Prepare your company to be bought

[Editor's Note: Many business owners fail to prepare their businesses for a sale either because they believe that a potential sale is far off in the future or because they are focused on current issues and do not consider preparation to be a priority. We would submit that companies need to be "prepared to be bought." Sometimes lucrative offers come unexpectedly for companies that are well-positioned. We typically recommend that a company engage an experienced investment banker to assist them in a sale - often even if they have received an offer - in order to generate a competitive environment.

Some business owners who have tried to "time the market" at some point off in the future have found that unpredictable events such as the Covid-19 pandemic, 2007-2012 recession, credit and stock market crunches, tech bust(s), 9/11, industry issues, etc. can derail their ability to sell at maximum value. We recommend to our clients to work each year to make certain that their companies are currently desirable to buyers. - DPM]

 

How best to position your company to be attractive to buyers:

1.   Demonstrate Strong Financial Performance

a. Historical Financials

*   Consistent revenue growth (at least upward trend)

*   Recurring revenue is a plus

*   Strong operating margins

*   Increasing profitability

*   Importance of last twelve months

b. Operating Cash Flow

*   Focus on hitting projected revenue and earnings numbers

*   Review net profitability of customers and products

2.   Maintain "clean" financials

a. Audited or "auditable" Financial Statements

*   Have your financial statements audited with a reputable firm to add    credibility

*   Use GAAP accounting. If not, identify how practices differ from GAAP

*   Understand cash vs. accrual accounting - timing differences can be material

b. Income Statement Adjustments and "Add-backs"

*   Buyers are skeptical of earnings that rely on substantial add-backs (one-time, non-recurring charges, private company expenses, etc.)

3.   Diversify your customer & supplier base

*   Diversification signifies a healthy business and reduces risk

*   Buyers will pay less for companies dominated by one or two customers

*   Examine what % of sales your top 10 customers represent?

*   How stable are your top suppliers? How stable are their terms?

*   Do you have multiple suppliers for critical components/services?

*   What % of total purchases does your top supplier represent? Top-5 combined?

*   What % of the company's sales are related to a few key employees?

4.   Develop a Strategic Growth Plan

*   Maintain a clear strategy and be able to demonstrate your history of execution

*   Be able to articulate specific future growth opportunities

*   Position your company to take advantage of them

* Remember: A buyer needs to see a potential Return on Investment

5.   Build a capable Management Team

* Invest in training and key strategic hires, if needed

*  Motivate management to add value to the company through a potential sale

* Focus on building a deep management team that can thrive without your continued leadership

6.   Eliminate potential "Gotchas"(these are items that could result in significant discounts to value)

*   Maintain legal documentation (licenses, regulatory filings, contracts, intellectual property, incorporation, etc.)

*   Clear title to all assets

*   Document processes and procedures

*   Resolve legal disputes, environmental issues, etc.

7.   Build a team of Qualified Advisors

*   Minimize distractions from running your business effectively

*  Get advice from professionals who have "done it before" and 

who have expertise in areas you do not 

*   Beware of advisors that outstep their areas of expertise

Are you and your company ready if a buyer appeared on the radar?

Most business owners who have executed a successful sale of their business will tell you the most important thing is: BE PREPARED.

 

Selling a business is very different than operating a business. As a business owner you know your industry, your product or service, your customers and your markets. Most business owners will only sell a business once in their lifetimes - and it can be by far the most important financial transaction of their lifetime.

                                ________________________________________

 

The Mead Consulting Group has helped over 60 clients prepare for successful sales transactions ranging from $15M to $350M in transaction value. We help companies increase the value of their businesses leading up to a transaction, minimize the things that cause potential buyers to discount the price, prepare to best position the company, and assist the owners in building a transaction team.

 

What successful business owners say about us:

 ...We could not have completed the sale of our business without the advice and guidance of The Mead Consulting Group. Their experience was critical in helping us prepare, and endure, the transaction process to a successful outcome. ...Charles M, President, Healthcare IT Company

 

A successful process is draining and stressful. The Mead Consulting Group brought the experience and expertise necessary to help our team focus on the critical issues and not get caught up in the multitude of items that can derail a transaction. Why reinvent the wheel? We chose to take advantage of individuals who could help us understand the nuances, negotiate effectively, and close the deal. ... Ken W, CEO, Behavioral Healthcare

...We missed the opportunity to sell our family business during the last upcycle. Mead Consulting helped us grow revenue and EBITDA to record levels and guided us through the selection of a transaction team. Dave Mead and his group provided great counsel throughout the sales process, removing obstacles and firmly encouraging us to a great deal with a strategic buyer that mirrored our family business values. ...Dan M, President, Building Products Company

...I do not know why anyone would attempt to sell their business without Mead Consulting. Since they have owned and sold their own businesses, they understand the challenges of continuing to run the business while trying to sell it. Their experience kept us focused on the right things and they helped keep our transaction team well-aligned during the process. They truly act as the advocate for the CEO and owner, helping to make sure that it was the best deal for the owner. ...Ron T, CEO, Software Business

   

 Let us your your thoughts. Call me on (303)660-8135 or Email me

               

Nine reasons why 2021 could be a great time to sell your lower middle market company.

 

What is a lower middle market company?

Lower middle market is defined nationally as transactions between $10M and $250M in enterprise value.

When is a good time to sell?

CEOs and business owners routinely ask the question, When is the best time for me to sell? Is now a good time or should I wait? Truthfully, many of the folks that address that question (investment bankers, private equity professionals, financing sources) have a vested interest in having companies go to market. So, business owners can be skeptical when reading optimistic projections. 

The Mead Consulting Group has advised business owners for years that there are a number of factors to consider when evaluating if it is a good time to sell a business. The most important is to make sure your company is prepared, and to not wait for the "absolute best time" to sell, but to sell when the market is good. There are lots of examples of companies that have regretted not going to market in 2006-2007 because they thought the market for their company would be better in 2009 or 2010, or got caught in the early “Covid squeeze” when the stock market plummeted in March 2020.

 There are a number of factors that suggest that 2021 could be a terrific time for some lower middle market company owners to sell.

1. Company results have rebounded or stabilized. Many lower middle market companies have rebounded or at least stabilized from the early Covid downturn. Even if revenue growth in some sectors is still very moderate, many companies have done an excellent job of managing expenses and increasing cash flow. Demand in many industries has rebounded nicely.

2.  Valuations are high. With stock market at record levels, the prices (multiples of EBIDA) being paid for good companies are at high levels.

3. Potential Tax Changes. With changes in Washington, there may be an appetite for raising taxes to offset the cost of the Pandemic, and the economic stimulus packages.

4. Interest rates are still historically low. This is important since the buyer of your business need to borrow for the transaction.

5.  Private equity firms have plenty of dry powder and fewer distractions from older investments. Private equity firms have raised record amounts of investment capital. With lots of capital to invest, they need to put that capital to work by buying companies. At this time of year, they can focus most of their attention on looking for new opportunities.

6. Private Equity has an increased focus on lower middle market transactions. There are many new private equity firms and family offices that specifically focus on the lower middle market.

7. Strategic buyers have lots of cash. Strategic buyers have been accumulating cash in record amounts.

8.  Strategic buyers need to find new ways to grow. Sources of organic (internal) revenue growth have been difficult for many strategics. They are under pressure to acquire companies that add new products, new customers, new geographies, and new capabilities.

9. There are still more buyers than sellers in the market. The number of baby boomer business owners who are reaching retirement age is increasing daily. In 2021 baby boomers range in age from 57-75 years old. There comes a time when these business owners need to sell and there may well be a glut of businesses on the market. Surprisingly, this has not happened yet.

 Are you and your company ready to go to market?

Most business owners who have executed a successful sale of their business will tell you the most important thing is: BE PREPARED.

 Selling a business is very different than operating a business. As a business owner you know your industry, your product or service, your customers and your markets. Most business owners will only sell a business once in their lifetimes - and it can be by far the most important financial transaction of their lifetime.

 If you would like to perform an assessment of your company's readiness to maximize value in a sales or recapitalization transaction, contact me today.

Traits for Happiness - Seven Gifts from people with the happiest lives

                                                             Traits for Happiness

Seven Gifts from people with the happiest lives

This list is from Hugh Hewitt's book, "The Happiest Life". As we move into the new year, I thought this list was very appropriate, especially given the trying year in 2020. It was compiled from interviews of people across all ages, ethnic groups, and circumstances. I hope you find it inspiring as we enter this new year. . If you haven't read Hewitt's book, it's a quick read and well worth your time.  - dpm] 

Encouragement

Enthusiasm

Empathy

Energy

Good Humor

Graciousness

Gratitude 

Best wishes for a happy, healthy, and prosperous new year! 

  

(Excerpt from "The Happiest Life" by Hugh Hewitt)

 

Benefits of a Strategic Business Coach (Someone who has been in your shoes)

 

[Editor's Note: In these uncertain times, business and personal decision-making is very difficult for CEOs and senior leaders. We can never predict the future, yet we must make the best possible decisions, maintain a positive culture, and be adaptable and agile to changing conditions. I hope you find the following article useful about the importance of strategic coaching.            - dpm] Benefits of a Strategic Business Coach (Someone who has been in your shoes)   Over the past few years, I have been asked repeatedly why The Mead Consulting Group  does not promote the coaching we do with CEOs and business leaders. My response has typically been that the term "Coach" is much overused and "abused." We have not wanted to be lumped into the bucket of people who bill themselves as business coaches but who have limited or no real life business experience.   We have been doing strategic business coaching for many years. For many years, helping company leaders execute and grow as leaders has been a core part of our DNA. Our entire consulting practice is built around helping companies reach the next level - helping them to get results. Leadership, communication, strategic thinking, setting priorities, motivation, team development, alignment, accountability, and personal development are all part of the process. These are developed by close interaction with our client's leaders. We refer to it as CEO coaching or strategic coaching, but in truth it usually involves the entire senior team.   My personal education with a strategic business coach.  A recent conversation with a client brought back to mind my personal situation - when I was thrust into the CEO role by the death of the Founder. My best strategic coach was one of the Board members who took me under his wing. I was 27 and he was 73. He had lived quite a life, from growing and selling businesses to failed partnerships, lawsuits, large acquisitions, employee issues. He had forgotten more than most people ever experience. He was an irascible cuss and didn't suffer any fools. I was able to leverage his failures and successes and his incredible perspective. He helped me achieve my goals, and made sure I was prepared for almost any situation that came my way. He was the person who helped me understand the importance of developing and focusing on strategic plans that can actually be executed.   I saw an article a number of years back that listed some reasons why business leaders could benefit from having an experienced strategic coach. Long ago I turned these into my own list - which I will outline below. It is this same focus that our senior consultants bring to every one of our clients.   Benefits of a Strategic Business Coach You gain a needed confidante Strategic Business coaches force you outside your comfort zone You get personal attention from someone who knows your business. You hear the hard truth - that people inside your company won't share You get objective, unbiased opinions You learn how to turn your ideas into reality... Or hear why you are chasing too many shiny objects and need to focus You are held accountable for getting important things done - focus on strategic issues not what shade of mauve the office furniture will be. You get exposed to a huge external network You gain confidence in your decisions and actions If you want more information about how we help CEOs and business leaders continue to grow and accomplish their goals, please contact me ------------------------------ The Mead Consulting Group helps dozens of companies and organizations -like yours - every year with both strategic planning & execution, and strategic business coaching.  These processes have helped our clients consistently outperform their competition. If you would like to discuss your situation with one of our senior consultants, please contact me to set up a complimentary meeting. Remember - our consultants have been experienced business owners, CEOs and senior executives who have been in your shoes. Our consultants have all been through uncertain economic times before and can help you best position your company to thrive through these next years.

Survival is not a strategy: The most common mistakes organizations make about strategy

[Editor's Note: In difficult and uncertain economic times, it is easy to get distracted by the very real details of getting through the "economic day." Sometimes, the development and execution of strategy that leads to a true competitive advantage can get lost in the tactics of survival. Organizations with a focused strategy can emerge from economic (and health) downturns with distinct competitive advantages. I thought this book might be interesting for those of you whose companies might have perhaps inadvertently slipped into one of the mistakes about strategy. I hope you find it useful.               -Dave Mead, Mead Consulting Group]

Michael Porter is one of the most renowned authors on the subjects of strategy and competitive advantage. In her book, Understanding Michael Porter: The Essential Guide to Competition and Strategy, Joan Magretta distills Porter's core concepts and frameworks into a concise guide for business practitioners.

Porter discusses common strategy mistakes. Key concepts include:

Assuming you can do it better than everyone else. One of the biggest mistakes a manager can make is to assume the best results come from competing to be the best, going down the same path as everybody else and thinking that somehow you can achieve better results.  Competing to be unique is a much more effective strategy.

Confusing marketing with strategy. It's natural for strategy to arise from a focus on customers and their needs. So, in many companies, strategy is built around the value proposition, which is the demand side of the equation. But a robust strategy requires a tailored value chain - it's about the supply side as well, the unique configuration of activities that delivers value. Strategy links choices on the demand side with the unique choices about the value chain (the supply side). You can't have competitive advantage without both.

Overestimating strengths.  There's an inward-looking bias in many organizations. You might perceive customer service as a strong area. So that becomes the "strength" on which you attempt to build a strategy. But a real strength for strategy purposes has to be something the company can do better than any of its rivals. And "better" because you are performing different activities than they perform, because you've chosen a different configuration than they have.

Not having a “What we’re not going to do now” list.  The need for trade-offs is a huge barrier. Most managers hate to make trade-offs; they hate to accept limits. They'd almost always rather try to serve more customers, offer more features. This prevents them from being able to focus resources.

Misunderstanding the definition of business. Understanding your business too narrowly can leave an organization exposed to disruption from “unseen” competitors (e.g., the record business, Blockbuster video, etc.)

Trying to please everybody - The desire to delight and retain every single customer.

If you listen to every customer and do what they ask you to do, you can't have a strategy. Strategy is not about making every customer happy. When you've got your strategist's hat on, you want to decide which customers and which needs you want to meet.

The worst mistake-but the most common one - is not to have a strategy at all"

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Five possible scenarios of the economy in the future

[Editor's Note: 

Every day we get new and often conflicting messages about the Covid-19 pandemic and the economic outlook. It is very difficult for most companies to think out farther than "how to re-open" and "how to survive." However, as we have learned from previous economic downturns and disruptions, the most significant competitive advances (and retreats) come during these events and the subsequent recoveries. Thinking through the possible scenarios of the future and being prepared to adjust as they play out will be critical to future success. I hope you find this thought-provoking.  -dpm]

 Five possible scenarios of the economy in the future    

[Scenarios - in no particular order]

1. Paralysis/Survival: L-shaped recovery This describes a situation where the pandemic will persist and, similar to the Spanish Flu pandemic (1918-1920), the second wave may be worse than the first. Government and the healthcare system are overwhelmed once again by a second wave and the pandemic persists through 2021 causing very serious long term global economic consequences.

This, clearly, is the worst-case scenario. In this situation, "unexpected" and disruptive events will increase over the next two to three years, and companies (and/or economies) will react by pulling into a protective shell. The shocks include the failure to contain COVID-19 across the globe, the potential that a successful vaccine in sufficient production volumes is unavailable through 2021, and there are repeated economic shutdowns due to significant "flare-ups" of infection. Isolationism and protectionism may prevail. Unemployment remains at very high levels through 2021. Companies (could) react by trying to protect existing assets with continued layoffs, reduced R&D investment, reduced product development, and lower foreign direct investment. Consumers may compound the problem by continuing to reduce spending dramatically.

The bottom line in this scenario:A long, global recession, possible depression

 2. Slow Growth / Long recovery - The Swoosh-shaped or 

"Bathtub -shaped (__)

This scenario predicts a future where the impact of Covid-19 will persist, and the economy will take several years to recover.

This, too, is a grim scenario, though not as irredeemably dismal as the previous one. In this case, "disruptive events with moderate impact continue, and while seen as normal, they result in slow economic growth. This scenario would be marked by debt and currency problems in key world economies, though a full-blown long-term global depression is avoided. Unemployment would continue to be higher through 2021 and well into 2022, and consumer confidence would remain low. High unemployment numbers will continue for several years, taking almost a decade to return to pre-pandemic levels. Companies would learn to cope with their losses. They would make modest investments. The rebuilding of consumer confidence begins on a long, low trajectory, especially in areas such as restaurants, hospitality and travel.

The bottom line in this scenario: Life becomes hopeful but it's a long grind to full recovery. Trends such as remote work, decline in bricks & mortar retail, meal and grocery delivery, etc., are accelerated.

3. Thriving with Chaos (or Thriving with COVID-19): U-shaped recovery The Pandemic persists past initial projections placing a burden on governments around the world that struggle to handle the crisis. Public-private partnerships emerge as companies across industries partner to respond to critical needs and needed innovation. External events will be uncertain and surprising, but companies will respond mostly in an active and opportunistic fashion.

In this scenario life is still gray, but sunlight begins to filter through the gloom in some areas. The unpredictable, disruptive events of the pandemic" would continue, but "corporate and national resolve to be successful in the face of adversity" would drive modest prosperity. While uncertainty would continue, companies take a more empathetic stance to best serve employees, customers, stakeholders. New employee and customer safety measures, new facility layouts, regular testing, social distancing, flexible scheduling, and remote work (telework) would be considered a cost of doing business. Companies would try to seize business opportunities amid the disruption and uncertainties and make increasing investments in areas that seem to be potentially profitable. The economy is slow to improve through 2020 and 2021, but then rebounds sharply.

The bottom line: Life could be better, but there's money to be made if you know where to look.

4. Growth - The V-shaped recovery  In this scenario, external events will be known and expected, and companies will respond actively and aggressively. There is no second wave of the virus, Mechanisms to combat the virus (such as vaccines developed in record time by the end of 2020 and produced in sufficient quantities) are mobilized and lead to effective prevention and treatments. A Global "Marshall Plan" is developed to vaccinate not only the United States, but also the world.

This, clearly, is the best-case scenario, one in which countries and peoples of the world recognize common goals and focus on healthcare and economic development as the route to permanent stability. The key features of this scenario would be that the recession proves short-lived through 2020, the economy begins to rebound in 2020 but improves sharply in 2021 to return to some normalcy. Consumer confidence responds in very short order as the virus recedes.

The bottom line: The COVID-19 pandemic disrupts society, but despite a slow start, is curtailed by an increasingly effective health system and government response. As the storm passes, Life's return to normalcy is swift.

5. False Optimism - Sharp Uptick followed by a long swoosh. In this scenario, as economies open up, there is a surge of pent-up demand amidst quarantine fatigue. However, as the pandemic persists past initial projections, the reality of a long grinding recovery becomes apparent. Conditions are similar to the long slow recovery outlined in scenario #2 (above).

The bottom line in this scenario: There is a false optimism that results from an early surge in the economy. Then reality sinks in and while life becomes hopeful, it's a long grind to full recovery. Trends such as remote work, decline in bricks & mortar retail, meal and grocery delivery, etc., are accelerated.

Beware trying to guess the future. Many organizations lock in on a view of the future. With so many uncertainties that would be a mistake that could result in a lack of preparedness.

If these five scenarios - or a combination of them - represent what lies ahead in the next several years, what strategies should companies put in place today to deal with them?  Clearly, though, neither these scenarios nor the strategies that follow from them will apply across the board. The scenarios will play out differently not only in different industries, but also in various regions of the country and the world. Accordingly, the strategies that companies develop to cope with these situations will need to vary to reflect these differences.

It would also be a mistake to allow the uncertainties that prevail today to put business decision making on hold. The future may be unclear, but one thing is certain: In today's circumstances, scenario planning is more than a tool. It is a weapon to combat uncertainty, and the future will belong to companies and executives that wield it well.   

      

How well is your company prepared to respond? Are you taking control of the things that you can? Are your actions strengthening your company - or weakening it? Are you building flexibility into your plans? Have you changed your approach to planning?

Ten tips for preserving the value of your company in these uncertain times

[Editor's Note: Many business owners have spent years building value in their businesses. A number had been planning to exit in 2020 or 2021. Now, people are fearful that the value that took years to build, may erode over a few months. While this combined health and economic crisis is more complex than other economic downturns, let's look at what we have learned from other periods of uncertainty and put in place the steps that will help preserve value.   -dpm]

Fear, Uncertainty, and Doubt - These conditions can shake even the most confident business owner and CEO.

• Fear of the unknown.
• Uncertainty about the future
• Doubt about the appropriate path

 Principles we learned in previous downturns:

• Focus on business fundamentals
• Control what you can
• Pay attention to relationships
• Communicate, Communicate, Communicate
• Look for opportunities

Here are ten things to keep in mind in order to preserve value: 

1. Conserve cash- This event could have lingering effects on consumer confidence and recovery could well take several quarters.

• Liquidate surplus finished goods inventory if applicable - turn it into cash
• Manage receivables closely
• Watch Cash Flow - Daily

2. Change the way you operate

• Systematically Examine expenses
• Not just the level, but the processes and the vendors
• Eliminate some expenses for the next 90-180 days (especially discretionary)
• Process mapping to determine if there are unnecessary steps, cost, or waste
• Give your suppliers/providers the ability to offer good ideas, not just be an order taker
• Eliminate some positions - Take the opportunity to trim the underperformers
• Cut wages if necessary (start w/ top management)
• Accounts Receivable - "Pre-collection" activities
• More frequent invoicing
• Seek extended terms from suppliers (Talk with them - don't just stretch them out) 

3. Keep your banker informed of your plans especially as circumstances change

• Overcommunicate with your banker
• What new communication is required - type/ frequency/ form?
• What new reporting is required?
• Do you understand bank and regulatory requirements and their impact on financial lending instruments?
• How can you streamline your reporting function for timely and accurate reports?
• How has the environment changed your relationship with your bank?
• What policy and procedure updates are necessary to meet lender requirements?

4. Demonstrate leadership as a CEO or Business owner

• Be visible - Communicate with employees what you know; be honest about what you don't know; Be frank, but show confidence
• Maintain high expectations
• Require accountability
• Reinforce your culture
• Control what you can 

5. Communicate with customers and suppliers

• Tailor offerings to your customer's needs, not yours (saves $, flexible payments, simplify, lowers risk, solves problems)
• Use this opportunity to strengthen relationships - People want to do business with someone they know and trust
• Keep in touch with suppliers; some may be in trouble

6. Upgrade talent

7. Develop scenarios and plans for the future new normal

• Things will not be the same. No one can accurately predict the future, so we need to anticipate and be prepared for different views of the future environment

8. Be prepared for the upturn    

9. Look for opportunities created by uncertainty - perhaps a merger or acquisition, new partnerships, etc.

10. Importance of Acting NOW

• Most significant competitive gains occur during downturns
• Competitors are sleeping - internally-focused
• Look for ways to reinvigorate your company and employees
• Get on the front side of this; Not acting will make things worse 
• Never waste the great opportunity of a downturn

________________________ 

 We can help. Our senior consultants have helped companies successfully navigate through several economic downturns.  Contact;Dave Mead if you would like to start a conversation.