In our practice we work with many business owners, many of whom have used these last few coronavirus-dominated months to reevaluate their businesses, their work and their lives. As a result of this reflection, we have seen an increasing number of business owners decide that now is the time to exit.
It wasn’t just our clients taking stock. Over the past six months, we left our large financial services firm and started a new practice, Interchange Capital Partners.
So it is with a personal perspective, combined with years of experience in guiding business owners through major transitions, that we offer these tips on how to navigate a major transaction during a global pandemic.
1) Know the company’s valuation
We recently performed a normalization calculation for an oil field services company looking to sell, and worked with the CPA to make sure the numbers were correct. I will note the company is thriving in an industry that is otherwise being clobbered right now due to a combination of the oil pricing wars and COVID-19.
We found the owners were not capitalizing the equipment they built and then put into the field appropriately on their P&L and balance sheets. Once we reconfigured the numbers, their valuation grew by $4 million.
Ironically, this was something that could have been missed even if the coronavirus was not running rampant. But the fact that we identified it now will put the family in a much stronger position when it comes time to negotiate the final sale price of their business.
2) Focus on cash flow
When preparing to sell, most companies concentrate on their P&L and balance sheets. This often happens at the expense of their cash flow statements, which are extremely important now as buyers are seeking certainty in a world of chaos.
The added benefit to focusing on the cash flow becomes clear when business owners understand the cash conversion cycle is and how many days it takes one dollar to flow through the organization and back into their bank accounts. Once they know that, they can more easily invest without going to a bank or other source of cash for growth capital. If cash turns quicker, the business grows faster.
For example, we worked with one business owner to help them change how they followed up with their customers’ accounts payable department. We had them change the due date on the invoices to an actual date, not on net 30 terms.
Finally, a few days before the invoice was due, they placed a call to the AP department and reminded them of the upcoming due date. This decreased the amount of days they were waiting for payment by 50%, which increased their cash flow significantly. This made the company more attractive to potential buyers.
In these COVID-19 times, when cash is king, this tactic will save a lot of companies from going under or striking bad deals with lenders.
3) Engage employees and tap into their growth ideas
With the world around us changing on a daily basis, owners need to be thinking of how to protect and grow the business' value into the future.
One way is to tap into the intellectual capital of your employees who possess a treasure trove of ideas that could positively affect your business and ultimately lead to opportunities that you otherwise would have missed.
Here is some collective intelligence my son, Brian Baum, brought to our company recently. Everyone has been focused on the PPP loans — and rightfully so. But in doing so, almost everyone missed a once-in- a-generation opportunity that is the Main Street Lending Program, announced in April in response to COVID-19’s effect on businesses.
Overall, the program asks banks to lend on cash flow, something that they typically don't do any longer. The payback terms are very favorable to companies and could be an insurance policy for some.
Most of all, we think that this program, as it is written, could be used to buy out older generations. We have already identified home run opportunities for our own company and our clients through this program.
All of this is to say that some of the best innovations for an owner's business are in someone's head right down the hall. I wonder what you can learn from your employees this or next week?
4) Avoid shiny new business opportunities and focus on long-term growth
As you seek to add value to your company in preparation for a sale, make sure that you continue to focus on business opportunities that are tied to long-term trends in your company’s industry.
For instance, right now business owners are focused on personal protective equipment. But if you were not a business that created PPE prior to the pandemic, you need to understand that as fast as this segment will grow for you, it will most likely fall just as fast at some point in the future.
Buyers will not value flash-in-the-pan opportunities. Just because you can make $100 million or more in revenue does not mean you will get the benefit of that value at sale. Buyers know that those metrics are not sustainable and will discount your value for not being tested over a long period of time.
5) The 4 intangible capitals
A good way to leave money on the table is to focus solely on revenue growth or another metric that isn’t directly tied to the value of your business.
Your time is better spent on value-creating opportunities. To accomplish this you need a firm grasp on what increases and decreases value that you and your executive team have control over.
There are four intangible capitals that add to business value significantly: human, social, customer and structural.
Together, these four capitals have the ability to push your valuation multiple to a best-of-class business — or in the other direction to a business that no one outside the current owner would want to run.
Right now we are seeing which companies focused on these areas prior to the pandemic. They are still thriving for the most part. It is not too late to focus on them yourself — and it might just save your business.
We are in a time of reset due to the coronavirus and that applies to business owners. If you want to make a significant change and sell all or part of your business, I strongly recommend that you remain laser-focused on maximizing the value of your business and ensure that you have many options when you are examining your exit strategy.
