The EXIT! Building, Buying, Running and Selling Companies – Part Four

I have had the opportunity to build businesses from scratch, buy existing businesses, run them and sell them. This is the final blog in our four-part series. Here, we will take a quick look at the exit – selling a business.

Selling a Business creds. I sold my national business-to-business service to four different buyers over a ten-year period, including the first location to a publicly traded company. I sold my satellite and radar systems defense related software engineering business to a Maryland contractor that manages NASA’s Hubble Telescope. I sold the extended stay lodge to a national private equity firm. I sold my technology firm which specializes in Migration to Cloud, Big Data, Data Analytics, and Data Modernization Competencies to my Capital Partner. I sold our IT staffing firm to my Capital Partner. Including deals not mentioned here, I managed the investment banking role on businesses I built of eleven separate exits, nine of which were seven or eight figures.

Congrats if you are planning to exit! It is an exciting time. Here are three of the many lessons I’ve learned in selling companies:

1.      Perform prospective Buyer due diligence before signing anything. I sold the Michigan office of my Professional Employer Organization to a NASDAQ company when the market for that type of business was hot. A year later, a large competitor from the East Coast wanted to buy the remainder of the company’s offices. I signed an LOI with the business that contained explicit non-binding language, allowing either party to terminate without cause. I did some due diligence on the company and decided not to sell to that prospective buyer, so I terminated the LOI. He sued me. We countered for tortious interference since we quickly found another bone fide buyer. He tied up the company, causing us to miss the wave of high valuations. In the end, I won a multi-million-dollar judgement at trial. He appealed. I won again on all counts including interest. Sounds good, right? But it took seven years of cash, focus and energy. Even after the New York bond company grudgingly paid us the $5.5mm judgment, I lost millions compared to selling at peak.

 

Those experiences are hard to predict, but whether it is a piece of property or a business, beware of those who use litigation as a tool to attempt to bully sellers. In the real estate sector, there are bad actors that have used the lis pendens concept to tie up property with little risk. They entice you to sign something and then use litigation as a tool to try to keep others from buying from you. Under pressure, often the seller will relinquish the property at a lower price versus defeat the frivolous litigation. In my case, the prospective buyer was using the LOI in this manner, even though it explicitly gave both parties a walk away with no obligation.

 

Though this prospective buyer had no case, he thought I would eventually cave.  After seven years in the courts, it probably cost him nearly $10mm, including legal fees. Regardless, don’t get too excited when you have a buyer come in quickly and give you what appears to be an attractive LOI.  First, conduct “prospective buyer due diligence” before you sign a term sheet or a letter of interest or letter of intent. To the extent possible, consider the following:

a.      Is too much of the value tied to the future performance of the prospective Buyer?

b.      Is the prospective Buyer financially capable of making the acquisition, or are they using your platform to raise money after you sign the LOI?

c.      Is the prospective Buyer a good actor; a company or individual with integrity and a reputation for fulfilling requirements in a reasonable manner?

d.      Is the prospective Buyer sue-happy? Do a quick Nexus search to uncover if he initiates law suits as a tool to try to get his way.

  

2.      Add some independent directors, or at least do some of what they would do for you if you did. Most entrepreneurs place family members and friends on their board. Independent directors who have industry wisdom and value chain skill can enhance your exit price. Here are a couple things that you can do through closing to gain that benefit:

a.      Run past the finish line. While in the selling process, continue to focus on increasing sales and making smart decisions for marketing related expenses. The Buyer’s due diligence team will likely uncover any attempts at masking performance. They are looking for upside. They want to find some value that reflects some ROI on the other side of closing. They will be looking at sales pipeline, service delivery capacity, synergies, rollup efficiencies and client concentration.

b.      Reduce risk for the Buyer. Continue to operate the business with a strong sense of protecting the asset. Make good decisions on litigation issues, as if you were keeping the company for the long term. Terminate problem employees before closing. Close the underperforming office. Leave as little to the Buyer to clean up or fix up as possible. In terms of risk mitigation, expect them to have sophisticated due diligence capabilities and tools to unearth anything you tried to hide. The less they have to fix post-closing, the higher your price.

 

3.      Deliver a great culture. A great culture helps with the HR checklist on talent acquisition and retention and can increase the company value by up to 15%. A great culture helps with the SWOT analysis. A great culture reduces the pressure from the Buyer’s management team during transition. When you are in the process of selling your business, you might think you are in some way “defrauding” your team to have inspiring culture meetings. That is not the case – an uplifting work environment is a good thing regardless of your personal exit plans. And, the reality is that you are staying engaged to take great care of your employees so they will take great care of the customers to protect the company as an asset. This provides the Buyer with an easier transition.  

If you are in the process of exiting, I hope these thoughts are helpful to you. And, I hope your business flourishes whether you are building it from scratch, buying a company, running a company or selling one.

Building, Buying, Running and Selling Companies – Part Three

I have had the opportunity to build businesses from scratch, buy existing businesses, run them and sell them. I thought I would share a couple things I’ve learned along the way. Here, we will take a quick look at running a business.

Running a Business creds: I was CEO of a national business-to-business service for more than twenty years. Concurrently, I was the executive Chairman of a defense software engineering business, which upgraded NORAD’s satellite and radar systems for twelve years. I ran an extended stay hospitality business for five years and parallel to the above ran an executive suites business for eighteen years. I ran a digital transformation consulting and IT Staffing business for four years

Our businesses served well-known brands including Goldman Sachs, American Airlines, MIT, TD Bank, Boeing, GEICO, Neiman Marcus and the United States Air Force. We provided investors with double digit returns most of the time, with the best yielding $15mm for every $300k invested – over a twelve-year period that was solid triple digit territory.

As CEO in a total of six different sectors over nearly three decades, I learned that the job can be simplified in two primary audiences and four responsibilities.

First, you serve your external stakeholders. And, to your external stakeholders you have two primary responsibilities:

1.      You are the investor. You deploy capital to increase value. You are “el jefe” of capital allocation strategy, and that is your external lever to increase long-term business value. For me, that includes driving the company’s capital allocation objectives of improving free cash flow and investing in projects and acquisitions with likely returns above the cost of equity and debt. That factors in the hurdle of reasonable estimations of market risk. Whether you are expanding an office or buying another business the hurdle rate needs to be reasonably likely. For example, if your business is ready to add an office do you increase the size of your Miami office or establish a new one in Fort Lauderdale? The prestige of having multiple offices sometimes clouds the capital allocation strategy question. Here is a simplified approach to weigh the decision.

a.      Analyze the total cost of increasing Miami’s footprint and compare that to the total cost of adding a new location in Fort Lauderdale. Include all leasing, tenant finish, likely delays, travel from top executives and financing costs. If we need to raise the increased cost of the expansion with debt does that clip our wings in other more profitable ventures?

b.      What is the hurdle rate (ROI of the investment) of the new Ft Lauderdale office? In other words, how much higher of a return does the more expensive (risky) option need to be to take it on? Establish before the next step.

c.      What is the likelihood that sales will increase as we expect? What happens if we are wrong?

d.      Is the projected higher return enough in percentage terms and in aggregate dollars to compensate for the increased risk and uncertainty?

e.      Calculate a return on both investments.

If the return for the Ft Lauderdale option is above your hurdle rate move forward with the expansion – if not, just increase Miami’s footprint.

2.      You are the customer loyalty strategist. Your COO will pull it off, but you set the strategy. If you don’t have a good customer experience strategy that you like, consider the five steps outlined in my book The Magic Wand, summarized here:

a.      Develop and deploy an objective, measurable Customer Experience (CX) vision.

b.      Understand each step and touchpoint in the customer’s path and how the customer feels about it.

c.      Reorganize all customer touchpoints to create a better, more real-time dialogue with them that solicits from them the kind of interactions that deepen loyalty.

d.      Recognize and reward CX knowledge throughout the company.

e.      Communicate and measure CX everywhere—from top to bottom.

These steps are achievable by deliberately asking empowering questions.

Second, you serve your internal stakeholders. And, to your internal stakeholders you have two primary responsibilities:

1.      Build an exceptional company culture. Use some rendition of the three cultural pillars of Integrity, Innovation, and Invitation. This helps create a talent arbitrage environment. I was able to attract world-class talent with little more to offer than championing the Customer Success mindset. For a quick read on the details of this culture see my book Go Ahead! Unleash a Contagious Customer Success Culture.

a.      Build a proactive customer success environment built on rock solid principles.

b.      Hire exceptional people with a customer success bent.

c.      Train your team to sell with integrity, negotiate with value and serve with excellence.

 

2.      Align your team to increase business value. This includes establishing the strategy for a map of all touchpoints that crystalizes every team member’s OKRs (Objectives and Key Results or whatever metric you prefer). Peter Drucker’s management by objectives is the forerunner to this structure, but I like OKRs because of their simplicity and power. Complex performance management systems have the tendency to become cumbersome over time. The tool of OKRs is a reliable way to encourage the team to stretch in their efforts with energy and passion. And, as long as the CEO is leading the way, the results should yield outsized performance.

The final part in this building from scratch, buying, running and selling series is the exit – selling the business.

A Different View of De-risking – Comparing Customer Service to Customer Success

Customer Success incorporates de-risking, but it does not stop there. And, though it requires a certain mindset, it is not as hard to maintain as customer service. That is because the Customer Success Culture delegates and distributes creative energy. In fact, it generates energy, because the team is empowered to ask open-ended questions with a genuine desire to uncover shifts. And, when they unearth a customer inclination, they have the authority to respond. Since it is fueled by purpose, the employees in a Customer Success Culture are motivated to develop inventive new approaches.

Talent Arbitrage – a Cultural Application

Labor arbitrage is when you tap into offshore talent at a lower cost than your home country to provide the same services. This continues to be used extensively in the IT world for myriad software applications. The economics are shrinking with wage growth and it is difficult to measure real productivity gains since they can be masked with volume and though the term “labor” was upgraded to “talent”, in my view it isn’t really arbitrage.

Go Ahead and Succeed in Business!

I’m told I coined the term, Customer Success, in 1998. Since then, as CEO in six different sectors I have found that the principles work. In fact, I delivered to my investors double and triple-digit returns on investment. And, even in the face of one of my greatest business challenges due to a sudden unforeseen dramatic drop in the price of a commodity, the project was awarded with a world class customer net promoter score.