Entrepreneurship Through Acquisition Conference Notes | February 2021
This week we’re participating at the ETA Conference put on by The University of Chicago – Booth School of Business and Kellogg School of Management at Northwestern. If you were unable to attend, or if you did attend and wanted to compare/contrast session highlights, below is the notes that we took.
ETA Day 1
Managing a Search Fund Business – A Discussion with CEOs
Presented by Professional Bank. This panel discussion with ETA operators will focus on three key areas of operating a business – people, strategy, and finance – as well as the challenges and learnings CEOs have found.
Cybersecurity and Implementation
Presented by Mowery & Schoenfeld. “So you own a business, now what?” This panel will take a realist look at the financial, accounting, and cybersecurity challenges facing business owners. Participants will leave equipped with practical tools to help them make solid decisions during the search phase that will set them up for success as an early owner-operator.
Operating and Searching Amidst COVID-19
Presented by NextGen Growth Partners. This discussion will address how NextGen Growth Partners navigated the impacts of COVID-19. They will discuss the various ways their portfolio companies and entrepreneurs-in-residence adapted to unforeseen circumstances, and how they leveraged their ecosystem to weather the storm, innovate, and capitalize on great opportunities.
To access the notes from Day 1, please register below and you’ll have immediate access:
Family Office as Entrepreneur Capital Source
The Point: The Family Office as Entrepreneur Capital Source is an avenue rarely investigated, until recently. Why? The Family Office structure is one that is a relatively new “player” in the capital source space. So what do you need to do as an entrepreneur in order to approach a family office and successfully secure capital? In this post, we’ll explore family offices as Entrepreneur Capital Source… Enjoy!
When you are looking into the best way to raise venture capital for your entrepreneurial effort, you need to keep in mind that there are two main options when it comes to raising capital – Angel investors and institutional investors. Angel investors are wealthy individuals who provide small amounts of money to start a new business with the intention of generating a much larger return later on. While these investors do not normally require any particular terms nor have control over organizational operation when providing capital, they are also extremely impatient and lack understanding of the technology and risk issues that you are going through in building your new company as an entrepreneur. Most angel investors will prefer to see a business plan and more importantly, a projected financials so they can get a full picture of the business you are attempting to build.
Family offices on the other hand, run more like private equity firms where joint ventures between entrepreneurs and them as business partner generally require an initial investment. Typically, this relationship is formed because it allows family offices to tap into the entrepreneurial mindset of their entrepreneur partners and receive returns that are superior to other capital instruments. Most family offices that run like a private equity firm prefer to provide capital to small to mid-sized organizations rather than large corporate companies because of the obvious benefit of being personally involved in the business and being able to contribute ideas and help direct the business (Again, don’t overlook the returns!) They also are able to provide a direct exit path from the current project to providing capital to future projects. In order to raise family office capital funding requires the entrepreneur to again submit a formal business plan along with a well-written equity prospectus and a complete financial statement so the family office knows exactly what kind of return they can expect.
Family offices provide a great way for relatively inexperienced entrepreneurs to obtain the experience needed to raise large sums of capital and have a smart-money partner along with them. Because the entrepreneur receives small investments from family offices and not from institutional investors, they typically view paying very good returns on these investments as a small price to pay in return for the capital received to accomplish goals. The key to success is in the collaboration and relationship building between the entrepreneurs and family offices. Family offices are really just an extension of a venture capital outlet, allowing entrepreneurs to access the wealth of the family office entrepreneurial team at a much lower hurdle.
Sam Palazzolo
Selling a Small Business – 5 Tips for Baby Boomers Approaching Retirement
The Point: As a small business owner, you pour your blood, sweat, and tears into your business! The day-in/day-out challenges associated with leading a business as it’s owner are supposed to be offset by the “golden” years of selling it and retiring. As the largest demographic in our society, the Baby Boomers, approach their exit it appears as though the golden years are turning to rust before our very eyes! So, in this post we’ll explore selling a small business with 5 tips for Baby Boomers approaching retirement… Enjoy! (NOTE: While the focus of this article is on Baby Boomers, it can be applied to any small business owner looking to successfully exit!)
The Baby Boomers
Baby Boomers born between 1946 and 1964 represent an estimated 73 million people in our society (The second-largest age group after their children, the Millennials, born from 1982 to 2000). Baby Boomers represent 41% of small business owners or franchise owners (Second to Gen X’ers born between 1965 and 1980 at 44%).
This demographic rapidly approaching retirement age (generally thought of as age 62 – the age at which a person is expected or required to cease work and is usually the age at which they may be entitled to receive superannuation or other government benefits, like a state pension). As they achieve this milestone, few appear to be financially ready/able to successfully retire. The top two reasons being that (1) they were the first generation expected to establish for themselves self-retirement tools/savings as opposed to government provisions and (2) the economic recession from 2008 reducing significant savings (if any were established).
Baby Boomer Small Business Owners
Statistics reflect that almost 40% of Baby Boomer small business owners feel they don’t have the financial confidence to retire before they’re 65, let alone three years earlier at 62! What’s more, a recent study suggests a full 72% don’t even have an exit strategy. Exit strategies for small business owners typically consist of the following (in popularity order):
- Liquidation
- Liquidation Over Time
- Keep Your Business in the Family (i.e., Succession Planning)
- Sell Your Business to Managers and/or Employees (i.e., Employee Stock Ownership Planning – ESOP)
- Sell the Business in the Open Market (i.e., Mergers)
- Sell to Another Business (i.e., Acquisitions)
- The IPO (Initial Public Offering)
Tips for Baby Boomers Selling Their Small Business for Retirement
As an active acquirer of small businesses (You can view my firms Acquisition Criteria here: https://tipofthespearventures.com/acquisitions/), I’ve compiled the following five (5) strategies or tips for successfully selling the Baby Boomer owned small business. (Note: As a somewhat conservative investor, I caution against the “all-your-eggs-in-one-basket” mentality when it comes to selling your business ahead of retirement).
Tip #1 – Diversify Your Money
One of the biggest strategies I see small business owners do is hinge their entire retirement on the sale of their business. A better strategy consists of acting well before the sale. It is important that small business owners take money out of the business from a personal standpoint and invest those funds no less than three years prior to an anticipated sale. Typically, most businesses will provide the most recent years financial statements as part of the financial packet to prospective buyers. Statements that reflect anomalies are scrutinized, leading to a sale multiple (3-5x) that will be less than or undesirable.
Tip #2 – Financial Statement Cleaning
Along those lines, the organization’s financial statements are the foundation reviewed during acquisition due diligence when selling any business. Updating the core documents like profit and loss statements can make a big difference to anyone exploring the enterprise.
Updated balance sheets and tax returns for at least the last three fiscal years is crucial in projecting the best financial position possible. The goal being to make sure everything ties together, making sense to potential acquirers and being easy to understand.
Tip #3 – Removing Yourself from the Business
Do you have staffing that’s able to run the business after your exit? As an active Owner Investor (as opposed to Owner Operator) I typically look for organizations that have depth of staff that will allow the organization under new leadership to continue on without current ownership running the entity day-in/day-out. Easing the transition here means hiring employees that will stay as the face of your business when the ownership changes. This strategy allows small business owners to potentially increase the value of their business and the likelihood it will sell.
Tip #4 – Operational Documentation
Having an Operational Guide is important for every business to successfully operate/run. These Operational Guides are critical details for manufacturing, distribution and sales. This guide that is written down and documented makes it easier for the new buyer to pick-up where the old owner left off and drive the organization forward. They also make it easier/less stressful for those employees remaining with the business.
Tip #5 – Identify Legal Barriers
Identifying if the sale of your business is an Asset (when a buyer is interested in purchasing the operating assets of a business instead of stock shares) or Stock (shareholders of the target company receive shares in the acquiring company as payment, rather than cash) sale will ease the exit process. Removing any of the legal hurdles can make the road to a sale less difficult for acquisition. For example, one that we keep coming up against is the transfer of the lease (Landlords using the sale of the business as an opportunity to renegotiate leases and up the rent can be viewed as undesirable to potential buyers).
SUMMARY
In this post, we’ve explored selling a small business with 5 tips for Baby Boomers approaching retirement along with 5 tips. All of these strategies are desirable for potential acquirers. As such, Baby Boomers looking to sell their business should look to complete them to position their business as they look to exit into their golden years of retirement.
Sam Palazzolo
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Is Happiness a Requirement for Success?
Are you happy? Ask yourself right here/right now are you truly happy? It seems the world right now is not a very happy place. With a health pandemic raging on, long overdue protests taking place, and a world economy on the verge of collapsing the news headlines don’t share a lot to be happy about. It’s an unrealistic expectation for people to be happy all the time, even without the current happenings. So, it got us thinking here at the Tip of the Spear Ventures, is happiness a requirement for success? In this post we’ll explore the benefits of happiness and share two reasons why it’s not good to be happy all the time (Trust me… Research shows it’s not all it’s cracked up to be)… Enjoy!
Happiness Meet Ditch
Yesterday I had a Zoom meeting with a colleague (I’m sure you did too!) The meeting started off just like every other meeting I’ve ever participated in, but quickly took a hard left-turn straight into the ditch! After we initially exchanged pleasantries (“Good morning (Name)”… “Good morning Sam”) we breached the “How are things going?” moment. This is where the turn came in! My colleague expressed “I’m bitter, burned out, and besieged!” How do you respond to that? Truth be told, I’ve asked that question a thousand times, pre-pandemic/pre-protest and typically get the standard “I’m good, how are you?” response. But not this time! Was my colleague trying me on? Didn’t they really owe me the standard response so that we could get down to business? Why was I facing this derailing moment?
Positive Psychology and the Study of Happiness
Positive psychology is a field born roughly 25 years ago. Positive psychology is often mistaken of perpetuating a myth regarding happiness, inasmuch a good life is all about being happy. There have been a number of good works on the topic of happiness, including Shawn Achor’s “The Happiness Advantage,” Matthieu Ricard’s “Happiness: A Guide to Developing Life’s Most Important Skill,” and The Dalai Lama’s “The Art of Happiness: A Handbook for Living” (Even I’ve written on the topic in a post titled “The Leadership Challenge: Pollyannaish!”) But perhaps this happiness-focus is not exactly what it should be?
According to Martin Seligman, perhaps the most-often cited expert in the field of positive psychology, the study is meant to approach optimal human functioning at large, including the topic of happiness. Furthermore, it turns out that happiness might not be the best state to operate in for success (As a matter of fact, it isn’t!)
Success does not Require Happiness
In order to function optimally in our lives, we do not need to operate in a perpetual state of happiness all the time. So why would we not want to operate in such a state of bliss? Here are two (2) reasons:
Why are You Here? – Meaning and Happiness
The question is as old as time: “Why are you here?” or “What is your purpose?” Defining your meaning is difficult, after all it’s at the top of Maslow’s ‘Hierarchy of Needs’ for a reason. With this in mind, answering those questions is going to take some thought… Some real deep thought! The experiences, actions, and relationships that make your life worth living typically fall into the two camps of “hedonic” and “eudaimonic.” Hedonic life moments are all about pleasure (Seeing beauty, eating chocolate, and/or loving another). Eudaimonic life moments, on the other hand, are all about personal meaning and purpose (Upholding your personal values, finding ethical meaning expressed in what you do, and/or standing up for someone that can no longer stand). Most of the time, what is most meaningful isn’t the most pleasurable and vice versa.
Negativity Makes Life Better!
While happiness might be a preferred state, research shows that negative feelings can in fact be good for us! Anxiety and fear can protect us (think “fight or flight”), guilt can motivate us to make amends, and anger can help us increase focus on a problem at hand. While there’s a difference between feeling an emotion and acting out as a result of it, most are able to experience the negative emotion in life’s ups and downs with a goal of creating a healthy and manageable lifestyle.
SUMMARY
So, happiness as it turns out is not the sole requirement for success. While living a good life isn’t just about being happy, it also entails incorporating authenticity, pleasure, pain, happiness, sadness, love and conflict. If we were only happy all the time, we’d overlook opportunities to provide improvement to ourselves, those we lead, and the communities in which we serve.
Sam Palazzolo