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30 Days to ETA | Day #1 – Startup or Acquisition?

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My goal for this 30 Days to ETA Series is simply to walk you through the journey of sourcing, searching, and ultimately buying a business. However, make no mistake about this whole world of Mergers & Acquisitions… There is nothing “simple” about it! And in this Day #1 post we’ll explore whether as an Entrepreneur you should Startup or Acquisition — That is, should you start your own business from scratch (i.e., Startup) or buy a business that’s already in existence (i.e., Acquisition).

The Purpose of the 30 Days to ETA Series

If we want to take a trip, I’ll begin my travels with an end destination in mind. In order to leave my home in Las Vegas, Nevada to get to Seattle, Washington, we all know that I need to head northwest. But what route(s) should I take in order to get there? How will I be traveling to Seattle — Airplane, Car, Uber, etc.? It would be helpful if I had detailed directions from a GPS to outline the quickest route possible. Because of the distance between Las Vegas and Seattle, I’m more than likely going to run into delays and problems somewhere along my path — Wrecks, construction work, road closures, storms. Inevitably, my GPS will reroute me and get me to my final destination (I hope!)

30 Days to ETA DAY 1 Startup or Acquisition

Attend Webinar Workshop: 30 Days to ETA

Mapping out directions for my trip is no different than you acquiring a business. You see, from my perspective it’s a matter of knowing what you want to happen at the end that should determine your focus at the beginning. Are you building your business to pass it down to the next generation? Or are you growing your company to sell it for profit? Do you hope to sell a lucrative business to your employees or to another entrepreneur so that it will continue into perpetuity?

You can spend 40-80 hours a week, 50 weeks a year, for an entire career working for someone else in their business helping them achieve wealth… OR you can spend the same amount of time creating your own wealth!

Sam Palazzolo, Managing Director @ Tip of the Spear Ventures

The whole idea behind this series is to help you understand the purpose of your business so that you can sell it for profit. Surely you don’t want to make just enough money to get by while you run a company. Don’t you want to make tons of money while you work and then make millions of dollars when you sell it? Is that even possible? Is it actually possible for you to build a sellable business?

What Happens at the End of a Business?

According to the Exit Planning Institute, or the EPI, 80% of companies below 50 million dollars in revenue never sell. 80%. Another statistic tells us that only 30% of family businesses survive into the 2nd generation. Do you understand that — There’s only a 30% chance that you will pass your business down to your children or have some other type of succession plan! What will happen to your company then?

The EPI has two other revealing statistics:

  1. 75% of the business owners (who make less than 50 million dollars) who actually sell their business aren’t even happy that they did after all is said and done.
  2. Three out of four companies will be changing ownership in the next ten years.

It’s The Opportunity of a Lifetime

So why are 75% of businesses changing ownership? Well, the Baby Boomers who wanted to sell or get out of business years ago ran into the financial recession of 2008. They couldn’t get out profitably then, so they’ve been holding onto their companies until they could recuperate a profit or until they’re just too old to continue. And now that we’ve just come out (🤞) of the pandemic recession on 2020, those that made it through the financial recession could, once again, slug it out to get through this recession as well. However, most Economists look for them to exit.

This presents entrepreneurs with a huge opportunity, or as I like to call it the opportunity of a lifetime. With all these Baby Boomers exiting the economy, they’ll be leaving behind the companies that they lead. Unless they have a clear path for succession (Kids that want to take over the business, relations that care to run the organization, and/or staff that want to buy the business from them) they’ll have to look for external sources to purchase the business.

I Lead a Startup… I have no Hair as a Result!

So here in Day #1 of the Series, appropriately titled Startup or Acquisition you may be wondering why I’m not telling you to start a business (Startup) as opposed to buying one (Acquisition)? The reason is that buying a business is a much better path to successful entrepreneurship. Why? The Small Business Administration (SBA) sites that less than 2% of startups achieve a private equity exit. Furthermore, about 90% of startups fail. 10% of startups fail within the first year. Across all industries, startup failure rates seem to be close to the same. Failure is most common for startups during years two through five, with 70% falling into this category.

The technology startup I lead was one of the few that succeed (I guess I’m a 2%’er!) So if startups are not a good opportunity to flex your entrepreneur muscles, what is? In my mind, the answer is simple — Acquisition or Entrepreneurship Through Acquisition!

Sam Palazzolo

30 Days to ETA Series | Overview

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Welcome to the “30 Days to ETA” series with Tip of the Spear Ventures. Within the next 30 posts, I’ve created a roadmap entrepreneurs can follow to drive toward successfully acquiring their own business – A destination I’d like to call “Success!” We will travel along the journey of sourcing, searching, and ultimately buying a business… for profit. I’m going to outline some of the most efficient routes I found while working within our Mergers & Acquisitions (M&A) framework at Tip of the Spear.

Entrepreneurship Through Acquisition (ETA)

There are thousands of small businesses that are currently for sale, and there will be thousands more coming in the next few years. I’ll share my personal stories to help you maximize your time and money. Along the way, I’ll highlight fuel stops you can take to increase your M&A value regardless of your industry and organization focus. I’ll show you how to work on your search so that you don’t waste time working in your search.

30 Days to ETA by Tip of the Spear Ventures

Attend Webinar Workshop: 30 Days to ETA

Let’s make this easy, or “financially sound” if you will. I’ll show you the steps to the successful acquisition of a business, and how to get there quickly and profitably. 

What advice would I give my 25-year old self? Get to Mergers & Acquisitions faster in your career path (It’s the most fun I’ve had in my entire career!)

Sam Palazzolo, Managing Director @ Tip of the Spear Ventures

As part of our mission of teaching the Entrepreneur through Acquisition (ETA) leader how to make their search a valuable asset (not just believe it has value). The goal is to take you through steps of how to source, search, and ultimately buy a business. In my years as an entrepreneur, in both startups and M&A, I have seen many common trends – some successful and unfortunately unsuccessful business owners. In this 30 Days to ETA series we will discuss both — and other topics in between — in easy-to-understand and simple terms. I want you to understand how you can buy a business and SHOULD do so now rather than later.

Go Fast Alone… OR Go BIG Together!

Why would I share this ETA information? It’s simple… If you like what you read then you can do one of three actions:

  1. DIY – You can go out and attempt to buy a business on your own. Afterall, you’ll know just enough to be dangerous!
  2. JOIN ME – I’m always looking for top-tier entrepreneurial talent that wants to own/run a small business. Partnering with you is my best strategy to grow our M&A practice. You can go fast alone, or you can go big as a team! Drop me an email at Recruiting@TipoftheSpearVentures.com.
  3. DO NOTHING – You’ll gain a lot of valuable information here in this 30 Days to ETA Series. Maybe you’re the type that likes to learn and never take action?

I hope you enjoy the series!

Read 30 Days to ETA | Day #1 – Startup or Acquisition

Sam Palazzolo

Business Entity Transformation – Why It’s Important?

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Business entity transformation is a term increasingly being used to refer to the merging and the resulting integration of a transformed organization to the corporate structure. A transformational change results from either internal or external pressure from the organizational community. The result is the invention of a new and potent business entity that efficiently takes over the role of the prior organization. This process can be very fast and dramatic one, but it can also be quite cluttered. But a true business may transform demand for a string of subtle steps that may yield far-reaching gains over the short-run and into the future.

One such step that many businesses are missing due to their adoption of a”quick-fix” approach is an analysis of the way the new organizational structure will probably impact key stakeholders. Normally, this analysis is done by a business coach or an advisor hired within the transformation effort. The objective is two-fold. First, the coach or adviser will help a company identify which portions of the business have to be transferred or replaced. The next component of the analysis is to assess the impact that the new regulatory demands will have to the various stakeholders. These demands may vary widely and may even be changing based on the state of the market.

The new regulatory demands impacting key stakeholders may include new technological developments, new managerial functions, new fiscal obligations and lack of control. For instance, if the new technological demands result from the creation of a cheaper and much more efficient product, the general earnings might actually increase instead of decrease. In addition, a business facing new regulatory conditions may be forced to consider altering the scope of its product offering so as to remain competitive. This may lead to the creation of a new product which is much better suited to the new regulatory conditions. However, the new technological merchandise may also lead to increased costs for the company, which the CEO may not be willing to absorb in the face of a declining revenue stream.

The next significant element of business entity transformation requires the effect that the new technological requirements will have on the manner in which the business does business. The results of the study can be highly detrimental to the long-term viability of the organization in the event the new technological needs do not encourage the organizational objectives. The chief benefit from this component is that the transformation can provide a competitive edge for a company that is already mature enough to capitalize on the new technological opportunities, without needing to invest substantial amounts of funds into training and recruitment efforts that may not prove to be fruitful.

Additionally, the results of the study will serve as the foundation for assessing the impact that any changes that are made will have on employees and the operational processes that employees currently work. Frequently, companies which are undergoing a company change will create significant structural modifications to their work environment and worker arrangements, in order to make room for the new technological inventions. In this situation, the modification of this organizational structure will frequently result in a decrease in employee numbers, with a corresponding decline in the potential employment benefits for the employees. These implications need to be weighed carefully before making any changes to the organizational workforce.

This analysis must also address the question of whether the implementation of the new regulatory demands will have a material effect on the organization’s ability to continue operations. If the new technological demands are implemented and there is a requirement for elevated levels of automation, the greater level of regulation or oversight will likely have an influence on the expense of operating the business. This growth in regulation and supervision could lower the sustainability of the company and the company might be forced to shut its operations. On the other hand, the majority of businesses which can adapt quickly and mitigate the impact of the regulations and oversight, will be the firms which will continue to function in the current period. The new regulation changes and the associated costs will likely force some businesses to seek a reexamination of their organizational structure and how they handle their companies, but those that can accommodate will continue to flourish.

The greatest effects of the business entity transformation is a question that has to be addressed from the company and its management. The extent to which the new regulatory requirements and the resulting efficiencies and cost savings are absorbed into the organization’s revenue stream is going to have an immediate effect on the type of profits the organization can understand. Although the amount of the profits realized may diminish slightly, it’s very likely that the pace of return on the capital invested in the new organizational structure and the surgeries will outweigh the losses in the adoption of new technology and improved efficiencies.

It’s important for the organization to comprehend all of the ramifications of the business entity transformation process and the consequences that will occur over time. All these have to be assessed and examined in the context of the company’s overall financial health and the kind of growth or decline that’s anticipated later on. It is also important for the organization to have a successful succession planning process in place to address any issues that arise because of the company entity transformation. The best solution to dealing with these issues is to implement a change management process in place to ensure all changes are properly recorded, monitored and controlled. This includes the involvement of senior management, that’s designated to create sure the aims of the transformation are fulfilled and are being preserved. The higher competitiveness and potential for enhanced functionality also require the organization to acquire extra skills and expertise so as to remain at the forefront of the industry and meet the changing demands of consumers.

Is Your Structure Prohibiting Business Entity Transformation?

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The Point: Business entity transformation can mean big results for business owners, regardless of entity size. Transforming a small company into a larger company with bigger revenue and market share can be a daunting challenge. It can also be time-consuming, costly, and ineffective if the owners don’t know what they’re doing. So in this post, we’ll explore a simple — yet insightful — framework for helping business owners understand their obligations to inform themselves as they prepare for, and successfully execute, a business entity transformation… Enjoy!

Business Entity Transformation

It’s All About Entity Transformation… But Where Do You Focus First?

Business owners — For our purposes, those that lead and own the business entity initiatives, regardless of if they are actually equity owners — are required to inform themselves about any and all changes in their business structure, product mix, or market shares through whatever means necessary. For example, a business may have recently incurred new technological breakthroughs and may now face new regulatory requirements. They may face changing market demands as customers demand more products and services with less money. Or they may have recently entered into an acquisition deal and now need to comply with new reporting and disclosure regulations. Each of these examples requires careful and detailed communication with key stakeholders. Failure to communicate properly and fully can result in fines or penalties, and can also result in potential harm to the business entity itself by diminishing its ability to protect and grow the business.

Business Entity Transformation Is More Than Strategy and Communication

It is not only the business that must be notified and informed of changes in its structure, product mix, or market shares (i.e., Strategy). Organizations engaged in transforming their business must also notify employees, officers, and other key executives. Business transformers should always remember that the first person in the chain of command, after the CEO and board of directors, makes the final decisions. Employees will likely be hesitant to question the new policies regarding pay and working conditions. Executives may also hesitate to raise questions regarding their own bonuses and stock options. By providing early and accurate notification of changes to all employees, the business can avoid this sort of crisis.

Business Entity Transformation From New Technological Breakthroughs

The business must also be aware of the potential impact that any new technological breakthroughs or regulatory requirements may have on its ability to operate and compete effectively. A major change in one technology can eliminate or reduce the need for certain functions, and require the development of new or additional technologies. Similarly, a change may make it necessary to retool the business’s methods to take advantage of the new technologies. The methods by which a business operates can change over time as well, if it is pursuing a strategy focused on market segmentation. Both of these scenarios can result in significant disruptions to a business’s operations and may require adjustments to business processes and employee routines.

Business Entity Transformation Is Change

Businesses also face the challenge of integrating changes with current practices. If the business has been successful in the past in the formation and execution of its strategies, it may prove difficult to change the same strategies and execute the same processes. For example, if the business has successfully established a balanced mix of internal and external resources, it may prove difficult to change to a new sales and marketing strategy if it is based on the same internal resources and practices. Likewise, if an existing procurement strategy is effective, changing to a new procurement process could result in a loss of competitive advantage.

Another difficulty faced by a business that wishes to convert to a different legal entity is that of change management. There are many issues involved in change management, such as identifying who will manage change activities, evaluating the impact of any new regulation, and ensuring that the new regulation complies with the corporate governance standards already in place. Changing the makeup of a board of directors or personnel to include new members while maintaining key personnel may prove difficult, if not impossible, once regulatory requirements are implemented. Moreover, there may be an added administrative cost involved in tracking personnel changes and making any other personnel changes necessary to implement the new regulation. Finally, the implementation of new regulations can have a negative impact on cash flows and liquidity and the need to obtain additional capital in order to support the new regulation. This risk could be reduced by better aligning company objectives with business governance standards.

Business Entity Transformation – Where To Get Help?

Businesses should seek assistance when they are in danger of changing their legal structure. The legal documentation for incorporating a new corporation, limited liability company, partnership, or corporation varies from state to state. It is important to identify the requirements of the state in which one wishes to incorporate and make sure that the legal documents are current and comply with the requirements. A business that wishes to convert from a C-corp to a S-corp will have to register the corporation, obtain special certificates, and pay taxes on the transfer of shares and assets. Business owners may feel overwhelmed by the rapidly changing corporate governance requirements and the potential costs and risks associated with these changes. Hiring a consultant can help reduce the stress and complexity of navigating the complexities of incorporating a new business entity.

SUMMARY

The most important thing that a business owner should remember is that a business entity is often very different from the “person” that owns and controls the business. A business is often a complex legal structure that consists of many different parties and relationships. Business governance is often referred to as “business code”, and this code is often very difficult to understand and follow. Consulting an attorney who specializes in business law can provide insight into the current requirements for incorporation and a review of the possible future changes that may affect a business’s structure and management. When incorporating a new business entity, it is important to hire an attorney who understands the complexities of incorporating and knows how to navigate the ever-changing business terrain.

Sam Palazzolo

10 Criteria Every Investor Wants to Know

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The Point: We see a lot of investment opportunities (sometimes too many!) However, we rarely see “quality” investment opportunities cross our desk. It’s not the colors of the presentation, the font, or the graphics used that I’m talking about regarding quality. What I am focusing on is the following 10 criteria every investor wants to know… Enjoy!

Tip of the Spear 10 criteria every investor wants to know
https://www.slideshare.net/TipoftheSpearVentures/tip-of-the-spear-ventures-pitch-deck

Every once in a while, a presentation is made to us at Tip of the Spear Ventures that makes us stop. Similar to the social media attention grabbing headline or video, these presentations make us want to know more about what the entrepreneur has going on. What are the criteria that most often make us stop and take notice?

What follows are the 10 criteria every investor wants to know (and what every entrepreneur should put in their presentation deck):

OVERVIEW

Simply put, the overview is the starting place to grab investors attention. Who are you? What are you about to do that’s great? Why should we look at page number two in this presentation? Every investor will want to know a high-level overview of what you’re doing (briefly!)

ELEVATOR PITCH

You have 30-seconds in an elevator to tell the investor what is so special about your company. Can you do it in 30 seconds? Will the investor know what you’re talking about (or are you too deep in the weeds)? Every investor will want to know in short/concise fashion what you’re working on.

TEAM / ADVISORS

More times than not, we’re looking to invest in people. So who are the people that are directly / indirectly involved with your initiative? What experience do they have? What are they doing to add value to the organization? Every investor will want to know who comprises the team and advisors to the team.

MARKET

Is there really an opportunity, and more important is the solution to the opportunity going to have some redeemable quality (i.e., $$$)? Every investor will want to know what the size of the problem is, as well as the solution.

BUSINESS MODEL

Will you offer a demonstration (not during the pitch presentation, but as a part of your business model)? Every investor will want to know how you plan on making money. Will your revenue source be business to consumer (B2C), business to consumer (B2C), or business to government (B2G)? Will your business model consist of a one-time sale, recurring revenue models (RUNDLE!), and/or rely on affiliates? Every investor will want to know what your business model is.

RESULTS

Are you/your venture pre-revenue (a nice way of saying we haven’t made any money yet — zero)? Are you post-revenue, and if so what have the financial and other key performance indicators (KPIs)? Every investor will want to know what your results have been and what you anticipate them to be.

COMPETITION

You probably will not be operating in “blue” water (meaning little/no competition). So if you are operating in “red” water (with competition), who are your competitors? What are the results your competitors are accomplishing? When you compare your offering to that of your competitors, how do you stack up? Every investor will want to know about the competition.

EXIT STRATEGY

I’ve been told that exit strategies do not need to be spelled out — and I’m not certain why? We always want to know is this a “build/hold” or “build/sell” strategy? If it’s targeted to sell, what and when is the exit to occur? Every investor will want to know about your planned exit strategy.

CAPITAL REQUEST

You are probably pitching or presenting your company to raise capital. If so, how much are you looking to raise? Upon successful raise, what will you do with the money? Most important, what can the investor expect to get for their investment? Every investor will want to know your capital request.

CLOSE / Q&A

If the presentation model of “Tell them what you’re going to tell them, tell them, and tell them what you told them” holds true, bring the conversation home with a strong closing. Always leave time at the end of your presentation for questions and answers. Nothing is more frustrating for an investor to not have time to ask questions — they will typically not hunt down the entrepreneur afterwards to ask. They also might ask the same question, or the question that gets asked might be the one you answer with the reason why investors decide to invest. Every investor will want to know how you close and have time for Q&A.

SUMMARY

In this post, we’ve explored the “10 Criteria Every Investor Wants to Know.” Follow this guide when you’re searching for capital, looking for support, and/or launching your entrepreneurial talents.

Sam Palazzolo