast fan. I listen to podcasts almost exclusively while I run and while I’m walking around D.C. There is just something about a great story—fiction or non-fiction. Here are a few of my favorites. What are you listening to these days?

1. The Pitch

If you like Shark Tank, you’ll enjoy The Pitch.

The Pitch puts you inside the room of a live pitch and then shares the behind-the-scenes details of what folks “really” thought and what happens after the pitch. It’s great for entrepreneurs, anyone working with entrepreneurs, or anyone responsible for selling anything… including themselves.

2. Planet Money

Planet Money is an NPR podcast that helps to make sense of the complexities of economics and the economy. They often use creative examples and in-depth reporting. For example, they made a t-shirt and traced the supply chain around the world, launched a satellite (one of my favorite episodes—totally fed my space geek side), and built an algorithmic trading Twitter bot.

3. How I Built This

Another NPR show, How I Built This has gained legions of fans and I’m one of them. You’ll hear straight from the founders how their companies came to be…and sometimes almost didn’t! AirBnB, Burton Snowboards, Whole Foods, StitchFix, Lyft, DryBar—you’ll hear from companies that we interact with or read about regularly. And you’ll hear about the genesis of the idea for the company, how they grew, got funded, what worked and what *almost* pulled them under.

Audio Book:

The Year of Yes: How to Dance It Out, Stand in the Sun, and Be Your Own Person

Stay with me here.

Yes, it has a very self-helpy title. It’s Okay. I promise. This is a super funny book. Don’t write it off. And…okay, technically, it is a book. But I listened to the audio version and I recommend that you do the same. Shonda Rhimes (the creator, head writer and executive producer—of Grey’s Anatomy, Private Practice, Scandal, How to Get Away with Murder, and several other shows) tells this compelling and laugh-out-loud funny story of how she stopped saying “no” to opportunities, started saying “yes,” and the changes that resulted. If you’ve ever felt like you needed a bit more “why not?” in your life, you will appreciate her story. And, if you have a commute this book will make your time on the road fly by.

Watching

Admittedly, I’m not great with television. I’ve watched my fair share of shows, but I’m not a good “binger” of television and I’m always behind on the latest and greatest. (Confession: I’ve never seen Breaking Bad…I think that might be a cultural crime at this point). But, I do have a few recommendations for shows that I found compelling this year. What did I miss?

1. Panic: The untold story of the 2008 financial crisis

With stellar reporting from the Vice team for HBO, this documentary tracks the financial crisis that took hold during the Fall of 2008 and provides real-talk about what caused the crisis and what happened behind the scenes as policy makers, legislators, and corporate titans attempted to avoid a global financial collapse. The creators managed to interview all of the key players in the 2008 financial crisis: Bernake, Paulson, Obama, Bush (W.), Dimon, Buffett, and many more. It’s well-researched, well-reported, watchable and very scary. This should be required viewing for all leaders and, especially, communicators. The lessons for crisis management and crisis communications are innumerable. Just watch it!  

2. The Marvelous Mrs. Maisel (Seasons 1 and 2)

I’m addicted to this show. In an era of dystopian dramas (and yes, I’ve watched many of those too), this show manages to be funny, optimistic, and timely all at once. The dialog is snappy and on point and Tony Shalub plays a pitch perfect role, as always. If you need a break from the drama of real life The Marvelous Mrs. Maisel is a wonderful way to escape for a bit.

3. The Greatest Package Theft Revenge of All Time

If you’ve ever had a package stolen, you’ll appreciate the karmic justice in this short video. And, if you’ve never had a package stolen (lucky you!), you’ll appreciate the engineering that went into this project. If you’ve ever wondered what NASA engineers do in their spare time, this is a must watch!

As you enjoy some much deserved R&R over the next couple of weeks, I hope you’ll spend some time with some inspirational and fun content. And I’m always looking for recommendations, so if you have any must-read, must-listen-to, or must-watch suggestions for me, please send them my way.

Happy Holidays from Audacia Strategies!

Photo credit: Alexander Raths

working with a communications specialist

Audacia’s Guide to Working With a Communications Specialist—Fabulous Business Transformations Begins With Smart Preparation

You have a glimmer of a change in your mind…a transformation. Perhaps you’re considering an acquisition, a new product launch, a fundraising round, or implementing a new, game-changing internal system. You’re excited, but you’re also practical. You know big, bold moves that lead to transformation require time, energy, and money.

What can you do today to set yourself up for success down the road? You need the A-team onboard to make this work and that means you need some external expertise—lawyers, financial specialists, technology specialists, and yes, even (or dare I say, especially) communications specialists.

Business TransformationsAnd if you’re extra ready to be wildly successful, you will want to be as prepared as the professionals you’ve gathered. So, here’s everything you need to know when working with a communications specialist.

Where to begin and how to set yourself up for success?

1. Find the right consultant early in your process.

Often, finding the right external talent takes time and effort up front. But keep in mind that you don’t need to save this task until crunch time. Just as you prospect for clients, you should always be prospecting for external talent. This way, when you’re ready to make that big move, you won’t lose momentum searching for the right consultant.

Have a conversation before you think it’s time. Most consultants are more than willing to sign a non-disclosure agreement (NDA) to ensure that you can have a candid conversation about your goals and expectations without the risk of giving away anything precious (And if consultants aren’t willing to sign an NDA, you should run).

In addition, starting the conversation and integrating the team early in your planning process allows you the benefit of their expertise as you build your strategy.  Working with a communications specialist early on can help you shape your plan to be even more likely to deliver the ROI that we all seek.

2. Ask for recommendations.

Prospecting for consultants can extend to prospecting for other business partners and strategists. Who has your consultant worked with before and are they willing to speak with you? I LOVE connecting my clients. Success stories sound best coming directly from happy clients and word-of-mouth is a great way to find those hidden gems who can really propel your business forward. Plus, you never know when clients might find some business opportunity together in their conversations. So, spread the love!

3. Consider company culture.

It’s also smart to consider company culture—yours and theirs. Diversity of thought and experience is critical, but if your organizational culture and theirs are 180-degrees different, chances are that you will have a hard time communicating effectively and that will make your interactions less efficient. Look for any clues about how working with a communications specialist could support or clash with your company culture and strategize accordingly.

4. Be ready for an in-depth conversation.

A good consultant asks lots of questions and really listens to your answers so that they can provide their best counsel. As advisors, our role is to hear you and help to accomplish your Big Idea. And, a good advisor will ask a lot of follow-on questions to get to the heart of a challenge.

For working with a communications specialist to be worth your while, it’s important that you can answer your expert’s questions to the best of your ability. So, you absolutely will want to treat every conversation like you’re entering the Shark Tank. Okay, it probably won’t be that bad, but be ready to have your assumptions challenged.

Remember, you can ask questions too. Do they have examples of their work available? A blog? Do they post on LinkedIn to share their knowledge? These are good places to start getting to know your consultant.

Also, don’t be surprised if that first conversation or two results in your consultant saying, “I don’t think that our firm is right for you at this time but you should really speak with ABC Consulting because they’ll knock this out of the park. I’m happy to make an introduction.” Don’t take it personally. This is how professionals do business.

5. Be ready to talk $$$.

Yes, I’m going there. Have a budget in mind. Be ready to discuss that budget. Budget guessing games waste everyone’s time. Communicate your budget requirements and expectations upfront. With budget guidance, a consultancy will offer you a plan that will get you to your desired outcome in the most efficient way, while staying within the budget you have. It will also save you from wasting time talking to the wrong consultants.

By the way, this means more than finding the cheapest vendor. An inexperienced consultancy who is cheaper, but takes a longer time to reach your goal and requires more time to get up to speed on your company or market, may be more costly in the end. It might make better sense to hire an experienced consultant who can reach your goal more quickly, but with higher bill rates.

6. But don’t fall into the trap of thinking only about money.

On a personal note, I find that some clients spend a lot of time thinking about the finances of a transformative event, but very little time thinking about how they’re going to communicate this event to customers, shareholders, employees, etc.

It’s easy to get swept up in the new idea and believe that everyone will think it’s a great idea too. But the reality is that change is change. Not everyone is going to be onboard. So, the sooner you start to think about how to communicate this Big Idea beyond the conference room walls, the better.

7. Focus on the outcome, not the time needed to deliver it.

No, this isn’t consultant-speak for “let me charge you more.” This is straight-talk. I want you to be successful as much as you want to be successful and I really don’t want you to feel like every minute you spend talking to me will cost you money. By focusing on the business outcome, rather than on the hours, you’re holding the consulting firm accountable for the results within the timeline and the budget that you have.

8. Set realistic expectations for working together.

Working with a consulting firm is not a one-way street. Do not expect that your consultant will hit the ground running on Day One and come back to you when the project is over. The best way to get as much as possible from your advisors is through collaboration where both parties are taking an active role.

You will want to think of your consultant team as an extension of your team. Invite your consultant to be present on-site, get into the weeds with you, and get integrated within your team. That’s the only way they can get a deep understanding of the challenges you’re facing and, ultimately, identify the best solution. Without making such allowances, working with a communications specialist will be frustrating for everyone involved.

If 2019 holds a glimmer of change for your firm, make sure your team is set up for wild success. We’ve consulted on transformations from product launches to CEO transitions and everything in between. Would you like to know how working with a communications specialist could propel your work forward in New Year? Schedule a discovery session and let’s discuss!

Photo credit: primagefactory

successful M&A deal

Let’s Make a…Successful M&A Deal! 5 Keys to Landing A Deal You’re Proud Of

Deciding to embark on a merger or acquisition (M&A) is one of the biggest transformations during the lifecycle of any business. Thinking in terms of resources alone, your money, time, and credibility are all on the line here. To land a successful M&A deal, you’ve got to be on top of your game.

If you focus too hard on all that’s at stake, though, you may not be in a position to make the best deal. In other words, don’t miss the forest for the trees—go in with your eyes wide open. Although it can be nerve-wracking to jump into an M&A deal, keeping the below 5 key points in mind should help you get through the process with your nerves firmly intact.

But first…let’s consider what not to do

Pushing through a successful M&A deal like acquiring a competitor or joining forces with a powerful peer is invigorating. But what’s invigorating on the day you sign on the dotted line can quickly deteriorate into something akin to buyers’ remorse if you haven’t thought things through.

Here are just a handful of the mistakes we’ve seen get in the way of a successful M&A deal:

  • Companies WAY overpaying for what they’re buying
  • Leaders forgetting that cultural fit between companies matters just as much (if not more) than securing cutting edge technology or getting a contract
  • Too little too late: companies being slow to consider market shifts and jumping in too late to address their gaps with M&A
  • Not considering the bigger corporate story—big, expensive “surprises” that don’t obviously fit are a tough sell and put you on the defensive with investors, customers, etc.
  • Failing to communicate with all shareholders. Remember, those little shops can band together to become an activist consortium

To avoid adding to this list, consider engaging a team who can lead you through any necessary course corrections. At Audacia Strategies, our core competencies revolve around helping clients consider their bigger corporate story and communicating with shareholders when making big, bold moves like this. You can also make sure everyone checks her ego a the door, by considering the following:

5 Keys to a Successful M&A Deal

1. Deal Fever Is Real.

You and your team have spent late nights, long weekends, blood, sweat, and tears pursuing this deal. You have done all that great valuation work to come up with a fair acquisition price. And now, you’re at the negotiating table (you can almost hear “Eye of the Tiger” playing in the background). And, you’re bidding against other firms… and the price is going up, and up, and up. It’s very easy to get caught up thinking, “I’ll show them. We’re going to win this thing at all costs.” It happens All.The.Time.

Successful M&A DealThe reality is while it’s good practice to come to the negotiating table with a valuation range that you’re willing to pay, it doesn’t pay to start warping your analysis just to “win.” This is how companies end up with massive write-downs a few years after a deal when they can’t achieve the value they needed to make the price they overpaid work.

It may be obvious, but even large companies are susceptible to deal fever. Want an example? See also:

Why does this happen and how can you control for it? Well, the short story is: all business deals are closed by human beings and the decisions human beings make are often influenced by emotional and psychological factors. Executives on both the buy side and the sell side can get caught up in their perception of the company and the management, for example. So, if you feel tensions running high and fear that you or your team are losing touch with your real goals, don’t be afraid to step back from the negotiating table to catch your breath or even walk away from the deal entirely.

Ask yourself:

  • What are the stories we’re telling ourselves?
  • How can we challenge these stories to get to the real story?

And remember Dan Doran’s advice: “Value is analyzed. Price is negotiated.” It’s crucial that you build your own valuation model, one that you’re completely comfortable with and can explain to stakeholders if (or when) challenges arise. One of the worst things you can do is rely on a target’s (very pretty, but very likely) biased projections. Do your own research. Do the work.

2. Due Diligence Is A Lot Like Going To The Dentist.

It is not glamorous, but it is necessary. Due diligence can be the difference between a successful M&A deal and one that feels like getting a root canal. To make this work for you, go beyond the financials (after making sure they work and are coherent, of course!) to really understand the logic behind the deal on every level. You need to consider carefully the reality of your team’s ability to create (or “unlock”) value in bringing two (or more) firms together.

3. Customers Matter.

Once you have your head wrapped around the business valuation and the inner workings of this new mash-up of a business being born, you’ve got to think about relationships external to the organization. Get into the weeds about how strong the current customer relationships are and how they affect the bottom line.

Ask these questions:

  • How much of current revenue depends on repeat customers vs acquiring new customers?
  • What is the cost of acquiring a new customer?
  • How strong is the current business pipeline?

4. Get Real About Your Competition.

You definitely want to take a look at where your target stands when it comes to market share, revenues, and profit, but also dig more deeply. Keep in mind, you are proposing a potential shake-up of the market here. Even if they’re tough to predict, consider all the ways in which this bombshell of a deal is going to have significant ripple effects outward.

Ask these questions:

  • Where in the value chain is your target excelling? Failing?
  • What changes can you realistically make to capitalize on strengths or cut the dead weight?
  • How do they stack up against their peers?
  • How do you expect competitors to react to a combined firm?
  • Will you have the wherewithal to combat a price war for example?

5. The Problem With “Synergies.”

I can’t really remember if Professor Mariann Jelinek shared this pearl of wisdom with us on the first day of my strategy class at The College of William and Mary, but she definitely shared it early and often: “When someone says ‘synergy,’ hold onto your wallet.” Throughout my MBA program and even to this day, I think no truer words have ever been spoken.

As a buzzword, synergy is overused and honestly, a red flag in most cases. Like pretty wallpaper covering an ugly stain, “these teams have a lot of synergy” is a pretty-sounding way of saying very little. As easy as it is for deal participants to get caught up in the possibilities and truly, badly, deeply underestimate the time it will take to achieve whatever they’re dreaming of, it’s equally as easy to overestimate the value of both cost and revenue synergies.

In the rush to eliminate redundancies and expand market share, a lot of details can get overlooked about what the new procedure will look like. Slow down and think things through at each stage.

Ask yourself:

  • How are we going to make more money by putting two firms together?
  • Do we have a crackerjack post-acquisition integration team ready to put our plan into action?
  • Do we have a good sense of what might go wrong in this integration? What’s our worst-case scenario?

Yes, there is a lot at stake when you’re spearheading what could easily be the biggest deal in your company’s history. But you can handle it. You’ve done the work and now you’ve got these 5 keys in your pocket. So you’re ready to seal that successful M&A deal.

Have questions? Want to talk through your deal with an experienced team? Audacia Strategies is here for you. We’ve helped businesses successfully navigate M&A deals and other big transformations. And we’re fun to work with! Contact us at info@audaciastrategies.com or give us a call at 202-521-7917 to schedule a consultation.

Photo credit: kzenon

business valuation

3 Expert Secrets for Getting the Biggest Bang for Your Buck When Selling a Business (Part 3 in our series on Business Valuation)

This is the third part in our series on business valuation. In Part 1, we give you the rundown on public vs. private valuations. Part 2 discusses 5 key factors influencing valuation. This time we are bringing you an expert’s take on common misperceptions, how to get the biggest bang for your buck when it comes to selling a business, and who is likely to be involved in the deal.  

To punctuate our fall blog series on business valuation, we interviewed a friend of Audacia Strategies, Dan Doran, Principal at financial services firm Quantive. As an experienced M&A professional focusing on small and mid-sized privately held companies, Dan has seen it all—or at least, A LOT. He and his team support both buyers and sellers uniquely positioning him to be the voice of reason when it comes to transformative business deals. Check out our full interview here.

If your plans involve selling your business—even if retirement is several years in the future—you need to carefully consider the insights Dan offers here. So let’s look at Dan’s top business valuation strategies for sellers.

1. Think early and often about how to influence your business’s valuation.

In basic terms, business valuation is a snapshot of the health of a business at any given time. We already examined in greater detail how analysts and buyers determine what a business is worth. But value can be boiled down to three things:

  • Earnings
  • Growth
  • Risk

To influence valuation, Dan works together with owners to get them thinking early on about these three aspects of their business. One challenge he often runs into is that business owners tend to think about the worth of their companies only when they are ready to go to market or when an offer comes their way. But, says Dan, “this is actually backwards.”

If you want to get the best price, it’s important to understand how you can best position yourself in the market. And if you aren’t satisfied with your current position, you need time to make improvements before you’re ready to find a buyer.

In addition, there are a lot of reasons why someone may want to know the value of a business, besides being in a position to sell. “There are number of litigation reasons, for example,” says Dan. A business owner might be going through divorce or someone might have died making the value a probate matter. Then, there’s the transaction stuff: buying or selling a company, buy-ins and buy-outs, capital needs, etc. “For all these reasons, it’s important to get to an understanding of where the market will likely price an asset (i.e., the business) at a given point in time.”

2. Mind the difference between valuation and price.

It’s also important to remember that there’s a difference between valuation and price. In the simplest terms, valuation is an analysis, while price can be negotiated. So, what this means for you is if you use an expert like Dan he will build a valuation model to predict where the market would likely price your business.

Of course, any valuation is only as good as the facts and knowledge available. “There’s no such thing as perfect information,” says Dan. In every transactional deal, there will be an asymmetry of knowledge, meaning that buyers and sellers will have different perceptions of what a company is worth. The most timely example of this is Elon Musk’s tension with short sellers a few months back.

Here’s Dan’s take on Tesla:

“This was really a battle of information,” says Dan. “There’s an asymmetry of knowledge and investors in public markets are constantly trying to gain more knowledge to predict where they think price will go. So, Elon is in possession of more facts than these investors and his position has been that the stock is going to grow, whereas short sellers are looking for it to decline. It’s been a battle of information to try to manipulate that stock price.”

But perhaps the biggest lesson learned in watching Elon Musk trying to value (or price?—it’s a bit hard to label) Tesla at $420 per share is that bringing a neutral party to the table during negotiations can help. Regardless of whether Elon was fairly valuing his company, he had no buyers in the end. A good M&A process will have some competition and likely involve negotiations around not only price, but also the terms of the deal.

3. Get the biggest bang for your buck when influencing business valuation.

We’ve discussed in a previous post, how competitive the M&A market is and how important it is for business owners looking to sell their businesses to stand out from the crowd. Our conversation with Dan reinforced this point. With fewer businesses being passed down to the children of business owners, 80% of business owners need to liquidate their businesses to fund their retirements, which means this is a seller’s market.

But where does Dan suggest putting your resources to see the biggest ROI? Well, he says, it’s important to realize that when you have a consultancy like Quantive appraise your company, “essentially what we’re doing is creating a risk profile that becomes a roadmap for what is impeding value and what we should be fixing before we go to market.”

So, again, it’s important not to wait to value your company. You want time to follow that roadmap to improve your position before going to market. “The real question,” according to Dan, “is how do we begin to drive more value and return a bigger rate on this investment?”

To answer this question, you need to think carefully about who your buyer might be and think like her. While the majority of small business owners are baby boomers (65+), buyers are likely to be in the next generation. What do these buyers want? What do they care about? Why is your company a smart investment for them?

And recognizing that we all tend to overprice our own assets can help you adjust expectations. As Dan says, selling a business is really not that different from going to market with a house. “Everybody thinks that their own house is a special unicorn. As a business owner when we go to market we want to get the most for that asset, obviously. But the market is looking at your business relative to alternative investments.”

Thinking of your business in these terms, as one possible alternative in a sea of potential investments for a buyer, you’ll want to look at several key factors to help you stand out:

    • Timing: we want to sell when the company is in a good position and when the market is in a good position.
    • Value of the company vs. how it fits into your overall portfolio: if you’re in a position where you want to liquidate your business to fund your retirement, you’ll want to have these two numbers in mind: how much is it worth and how much do I need?
    • Be ready for the personal transition: Most business owners spend more time working on their company than doing anything else in their lives. So when they sell the company, they suddenly have a lot of time on their hands. You have to look in the mirror and figure out what you’re going to do with that time. Otherwise, what invariably happens is the week before closing people look for excuses not to close. Releasing control can be hard, so make sure you’re ready.

As challenging as it can be to sell your business (which, let’s face it, feels more like “another child”), if you start early, consider how to influence business valuation, and take the necessary steps, you will be happily enjoying mai tais (or another drink of choice) before you know it.

To make the whole process less challenging, it’s smart to enlist the help of experts early on. At Audacia Strategies, we talk a lot about how to differentiate companies in a really crowded field. We can help you negotiate the best possible price for your business. Why not contact us to set up a consultation? It’s never too early to start strategizing!

Photo credit: Dmitriy Shironosov

communications strategy

Congrats, You’re the Proud New Owner of a Business! Now What? Prepare for a Smooth Transition With a Strong Communications Strategy

We teamed up with Richard Phillips of Crossroads Capital to create a webinar guiding the smaller financial buyer eying the middle market. We’ve included the link to the full 60-minute webinar at the end of this article.

In a recent blog article, we discussed a communications strategy for turning buy-side challenges to your advantage when purchasing an existing business. Smaller financial buyers looking to get their feet wet in the middle market face stiff competition. But if you play to your strengths such as flexibility on terms and show the seller that you understand her perspective, you stand a good chance of making a smart deal.

Once that deal goes through, the fun really begins! Making sure the transition goes smoothly following a merger or acquisition is one of the most delicate communications situations in all of business. Getting this right calls for a strong communications strategy. So let’s talk about how to plan for a successful transition.

Key Questions

As you begin to develop your communications strategy for the transition, you will want to keep many of the same questions in mind as when you were deciding how to close the deal. At this point, you already have well-thought-out answers to key questions such as:

  1. Why this deal?
  2. Why your organization?

But now it’s time to think about repackaging your answers. Previously, you needed a strategy for winning over the seller. You wanted to talk about why your deal was superior to those of the larger sellers. You wanted to position your organization as an asset and key to the future of the business. Now, it’s time to think more broadly about selling the deal to additional stakeholders.

You’ll need to ask and answer the following questions:

  1. What does this deal mean?
  2. What’s next?

Each of the stakeholders crucial to making the organization’s transition smooth will want to know what the deal means for them. Employees will want to know if their jobs will be on the chopping block. Investors will want to know if their risk is about to rise. Partners and community members will want to know if they can work with you and trust you to keep the business engaged in their goals. And customers will want to know if they can expect the same quality product or service they have come to appreciate.

Transition Announcement

After you have thought through your best answers to the key questions above, it’s time to devise your communications strategy for announcing the transition. Here it’s important to come up with a plan for announcing the transition and key steps to those in the “inner circle” and a plan for announcing the transition to the public. Carefully coordinate these two plans.

Timing is everything here. If the deal gets leaked to the public ahead of letting key personnel, investors, and partners know about the change, you could have a PR nightmare to deal with on top of a transition starting off on the wrong foot. This can kill your credibility and it won’t be easily rebuilt. So do what you can to control the timing of your announcements.

Employee Communication

Employees play a huge role in making sure an M&A transition goes off well. Consider holding an all-hands, townhall-type meeting for employees where the old guard and the new guard come together to demonstrate solidarity. Explain what’s next and introduce new leaders and any exciting new initiatives that benefit them. Allow employees to ask any questions in this forum and invite further discussion to establish open lines of communication too. Taking steps like these will go a long way toward engaging employees in a positive way.

Investor Communication

You’ve probably already thought about how to introduce yourself and your organization to investors. Make sure KPIs, metrics, and milestones are part of these communications. Being mindful that you can’t use numbers to tell the entire story, the last thing you want is to get caught flat-footed during these first few meetings with investors. Remember that communicating with investors goes well beyond the initial M&A announcement. An ongoing plan should be part of your communications strategy going forward.

Partners and Community

Suppliers, distributors, and community partners also play an important role in any successful transition. Get out of the building and meet face-to-face whenever it makes sense. A firm handshake and steady eye contact will help partners put a name with a face and open the door to a strong relationship. Make sure you talk to your seller about any insider tips and tricks for dealing with business partners. Are there some partners who deal only in cash? Will having cash on hand give you key discounts that will increase profitability? Is there only one supplier in the state who can sell you a particular part in the volume you need?

Customers

Last, but certainly not least, you need to communicate with your new customers before, during, and after the transition. Even if you expect little to change on the customer-facing side of the business, you want to let loyal customers know about the acquisition. A strong customer communications strategy demonstrates that you aren’t simply paying lip service to the mission and vision of the business.

In this market, realize that many of the most loyal customers may have interacted with the previous owner of the business and may even think of her as part of their team. If the previous owner is willing to attend those initial customer visits or write a letter or heart-felt email about her decision to sell, this can go a long way towards winning over loyal customers and easing their transition. This helps you pragmatically too. Losing a significant number of clients immediately after the sale goes through does not look good.

Transitioning after an M&A deal is one of the most delicate communications moments new business owners face. Fortunately, the team at Audacia Strategies loves a challenge! We’ll jump in with both feet, roll up our sleeves, and get to work developing the right communications strategy for you.

If you haven’t heard Katy and Richard’s full 60-minute webinar, there’s no time like the present! You can check it out here: Succeeding as a Small Financial Buyer in Mid-Market M&A.

Photo credit: Cathy Yeulet

buying an existing business

So You Want to Buy a Business? Turn Buy-Side Challenges to Your Advantage with Our Strategies

Buying an existing business is one of the best ways to break into a new market, acquire valuable copyrights or patents, or leverage your expertise to steer a stagnating business in the right direction. While acquiring a business typically requires more funds upfront, the risks tend to be less than starting your own business—as long as you buy smart, that is.

We teamed up with Richard Phillips of Crossroads Capital to create a webinar guiding the smaller financial buyer eying the middle market. We’ve included the link to the full 60-minute webinar at the end of this article. Here we specifically address two key insights about buying an existing business: buy-side challenges to consider and how to develop a communications approach that turns those challenges to your advantage. So, let’s get to it!

Buy-Side Challenges Facing Smaller Financial Buyers

Because the mid-market M&A environment is highly competitive, if you are a smaller financial buyer looking at buying an existing business, you are unlikely to be able to compete on price alone. Bigger, strategic buyers will be in a position to offer better deal terms and be able to outbid you in most cases. This means you need to get clear about who you are and what you offer AND you need to be creative in coming up with a strong target list, developing your relationships, and negotiating deals.

First, keep in mind that opportunities to buy are not limited to brokers’ lists or small business auctions. In fact, investment bankers, who advise smaller commercial buyers recommend looking closely at not-for-sale companies. While it is tougher to find business owners who are willing to sell here, when you do find one, it can be easier to close a deal.

One key advantage you have over bigger buyers is flexibility, so use it. Your flexibility may allow you to shape a deal that’s more attractive to the seller. Consider that small business owners willing to sell often have concerns beyond price. An owner who has built her business from the ground up over the past 40 years may prefer an agreement that includes provisions for her continued involvement as a consultant or a guarantee that loyal employees will be protected. Bigger buyers often can’t or won’t make such promises.

Because many owners of middle market businesses care as much (or more) about non-financial concerns as they do about the money, it’s important to think about the transaction from the seller’s perspective. This may be challenging since, as a buyer, you will be primarily focused on the business valuation and financials. But this broader focus will pay dividends in the long run.

As you begin discussions, keep the following likely differences in mind:

  • Personal: Business owners are often at a different stage in life than buyers and have different motivations. This makes sense if you think about when an owner might be in a position to sell, e.g., when she’s ready to retire. Also, according to recent reports, America’s business owners tend to be older (50% over 55). There may be important generational differences between you and the seller.
  • Cultural: While you may be a numbers person, keep in mind that your seller is likely not tracking KPI’s or sweating over spreadsheets. Most business owners in this environment are independent-minded and focused on qualitative measures. Many entrepreneurs build their businesses by making smart short-term decisions and keeping their noses to the grindstone, rather than thinking about their exit strategy. Sweat equity may be all they know.
  • Situational: Above all else, remember that while this may be one deal among many for you, this business owner will likely sell only once. Be respectful of this mindset difference and realize that if the seller expresses “sellers’ remorse,” resistance, or reluctance, he’s probably not trying to be a jerk—he’s trying to get things right. It can also help to keep in mind that you’re both doing something you’ve never done before. You’ve never bought this business and he’s never sold this business.

Overall, if you approach discussions with the owner of a not-for-sale business with an attitude of respect and a willingness to be flexible on the terms of a deal, you both stand to gain. Now let’s get specific about what your approach should look like.

Key Ingredients in Your Communications Approach

Keeping the above challenges in mind, it’s clear that if you approach a potential seller with complicated spreadsheets and graphs, you’re likely to be met with polite stares, if not a quick invitation to show yourself out. This is not to say the numbers aren’t important to a seller, but buying an existing business is all about how you present the rationale behind the numbers, not to mention yourself and your qualifications as a buyer.

Ask yourself: What’s my differentiator?

Although you want to buy this business, your approach should come from more of a seller’s mindset. Your goal should be to articulate your value and sell your organization to the owner. Above all, gain rapport by listening to the seller, figuring out what she needs most to be comfortable selling, and then being willing to adapt to those needs. The bottom line is you have to build credibility with the business owner or you don’t have a deal. Period.

Key ingredients in your winning pitch:

1. Articulate your organization’s value. Be ready to talk about your mission and how buying an existing business fits into the broader vision you have for your organization. Bonus points for connecting this with the seller’s values.

2. Come up with a seller-focused message. Paint a clear picture that explains why this particular business, what your aspirations are for the future, and how you are uniquely positioned to usher this business into that bright future. This message needs to be authentic. If you simply say what you think the seller wants to hear, without buying in yourself, the owner will see right through you.

3. Emphasize how you stand apart from other potential buyers. It’s not unheard of in a competitive environment, such as the mid-market, for there to be 10 other buyers offering all-cash deals. It’s imperative for you to talk about how you and your team could be an asset to the company you want to buy. Talk about the unique strengths can bring that help them achieve their vision for the business.

Again, go beyond the numbers and consider the owner’s mindset. She is considering turning over her company, which is more like her baby, to a complete stranger. You would have reservations too. Help her see past those reservations through your message.

Remember: This is Personal

Finally, as you consider how to set yourself apart from other buyers, know that making the personal connection and gaining the seller’s trust can absolutely determine who wins the sale in the end. You’ve probably heard stories about home buyers in competitive markets writing heartfelt, handwritten notes to sellers and getting the house because of the letter. The same strategy can work in buying an existing business.

But before you pull out the stationary, it’s crucial to locate the point of overlapping values early on and expand on those points of relevance throughout the process. Describe your respect for the seller’s legacy and her motivations, talk about your investment plan and growth strategies, and discuss your philosophy on performance-aligned compensation. In other words, appeal to the owner’s beliefs about what it takes to successfully run this business.

There’s no doubt smaller buyers face several challenges in buying an existing business. But the right communications approach can turn those challenges into a winning strategy. If you remain open to opportunities to show that your aspirations align with the owner’s aspirations and that you can be creative with your deal structure, you can succeed in the mid-market M&A environment.

Once you’ve decided buying an existing business is your next move, it’s time to find the right advisors to guide you through the 16-18 month process. At Audacia Strategies, we’re here to support you before, during, and after your acquisition. We live for strategy!

For additional insights on this hot topic, follow this link to hear Katy and Richard’s full webinar: Succeeding as a Small Financial Buyer in Mid-Market M&A.

Photo credit: Wavebreak Media Ltd

influencing business valuation

Could Your Business Be the Next Apple or Amazon? 5 Key Factors Influencing Business Valuation (Part 2 in our series on Business Valuation)

This is the second part of our series on business valuation. Before you dive in here on influencing business valuation, make sure to check out part one where we dig deep into types of valuation.

In our previous post, we discussed some of the complications involved in determining the value of publicly traded and privately owned businesses. And we want to emphasize that while from the outside it can seem like big corporations are dealing in Monopoly money—business valuation is not (completely) based on concrete, objective measures—strategic investors and private equity buyers do follow some standard assessment practices.

Still, business valuation remains a contentious issue and as a result, many potential sellers approach negotiations with assumptions, rather than knowledge about specific value drivers supporting a realistic assessment of their business’s worth. Since assuming is always inferior to knowing, especially during the negotiation process, it’s worth considering internal and external factors influencing business valuation.

Whether you’re thinking about selling your business in the near future, interested in keeping value drivers on your radar as you grow your business, or looking to get into the investment game yourself, there are key factors influencing business valuation to keep in mind. In addition, CEO Katy Herr will be speaking with our friends at Quantive to get their expert perspective on this timely topic. Check back for a link to the podcast where Katy and the Quantive team will dig deeper into influencing business valuation and transferring value in M&A. In the meantime, here’s a primer.

A Quick Recap

Before we look at the specifics influencing business valuation, let’s remember why this is an important question to ask. Recall that there are a couple ways to assess the value of a publicly traded company:

1. Market Capitalization (cost of a company in “real money”):

  • Market cap = stock price x number of outstanding shares

Following Apple’s ascent into 13-digit territory last month, Amazon’s total market value surpassed $1 trillion last week. Both of these valuations are based on the simple formula above.

2. Enterprise Value (cost to acquire a company):

  • Enterprise value = a corporation’s market cap + preferred stock + outstanding debt – cash (and cash equivalents) found on the balance sheet

This is the formula a buyer might use to determine what would be a fair offer to acquire a publicly traded company.

Now, investors don’t use these formulas when looking at the opportunity or degree of risk involved in acquiring privately held companies simply because they don’t usually have access to this information. Private companies aren’t required to report earnings, stock or share prices, outstanding debt, or cash in the bank. However, as a business owner, you do have access to this information and you could provide it to interested investors or buyers. In fact, strategically releasing this information will likely give you a leg up on influencing business valuation.

What’s really important to understand for our purposes is both types of business valuation, but especially market cap, rely on expectations. So let’s talk about factors influencing business valuation.

Buyers look at the following factors when deciding which valuation multiple to apply to their assessment of your business’s ability to generate income and cash flow. Here is what you can do to put yourself in the best possible bargaining position:

1. Maintain Clean Records

If you aren’t doing this for your own peace of mind and other business benefits, it’s crucial for you to get your books and records in order well (years, ideally) before you start looking for investors or buyers. At a minimum, you will want to keep personal and business expenses separate. Having professionally managed books and a solid financial audit is a smart investment if you are seriously hoping to sell one day. This will also help you understand where you are today so you can target your growth goals and mitigate business risks influencing business valuation. So, do your homework here.

Keeping clean records is the first step toward running a profitable business. But records means more than financials. Make sure all important documentation is well-organized and would make sense to interested parties outside of your inner circle.

Important documentation includes:

  • Financials (balance sheets, expenses, tax returns, credit card statements, bank statements)
  • Audits, regulations, and licensing records
  • Recent legal due diligence reviews
  • Written systems and processes, including employee handbooks and manuals
  • Key employee agreements and noncompetes
  • Customer records
  • Written and assignable customer agreements
  • Written contingency plans for emergencies and other potential disruptions to cash flow
  • Key equipment maintenance records

2. Highlight Positive Trends

Investors want to know when they can hope to see a return on their investment, of course. This means showing a projection of positive, predictable profits is ideal. But if your business is new, this might not be a realistic benchmark.

Typically, analysts and investors will look at the most recent 3-5 years of past performance and 2-3 years of projections in determining value. Be sure to point to factors within your control, such as personnel management and smart cost-cutting maneuvers, as well as external factors, such as industry dips and seasonal declines, to tell a complete story.

It’s also crucial to point out other positive trends influencing business valuation that make your business attractive:

  • Revenue growth rate
  • Consistent gross margins trending upward
  • Higher than average industry operating margins
  • History of achieving financial projections
  • Strong, sustainable, predictable cash flow
  • Consistent history of profitability
  • Solid pipeline of new business and demonstrated ability to convert

3. Be Open to Change

One of the big external factors to consider is how the business will respond to inevitable market adjustments and changes in the industry. With technology and automation bringing about rapid changes in most industries, businesses that show an ability to evolve are most likely to maximize profits and sustain additional growth while keeping operational expenses low.

For companies involved in the production of a product, evaluating your strengths and weaknesses is crucial. Can you increase efficiency, product quality, profitability, or customer satisfaction by outsourcing certain aspects of your supply chain? Should you seek out strategic partners in particular areas?

4. Make the Business Less Reliant on Key Personnel

What would happen if the CEO decided to retire, seek out another career opportunity, or take an extended vacation? If your answer is that the company would not skip a beat, then you are on the right track. Companies that rely on owners who spend a lot of time working “in” the business are susceptible to lower valuations. By contrast, those who can set up reliable processes and trusted management to serve clients can walk away leaving a new individual to run the business.

Bob Moskal at Quantive shared this example:

We worked with a facilities maintenance company to recommend and implement a host of improvements to make their business transferable. For example, we recommended they digitize their record keeping, make their financials useful for running the business not just for tax returns, and transition customer accounts to account managers so that a potential new owner could see that the company could run with the same level of success without the departing owner. Previously, this business would have been heavily discounted or not sold at all. It’s now positioned for growth and a more attractive acquisition target.  

Additionally, the following factors make a business easier for a buyer to take over and manage successfully:

  • A strong, recognizable brand identity
  • For product-centric businesses: a clear supply chain; equipment upgrades to modern, productive equipment; systems in place for identifying and implementing new technology
  • For service-centric businesses: system protocols that have been tested; an established, clear succession chain; well-documented job descriptions and processes for sharing institutional knowledge

5. Be Able to Show Large Market Potential

In one sense, how a business has performed in the past matters less to investors than the potential for future growth. Past performance is only as good as what it tells us about future projections. Many buyers focus on turning around businesses in industries where they have been successful in the past or businesses where they have key contacts who could help increase future profitability.

Because so much depends upon the expectations of individual investors, it pays to focus on factors that will likely influence the market potential:

  • Multiple, strong sales distribution channels
  • Multiple revenue streams
  • A strong industry market share
  • A written and up-to-date business plan
  • Proprietary products or technology

Because all of the above five factors influencing business valuation depend on expectations, the best you can do as a seller is lay your cards on the table in a way that puts your company in the best light. This means putting yourself in the shoes of your investors and considering carefully what would make this offer most attractive.

Finally, if you’re really hoping to get top dollar for your business when you are ready to sell, experts say it’s all about doing the pre-sale prep. Again, according to Bob Moskal, business owners will want to start with due diligence a couple years ahead of time, so they have plenty of time to take steps to correct any “skeletons in the closet” ahead of negotiating a sale.

Also, Bob recommends knowing what your company is worth before starting the process, “we’ve often seen a seller shy away when he starts actual retirement planning late in the game and realizes the value falls short. A good financial planner can help here.” You can hear more of Katy’s conversation with Bob about influencing business valuation when they sit down to record a podcast later this month. We’ll add the link when it’s available. Stay tuned!

At Audacia Strategies, we specialize in putting together communications strategies that helps our clients meet their goals. We’ll be the voice of reason as you figure out how to highlight the key value drivers and tell the story of your current (and future!) success. Our team is all about managing expectations. Contact us to schedule a consultation.

Photo credit: rawpixel

business valuation

Are Apple and Tesla Using Monopoly Money?—Business Value, Valuation Myths, and Your Business (Part 1 in our series on Business Valuation)

This is the first part of our series on business valuation. Check out part two where we dig into what influences these different types of valuation.

Business valuation is making headlines these days. With the announcement that Apple is the first publicly traded company to surpass the trillion dollar mark and Elon Musk making Twitter waves about taking Tesla private putting its value at $72 billion, it can feel like some of the big dogs get to play with Monopoly money.

Adding to this perception that business valuation isn’t always (completely) based in reality (hint: there is a big difference between what a company’s worth in “real money” vs. what it could be worth in an acquisition), consider what’s happening in the Venture Capital (VC) ecosystem. VC investors love to reward growth metrics with higher valuations. So it’s common for startups to shop VC firms looking for the best price. This practice has some experts worried that the VC industry is the next bubble.

However, before we throw our hands up, let’s look at what we know about types of business valuation and what these mean for successful non-unicorns and their investors.

Public vs. Private Company Valuation

One of these things is not like the other.

The first thing to understand about business valuation is that we can’t easily compare the values of publicly and privately held companies. Determining the market value of a company that trades on a stock exchange (e.g., Apple, Tesla, Facebook) is fairly straightforward (though we’ll see below that this method doesn’t take into account all types of value investors might want to consider).

business valuationHowever, for private companies, the process is not as straightforward or transparent. This is because unlike public companies that must adhere to the SEC accounting and reporting standards, private companies do not report their financials publicly and since they aren’t listed on the stock exchange, it’s more difficult to determine a value for a private company.

Public company valuation: generally in the press you see market capitalization (AKA market cap, in slang) used as a valuation description (see: Apple, Tesla).

  • Market cap = stock price x number of outstanding shares
  • Example: Apple shares outstanding: 4,829,926,000 x $219.01 (closing price on 8/27/18) = $1.06T

This is pretty simple, but keep in mind that this doesn’t necessarily take into account the full range of measures used to assess the potential purchase price (aka value or market value or valuation) of a business. One of the most commonly used valuation metrics for a public company is enterprise value.

  • Enterprise value = a corporation’s market cap (see above) plus preferred stock plus outstanding debt minus cash and cash equivalents found on the balance sheet

So, let’s say that you wanted to buy Apple. The enterprise value is the amount it would cost you to buy every single share of a company’s common and preferred stock, plus take over their outstanding debt. You would subtract the cash balance because once you have acquired complete ownership of the company, the cash is yours.

  • Example: Apple’s Enterprise Value

Apple’s market cap: $1.06T + outstanding debt: $114.6B – cash and cash equivalents: $70.97B = 1.1T

Okay, so how do we determine the value of a private company. Here there are several different approaches.

Headline valuation: private company valuation metric generally based on the price paid per share at the latest preferred stock round (i.e., investment round) multiplied by the company’s fully diluted shares (see: Slack).

  • “Fully diluted shares” = Common Shares outstanding + Preferred Shares outstanding + Options outstanding + Warrants outstanding + Restricted Shares (RSUs) + Option Pool (sometimes)

See. It’s complicated. And, also a bit of a black box for the average investor. It infers that all shares were acquired at the same price as the latest round, which isn’t typically the case.

Generally, this type of valuation is used because it’s impressive on paper and in the paper (or on the screen). Keep in mind that this basic formula, while it may seem complicated, avoids a lot of the technicalities of private company valuation (but if you’re interested Scott Kupor of Andreessen Horowitz did a great post on VC valuation here).

Although private companies are not usually accessible to the average investor, there are times when private firms need to raise capital and, as a result, need to sell part ownership in the company. For example, private companies might offer employees the opportunity to purchase stock in the company or seek capital from private equity firms.

In these cases, investors can assess business valuation using another common approach:

Comparable company analysis (CCA): a method of business valuation that involves researching publicly traded companies that most closely resemble the private firm under consideration. Such analysis includes companies in the same industry (ideally a direct competitor) and of similar size, age, and growth rate.

Once an industry group of comparable companies has been established, averages of their valuations will be calculated to establish an estimate for the private company’s value. Also, if the target firm operates in an industry that has seen recent acquisitions, corporate mergers, or IPOs, investors can use the financial information from those transactions to calculate a valuation.

Discounted cash flow (DCF) valuation: similar to the above method, this approach involves researching peer publicly traded companies and estimating an appropriate capital structure to apply to the target firm. From here, by discounting the target’s estimated cash flow, investors can establish a fair value for the private firm. A premium may also be added to the business valuation to compensate investors for taking a chance with the private investment.

Misconceptions About a Company’s Worth

So, what’s your company “worth?” If you’re not running a billion or trillion dollar company, you may be wondering where to start in figuring out your company’s valuation. We discussed the basics of business valuation in a previous blog article, which will give you some answers.

And, of course, you may now be wondering whether to take your company public. Or perhaps you’re thinking about raising money to fund your business. You can find out more in Audacia’s IPO Roadmap series (Part One is here).

Now that you know the basics, let’s bust a few common myths:

Business Valuation Myth #1: Valuation is a search for “objective truth.”

This may be obvious already, but all valuations have some bias built-in. Yes, investors will pick and choose the model or approach they want to use. So if you want to put your company in the best light when raising capital, it’s important to understand your target investors so you can tailor your pitch.

Business Valuation Myth #2: A good valuation provides a precise estimate of value.

In some sense, investors are not that interested in precise value. Think about it. What does the value of a company today tell you? This is a measure of what the company has done in the past. But investors are really interested in what the company will do in the future. So, the current value need not be precise to determine whether the business is a smart investment.

In fact, while this is somewhat dependent on industry, it’s arguable that the ROI is greatest when the business valuation is least precise. This could be one of the lessons learned from analyzing the VC industry in Silicon Valley.

Look at Uber, for instance, the world’s most valuable VC-backed company, with an estimated valuation of $62 billion. It’s burning through cash, losing between $500 million and $1.5 billion per quarter on a run-rate basis since early 2017. Yet the company still raised a $1.25 billion Series G led by SoftBank earlier this year, according to the PitchBook Platform.

Business Valuation Myth #3: The more quantitative the model, the better the valuation.

There are a few different schools of thought here, but often the more numbers contained in the model, the more questions investors will have. The best valuation is the one that makes sense and is clear enough to be pressure tested by investors. So beware of overly complex quantitative models and numbers that need a lot of explaining.

As you can see, business valuation for private companies is full of assumptions, educated guesses, and projections based on industry averages. With the lack of transparency, it’s often difficult for investors and analysts to place a reliable value on privately-held companies. However, this is really not much different from other aspects of business. Whether you’re a business owner considering how to raise capital or an investor looking to take a chance by getting in on the ground floor of the next big dog, business is all about taking calculated risks.

At Audacia Strategies, we love to help companies in all stages. You choose the next calculated risk and we’ll be there to support you in making bold moves confidently. Business valuation is not for the faint of heart. Get the right team on your side!

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