A key word in business is PREPARE. It’s something most of us learned around the time that we started receiving homework assignments. "Start with the end in mind" has been not only a personal motto, but at the core of Traklight’s software platform!
I had the pleasure of speaking with Mike Chadwick of CKS Advisors and Juliet Peters of Framework Legal at a recent Arizona Technology Council Lunch and Learn. You can check out the slides on Slideshare here.
With up to 12 million businesses estimated to trade hands in the next 10-20 year, which is about 70% of small businesses, there will be deal flow of about $10 trillion. Given the number of baby boomers, it’s no surprise that 35% of small business owners will rely on an exit for retirement.
We discussed some real life examples that unearthed some of the challenges. For example, the transaction always takes longer than anticipated. That is not only for exits, but also for financing. Plan on double the time so that you have adequate funds for operations, or runway, to make it to the financing or exit.
A common problem is that often businesses do not have the proper documentation for years of operations and not just a lack of financial but too many deals done on handshakes. If your business is not properly prepared, diligence is stressful and will reduce the end value of the transaction.
Valuation is a hot button issue. Often owners have too much emotion around the exit price, and it needs to be removed from the transaction. The same can be said for the valuation in financing – resist disclosing the valuation! Rely on trusted advisors to guide you through the process.
Getting prepared includes having the proper foundational pieces in place:
- Management Team
- Capital Structure
- Strategy and Growth Plans
- Processes and Financial Controls
- Succession Planning
And of course there are legal requirements that are best not to ignore, including:
- Corporate Structure
- Intellectual Property
- Loan Documents
- Employee Contracts and Agreements
In summary, the critical takeaways from the session include:
- Start with the end in mind.
- Start properly – entity, contracts, financial controls, IP, etc.
- Always be prepared for diligence.
- Be meticulous with administration and governance.
- Hire the right advisors.
- Let go and have fun – remove emotions where you can.
If you wish to maximize your value, you must be prepared and minimize the risks or issues that will negatively impact your valuation. All of the above is equally important whether you are financing or selling.