Tip of the Spear Ventures

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30 days to eta

30 Days to ETA | Day #16 – ETA Deal Flow

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If you’ve been reading along in this 30 Days to ETA series, you know that in the Day #15 post I discussed how to achieve The ETA Business Team. I’ve said it before and I’ll say it again, people are the most important ingredient in your journey to Entrepreneurship Through Acquisition (You can read the previous post by CLICKING HERE). So, even though so far in this series we’ve spent a lot of time talking about strategic initiatives within the business, it’s time we pull up to explore ways in which you can find that business. In today’s 30 Days to ETA post, we’re going to explore how we can create a system where business owners, and those that have a business for sale — Brokers, Attorneys, CPAs, Bankers, etc. — can find you to present the business… Enjoy!

ETA Deal Flow

A few years ago, I helped a client acquire a business. Let’s call this Entrepreneur Through Acquisition Jason. Together, Acquisition Entrepreneur Jason and I created systems, goals, and vision statements. As a part of my consulting, Jason packed his ETA Team bench. An an ETA Team, they wrote and implemented their business plan and detailed marketing plan. Well, guess what? It worked, and it worked well. A key component to their future growth involved Mergers & Acquisitions — An advanced plan, but one where growth can be achieved quickly through mergers or acquisitions than through normal channels to grow the business.

Soon, though, Jason and his team became too busy — What seemed like a good problem to have! Although they revised systems and team roles, and against my counsel, Jason demanded that we stop all Mergers & Acquisitions activity. I remember him saying, “Sam, we’re just too busy with the business that we have. Any Mergers & Acquisitions activity we pursue will be a waste of time and money.” He opted to discontinue all ETA Deal Flow.

Fast forward just two years later, when company sales slowed down. While their business started off well, Jason and the ETA Team was now beating their collective heads against the proverbial wall. Their revenue was stagnant. Every time we met, I’d remind him to begin ETA Deal Flow again… restart it and increase it — It will be worth the spend in time and money. Yet, time and time again Jason refused.

The company ultimately slowed down to where business had become financially painful for Jason and the ETA Team. When we met at this pain point, Jason agreed to restart their ETA Deal Flow. As my physical trainer used to tell me, “No change will happen until the pain associated with staying the same is greater than the pain associated with changing.” The same methodology unfortunately was the same for Jason.

The Mergers & Acquisitions process isn’t complete until all Purchase Agreements are signed, money is exchanged, and you takeover the business. Until then, keep your ETA Deal Flow running!

Sam Palazzolo, Managing Director @ Tip of the Spear Ventures

ETA Deal Flow Marketing Overview

ETA Deal Flow is not a new concept to business owners. Simply put, ETA Deal Flow is showing your potential business sellers and their ETA Professional Team who you want to be, not who you are today. You want your potential sellers to think about you first when they think about selling their business. To show off your Entrepreneurship Through Acquisition skillset you need to do three different things:

  1. Brand Your ETA Deal Flow – Create a logo or visual imagery to identify your ETA company
  2. Advertise – Use media to get that visual image to the potential buyer
  3. Relate to the Public – Get public relations media sources to tell your business acquisition story in a favorable light

ETA Deal Flow Target Market

If you’re like most Acquisition Entrepreneurs, you’re short on time. You may not think you have time to market much less develop an ETA Deal Flow campaign system. Well, that’s the furthest thing from the truth. Every person in the Mergers & Acquisitions markets whether you have a marketing campaign plan in place or not.

So, wouldn’t it be best to create a plan so that you market your search in a similar manner? If you want to show off your culture of kindness, make sure all employees are kind. That’s marketing. Or, hire an agency or a team to create a uniform ETA Deal Flow campaign plan that shows the community how kind you are. However you chose to market, remember that all are a part of your marketing presentation — You are not an Acquisition Entrepreneur in and of yourself.

When Should We Market ETA Deal Flow?

By default then, if everyone is helping with ETA Deal Flow, then we’re searching for businesses to merge or acquire all the time. However, we Acquisition Entrepreneurs should develop formal ETA Deal Flow strategies from day one. We should also refine/modify as we receive input from the market. What we shouldn’t do is stop like Jason! We shouldn’t stop ETA Deal Flow until we have a signed Purchase Agreement contract from a business acquisition. This may cause you to conduct ETA Deal Flow twice as much when times are bad.

Where Should We Market ETA Deal Flow?

It’s easy to see that everyone on your ETA Team markets all the time, but who do we market to? Where do we market? I could easily say that it depends on your national, state, or local location. I could also say that it depends on the type of industry your target business resides in. At its simplest, what works for one ETA may not work for another, even within the same industry or geographic location.

How Much Money Should We Devote to ETA Deal Flow?

Once you’ve established an ETA Deal Flow system, you’ll need to allocate funds to it. If you have a couple million dollars in the bank or can afford to market like Coca Cola, more power to you. Most of us don’t have that luxury when looking at the small business market. Entrepreneurs Through Acquisition often feel like ETA Deal Flow is a waste of time and money because we don’t see immediate results.

I often tell the Entrepreneurs in Residence at Tip of the Spear Ventures that marketing in general is successful only 10% of the time. If we knew what 90% of ETA Deal Flow marketing was going to be wasted, of course we wouldn’t spend time/money on it — But we don’t know!

ETA Deal Flow is a Business Investment

What Entrepreneurs Through Acquisition are actually dealing with in searching for a business, then, is an investment NOT an expense. Even though the quantifiable costs for ETA Deal Flow will not show up on any Profit and Loss Statement as an expense, we’re actually dealing with an investment and the initiative should be considered as such.

Making, implementing, and continuing an ETA Deal Flow campaign is comparable to the laws of sowing and reaping:

  1. We reap what we sow
  2. Reaping happens after sowing
  3. We reap more than we sow

So if we conduct consistent ETA Deal Flow activities, we’re going to sow good seeds, if you will. Those good seeds should become viable leads to businesses for sale. When business owners ultimately decide to sell, we will be in position to reap our ETA Deal Flow rewards. And that’s WHY having an ETA Deal Flow campaign system is important.

SUMMARY

Everything we’ve been talking about in this 30 Days to ETA series now ties together. This post finalizes how to search for a business to buy via ETA Deal Flow.

Sam Palazzolo

30 Days to ETA | Day #14 – ETA Engagement

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If you’ve been reading along in this 30 Days to ETA series, you know that in the Day #13 post I discussed how your ETA Risk Mitigation — if done properly — will allow you to avoid big and costly mistakes in your journey to Entrepreneurship Through Acquisition (You can read the previous post by CLICKING HERE). I know that you know the saying, “No risk, no reward!” I also know that strategic risks take into account lead to your motivation. Some of us are motivated by fame, others by money, etc. In today’s 30 Days to ETA post, we’re going to explore what drives ETA Engagement, or the motivations associated with owning/running a business with a team… Enjoy!

30 Days to ETA - ETA Engagement

ETA Engagement

I spent a few years in my late-twenties working for a large Change Management consulting firm. One of the change initiatives I worked on was with a Fortune 500 organization focused on improving their customer satisfaction. To say that their customer satisfaction to that time was bad would be an understatement! JD Power, the true voice of customer data coordination company, reported that this manufacturer was one of the worst not only in their industry, but in business. I was eager to get on this project as I had been a customer of this organization several years back and had the experience of a lifetime, and not the good kind!

As a college student I put my way through school by working and going to night school. I’m not saying this with shame or to brag, just to say that every dollar I made went to my college education. I was able to graduate both undergrad and grad studies with zero debt. I look back on those days and wouldn’t change a thing, except my first big purchase after graduate school left me feeling like I gave away the farm. I overpaid significantly for a product, and on top of it felt like I’d gotten taken advantage of. Life has a funny way of teaching you lessons sometimes. This was one of them where I wasn’t laughing. The company, you’ve probably guessed by now was the same client years later I’d be assigned to in an engagement to raise their customer satisfaction. I was dissatisfied with their product/service and even in this engagement that was four years later, still had a bad taste in my mouth.

As part of the consulting engagement launch, we conducted assessments of customers — both those external the organization as well as those internal. Here’s what the results concluded:

  • Nearly 80% of external customers hated their experience with the organization
  • Nearly 90% of the internal customers hated working for the organization

It’s awfully difficult to have great external customer satisfaction if you have bad internal customer satisfaction. The saying, “Happy employees equal happy customers” rang true loud and clear. The Entrepreneurship Through Acquisition journey is not a road typically traveled alone. As part of your Acquisition Entrepreneur skills you will have to lead others to get to where you want to go. In order to get to that goal destination in the most efficient manner (time and approach), you will need to have ETA Engagement in place, meaning your team will have to be 100% engaged in what you are doing. With everyone pushing/pulling in the same direction, traction can be achieved.

Happy Customers can’t occur if you have Unhappy Employees!

Sam Palazzolo, Managing Director @ Tip of the Spear Ventures

Building ETA Engagement

As you approach the acquisition of your future business, you will be faced with questions from your team members about their role in your company’s future. Regardless of how effective you believe you are in sharing your ETA Mission, Vision, & Values (See Day #9’s post by CLICKING HERE), this can cause major concerns. Team members will worry about their future job security. On the other hand, some team members will worry about losing seniority or respect. Emotions run amuck whenever we business owners where they are at and where they are going, and ETA Engagement success/failure lies in the balance.

Entrepreneurship Through Acquisition individuals I work with often pull-up and ask, “How can we build a team dedicated to helping us reach our goals in the business?” If you have a stable bench of team players who help you realize profit in your business, more than likely, you’ll want to be philanthropic. You’ll want to show benevolence towards those individuals who are in the dirt and the grime, pulling towards the goal with you.

ETA Engagement Strategy Goals

Before you “give away the farm,” so to speak like I did in the opening of this post, let’s look at strategies you can implement to incentivize employees and still have your desired pay-out while running your business. Keep these concepts in the back of your mind while you decide what incentives to offer:

  1. Give all team members a way to piggy-back on your company’s financial success
  2. Have contingencies in place to ensure the commitment of your executive team
  3. Reward the team members for actions you want to encourage

Long-term ETA Engagement Incentive Plans

So what kind of rewards can you offer employees? If you don’t plan to give away stock shares, but you want to be benevolent and fair what exactly can you do to encourage ETA Engagement? One way to incentivize team members over the long-term course of their employment is to offer them a stock-option. While I could spend multiple blog posts on the topic of stock-options, my goal of this article is just to introduce you to the idea at its highest level.

I’ll tell you, too, that if you’re going to entertain the idea of a stock-option plan or stock options for your company, you’ll want to have a competent attorney and a power-house accountant on your professional advisory team. There are plenty of red-tape barriers and legal risks surrounding stock-options, so you’re going to need a good consulting team (See Day #6 – The ETA Team by CLICKING HERE).

Create A Stock-Option Employee Incentive Plan

So at its simplest, a stock-option plan is when you provide your employees with an option to buy stock in your company. Notice, I didn’t say that you’re giving your employees stock in your company. No, you’re providing them with the option to purchase stock in the company. At the same time, you’re controlling most aspects of the stocks in this stock-option. You are:

  • Setting the number of shares or units employees can purchase
  • Fixing a purchase price for each available share
  • Creating a vesting timeline

If you can get an employee to invest the money he earns into the very company for which he works, then you have a dedicated employee. You have someone who sees value in your business and puts his dollars to work within it.

Phantom Stock Options

Now the stock-option method eventually has you give up stock in your company. But what happens if you don’t want to give up stock? There’s another way to offer long-term employee incentives. Some people call this incentive strategy “phantom stock” or stock appreciation rights. Basically, in this method, you’re providing money to the employee without ceding ownership or control.

Within a phantom stock-option, you can create a bonus structure for key employees that pays them based on a “phantom,” or figurative ownership, share in your company. So while you own 100% of the stock in your corporation (member units is an LLC), you can pay your employees an ownership percentage when your company does well. That way, your employees don’t get all up in your business from an equity perspective, but they stay motivated and dedicated to your end goals by receiving a financial performance amount.

Short-term ETA Engagement Incentive Plans

Not all employees see a long-term reward as a reason to stay at a place of employment. Therefore, business owners should probably offer incentives along the way to encourage ETA Engagement. Short-term employee incentive plans can keep your team members happy and motivated so they don’t look for positions at your competing companies. You don’t want to train your employees to work for or to become your competition, but know that sometimes this happens if you don’t establish the right promote from within strategy. Positive reinforcement and instant gratification can work like a carrot held out on a stick does for a donkey. Short-term employee incentives can also foster team member harmony and cohesion.

The following approaches will motivate employees for short-term ETA Engagement:

  1. Recognition – If an employee does a good job, reward him openly with verbal praise. A simple “Thank you” or “Great job” can make most anyone feel appreciated, wanted, and needed.
  2. Fringe benefits – Healthcare benefits, 401K matches, and the like can set your company above your competitor’s in the eyes of employees.
  3. Paid time off – The opportunity for earned and compensated time-off adds value to your employee workplace.
  4. Annual bonuses – Merited or unmerited, a Holiday bonus or a work anniversary bonus can add to employee happiness and commitment to your company.
  5. Production based rewards – Employees can become extremely motivated to work hard if they know they can earn trips to desirable locations, monetary bonuses, redeemable merchant gift cards, or many other types of gifts.
  6. Peace and happiness – Incentives don’t always come in time, gifts, or money. Simply creating a respectful and happy work environment can create employee loyalty for years to come.

SUMMARY

Whichever way you decide to incentivize employees for ETA Engagement, make sure you have a good lawyer, an amazing accountant guide you, and a Human Resources professional. You’ll need help wading through the rights, warrants, risks, and taxes that come with stock ownership, stock options, fringe benefits, paid time off, bonuses, and gifts. Let me give you a word of caution: Don’t go to your next team meeting and mention to your employees that you’re considering ETA Engagement incentives until you’ve talked to your professional team. You shouldn’t blindly offer something your ETA Team may ultimately find too risky. Additionally, you don’t want to offer your employees incentive programs without educating them about the guidelines and requirements involved.

Sam Palazzolo

30 Days to ETA | Day #2 – Leading Your Business

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In this 30 Days to ETA post, we’ll explore the topic of leading your business. Sounds pretty simple/straightforward, but there is a twist to consider! Specifically, if in Day #1 we tackled the decision of Startup or Acquisition (You can read the post by CLICKING HERE), in this post we’ll look at leading your business so as to create value or increase business valuation. Why? It’s keeping in line with our identification of the desired endpoint of the business. A business that you lead effectively should increase in value, and therefore be worth more to prospective buyers when you ultimately determine to exit. Understanding business valuations will help you as you start out on your Entrepreneurship Through Acquisition journey!

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What Do Business Buyers Find Attractive?

In the book Walking to Destiny (2016), author Chris Snider gives business owners a plan to prepare their companies for sale where they the capital of their business. Driving the value of a business up will simultaneously increase net income. Increased value plus increased income are prime ways to increase profits achieved during the business sale.

Value Acceleration is the concept throughout whereby the focus is on value growth through the coordination of business, personal, and financial goals. I perceive Value Acceleration to be when business owners design and build a business that other people want to buy with purpose/intention strategically for sale.

So what characteristics are potential buyers looking for, especially if you can grow your company to a level where it “pops” on the radar of Private Equity firms? The following four business attributes appear at the top of every buyer’s wish list:

Top 4 Characteristics that Make a Business Valuable to Buyers

  1. Is it profitable – Does your business make significant net income?
  2. Is it competitive – Is your business beating the competition?
  3. Is it scalable – Can your business grow or downsize quickly to withstand ebbs and flows in demand?
  4. Is it sustainable – Can your business withstand economic and personal storms?

Your ultimate goal in getting into business, besides being able to be the hands-on leader running the organization, is to one day sell the business and live off of its proceeds. In order to do this, you must know how to make your company valuable to buyers. Business buyers look for profit, competitive advantage, scalability, and sustainability. These four criteria are cornerstones in leading a business blueprint.

Value creators work on their business instead of working in their business.

Sam Palazzolo, Managing Director @ Tip of the Spear Ventures

How Do Buyers Determine Business Valuation?

When you analyze a business, in addition to the operational efficiency, you’ll want to identify the accounting underpinnings. In other words, you’ll want to dig-in on the financial statements. I know this is not the sexiest part of leading a business, but you have to know your numbers. Here are a few accounting numbers to know:

  • Top Line Revenue
  • Cost of Goods Sold (COGS)
  • Net Earnings
  • Operation Expenses
  • Profit/Loss
  • Earnings Before Interest Taxes Depreciation and Amortization (EBITDA)
  • Average Multiples for Similar Businesses Sold

How Leading a Business to Sell with Value

How, then, do we make our businesses profitable, competitive, scalable, and sustainable to make them valuable to potential buyers? As we’ve talked about, Value Acceleration is a process that focuses on value growth by aligning business, personal, and financial goals. Essentially, it creates a roadmap to success.

Before we can focus on growing value within our business, though, in leading a business you must recognize that value already exists within your company through meeting your customer’s need(s). For example, you provide a service or a product that people just have to possess. That’s valuable. You’ve already identified a need in the market that your competitors haven’t met, and you’ve seen the profit that can come from meeting that need. Over time, you’ve put together a team of people to help you reach your target market and take care of your consumers once they find you. You’ve even purchased insurance plans and the like to make sure that your company can weather storms. Your business, therefore, has value.

Business Cycles Effect on Leading a Business

Your business’s value exists when you open your company’s doors, and it exists within every cycle of your business’s life. Just like the national economic market, you’re going to experience expansion; you’re going to experience contraction. You’ll go through cyclical periods of recession, recovery, and expansion throughout the entire life of your business. Worth exists throughout those cycles, but the amount of your business’s value will rise and fall according to what period of the cycle you are in. However, you as a business owner determine the severity of value loss or the significance of value gain over the life of your business.

Successful business owners identify what their business is worth at all times, and they determine the worth they want their company to have. They keep that value goal at the top of their minds all the time. In other words, they have an end worth in mind.

SUMMARY

Successful entrepreneurs know their current worth and their goal worth, but more importantly, they take active steps to achieve those goals. The systematic approach to identify, protect, and build value is at the heart of this process. Creating detailed, written, systemized plan to increase company capital value comes through a relentless strategic plan and following thereof.

Sam Palazzolo