Tip of the Spear Ventures

A Family Office that behaves like Venture Capital | Private Equity | Business Consulting

entrepreneur

30 Days to ETA | Day #17 – The ETA Exit Plan

By

If you’ve been reading along in this 30 Days to ETA series, you know that in the Day #16 post I discussed how to maximize ETA Deal Flow. You need to analyze a lot of businesses in order to get one to purchase in your journey to Entrepreneurship Through Acquisition (You can read the previous post by CLICKING HERE). But even though you’ve found the perfect business and were fortunate to purchase it, I’m going to encourage you to focus on the end. In today’s 30 Days to ETA post, we’re going to explore how that end-game focus — The ETA Exit Plan — can provide you with all kinds of benefits, especially financial benefits if you do things right… Enjoy!

30 Days to ETA The ETA Exit Plan

The ETA Exit Plan

Entrepreneurs Through Acquisition (ETA) have to have a plan in place for how to get where we want to go — Something I refer to as the ETA Exit Plan. The future sale of your company is your ETA Exit Plan destination. I wish I could tell you that the road from where you are now (Acquisition Entrepreneur) to successfully selling your business in the future with generational wealth (The ETA Exit Plan) is a linear-shortest-distance-between-two-points line. Unfortunately, it rarely is a straight line! Instead, you can anticipate experiencing some type of setback along the way.

I typically refer to these setbacks as roadblocks. Your objective when you come across them, is to get on the other side (Either up/over/under or around) as quickly as possible. Here’s where the ETA Exit Plan gets good — You can anticipate coming up to another roadblock after you clear one, and another after that one, and so on. Not that that is “good” news, but it might come as news to you in general. Most of the Acquisition Entrepreneurs I work with at Tip of the Spear Ventures believe that they will not have to encounter any roadblocks on their ETA journey — WRONG! No matter how much planning you do. No matter how well you execute those plans. There will always be a roadblock along the way to the ETA Exit Plan accomplishment.

Making the ETA Exit Plan

By this point in our series, you should already have a business plan in place and be following that plan to find your future business through Mergers & Acquisitions. You’ve been preparing for this business acquisition since you discovered ETA, so it only makes sense to also focus on the sale of that business not only from day one of ownership, but before you even purchase the business! If you don’t have a business plan, drop everything and do that first. You’re not ready to acquire or consider how you will sell the business. You need to go back to the beginning of your business and identify how you want the end to occur!

How to Prepare for The ETA Exit Plan

No matter how good your original business plan is, you’ll never be able to walk away from this amazing company you’ve developed if you’re not mentally prepared. If you haven’t come to terms with letting someone else buy your business, you might even pass up millions of dollars. At Tip of the Spear Ventures Mergers & Acquisitions practice, we often speak with owners of businesses that tell us the all too often sad story about how they should have sold two-three years ago at triple the price they’re talking with us about selling their business. But there are things you can do now to prepare for the ETA Exit Plan.

What to Include in The ETA Exit Plan

  1. Decide what you’ll do after you sell – Make personal plans to travel, golf, take care of grandkids, spend time on a hobby, or begin another business before you leave this one.
  2. Gather your ETA Professional Team – Let your professional consultants, employees, family members, and friends know what your personal exit goals are so that they can hold you accountable for reaching them.
  3. Establish a Timeline – Decide what age you want to be when you “retire” or sell your company so that you can make appropriate personal and financial plans.
  4. Make a step-by-step Financial Agenda – If you know when you want to sell, you’ll know how much money you need to set back monthly in personal retirement accounts or savings accounts. If you lay out a detailed financial agenda, you’ll have the money you need to enjoy your life of leisure or your next big venture. Any profit from the sale will just be the icing on your financial cake.
  5. Hold your ETA Team Accountable – Just as your ETA Team is holding you accountable, hold them accountable as well. Don’t let anything slip through the cracks that could leave you or your company vulnerable at its time.

Which ETA Business Owner Are You?

You may be a person who constantly develops plans, but you can’t start or implement them. Maybe you’re the person who starts 20 things but can’t finish one thing. Or you might be the person who has his hand in 1001 different things. Whether acting, finishing, or prioritizing is your weakness, I have the same word of caution for you. It’s WAY too risky to jump right into ETA or into the sale of your future without having a plan. Many times, it’s impossible.

Creating the ETA Exit Plan can provide you with timelines, agendas, financial estimates, and accountability. Walking through these contingency scenarios for the time after we leave our business can help us prepare for our next step in life. Additionally, if we’re preparing to leave, we’re stepping back from day-to-day operations. That leads to a business’s self-sustainability and scalability which we previously discussed.

SUMMARY

The best-designed plans don’t do us any good unless we act. So, get the ETA Exit Plan down now as you conduct your search as an Acquisition Entrepreneur and you’ll find it easier when you go to exit the business.

Sam Palazzolo

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

By

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

By

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 #13 – ETA Risk Mitigation

By

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

Attend Webinar Workshop: 30 Days to ETA

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

By

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!

Attend Webinar Workshop: 30 Days to ETA

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