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Tip of the Spear Ventures

Venture Capital | Business Transformation Consulting

acquisition entrepreneurship

30 Days to ETA | Day #18 – The ETA Conglomerate

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If you’ve been reading along in this 30 Days to ETA series, you know that in the Day #17 post I discussed how as Acquisition Entrepreneurs we need to have focus on the end with The ETA Exit Plan. While you need to buy your business via Mergers & Acquisitions at the right strike-price, it’s equally important as a part of due diligence to sell the business right as well as a part of your Entrepreneurship Through Acquisition journey (You can read the previous post by CLICKING HERE). But what if you get into this as an entrepreneur and you find out you really enjoy owning a business? I mean, what’s better than owning a single business? Two or more businesses! So, in today’s 30 Days to ETA post, we’re going to explore how you can expand/create an empire by owning multiple companies — The ETA Conglomerate… Enjoy!

30 Days to ETA The ETA Conglomerate

The ETA Conglomerate

As Managing Director at Tip of the Spear Ventures, one of the most amazing things I see during an entrepreneur’s journey in Entrepreneurship Through Acquisition is owners walking away from a buyer’s dream offer. If we’ve spent all of these years building a business to sell it, why wouldn’t we want not to explore taking it? What makes some business owners take the money and run, so to speak? And what causes others to turn down millions of dollars to keep working their fingers to the bone?

Ultimately, I find that some business owners are scared of their lives after leaving. All they’ve known is business, and they don’t know what else to do. That makes their future-after-business-ownership extremely precarious. But it also gives them an advantage: They shouldn’t just own one business… Enter the ETA Conglomerate!

3 Decisions Owners Make as the ETA Conglomerate

Essentially, Acquisition Entrepreneurs will do one of three things in order to excel as The ETA Conglomerate. Two decisions we make can lead to life and prosperity after the business sale. However, one decision could lead down a path of self-destruction before the business acquisition or in life after the business sale.

Here are three decisions we owners typically make when it comes time for The ETA Conglomerate:

  1. Take the money and run! We want more challenges, we need more challenges, but we take the money and run rather than investing those Benjamins in additional businesses where they can make more!
  2. Make an offer but make a calculated decision not to buy at that time. This decision has the potential to be rewarding. Maybe we invest the time and energy into exploring other business for sale, and it becomes so highly efficient that we don’t have to be in the office every day. With a highly functioning business, we find time to relax AND run the company. Or maybe we want more time to save for our ideal retirement goals. Sometimes, we want to spend more time building the business’s value to get a better offer later. Either way we go, we can still get to a sale’s table at another point in our business’s life and take more time to prepare ourselves to leave the business.
  3. Walk away from the Letter of Intent (LOI) prior to Purchase Agreement. This is a dangerous decision we ETAs often make. We perceive value in a company and make the offer we want via LOI. But when it is time to sign on the dotted line, we change our minds. It seems unlikely, but so many of us make this mistake that the Exit Planning Institute has done studies with the results that 80% of companies making below $50 Million in revenue never sell.

Questions That Determine The ETA Conglomerate Path

So you have an ETA Conglomerate Plan that’s been in the works for months, years, or decades? What makes you hesitate just long enough to back out? In my business at Tip of the Spear Ventures, I typically find that the deals that we’ve walk away from a business mergers or acquisitions scenario haven’t been the ones that we’re mentally prepared for. In other words, we get too attached to the company.

Ultimately, though, our answers to two questions tend to determine whether we can achieve The ETA Conglomerate dream:

How Much Money Will I Get?

Money can fix a lot of problems, but it can’t fix everything. I’ve witnessed Acquisition Entrepreneurs with lots of money self-destruct before they ever get to the sale of the business — Just as quickly as businesses with little/no cash flow. When it comes time to acquire businesses (multiple) though, money will be a deciding factor or the deciding factor.

Almost without exception, we Acquisition Entrepreneurs know how much we want for our business and how much we actually need to earn from the sale of our company in the future.  If we’ve planned our business sale for years and worked with professionals to come up with a realistic company valuation, we’ll balk if a buyer offers us significantly less. For instance, we’ll walk away if we’ve valued our company at $5 Million, but an outsider only offers us $1 Million. Alternatively, if we think our company is worth $1 Million and someone offers us $5 Million, we’d likely take that money and run before they change their mind. This scenario is with one business, and diversification or exponential growth/sales figures can be achieved with multiple businesses. So how much money you receive from selling The ETA Conglomerate is a crucial metric/KPI to consider!

What’s the WHY?

As an Entrepreneur Through Acquisition, and you know this all too well by Day #18 in the 30 Days to ETA series, you will face many ups and downs on your journey. Money, while a considerable factor to consider may not be enough to drive every decision you make. I’m going to ask you to dig deep… Deeper than you probably feel comfortable with and ask yourself why you are doing this whole ETA journey for in the first place. Is it to live the lifestyle that you’ve always dreamed of? Is it to provide generational wealth for you/your family? Is it to better your community/state/country?

If you strip away the exterior and are stuck with the interior decisions that you are attempting this ETA climb, you’ll find your WHY.

SUMMARY

So what will we business owners do when we get to the future moment of selling your organization? Will you take the money and run, or will you stay put? In this ETA Conglomerate post we’ve looked at why some Acquisition Entrepreneurs decide to do just that. My answer: Build an empire! If you can take one business and scale it, several businesses will allow you to better diversify and get to your endpoints of money or WHY.

Sam Palazzolo

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 #15 – The ETA Business Team

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If you’ve been reading along in this 30 Days to ETA series, you know that in the Day #14 post I discussed how to achieve ETA Engagement amongst your future employees. Why? It’s awfully difficult — Impossible! — to achieve happy customers if you have unhappy team members, and happy team members are engaged team members in your journey to Entrepreneurship Through Acquisition (You can read the previous post by CLICKING HERE). But what if there was a way to build the company of your dreams with an ETA Business Team? An awesome ETA Business Team that pulls just as hard as you do towards the business goal of not only acquiring, but building a company in order to sell it for maximum profit. In today’s 30 Days to ETA post, we’re going to explore how we can assemble our dream ETA Business Team of employees and executives, and in doing so how we can cultivate company culture and add employee incentive programs to ensure our ETA Engagement adds to company success… Enjoy!

The ETA Business Team

I shared a career opportunity post on my LInkedIn feed a few months back, searching for a team member to fill an executive position in my company. Sure enough, I had a few candidates present themselves who seemed to fit the position profile. During one of their interviews, I asked the candidate, “Where do you see yourself in a couple of years?” I’ll never forget his reply. With no shame, the young man said, “You know, I’ve always wanted to start my own private equity business. I thought working with you would give me enough information to go out and start my own business one day.”

What? Was I being punked here?? If you’re an ETA business owner, you might consider that answer to lead to an instant “no-hire!” However, I’m curious by nature so I asked the candidate, “Tell me about that answer. What about working here with me will allow you to start your own business?” He said, “I view what you’re doing here Mr. Palazzolo to be best-in-class, and if I was going to go out and attempt to start my own business I know I’d learn the ins/outs of running a business the right way from you.” Flattery will get you far, but not that far with me…

Why is the Grass Greener?

We all know that Entrepreneurship Through Acquisition (ETA) is a tough business model. Perhaps you can look at it and say that it’s not as tough as a Startup Entrepreneur might have it, but it’s tough nonetheless. So in your search for a business and in screening the ETA Business Team, why should you invest all of your time, energy, and money training and equipping what will inevitably be another company’s future employee? The short-answer, we shouldn’t. The long-answer, we should! If we train our ETA Business Team members and they leave to be part of a competitor’s workforce, or even worse, become our competition, we are doing what you probably did to get to the point where you’re exploring Acquisition Entrepreneurship. 

Know that even with the best incentives in place, competing companies will attempt to lure your ETA Business Team members with promises of greener grass. Sometimes, you’ll have to gently prod your employees back in the right direction — Although it’s my best practice to let an employee leave if they’ve made up their mind and they’ve approached me on the topic. By the time your ETA Business Team member gets to you, they’ve probably thought long and hard about their search for/attainment of another opportunity. In other words, they’re already one foot out the door, so let them leave. They will quickly learn that the reason the grass is greener on the other side is because of the enhanced fertilizer being deployed!

Can You Encourage ETA Business Team Loyalty?

If your competitors do happen to catch employees’ eyes with those green pastures a plenty, what can you do to guide your ETA Business Team members gently back to the company? Is a healthy fear of ramifications possible to lead ETA Business Team members in the right direction to back?

While as I previously stated, one foot out the door should be followed by two. However, you may want to consider agreements or restrictions that you can put in place to help keep your ETA Business Team employees from becoming the competitions employees?

  • A Non-Compete Agreement may help keep your employees from working with — or as — your competition.
  • Non-Solicit Agreements prevent your employees from soliciting customers away from you — They also prevent vendors from soliciting your employees.
  • A Confidentiality Agreement keeps ETA Business Team employees from revealing company secrets if they leave or talk to other business owners.
  • Intellectual Property Agreements keep work employees did for a company within that company if the ETA Business Team employee leaves.

We all want to build a strong team of ETA Business Team employees who have our best interests at heart. There’s a fine line between making ETA Business Team employees fearful and establishing healthy protections against employee retribution or employee turnover. Before enforcing any employee agreements, consult with your attorney to protect yourself from any known or unknown business risks — In one instance I can recall, our attorney partner recommended that a noncompete would be worthless and not to initiate. It’s important to keep in mind that not all court jurisdictions honor employer-employee agreements, so check with a legal professional before you implement any of them to be sure they actually protect you.

SUMMARY

ETA Business Team turnover and ETA Engagement (i.e., Employee unhappiness or dissatisfaction) can hurt a company’s operations and value from the future buyer’s perspective. If as a buyer you notice that the organization you’re conducting due diligence on has current employees that don’t want to be at work or have already left via turnover data, why would you want to buy that business? If you decide to buy it, you’ll probably refuse to offer top dollar or valuation multiple for that business. On the other hand, if you discover a business that is treating employees the way you would want to be treated — An ETA Business that offered clearly defined long-term and short-term incentives — you’re willing to pay top dollar.

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 #12 – ETA Metrics/KPIs

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If you’ve been reading this 30 Days to ETA series, you know that in the Day #11 post I discussed how your ETA Entity Formation is an important structural item on your journey to Entrepreneurship Through Acquisition (You can read the previous post by CLICKING HERE). In today’s 30 Days to ETA post, as an Accountant I want to look at two of my favorite things in the business world – facts and figures in the form of ETA Metrics/KPIs. We’re going to deal with the financial reports your future business needs to provide to not only lead the organization successfully, but allow interested buyers to see how great a business you have. Remember our end-game when it comes to Acquisition Entrepreneurship, that in order to make a business sellable we have to provide buyers with accurate financial reports that show our historical growth, our current financial status, and our business’s potential growth in the future…. Enjoy!

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Fact and Figures Drive Success

In our Mergers & Acquisitions business at Tip of the Spear Ventures, we’re often asked how ETA Metrics/KPIs can allow you to identify/acquire the perfect business. While perfection might be elusive, finding a nice business shouldn’t be if you stick to our ETA Metrics/KPIs formula. At Tip of the Spear Ventures, this method has yielded unbelievable success. The ETA Metrics/KPIs method will also not turn away potential buyers when it comes time to sell your business because a buyer can’t take figures scribbled on a napkin to the bank. Key Performance Indicators (KPIs) should tell a story of the business, regardless of formal system utilized and say, “Is this a viable business for me to buy? Is this business going to be profitable for me a couple of years from now?” Ironic right? These are the same questions you’ll ask when looking to conduct your mergers & acquisitions search for the right business to purchase!

Liars might figure, but figures never lie!

Sam Palazzolo, Managing Director @ Tip of the Spear Ventures

Show Growth + Current Status with ETA Metrics/KPIs

So what types of financial reports show buyers and banks the health and wealth of your business? Or how do you personally figure out how well your company is doing at any given time?

This is where our business management systems come into play. You’ll need to have a basic financial management system in place that allows you to compile facts and figures on a daily basis. Whether you use QuickBooks, Quicken, Sage, Microsoft Excel Spreadsheets, or an outsourced bookkeeper/accounting firm, the accounting system you use needs to be able to compile at least two different financial reports – The Balance Sheet and Operating Statement

1. The Balance Sheet

Your CPA has most likely asked you to print your company’s balance sheet at the end of each year so that they can begin preparing your taxes. But what does it show? Very simply, the balance sheet tracks your company’s assets and liabilities. It provides banks, buyers, or tax advisers a picture of what you own and what you owe.

In detail, the balance sheet provides the following information about your company:

  1. Net worth – Accomplished by subtracting your liabilities from your assets.
  2. Debt to income ratio – Calculated by looking at the amount of money you’ve borrowed compared to the assets that can be used to pay off that debt.
  3. Cash equivalency – A quick ratio test can show how much cash your company has coming in to offset its upcoming expenses.
  4. Collection periods – A collection test can calculate how long it takes your company’s accounts receivables to turn into cash collections.

2. The Operating Statement

Inevitably, your company will have to produce an operating statement for lenders, buyers, and CPAs in addition to a balance sheet upon the sale of your company. You may recognize this financial report by its more common name, the Profit and Loss statement, or the P&L. While the balance sheet details your company’s assets and liabilities, the operating statement details your company’s income and expenses. Think long-term figures for the balance sheet versus short-term figures for the P&L.

In detail, the operating statement can provide the following information about your company:

  1. Profitability – Derived from the profit margin ratio comparing the net profits (income earned after expenses but before taxes) to your gross sales income. E.g. – If you sell $1,000 in a month with a net income of $100, your profitability is 10%.
  2. Return on Investment – Calculated ratio that compares the net profit of your company to your company’s net worth. E.g. – If your company’s net worth is $1,000,000, and it’s earning $100,000, your return on investment is 10%.
  3. Inventory Valuation – Technically, the value of your inventory is how much you paid for it. To determine if you have too little or too much inventory at any given time, you need to figure up an end-inventory value ratio. E.g. – If you paid $100,000 for your current inventory, and your monthly sales are $50,000, you have a 2:1 ratio. In other words, your inventory is two times greater than your sales.

The Importance of KPIs

While a financial management software or company can easily compile a Balance Sheet or an Operating Statement from your company’s bank ledgers and bills, you, as a business owner, will have to compile the last type of financial reports a potential buyer will need.

You will have to identify the Key Performance Indicators, or KPIs, that show how successful your business is currently and how successful it can be in the future. Once identified, you will then use the indicators to analyze and predict future income and expenses in a quantifiable financial report.

The difficult part of KPIs is that every business has different performance indicators. For example, dentists can predict income by pointing to the number of patients scheduled each week or the number of patients pre-scheduled for the upcoming year. KPIs aren’t just important for tracking income. They identify upcoming expenses, growth pains, risks, rewards, and opportunities. Essentially, KPIs paint a picture of the strengths and weaknesses of your business.

KPI Financial Reports – Now What?

Once you predict your future income and expenses, your company’s strengths and weaknesses will show up. Obviously, you’re going to know what you like about your company and what you don’t like about your company. That’s what your buyer is looking for, too. He’s going to hire attorneys, CPAs, and people like me to tear your business apart to find its strengths and weaknesses. So you might as well use your KPIs to analyze your business before they do. Here’s what you can do:

  • Consult with your advisers to identify what data a buyer needs to see.
  • Create a system that produces, compiles, arranges, and presents that data in financial reports.
  • Analyze the financial reports from a buyer’s perspective.
  • Make the necessary changes to your business.

SUMMARY

So we’ve identified the compilations of ETA Metrics/KPIs and financial reports you will want to see when you’re interested in purchasing a company. By having quantifiable, printable financial reports that show your company’s historical growth, current success, and future potential, you’re probably going to have increased confidence as you pursue your Entrepreneurship Through Acquisition strategy.

Before buying your company, though, you can use their Balance Sheet, Profit and Loss Statement, and KPIs to get a better grasp on the business. You can use those financial reports to compare the company’s strengths and to identify their weaknesses. If you start doing that now, your ETA business’s value is going to shoot through the roof. You might be able to sell your company earlier than you expected, or you could sit back and reap the rewards of your hard work before you reach sale time (You may also save yourself significant time with a business that you shouldn’t purchase in the first place!)

Sam Palazzolo