Tip of the Spear Ventures

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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 #13 – ETA Risk Mitigation

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If you’ve been reading along in this 30 Days to ETA series, you know that in the Day #12 post I discussed how your ETA Metrics/KPIs allow you to establish a scoreboard for your journey to Entrepreneurship Through Acquisition (You can read the previous post by CLICKING HERE). In today’s 30 Days to ETA post, a wise person once told me, “Somebody else’s experience is a far better teacher than your own.” I wish I had listened to that advice. If I had understood the vital role of a business risk assessment in the purchase of a business, I might have avoided making the single biggest mistake of my business career… Enjoy!

An Expensive Education

Many years ago, I had the opportunity to purchase a business. It appeared, by all standards, to be a very good opportunity for me. So like any prudent business person, I began gathering intelligence on the business and conducting due diligence. I looked at everything in the company — From interviewing employees and customers to looking at the financial statements. I went through this business with a fine-tooth comb attempting to leave no stone unturned. I also thought I was being prudent by seeking counsel from my ETA Professional Team of attorneys, CPAs, and other professional advisers.

It was during this due diligence phase that I can remember asking myself, “Do I really need to buy this business? Should I really add this much stress to my life?” Like an angel sitting on my shoulder, my conscience warned me over and over against purchasing the company. I began to focus on the pros of buying the business. To my detriment, I ignored the red flags I saw in the list of cons.

Long story short, I came really close to purchasing the company. What seemed like minor discrepancies in the business assessment at the beginning, ended up becoming MAJOR problems at the end. These problems caused lots of harm, lots of grief, and lots of brain damage. Ultimately, I was glad that I had listened to my gut and the risks that appeared in the assessment I conducted. If I hadn’t, I would have bought the company. The excitement for the potential of making more money, though, almost got the better of me, and it nearly cost me years of my business life.

30 Days to ETA - ETA Risk Mitigation

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ETA Risk Mitigation

In 30 Days to ETA, we Entrepreneurs Through Acquisition face risks in many different shapes and sizes. Depending on the industry, harm could befall us in unusual ways. For instance, you could face environmental or weather-related risks. National or global-economic crashes could take the legs out from under the business you’re considering. Changes in employment, political parties, market competition, or the like could also pose risks to businesses.

No matter what business you’re in, each will face risks. And dealing with the risks is what a successful Acquisition Entrepreneur does. More often than not, you’ll deal with the legal implications or ramifications of the risks. Some must comply with OSHA, HIPAA, or the Patriot Act. What about the Equal Opportunity Act or the Labor Standard Act? Regardless, all business owners have to deal with national or state laws that create risks in their companies, so preparation is the best plan for Entrepreneurship Through Acquisition.

Before we can manage risk, you must identify the risks and comply with the laws that govern them. The biggest mistake most make is not looking at all of the potential risks involved with buying a company, and the risks you ignore have to do with legal risks. Most of see the upside, but rarely see the full potential of the devastation of the downside. You must be aware of all of the various types of potential risks, and you must follow the laws that govern the risks. As an attorney friend of mine says over and over, “Ignorance is not an excuse not to obey the law.” We definitely have our hands full.

The great ETA Alfred E. Neuman said it best…

‘What, Me Worry?’

Sam Palazzolo, Managing Director @ Tip of the Spear Ventures

Risks Monitoring

So what are we Entrepreneurs Through Acquisition to do with the ETA Risk Mitigation we discover? Whether you’re preparing for a business merger or acquisition, you should sit down with every business you’re considering placing under Letter of Intent (LOI) and do a new risk assessment of the company. The reason I recommend looking early and often is because risks change. The state the business operates in may have issued new employment laws, or a competitor may have opened their doors since the last risk assessment. What if interest rates have changed or new tax laws been issued? With so many different types of risks, where do you start?

Business Risk Assessment – 6 Steps

  1. Consult outside counsel – Start with a good insurance agent who works to protect you from risk on a daily basis. Then, talk to your attorney, CPA, and a CERTIFIED FINANCIAL PLANNER™ to identify and forecast potential risks.
  2. Seek internal advice – Rally your family and your team, and perform a S.W.O.T. analysis. Identify Strengths, look for Weaknesses, find Opportunities, and guard against Threats.
  3. Weigh probability – Rank your identified risks in order of how likely they are to occur. Start with the most likely. Finish with the least likely.
  4. Predict harm – If your greatest risk is not harmful to the company, don’t devote countless time and energy to it. Instead, manage the risks most likely to cause harm.
  5. Address the risk – Don’t ignore any of the risks. Use your rankings and predictions to decide which ones need immediate attention, but don’t turn a blind eye to any risks.
  6. Monitor for changes – Shoot for yearly risk reviews to keep up with legal, economic, or political changes.

How ETA Risk Mitigation Effects M&A?

So how does ETA Risk Mitigation assessment and resulting management apply to our Entrepreneurship Through Acquisition journey? It’s not rocket science. Any potential buyer will be looking closely at the business you’re investing’s risk management process to see if they understand the risks in their business and to see if they’re prepared to handle the effects of those risks. Acquisition Entrepreneurs will want to look at the company’s risk management track record to see if they’ve prepared for and battled the risks successfully.

Put yourself in the seller’s perspective. The last thing their buyers want to do is come and purchase a business with holes in their risk management shield. If a buyer realizes they haven’t paid their workers’ compensation insurance or employee payroll taxes, they might (will?) walk away from the company. Entrepreneurs Through Acquisition haven’t spent all of their time and effort looking to acquire a business in hopes of selling it for millions only to see holes in its foundation before they actually purchase it. If you ignore parts of the business’s risk assessment, you will most likely lose significant interest in the future of the business (you will have exposed vulnerability).

So friends, now is the time to conduct ETA Risk Mitigation via an assessment of the business. Prepare yourself. Compare the company. Buy it and make millions!

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

30 Days to ETA | Day #3 – The ETA Business Plan

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In my most recent post in this 30 Days to ETA series, Leading Your Business, I explained that you can’t begin a business if you don’t know how it’s going to end. You have to identify where you want to go and why you are going there before you can figure out what type of business to acquire (You can read the post by CLICKING HERE). You must think strategically about the value of your business and then work to increase, or accelerate that value tactfully. And one of the best ways to start that process is by building a plan… The ETA Business Plan!

30 Days to ETA Day 3 The ETA Business Plan

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Plan More… Achieve More!

Have you ever scratched your head and wondered why some businesses achieve more? It would appear that for some businesses, nothing holds them back from achieving more: more money, more clients, more contracts, more products, more everything! While those entrepreneurs are taking the bull by the horns, other business owners are getting run over by the bull. They can’t get out of the trenches (or the bull’s way!) They’re stuck in the everyday business muck and mire, and they’re getting trampled right out of the business.

What Do Business Owners Who Achieve More Do Differently?

When I talk to business leaders, I always make a point of asking them what it is that they do to achieve more? The response that gave me the most insight (or most recently) said, “It’s pretty simple… I think we do a better job of implementing what we plan.”

In writing and reading that response, and sharing it with a few thousand friends since the conversation this leader was spot on. The difference between success and failure often comes down to being in the right place at the right time (If you’ve read any of my previous works, you know I love the quote “80 percent of success in life is just showing up” credited to Woody Allen. I’m convinced that preparation prior to showing up is the key. In other words, preparing your business plan consisting of business goals and outlines on how to achieve them. As a business owner, you have to start somewhere. So lay the original groundwork for success by developing a thorough business plan.

A goal without a plan is just a dream!

Sam Palazzolo, Managing Director @ Tip of the Spear Ventures

What’s In a Business Plan?

A good business plan is essential and a foundational piece to your business’s success. But what is in a business plan? Here is an overview of Business Plan basics:

  • Company description
  • Market analysis
  • Management and ownership
  • Service/Product line
  • Marketing & Sales
  • Funding
  • Financial projections
  • Appendix
  • Business Summary

I wrote a comprehensive article about exactly what needs to be in a good business plan. If you’d like more information drop me an email at info@tipofthespearventures.com.

The Purpose of a Business Plan… Global Domination (or to Become the Foundation for Your Business)

In order to acquire a business, creating a business plan at the beginning of your journey AND at the beginning of each year is fundamental to knowing what you’re trying to accomplish. I’ve heard it said that knowing what you want to achieve determines how well you succeed (as well as when). How do you know you’ve reached your destination if you didn’t have one in mind? What determines your business’s success if you’ve never defined success for yourself or your business?

Yes, a business plan is time-consuming and frustrating, and that’s not what we entrepreneurs want to hear. We have an amazing opportunity to buy a business with equally amazing products and/or an incredible service. We want to jump right into business and get that product or service to our customers who must be desperate for what we have to offer. Let’s make big money now!

Regardless to how tempting it is to push forward in business, remind yourself to take the time to create a business plan. Creating a business plan and keeping it at the center of everything you do will reap benefits in the long run.

The Foundation Drives the Business’s Success

At this acquisition phase, you won’t reach success by creating a one-and-done business plan and walking away from it. Theory became practice, and then practice became routine. I would encourage you to develop one-year revenue, product, service, improvement, and sales goals. Each team member contributes their thoughts and ideas, and agreement should be had (i.e., buy in) before we put them on paper. You needed the whole team pulling/pushing in the same direction.

SUMMARY

Remember that end game is selling the business that at this point you haven’t yet acquired. With this in mind, every business has to get their leaders, team members, to buy-in to your future business goals. If everyone on the team gets it, they’re happier, fulfilled, and motivated to hold each other accountable to achieving your business goals. They propel you to greatness and your business to success.

Sam Palazzolo

Acquisition Entrepreneur – Art or Science?

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The Point: We’re often asked about our Mergers & Acquisitions business specifically, “How can I be an Acquisition Entrepreneur?” The reality is that most entrepreneurs that take on an acquisition are not born that way, they are trained to do so. If learning is at the forefront, what else is involved in the background? So, in this post we’ll explore the Acquisition Entrepreneur – Art or Science… Enjoy!

Things to Consider As an Acquisition Entrepreneur

The acquisition of a business is often thought of as the same thing as buying an existing enterprise, however, there are several key differences. An acquisition can be more difficult for some entrepreneurs because of their inexperience and limited financial resources. Acquiring businesses involves a series of steps.

No Cowardly Lions!

The first step to successful acquisition is having the courage to buy a business. There is often fear among investors that if they invest in a startup it will fail. This is not true. The reason for this is that successful entrepreneurship is built on sound principles, strong leadership, and an excellent business plan.

You are an Investor

To buy a business, investors require information about the owner. They want to know the entrepreneur’s personal and professional background. This includes information on the founders, the current business model, and the products or services offered. Having this information allows investors to evaluate the potential acquisition more objectively.

What Does the Business Do Well?

Investors also look for the strength of a business. In addition to a strong business plan, an entrepreneur should have experience in his field. Additionally, he should show that he has the ability to manage and grow a business. In addition, it is important for a start-up to demonstrate how the business will survive during tough times. These can be difficult to assess when a company is still in the development stages.

What is the Legacy of the Business — and You?

When buying a company, investors look for companies that are well-established and that have a solid financial footing. It is also important for the entrepreneur to convince potential investors that he is capable of managing the business. By conducting a survey of the company and its current location, he can show investors that he knows where he is going. He can also convince potential funding sources that he has a great idea for making the company successful. If he is able to generate interest from interested funding sources, he may find himself able to buy the company more easily than he had originally expected.

Time is the Great Equalizer

Another important thing to consider when it comes to being an acquisition entrepreneur is the time line for making a successful acquisition. Most companies that are interested in buying a business develop interest over time. However, it is not always easy to close a deal at the right price and time. As a result, some companies prefer to wait to make an acquisition until they have more negotiating power. This gives them a better chance to get a good deal on the business. On the other hand, a strong acquisition entrepreneur knows that he needs to quickly close a deal so he needs to be ready to negotiate with all of his potential funding sources.

SUMMARY

In this post, we’ve explored the topic of Acquisition Entrepreneur – Art or Science. We know that there are a lot of ways in which you can explore your entrepreneurial spirit. Becoming an acquisition entrepreneur is a smart way of doing so.

Sam Palazzolo