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30 Days to ETA | Day #27 – ETA Capital

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If you’ve been reading along in this 30 Days to ETA series, you know that in the Day #26 post I shared as an Entrepreneur Through Acquisition (ETA), finding, researching, conducting preliminary due diligence — as well as interviews — are all precursor to what is considered by most to be the first step in the formal business sale, the ETA Letter of Intent – LOI (You can read the previous post by CLICKING HERE). Now that you have the found the business and the ownership vision is in sight, how are you going to fund it to make it a reality? So, in today’s 30 Days to ETA post, we’re going to explore ETA Capital… Enjoy!

30 Days to ETA - ETA Capital

ETA Capital – 5 Sources

When I think about our Mergers & Acquisitions practice at Tip of the Spear Ventures, the decisions that we make when it comes time to purchase a business generally fall within the confines of a financial decision. One of the mentors that I have in the capital space told me years ago that in order to successfully acquire a business, you have to bring capital. I couldn’t agree with him more! But how much and in what form?

The following represents five sources of ETA Capital that you should consider as an Acquisition Entrepreneur. These five sources fit regardless of whether or not you are breaking-off a piece of your Balance Sheet or going out and securing a debt instrument. NOTE – Entrepreneurship Through Acquisition is risky. Don’t believe for a second that because the business you are exploring has provided an income for the previous owner that the business under your new leadership will continue to do so — Especially in the early goings. Why do I share this? See the SUMMARY at the conclusion…

There has never been a time when capital is so inexpensive… Leverage your cash position accordingly!

Sam Palazzolo, Managing Director @ Tip of the Spear Ventures

ETA Capital Source #1 – Cash

The first way to acquire a business is to buy it with cash. Most likely, this is the way you expect to get paid when you sell your company when that time comes, right? However, this is the least likely ETA Capital sourcing event to occur. Why, I mean after all isn’t cash king? Of course cash is king, but with the cost of money so inexpensive, why would you want to put all of your cash to work in one place?

I have a capital mentor who is famous for telling me that with all those benjamins in the bank, the goal is to get those benjamins out into the economy and make little baby benjamins! It’s a good visual way of saying put your money to work for you, and I’ve grasped the concept since the day he shared it with me.

So while cash is king, it also like a king needs a heredity line of offspring to go forward with. So the ETA Capital Source of Cash should be your least likely way of funding your ETA Mergers & Acquisitions.

ETA Capital Source #2 – Stocks

Secondly, buyers and sellers can use one of two types of stock buy-out methods to pay for a business upon the sale. For these stock methods to work, the business must operate as a C Corporation or an S Corporation (technically an LLC taxed as a C or S is also allowed) that can buy, sell, and trade company stock. Remember our discussion about business operations and entities back in 30 Days to ETA post #11 – Entity Formation (You can read the post by CLICKING HERE)? This is where your chosen entity can affect your future sellability. If you’re not sure which business entity to choose or you’re not sure how your business operations affect your sellability, go back to that post.

Before we leave the ETA Capital Source topic of Stocks, let’s take a deeper dive into Employee Stock Ownership Plans (ESOP) and Stock Buy-Outs:

An Employee Stock Ownership Plan (ESOP)

What if you want to leverage the employees of the organization and make all of you owners of the business you are acquiring? Enter the Employee Stock Ownership Plan (ESOP). To buy a business through an ESOP in its simplest terms, you must hire an independent evaluator to place a value on the company’s stock. Once the value is determined, you hire a trustee to set up and operate an independent trust. At that point, the trust buys stock shares from you based on the purchase price the evaluator set. Employees, then, have the option to purchase company stock from the trust, which will hold the stock as long as the employee works for the company. When an employee leaves or retires, he can sell the stock back to the trust at a fair market value.

While the ESOP can get very complicated, it has a lot of advantages. Essentially, this is a way an owner can remain with the company while taking the capital out of the company. If the owner doesn’t want to retire in the immediate future, they can set up an ESOP. Then, they continue to partially run the organization until they’re fully paid or have sold all of their stock shares back to the trust.

Another good thing about an ESOP is that it benefits and rewards long-term employees. The ESOP creates a long-term initiative and loyalty program that rewards employee commitment and hard work. It incentivizes employees to drive the company towards success because they own portions of it. The more valuable your stock in the company becomes, the more money they get when they sell!

An ESOP is not for every corporation, though. Some entrepreneurs don’t like having a third party evaluate company shares. Many feel that the valuation is lower than what they would receive for their stocks on the open market. Another disadvantage of the ESOP is that the company has to have cash. You have to keep a fair amount of cash on hand so that when an employee leaves, you can convert their stocks to cash and pay-out that particular person’s shares.

Stock Buy-Outs

The second method of stocks as an ETA Capital source is stock buy-outs. These stock buy-outs can get complicated, so I’ll try to make it as simple as possible. To generate additional capital or to retire from the business, the owner of the company can sell their company stock. As in an ESOP, you’ll want to hire an independent valuator to place a value on those stocks. As the ETA, you can then purchase the majority of their shares, all of their shares, or portions of them. In doing so, you become shareholders/owners in the company and have rights to elect directors and vote on company policies. However, the previous owner may have the option to keep some of the company’s stock, depending on how you set the stock buy-out up. Thus, they can maintain some control of the business and receive immediate cash capital.

Let’s assume as the ETA you buy the company and as the majority shareholder drive the business to unprecedented success. Consequently, all shares increase in value, making everyone who owns stock lots and lots of money. With hopes this will happen, you want to add a provision into the stock sale agreement that allows you to buy additional shares at set terms, such as at the price the shares were valued upon the sale of the business.

Conversely, what if as the Acquisition Entrepreneur you drive the company into the ground? What if the value of your stocks plummet? You must have provisions written into the sales agreement which allows you to purchase additional shares at the same value majority owners can or sell them to other owners at a predetermined set price.

Another provision you want to address in stock buy-outs is a tag-along right. In other words, if as the buyer you purchase the majority of the company shares for $10 and then find a buyer to pay $20 for them, make sure you can include your shares in that deal. You want to “tag-along” on that sale and get that $20 per share.

Lastly, make sure you address piggyback rights in a stock buy-out. If as the buyer you ultimately make the shares public, you’ll want to address the right to publicly register shares. Most sellers will want the right to “piggyback” on your success.

ETA Capital Source #3 –  EarnOut

Here is a definition of ETA Capital Source #3 – Earnout from Investopedia:

“An earnout is a contractual provision stating that the seller of a business is to obtain additional compensation in the future if the business achieves certain financial goals, which are usually stated as a percentage of gross sales or earnings.”

Essentially, this allows you as the buyer to give the seller a fair price for their company now, but gives the seller the bonus if they think it’s worth more later on if/when the business does well. For example, say the company has $5,000,000 in sales and $500,000 in earnings. As the ETA you identify that you wants to pay $2,500,000 for the company, but the seller think that’s too low (Of course). The seller counters that the company will drastically increase in sales because of some groundwork they have laid (Perhaps a robust sales pipeline or backlog of their book of business). For both parties to agree, you enter into an earnout or a compromise. In this example, you pay the $2.5 Million up front as a deposit on the business. Then, you agree to give an additional $2.5 Million IF the company reaches $10,000,000 in sales over a three year period. If the company doesn’t reach a certain amount of sales, you don’t have to pay the seller any additional money. Or, you can add in a provision that you will owe the seller “$X” more at the end of three years dependent on a predetermined earnout scale for growth.

Using the same $5,000,000 and $500,000 from our example, let’s say you pay the seller $2,500,000 up front. Instead of asking for an additional $2,5000,000 IF the company reaches a certain amount of sales, the seller asks for a guaranteed 5% of the company’s gross sales over the next three years. Then, and only then, if the business makes $10,000,000 in three years, you owe the seller an additional $500,000 per year for the 3-year term.  If the business makes $20,000,000, the seller earns another million per year of the 3-year earnout term.

An earnout can offer the seller a handsome reward if the company is who they say that it is. We’ve gone through LOI and typically identified that there is no way the business’ sales pipeline is anything but fiction. If we had gone through with the Purchase Agreement, it would have left the seller with nothing other than the down payment and us with the debt associated with structuring that down payment. So be wary, and protect yourself. Know the seller’s nonfiction reality before you choose to exercise an earnout option.

ETA Capital Source #4 – Seller Carried Note

A great option for buyers, Owner Financing may be the best option for sellers.

Different than an earnout, you and the seller agree on the company’s worth. You cannot or will not come up with the cash to cover the entire purchase price or even the down payment.  Typically, you offer to pay 65% – 80% of the company’s value, but ask the seller to carry a promissory note for the remaining 20%-35%. In this case, then, you expect the seller to carry some of the risks with him.

If you’re going to do a seller-carry, take a few factors into consideration:

  • Is the company well seasoned? In other words, is it strong enough to withstand transitions within the market? Is their product or service adaptable if technology advances or the economic market crashes? You may be investing in a market fad. Maybe the company is one of 20 stores in a small town. You know, because of economic circumstance, the majority of those stores will close their doors. If you doubt the future longevity of the company for any reason, then you may want to choose a different buy-out option.
  • Skin in the game! You are asking the seller to put “skin in the game” here, even as they exit the business. They must trust you enough to carry a note. What happens if you liquidate the company assets or spend all the company cash? Does the seller trust you enough to make consistent, long-term payments? Essentially, you’re asking the seller to leave you their greatest asset — the company’s assets — and risk it in your hands. At Tip of the Spear, we love owners who want to partner with us for the long term. Even though they are looking to exit their business, we still value them as a valuable resource and want to create an environment of trust.

ETA Capital Source #5 – Offer of Employment

In this last option, you may offer the seller some form of employment as part of the buy-out. If you’d like the seller to continue working within the business, this option might work for you. In those instances where you are acquiring a business where you don’t know enough/everything about the industry, ask the current owner to remain in the company at a certain level for a set amount of time so as to teach you how to operate the business. In my experience, I’ve seen the offer of employment buy-out work well, and I’ve unfortunately seen it work really bad. Here are a few examples of Offers of Employment gone right/wrong:

  • Leadership preferences. Sometimes, sellers stay to fulfill an employment contract and get frustrated. Usually, this happens when there’s a significant difference present (Difference in leadership styles, operational preferences, etc.)
  • It’s personal. Other times, buyers and sellers may encounter personality conflicts. Remember, sellers have poured years of blood, sweat, and spears into this business. They have made it their “baby” and if as the ETA buyer you come in and start making all kinds of changes, these actions could create resentment, angst, and animosity in the relationship.
  • It’s business. I’ve worked with over 1,000 organizations and an exponential number of leaders therein. I recognize that while there are similarities in style, no two businesses are operated the same and no two business situations are alike for a leader to apply the same principle. If buyers and sellers recognize that conflict can arise in this buy-out option, they can build protective provisions into the employment contract and make the arrangement simply business. For example, as an ETA you intend to become the President/CEO of the company and want the seller to report to you directly. Make sure you spell-out the specific roles/responsibilities, job description, even work location for the exiting owner. Try to get every card face-up on the table. The last thing the previous owner will want to do is go from being the President/CEO of the company to cleaning toilets. Make certain you add/consider exit clauses, such as: What if they get fed up? Is there a fall-back provision where they pay back some money, or do they get to leave and just keep some unearned compensation? What if you get tired of the exiting owner? Can you terminate them with/without pay?

SUMMARY

So, in today’s 30 Days to ETA post, we explored the concept of ETA Capital. Once you have the found the business and the ownership vision is in sight, how you are going to fund it to make it a reality is crucial. As such, we’ve explored 5 sources of ETA Capital for you to explore and select the best option to make your ETA dreams come closer to reality. Don’t forget, every business acquisition is different… Rely on your ETA Professional Team for counsel/advice.

Sam Palazzolo

30 Days to ETA | Day #26 – The ETA Letter of Intent (LOI)

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If you’ve been reading along in this 30 Days to ETA series, you know that in the Day #25 post I shared that your ability to analyze reports, or the CIM will not be enough as an Entrepreneur Through Acquisition (ETA). You’re going to have to conduct interviews with key parties on the seller’s side of the equation successfully. The ETA Owner Interview needs to be done so that you gather all of the missing pieces of information you need to proceed — if justified (You can read the previous post by CLICKING HERE). Finding, researching, conducting preliminary due diligence — as well as interviews — are all precursor to what is considered by most to be the first step in the formal business sale, the Letter of Intent (LOI). So, in today’s 30 Days to ETA post, we’re going to explore The ETA Letter of Intent (LOI)… Enjoy!

30 Days to ETA - The ETA Letter of Intent (LOI)

The ETA Letter of Intent (LOI)

Sometimes called a Memorandum of Understanding or an LOI, the Letter of Intent alerts a business seller that a buyer “intends” to purchase their company. Usually, the LOI is non-binding, but many courts uphold its provisions as contractual and binding. Therefore, whenever you provide a Letter of Intent, make certain your attorney and your transition team have created/reviewed it respectively.

At Tip of the Spear Ventures, when we create an ETA Letter of Intent (LOI) we want to convey the purpose this potentially binding document serves In its most basic form, the ETA LOI is an agreement to agree or to reach an agreement. The ETA Letter of Intent (LOI) sets the stage for the business sale. It can effectively do one or more of the following things:

  1. Lay out the expectations and essential terms of the business sale.
  2. Serve as preliminary documentation for lenders or governmental boards.
  3. Put the public on notice that there will be a sales transaction.
  4. Determine which party or which team member will draft certain documents.
  5. Set a time frame for negotiations, periods of purchasing exclusivity, purchase agreements, and closings.

Elements of The ETA LOI

Whether the ETA Letter of Intent (LOI) shows a basic commitment between the buyer and seller or publicizes the trading of a company’s stock, it will inevitably contain a number of elements. While not exhaustive, here is a list of details typically contained therein:

  • A list of the assets to be sold in the transaction.
  • The purchase price for the business and all its stated assets
  • A good faith, or earnest money, deposit
  • Exclusivity period parameters
  • Expected length of time for due-diligence to occur
  • Signed Confidentiality Agreements
  • Definitions of important terms that might be used during the transaction
  • A target date for the execution of the Purchase Agreement (PA)
  • Allocation of expenses for both parties
  • Identification of sale’s jurisdiction and governing entities
  • Any provisions intended to be binding

The ETA LOI Excitement Blunder

Since the ETA LOI signals the start of the formal business sales process, you must be more cautious than ever before. As the Buyer, you have the opportunity to make many demands which the Seller has the choice to accept or refuse. Adding restrictions or limits to your Buyer demands can protect you during the approaching due-diligence period. I can’t say this enough; lean on your ETA Professional Team. The ETA Professionals you’ve assembled have hopefully walked down this road before and will know how to advise you accordingly.

The ETA LOI Guidelines

The following are a few ETA LOI Guidelines that I have created/compiled from the Tip of the Spear Ventures Mergers & Acquisitions practice:

  • Limit the exclusivity period to 90 days – If you’ve been properly preparing to acquire the business, you should have most of the data the seller will provide already. By limiting the time you give this particular exclusive right to buy the business, you prevent the seller from dragging out the process so long that the seller loses potential interest in selling to you.
  • Request the delivery of a purchase agreement within 60 days – Dragging out the sales process could keep you from effectively managing the company, which could cause the value of the company to decrease over the short-term. The seller will inevitably check-out from leading the business the moment they decide to sell the business. Time is not your ally.
  • Publicize other Letters of Intent received – If the seller receives other Letters of Intent (LOIs) during the due-diligence process, I’m a firm believe in wanting to know that they are receiving them. Therefore, they should be public record. It shows transparency, trust, and good faith to share this information. Any withholding of an LOI approach could/should be grounds for termination of LOI.
  • Don’t take responsibility for any fees – Don’t give the seller everything they desire and the kitchen sink! Share that you will not be responsible for legal fees and professional fees incurred during this time.
  • List everything that is not included in the sale – Just as you list everything that is included in the sale, be sure to list everything the seller should plan on taking with them. If they want to keep a piece of equipment or a plaque on the wall, list it. Don’t be afraid to keep things you will need for the business, but let them have those family heirloom items. Just be sure to clarify what you’re keeping versus what you’re having them take.
  • Address what will happen to cash on hand and Accounts Receivable – Clarify whether the seller is buying any, some, or all rights to the cash on hand and accounts receivable. Have a plan in place to purchase the 30 day, 60 day, or 90 day + accounts. Maybe buy the current accounts at a dollar-for-dollar rate. Then, maybe acquire the outstanding 60 day+ accounts for 50 cents on the dollar and the 90 day+ accounts for 10 cents on the dollar. Spell out what will be done with those open accounts and excess cash. I’ve had sellers desire to not include any accounts receivable as a part of the sale. The reason why you are an ETA, and not a startup entrepreneur, is that there is a business in place with associated customers/revenue streams. Not having access to this revenue stream is startup-equivalent, and therefore should be avoided.
  • Employ formula pricing – Also known as cap pricing, formula pricing places a set cap on the sales price. Formula pricing usually keeps a seller from negotiating a higher sales price as the buyer finds more value in the company.
  • Don’t text or email without attorney approval – Since this is the beginning of a FORMAL business sale, any and all written communication can affect the terms of your Letter of Intent and subsequent Purchase Agreement. Don’t send out a “quick text” or an emotional email without consulting your ETA Professional Team because that “quick text” or emotional email could alter the course of your sale and your legal responsibility therein.
  • Don’t offer IOU’s – If you agree to a promissory note for the cash on hand or the accounts receivable, the seller could receive it all, spend it all, and leave town without giving you a dime. Don’t trust them and don’t offer to write IOU’s.

SUMMARY

In today’s ’30 Days to ETA’ post, we explored The ETA Letter of Intent (LOI). Finding, researching, conducting preliminary due diligence — as well as interviews — are all precursor to what is considered by most to be the first step in the formal business sale, the Letter of Intent (LOI). A sharp seller is going to try to get everything they can for their bsuiness (You will too when it comes time to sell the business!) So when you’re dealing with the ETA Letter of Intent (LOI) to buy your business, listen to your ETA Professional Team.

Sam Palazzolo

30 Days to ETA | Day #25 – The ETA Owner Interview

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If you’ve been reading along in this 30 Days to ETA series, you know that in the Day #24 post I identified as an Acquisition Entrepreneur that seller personas and industry specifics are not enough in your Mergers & Acquisitions journey. You’ll want to know how to rip apart all of the information you receive as a part of due diligence. The center piece of this information is the Confidential Information Memorandum, or CIM as an Entrepreneurship Through Acquisition professional (You can read the previous post by CLICKING HERE). But your ability to analyze reports, or the CIM is not enough. You’re going to have to conduct interviews with key parties on the seller’s side of the equation successfully. These interviews need to be done so that you gather all of the missing pieces of information you need to proceed — if justified. So, in today’s 30 Days to ETA post, we’re going to explore The ETA Owner Interview… Enjoy!

30 Days to ETA - The ETA Owner Interview

The ETA Owner Interview

Congratulations! You’ve found a business that your initial review leads to an interview with the owner. Depending on their savvy, and their ability to be coached by their broker, you may or may not get the truth about the business that you are exploring acquiring. What? Sellers may or may not provide the truth? The sad, but true answer is that they don’t always provide the truth, but don’t always lie about what they are sharing with you. You see, I’ve investigated several businesses that when it came down to what the current state of the business is, their responses were anything but truthful. Unfortunately, I’ve had those conversations that only later, when digging through piles of data or conducting client or employee interviews prior to Purchase Agreement (PA) the truth was a long way off from what/where we were looking!

One business projected a ton of blue sky, meaning that the sky was the limit and the multiple that they wanted for the organization was equally oriented to blue sky figures — It was one of the highest valuations of the year that we considered purchasing businesses! The reality though was something completely different. You see, their company leaders as a result of selling the business were left scrambling about, trying to keep up with the documents, guided tours, phone calls, and entertaining every whim of the buyer’s team. That meant that the business, or the rest of the company was left unattended for the majority of the hours, days, and months the team leaders were preparing for and attending these selling meetings. Performance falls. Customers leave. Revenue plummets.

Because the owner of the business pulled their leaders into the selling process, the people who ran and were employed at the company began to suffer. It was devastating, and it could have cost me and my firm a ton! Had we purchased the organization we would have found that in doing so we would have lost their biggest client and some of their best employees.

The Seller’s Intent during the ETA Owner Interview

By the time you get to the owner interview, as I’ve said earlier the buyer will have assembled their internal and external team players for the sales transition period. They’re not going to make rookie mistakes — They think — and they have a seller’s playbook ready for you — The potential buyer. What could go wrong with that?

The seller’s playbook is a standard answer to just about every question you could ask. And it’s a sales pitch prepared exactly for you as the ETA! For example, the question most frequently asked of sellers is, “What are you going to do next?” The seller’s typical response, “I’m going to retire.” I’ve met some pretty incredible business people in my day. Ones that I would have thought could actually retire if they wanted to. However, most business owners that aren’t of appropriate age are not going to retire after they sell the business. So why do they tell you that they are going to sell the business and retire? Because that’s what the seller’s playbook tells them to tell you — There are less questions asked afterwards, and that’s exactly what the seller wants!

Remember, the seller and their team is ready for you as an Acquisition Entrepreneur. They’re sitting across the table with pen and paper, taking notes on your every word, waiting to find a crack they can exploit in your ETA approach. They know their company is valuable, but they want you to find reasons to offer an even higher price to save themselves time and money.

5 Tips for Nailing The ETA Owner Interview

So how do you prevent cracks from showing during your ETA Owner Interview?

  1. Choose a well-spoken presenter – Typically you, the ETA, or another member of your team, but make sure you have a speaker who is good on their feet. Make sure they can answer most of the questions about the business owner you are interviewing or return the answers to questions they does not know with additional questions.
  2. Practice, practice, practice – Practice makes perfect, so go over and over again the multiple questions you have before the actual ETA Owner Interview.
  3. Answer their questions – Ensure you answer the seller’s questions truthfully and succinctly. You don’t want a 10-minute answer to a two-second question. You do want to answer their questions in full.
  4. Practice on the indifferent – Find an audience that has zero skin in the game (something I like to call the indifferent – They don’t care one way or the other). Practice your ETA Owner Interview to them for feedback. Then take notes on their constructive feedback.
  5. Bring your A-Game – You’re an ETA and you’re goal is to buy a business. This is not the type to phone-it-in! You have to conduct the best ETA Owner Interview you possibly can.

SUMMARY

In today’s 30 Days to ETA post, we explored The ETA Owner Interview. Why? You’re going to have to conduct interviews with key parties on the seller’s side of the equation successfully. These interviews need to be done so that you gather all of the missing pieces of information you need to proceed — if justified. So congratulations! You’ve reached the point now where you’re actually conducting an ETA Owner Interview to buy a company. The key? Prepare yourself and your team!

Sam Palazzolo

30 Days to ETA | Day #24 – The ETA Confidential Information Memorandum (CIM)

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If you’ve been reading along in this 30 Days to ETA series, you know that in the Day #23 post I believe that as an Acquisition Entrepreneur if you fill your Mergers & Acquisitions pipeline with qualified companies to explore acquiring, Entrepreneurship Through Acquisition life will become easier for you. But how will you know which businesses are right and which businesses are wrong to begin the filtering process on? So, in yesterday’s 30 Days to ETA post, we explored ETA Industry / Business ID (You can read the previous post by CLICKING HERE). But identifying seller personas and industry specifics are not enough. You’ll want to know how to rip apart the information you receive as a part of due diligence. The center piece of this information is the Confidential Information Memorandum, or CIM. So, in today’s 30 Days to ETA post, we’re going to explore The ETA Confidential Information Memorandum (CIM)… Enjoy!

The ETA Confidential Information Memorandum (CIM)

This collection of written documents and printed reports provided by sellers on their business’ relevant details of their company is called a Confidential Information Memorandum (CIM). If the CIM is well-comprised and well-structured, a CIM book will have you as the Acquisition Entrepreneur salivating at the opportunity.

5 Sections Every ETA CIM Needs

Since every company is different, the ETA Professional Team will offer advice for what you need to see in the CIM for the industry you are searching in. Most ETA CIMs include five major categories.

  1. The history of the company
  2. The company’s team
  3. Their business model
  4. The company’s current financial situation
  5. The company’s financial forecast

They say that compiling this information is hard work. At times, digging through this ETA CIM will feel like even harder work — It will feel tedious, futile, and frustrating. But if you take the time to review it, the ETA CIM’s existence could bring you to a conclusion as to whether or not to filter the organization out of the ETA Deal Flow mix, or pass them on to the next step.

Why Most Sellers Should Follow an ETA CIM Pro Forma

For me, reading an ETA CIM is an evolving process. I want to see the entire company outlined in such a way that it tells an accurate story of the business that you are investigating for Mergers & Acquisitions.

If accuracy in ETA CIM is the goal, why are so many business sellers not willing to put in the effort to produce a quality production? The reason is that it takes effort and energy, and often times while they’ve successfully run their business for potentially several decades, this might be the first time that they are preparing it for sales. Therefore, they rely on the advice/counsel of others who might not have the best example, or pro forma to follow.

I love seeing an ETA CIM pro forma helps business owners communicate where they have taken their company over the years — What is their story? It also provides a nice trail guide of where they’ve been and what’s worked over the past few years. Beyond Profit and Loss Statement categories that fall into the ETA CIM pro forma for each year, somehow business owners miss that the ETA CIM needs to also include current year to date information as well. This way Acquisition Entrepreneurs can clearly see how much the company’s income has grown over the past four or five years.

Once ETAs can see the actual growth rate of the organization over the years, they can make realistic predictions about their future financial growth. If the company’s revenue has grown at a 10% annual rate, then the ETA cannot realistically project a 30% yearly growth rate in their pitch book unless they make drastic changes. However, if the ETA CIM pro forma shows business owners have maintained a historic growth rate of 10%, and they’re now projecting a 9% future growth rate, that should be easy to obtain. The Acquisition Entrepreneur can easily “buy into” that calculation.

Reading The ETA CIM

Where do you start? Here are a few ideas to help you get started on your ETA CIM. You’ll need to modify them to fit your individual needs.

  • Designate a team member to review all the necessary information.
  • Write down and record your reflections of the company’s history, including highlights and lowlights.
  • Ask your ETA Professional Team — or deal flow analysts — to review/write their reflections.
  • Identify questions that you have to be answered by broker and/or business owner.

As you review the ETA CIM, don’t get so caught up in every word, there will be general themes that should emerge. Your ETA Professional Team will make suggestions on what are growth opportunities which will culminate in whether or not to move forward with the opportunity or discard it.

ETA CIM Red Flags

When you read the ETA CIM, you obviously want to see the company in an accurate state, not a fictional “best light possible” one. Unfortunately, most seller brokers will want to show historical growth that shows-off their all-star team members if their financials don’t justify success. ETA CIMs will also outline an “enviable business model” and illustrate the company’s current “stable” financials, but provide little/no accuracy. Two ETA CIM Red Flags that should cause you to run for the next opportunity hill are:

  1. An inflation of financial forecast. If their ETA CIM makes their financial forecast overly optimistic, you should delay the mergers or acquisitions process to make sure the company reaches its “projected” sales success. If it fails to meet predictions, you should significantly lower the terms of your Letter of Intent (LOI) as you drive towards Purchase Order (PO).
  2. Don’t give a pass on the company’s success. As an ETA, you would love to get your hands on the ETA CIM to learn all of the company’s secrets. If they provide those secrets with supporting company data without asking you know you’re in good shape. Unfortunately, my experience is that securing secrets is akin to pulling teeth. Too much effort to identify company success details is the equivalent in my mind to too much effort and energy. I’m not afraid to dig for details, but at a certain depth even I will stop!

SUMMARY

In this 30 Days to ETA post, we explored The ETA Confidential Information Memorandum (CIM). A good ETA CIM can put you in a great position to offer a fair price/offer for a business. A poor ETA CIM will also provide you with an opportunity to ask questions of the broker and business owner. The filters you put in place will allow you to determine whether or not the ETA CIM provides you, the Acquisition Entrepreneur with the information required to either continue due diligence or eject.

Sam Palazzolo

30 Days to ETA | Day #23 – ETA Industry / Business ID

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If you’ve been reading along in this 30 Days to ETA series, you know that in the Day #22 post I discussed how as Acquisition Entrepreneurs there is one mistake that I see time and again made by Entrepreneurs Through Acquisition (ETA), that being not having enough opportunities in the Mergers & Acquisitions pipeline. So, in yesterday’s 30 Days to ETA post, we explored ETA Deal Flow | Brokers (You can read the previous post by CLICKING HERE). I believe that if you fill your Mergers & Acquisitions pipeline with qualified companies to explore acquiring, life will become easier for you. But how will you know which businesses are right and which businesses are wrong to begin the filtering process on? So, in today’s 30 Days to ETA post, we’re going to explore ETA Industry / Business ID… Enjoy!

30 Days to ETA - ETA Industry / Business ID

ETA Industry / Business ID

Business — and therefore life — would be boring if we were all the same, right? I mean, I know that the “like” attracts “like,” or we enjoy things in life that are similar to what we like or enjoy. But isn’t diversity the key to success? How many times have you heard “Don’t put all your eggs in one basket” told to you by your parents probably? While on the one hand, I’m glad we’re not all the same. On the other hand, I’d like there to be greater similarity. I know, a catch-22, right? We all have different likes and dislikes, different preferences and tastes. It takes all of us to make the world go around.

Similarly, Acquisition Entrepreneurs come in all different shapes and sizes. Some of us who pursue Entrepreneurship Through Acquisition (ETA) have a little bit of money while others have a lot. Frugality rules some while “spend it if you have it” are the rules for others. Some may want an instant return on their investment while others don’t really care about getting a return. And what about those that are looking to sell their business? Some look at the potential long-term capital gain from selling their business, while others just want to concede to their competition.

So who are the sellers? What type of person or company sells their business? Well, there are a couple of different categories into which sellers fall, and by going through the following exercise with me you’ll identify your potential seller persona. Once you understand who your seller is, then you can design, shape, and create your ETA strategy to appeal to that particular type of business seller.

I believe that if you fill your Mergers & Acquisitions pipeline with qualified companies to explore acquiring, life will become easier for you.

Sam Palazzolo, Managing Director @ Tip of the Spear Ventures

The Low-Risk Sellers

The first major category of sellers consists of two very different types of business owners who both desire low-risk Mergers & Acquisitions.

1. The Financial Seller

First, we have the individuals who trade businesses like they trade stock. These owners will crunch numbers to estimate their return on investment in every type of detailed scenario. Oftentimes, these sellers are looking to hold the business for less than 5 years. Thus, they’ll want to know all of the ins and outs of their business so as to put it in the best light when it comes time to sell the business. They are NOT taking any risk that they won’t make a return on their investment within a very short time period.

Not all Financial Sellers are number crunchers or business traders, though. Some Financial Sellers come in the form of family members or employees who sell the company. They may want to go “5 and out” so that they won’t be taking risks and gambling with their investments. They’ll look to earn a sizable living by continuing the legacy of the company you buy. Most will hope to sell it for profit when they’re ready to retire.

2. The Strategic Seller

Now, the Strategic Seller is just a slight bit different. This individual is not looking to flip a business, per se. Rather, they’re looking to sell their business to enhance their life. They may want to add a cog to his business wheel that will work in harmony with other current lifestyle events.

But not all Strategic Seller want to divulge of harmonious pieces to their existing business. Some may be your competitors in some other form or fashion, looking to take over your customer base or market niche right out from under you. They want harmony in the sales process, but beware their underlying intentions.

The High-Risk Sellers

The second category of business sellers breaks into three different high-risk takers. These are the gamblers of the business selling world!

1. Angel Investors

Angel Investors typically work with start-up companies that show promise but have no proven track-record. Therefore, they take the most risk. These investors come in, buy part or all of the company, and help drive its success. Whenever they purchase or buy-in to a business, they usually don’t take all of the assets or buy all of the stock. However, they’ll take a majority of the interest equity in the company. This seller may look for similar high-risk, high-reward payouts from the sale of their business.

2. Venture Capitalists

Venture Capitalists are not going to sell companies at ground level. Think multi-millionaires who buy a company or take ownership of a company that has a proven track record of success but needs connections that only the venture capitalist can provide. The Venture Capitalists hope that their high-level affiliations will drive the company to exponential success, making them even more money. When it comes time to sell, they want the earth, moon, and sky!

3. Private Equity Firms

Private Equity firms are a bit different from the other business sellers because they typically only purchase the best of the best companies. Consequently, they pay the most and typically deal with the largest companies worth over $100 Million. These firms are looking to buy the next Google or Amazon. When it comes time to sell while less aggressive than Venture Capitalists, will still want a healthy return on their investment.

Business ID (Identification)

So we’ve categorized the types of low-risk and high-risk sellers looking to sell their business. Besides identifying the type of risk-taker you want to buy your particular company from, you have to look at the rest of the Business ID (Identification) demographics. What I mean is the local, regional, national, or global size of the business that often determines which types of business sellers will be attracted to your Mergers & Acquistions ETA pitch.

Those companies that operate in a small, localized area will normally seek “mom-and-pop” purchasers. These seller’s goal is to go out and get a return on their investment within about three to five years. They’re really not interested in spending a long time getting a company off the ground, so they seek an established business they can then sell for hundreds of thousands or a few million dollars. Then, they expect to recoup their investment in a short amount of time.

Regional sellers will typically sell companies that operate in larger areas that have mastered the art of scalability. These sellers will purchase companies with multiple storefronts in multiple cities or states. Because of the bigger investment and the larger marketplace, regional sellers expect to wait about five to ten years before they see a return on their initial investment.

National and/or international sellers will purchase the publicly traded or globally based companies. These sellers/investors look for companies that are the “best of the best.” Expecting to be paid more than local and regional sellers, they want everything the company has to offer and then some. With such a large investments taking place and hanging in the balance, these sellers will insist on solid profits from the very beginning. So they’ll look at selling companies that show reliable trends and steady customers.

SUMMARY

In today’s 30 Days to ETA post, we explored the concept of ETA Industry / Business ID (Identification). This post should help you identify the types of business sellers most likely to sell their business based on risk and location. If you can determine the specific seller for your future ETA company, you have an idea of which location to search for the company during the ETA search phase. If you’re ready to buy, identifying your seller persona — or at least knowing who they could be — will help clarify where and how to reach a seller that will agree to your desired acquisition price.

Sam Palazzolo