Tip of the Spear Ventures

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30 Days to ETA | Day #5 – Enduring Profitability

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If you’ve been reading this 30 Days to ETA blog series, you’ve learned that having a business plan is essential for end results for success and that you should have that “end state” mentality in mind as you look to acquire a business. We’ve also explored your ETA Competitive Advantage that should allow you to be strategic in your direction and tactful in your actions to execute that business plan (You can read the previous post by CLICKING HERE). But there’s a key organizational attribute that you should screen for while conducting your Entrepreneurship Through Acquisition (ETA) process, that being Enduring Profitability. So in this 30 Days to ETA post, we’ll explore the concept of Enduring Profitability and how it should form the cornerstone of your search criteria… Enjoy!

30 Days to ETA Enduring Profitability

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What is Enduring Profitability?

If you’re like me and most entrepreneurs around the country, you work incredibly long hours. Entrepreneurs Through Acquisition spend much of their personal time working in their business, and rarely take vacations. It’s not something they have “time” to do. But why are they killing themselves by working so much? Didn’t they go into business to have more free time? If so, why can’t they take breaks without feeling guilty? It’s like the harder they work, the better off they’d be. I would argue that part of this “workaholic” state is induced by the pursuit of Enduring Profitability. I would define Enduring Profitability as the consistent achievement of profitability by the organization. Year after year, regardless of pandemic or economic situation, the organization can show on their financial statements the achievement of profitability.

Unfortunately, hard work isn’t the key to success. Without a doubt, we have to work hard to be successful. You’re definitely not going to reach success without some sweat equity, but there’s something more important. To make your business successful enough for your end-game results (i.e., to sell it), your hard work must go into making your business scalable in nature. There is no better reflection of the hard-work you put in and the scalable nature than Enduring Profitability.

What does scalable mean? Simply put, scalability is the ability to grow your business. Growing your business doesn’t necessarily mean making it into a franchise and opening store fronts all over the nation or the world. How many companies actually do that? That’s not necessarily our goal.

Business growth in scalability revolves around revenue and profits. In other words, how can we increase revenue and decrease costs involved to produce that revenue? Essentially, how do we make profits high and costs low; how do we increase our margins? Remember, people buy businesses that make money, and scalable businesses that show enduringly profitable characteristics typically bring larger price tags.

To use a baseball analogy, it’s the consistent singles and doubles that win the business game. Rarely is it the attempt to hit a home run that results in success for Entrepreneur Through Acquisition (ETA).

Sam Palazzolo, Managing Director @ Tip of the Spear Ventures

The Building Blocks of Scalability and Enduring Profitability

Maybe your business is already making money. Perhaps your business is booming with good employees and exponential sales’ growth. Sure, but I’m assuming that you’re not content with where you are; you want to make even more money and experience more growth. There’s no better time than now to invest your time, energy and passion into developing foundational systems that will help your business reach long-term success.

Just like a house, your business has to have a sound foundation. From our previous post, you know that foundation is your business plan. But the building blocks of the foundation – the footer, the piers, the concrete, the rebar – are what make your business scalable. The following three aspects make a business scalable: Strong Management Systems, Scalable Product Solutions, and Strategic Thinking.

Building Blocks to Build a Scaleable Business

1. Management Systems

Deep-rooted systems help us maximize our business growth so that we can make as much money as possible while minimizing growing pains. So when the storms of employee issues rush in or the gales of family issues flood our business world, we’ll have systems built to withstand the storms. These systems usually come in the form of processes surrounding people and technology. Here is a list of seven technology systems I’ve used in my own companies that have dramatically increased their scalability:

  • Customer Relationship Management System, a.k.a. CRM System – In order to get customers and to keep them in your business, you should put a system in place that analyzes and manages your interactions with customers. This software, or this team, will collect data about your customers that includes their demographic information, what brought them to your business, what they’re buying from you, and how often they use you. The data alone doesn’t do anything for your business. You must have a team or a software program that can analyze the data with the goal of improving business relationships with customers, retaining customers, and up-selling to customers.
  • Financial Management System – You also need a system to track where your money’s coming from and where it’s going. Basically, this is your record keeping system for income and expenses. Some financial management systems have sister CRM systems that link and sync information. Other financial management software systems have CRM components built into their basic structure so that business owners can use one program to accomplish two tasks.
  • Sales Management System – In this third system, you’re going to need a team who knows how to use the data you collected from your CRM system to make potential customers actual customers. This system funnels clients from the wide “prospective client” mouth of the funnel to the narrow “actual client” part of the funnel to make the sale.
  • Legal Management System – Ultimately, your business may delegate the operations of this system to a law firm as you grow. But initially, you’ll need a computer program or a paper filing system in place to store your business agreements, contracts, correspondence, identifying information, tax records, and employment records. However, you can’t just use the system for storage. You must have a team in place who can stay up-to-date and compliant with ongoing legal changes on local, state, and federal levels.
  • Marketing Management System – Systems one through four focus on your current customers and financials, but this fifth system helps you reach new consumers. Once you review the demographics of your target market from your CRM, you can plan what type of media you need to use to reach the customer. Should you offer your products and services through social media, print advertising, radio announcements, or TV commercials? Have a program or team in place that can strategically get your product in front of your ideal customer.
  • Talent Management System – Usually called “Employee Management Systems,” this system is how you find, hire, manage, and retain talented people. Without a good team in place, you won’t be able to reach your business goals. Moreover, have eyes on your talent four years out. Don’t look for good people on the spur of the moment; recruit on-going, consistently, purposefully and methodically.
  • Operational Management System – Finally and most importantly, your operational system manages all the other systems. It’s the written documentation of how your company runs. Whether it’s as basic as a hand-written bubble graph on a yellow legal pad or as complicated as a programmed and editable flow chart, this outline details the systems you’ve put into place, who manages them, how they function, and the benefit they provide your company. This operational system is the way you can manage the company without being physically in the company.

2. Product Solutions

In the early days of business, money is often tight, and it seems like business owners constantly have less than we need (I’ve mentioned previously the importance of cash flow management). In addition, our time and expertise are in constant demand. Implementing systems will take you time and money, but this second building block will increase your business’s scalability without a lot of time or money. What I’m talking about is just taking a moment and identifying the things in your business that can be easily increased or reduced to maximize your business’s profitability and revenue.

So here are seven questions you can ask yourself as you screen for a business to acquire:

  1. What product/service do you offer that has the highest margins?
  2. Which product/service has the potential to reach double-digit growth rates?
  3. What product/service can the team easily explain to the marketplace?
  4. Which product/service can secure outside leverage?
  5. Is there a product/service easy to market?
  6. What product/service can be automated?
  7. Can a product/service be franchised, licensed, or duplicated?

Your answers to the questions will show you how to take a product or service offering and scale it up. In other words, what you learn about the prospective business’ products/services will help you identify opportunities to increase revenue and decrease costs. You now have potential scalable business solutions.

3. Mind Shift Toward Scalability

The third aspect you have to do to make a scalable business is change your way of thinking. You’ve got to learn to think strategically. If you don’t know where you’re going, you won’t know what road to take to get there. If you’ve gotten this far in 30 Days to ETA series, you should have identified your exact business goals and written them down into a business plan. You should now be looking at ways to make prospective businesses you’re looking to acquire more valuable than the competition.

In order to build a plan for scalability, you must take the focus off of yourself in the business. For the company to be attractive, it can’t be wholly dependent on you. You wouldn’t even be where you are in business if it weren’t for people around you. Take a step back to understand that you are building a business that can operate without you. Therefore, you AND the future team must be successful together.

So how do you change your thinking?

  • Let go of “This is Me” thinking. – You must turn the conversation of your business from “I” to “We.” Stop thinking, “I’m the business owner who started this.” Instead, start thinking, “We have an outstanding business.” Turn from “My” to “Our.” Go from “This is My” to “This is Our.” It’s a play on words you see, but it has such intrinsic meaning.
  • Be the coach, not the star. – You didn’t become successful alone. Somewhere along the way, someone invested in your life. Maybe it was a family member, a friend, a pastor, a teacher, or a coach. Or maybe you read an inspirational book or blog post that changed your life’s direction. Inevitably, somebody in your life has dedicated or sacrificed time, money, and energy to help you. It’s time for you to do that now. If you’re going to build a scalable business, you have to be the coach. You have to cheer your team on to the victory.
  • Build the right team. – If you’re going to coach people to take over the everyday parts of your business, you have to hire the right people. Don’t look for “cheap talent.” If you get people who are less than your best, you’re going to get less than your best results. Hire the best people you can afford because great people yield great results.
  • Get help. – Sure, you can run the company by yourself. For the most part, you know what you’re doing. But you’re still going to need somebody in your corner. You’re going to need encouragement and financial advice. You’ll need an objective person to point out your failures and motivate you to success. Whether it’s a professional like a CPA or CFP, a family member or friend, or a board of advisers, you’re going to need help for yourself.
  • Remember your family. – If you’re like most entrepreneurs, then you spend a lot of time building your business to the detriment of your family. You have to make time spent away from your family the exception, not the habit. If you’re going to build a scalable business, you’re going to have to walk away once you have all of your systems in place. If you’ve become a stranger to your family and friends, what will you do? Who will be left with you when you reach success and have time to enjoy life?

SUMMARY

Remember, the goal we’re dealing with first and foremost in this particular series is acquire a business in 30 days with the goal of ultimately selling it. If we’re going to sell our company for top dollar, then the business has to be scalable and reflect enduring profitability. We have to increase revenue and decrease the costs it takes to produce that revenue to attract buyers and to get the most money possible from the buyers. Are you prepared to buy then build a scalable business? Read on in the series (We’re early, right… It’s only Day 5 on the way to Day 30!)

Sam Palazzolo

30 Days to ETA | Day #4 – Your ETA Competitive Advantage

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In my most recent post in this 30 Days to ETA series, The ETA Business Plan, I shared that you can go anywhere you want with your business, but you’ll get there faster if you establish a Business Plan. The adage “A goal without a plan is just a dream” has never been more true (You can read the post by CLICKING HERE). Part of that plan, and foundational to the process, is identifying your ETA Competitive Advantage. Thinking strategically about the value your business brings to the market and the benefits it provides should be advantages you look to capitalize on. And your ETA Competitive Advantage should be identified/contingency planned while looking at businesses to acquire!

30 Days to ETA Day 4 Your ETA Competitive Advantage

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What is Competitive Advantage?

Regardless of business type that you explore purchasing, there are probably thousands (if not hundreds of thousands) of similar businesses already in existence and potentially starting. So what will make a customer choose the business you’re considering purchasing over another? Why would someone travel further, pay more, or overlook small personal inconveniences to get your product or service? What makes you so special? What sets you apart from your competition? These questions drive to the heart of your ETA Competitive Advantage.

In simple terms, this advantage is what makes your business better than its competition in the minds of your customers.

What Does Your ETA Competitive Advantage Look/Feel Like?

To be successful as an Acquisition Entrepreneur, you need to be able to articulate the benefit you provide to your target market that’s better than any of the competition. You must have something or do something unique to draw customers to you right now and to entice buyers in the end. This does not mean blending in with the thousands of other competitors that are out there.

So as intuitive as this sounds, why do so many struggle with the concept? Your ETA Competitive Advantage doesn’t just sell your product or service — It multiplies the value of your business.

You can compete on cost as a business owner, but you’ll lose every time!

Sam Palazzolo, Managing Director @ Tip of the Spear Ventures LLC

Six ETA Competitive Advantage Examples

I’m not going to lie… Identifying a business competitive advantage is not that difficult. What is difficult is executing on that identified competitive advantage! I’ve seen hundreds of business leaders that perceive an advantage exists in their mind, only to have said advantage be nowhere to be seen. So, with that your ETA Competitive Advantages in mind I compiled the following list of six ETA Competitive Advantage examples:

1. People

This advantage isn’t about the number of owners, managers, or employees your company has. It’s not about your company’s gender, age, or ethnic ratios. This competitive advantage is about the loyalty of your team. One of the strongest competitive advantages a business can have is a remarkable team. If you invest in your team and include them in your vision, they will buy into your goal. They will want everyone they know to experience your product. If you get buy-in from your team, you have a rare, valuable commodity.

2. Organizational Culture

According to the Society for Human Resource Management (SHRM), Organizational Culture can be defined as follows:

“The proper way to behave within the organization. This culture consists of shared beliefs and values established by leaders and then communicated and reinforced through various methods, ultimately shaping employee perceptions, behaviors and understanding. Organizational culture sets the context for everything an enterprise does. Because industries and situations vary significantly, there is not a one-size-fits-all culture template that meets the needs of all organizations.”

Society for Human Resource Management (SHRM)

A company’s people show customers how to use your products or services. A successful owner will identify his individual employees’ strengths and teach his entire team to model those attitudes and behaviors. The company will streamline common expectations for its team if it excels in organizational culture. Companies that create value through organizational culture do so through many months and sometimes years of intentional training. They recognize employees’ unique knowledge, skills, and abilities. Then they teach each to work in a similar way for a common goal. Together, they accomplish something greater than one alone can achieve.

3. Processes and Practices

While many companies can make or sell related products or provide comparable services, companies can set themselves above their competition by creating unique manufacturing methods or service processes. Processes and practices in regards to your ETA Competitive Advantages are not only the what’s and where’s, but the how’s regarding execution.

4. Products and Intellectual Property

Your products or services are new and innovative in design or technology. They are unique, meaning you must protect your rights to that intellectual property through patents, copyrights, or trademarks. Without legal protection, competitors can replicate your product and take away your competitive edge.

If your business has a product, a system, or a design that isn’t easy for your competitors to replicate, you’ll want to direct your focus on these areas to protect yourself. If you can show your product’s unique design or your service’s unique process, you’ll add value to your product/service via intellectual property. Important to keep in mind that when your product’s value increases, so does the valuation of your business.

5. Capital and Natural Resources

Maybe you don’t have unique people, processes, products, or services. But you do have money. Cash capital is important in running your business, as poor cash flow management is the number one reason most small businesses fail (operationally, of course). Social capital can be achieved by creating a good name for yourself. Think of this as your business reputation. Your reputation is capital your competitors can’t purchase or achieve overnight, and makes your business more valuable as a result.

Obviously there are natural resources that may exist if the business you are exploring buying has land. Competitive advantages like oil, natural gas, ore, or coal are natural resources that add value.

6. Technology

The last advantage we’ll discuss combines intellectual property and capital in the form of Technology. Technology evolved into a powerful business asset during the Industrial Revolution at the turn of the 20th Century. Today, Technology is ever-evolving and plays an ever-increasing role in competitive advantage. If you are searching for a business in the tech space (software or hardware), or even if you’re not new technology or technological systems that none of your competitors can easily replicate can provide you with a valuable competitive advantage.

SUMMARY

Your ETA Competitive Advantage is an important aspect to consider when acquiring a business. How will you differentiate yourself from your competitors, those present today and those soon to arrive in the market. We discussed six ETA Competitive Advantages that you can look to employ, or screen for when searching for a company to acquire. It is precisely these competitive advantages that will increase the value of your business. The concept is simple – the harder it is for your customers to leave or the harder it is for your competitors to duplicate what you do, the more valuable your business is to buyers.

Sam Palazzolo

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

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

The Purpose of the 30 Days to ETA Series

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

30 Days to ETA DAY 1 Startup or Acquisition

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

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

Sam Palazzolo, Managing Director @ Tip of the Spear Ventures

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

What Happens at the End of a Business?

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

The EPI has two other revealing statistics:

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

It’s The Opportunity of a Lifetime

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

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

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

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

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

Sam Palazzolo

5 Ways Coronavirus has Changed Mergers and Acquisitions

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The Point: The COVID-19 pandemic has altered our expectations of mergers and acquisitions. If speed kills deals, and the coronavirus impact on mergers and acquisitions was not spared, the swiftness of doubt and uncertainty inflicted has shifted business values. As a result, we’re seeing mergers and acquisitions in a new light. So in this post, we present 5 ways coronavirus has changed mergers and acquisitions… Enjoy!

5 Ways Coronavirus has Changed M&A

There are five important shifts in mergers and acquisitions as a result of the coronavirus, which will permanently change the business of merging and/or acquiring businesses:

Change in the Understanding of Employees

Businesses have realized the value of their front-line teams in getting stuff done. Together with the efforts of the team members — many of whom are often at the lower end of the pay scale — many companies could not have lasted through the pandemic. So, how are individual perceptions of meaningful work and a special calling in some specific jobs influenced by the Covid-19 pandemic? It’s only when a crisis hits that we can identify the attractiveness of some functions — while other functions tend to lose out to those identified as low or dull. Ask yourself, who’d be the Most Valuable Player (MVP) for you now — someone who produces the materials/tools/information which you require or your C-Suite leader who coordinates/reports on? Where exactly is the value now? The answers to these questions pose serious implications for M&A.

Shift in Culture Priorities

Being kept apart from friends or family has shown team members where their true priorities lie — and it’s not work. Our relationships to the jobs we conduct have changed as a result of the pandemic. If you asked any part of your team what matters today, it will almost surely be family and their health. That’s where people wish to spend the majority of their time. When you realize that you could lose the people you love most, you see what actually matters. M&A will need to take and work with the changed priorities of organizational culture and the team members because when it comes to a choice, work will not come out on the top.

Change in Empathy and Compassion Expectations

One of the biggest adjustments demands M&A adapt to the individual’s with empathy and compassion. Whether they are in the workplace or working from your home, M&A professionals will need to use their own emotional intelligence (EQ) to understand each person’s situation, pressures, priorities, and values. No longer can M&A think of the organization’s team as a single thing or object — and this can and will be hard. More than ever, M&A will need to reveal themselves as people and build relationships with their own folks. Honest, accurate discussions about work and life will improve connection. Empathy and compassion will solidify it.

Change in the Power of Leadership

Having remote teams has meant leaders needed to step back from the job and let their people manage themselves. The M&A firms who gave their teams some autonomy and decision-making are the ones who have had the best results. It makes sense. To retain power, M&A will be to increase agility and decrease costs for the company in the long run. When you have the right people in the M&A function, don’t be afraid to show your faith in them? It’s time to let go of control over the particulars of people’s work and instead, begin to support them. Be certain they have everything that they need to make the ideal choice and get the job done.

Change in Attention and Direction

If there is one thing we learned during this time, it is that plans can be shattered at the drop of a hat. While planning is still important — Since you have to understand where you’re headed — it’s the results leaders need to concentrate on instead of the journey. Your purpose in M&A is to act as a driver, and that’s what’s going to maintain mergers and acquisitions strategy leading to results — or lack thereof.

SUMMARY

I see a significant move from strategy or process-led mergers and acquisitions towards a more agile one. While we still value powerful and elastic M&A, there’s presently a heavy focus on agility at Tip of the Spear.

Understanding Mergers and Acquisitions Strategy

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The Point: When most people think about starting a business, they often think of starting from scratch — designing the business from scratch and making your own concepts and plans. But is this the right — or best — strategy for an entrepreneur? In this post, we’ll explore understanding mergers and acquisitions strategy… Enjoy!

Tip of the Spear Understanding Mergers and Acquisitions

This is actually easier than starting an entirely new company, as you have a known product to base your business around. However, buying an existing company can still help you get started on the right foot. Here is what you should know to get a lot out of your purchase. Read on for more information on mergers and acquisitions.

There are two ways to go about mergers and acquisitions (M&A). One way is through an all-cash transaction, which allows you to take over a majority of the assets of the other companies and you keep all of the equity. Another way to approach the process is by conducting a financial transaction, where you receive cash for a portion of the total equity. Both methods have different advantages and disadvantages, so it’s important that you carefully consider which option will be best for you.

The first thing to consider is whether or not there are synergies between the two companies. You want to be able to add to the strength of one company while keeping away from the weakness of the other. For example, buying a hospital that offers medical equipment to nursing homes could be a good move for both companies. However, buying a manufacturing company that makes products for the home repair industry could be a bad move for both companies. So the two mergers and acquisitions strategies have to be well thought out before you make a decision.

You also have to understand the benefits of the mergers and acquisitions. Some examples of these benefits include saving cash, leveling the corporate ladder, combining research and development, and better service to customers. In order for these benefits to be realized, you have to look at the costs of the transactions carefully. This means looking at both the direct and indirect costs involved with the transactions.

You should also determine the value of the acquired assets. You should compare the total assets acquired, including goodwill, to the total market value of the combined company. Remember that these purchases do not always result in absolute value. Sometimes, the actual net worth of the acquired business is less than the purchase price.

SUMMARY

In summary, the main goal of the acquisition and mergers and acquisitions strategies is to acquire a company that can provide a service or product that solves a problem for the buyer. One of the main downsides to acquisitions is the risk of acquiring weak companies that might not be able to support the obligations you have with them. Be sure to get all the facts before you decide on a strategy. Make sure you are familiar with all the terms before you enter into any agreements.