BY TIM KEANE
For leaders of private, closely held companies, selling the company is an important and critical event in their lives. There are several important considerations in managing the sales process to avoid delays and failure to close, all centered around preparation for the entire selling cycle.
Even in hot markets, a lack of preparation and inadequate alternatives will produce a less than optimal outcome.
Using an Auction Process
The common expectation of sellers is that an auction process is the best course. The seller will prepare an offering document, (including a non-disclosure agreement) circulate to probable interested buyers, solicit bids, pick two or three of the best to negotiate with, and come to an acceptable, and painless close.
If the company is in a market with good fundamental characteristics and is one of the most attractive companies available, an auction will most probably work well, because the auction should attract multiple competitive buyers.
Putting the company in that position is the single most important thing a buyer can do.
Here’s how in five steps.
I. Develop Comparable Sales Data and Align your Offering
It’s important for the seller to be informed about what the current market pricing is for similarly situated companies, and what the components of that price are. A thorough review of comparable market transactions should include an understanding of which specific metrics support the most attractive multiples in the market. (and the more recent the better.) This may include earnings as a percent of sales, revenue growth over time, sustained growth rates, sales per employee and other industry-specific metrics. Investment bankers and industry trade groups are good sources of this kind of information, for instance.
Based on these facts, develop a buyer’s view of your company. If a seller has any concerns here, consider engaging a sell-side quality of earnings analysis. This will help you see your earnings through a seller’s point of view.
Clean Up Financial Statements
If financials are not “clean” this is a great time for sellers to remove extraneous balance sheet items, such as shareholder loans, non-operating assets, and the like. If possible avoid major adjustments on the P&L. This may mean operating for a year or more prior to a sale offering if the seller needs to remove personal items from company expenses. Buyers will look past these items for an excellent company, especially in a competitive situation, but their presence leads to deeper questions about other potential pitfalls and variances.
Base The Offering on Market Comparables
Build the sale offering based on this information. This will include the unique story of the company, its growth opportunities and its position in the market as well as its place in the comparables list based on its performance against these industry metrics. Highlight company strengths and opportunities and identify known risks. Proactively explaining risks and mitigation plans and achievements is a highly valued trait of successfully acquired companies.
The more attractive the company is on objective, quantifiable basis, the more likely that its offering will be attractive to multiple buyers, shifting leverage in the selling process.
Plan For Probable Terms
Construct a range of value expectations and review carefully current, comparable terms that may be proposed by buyers.
Some highlights include:
Consult your tax advisor at this stage about tax implications of various seller requests, such as asset vs. stock sales, favorable tax treatments available with certain sale structures, and so forth. I’ve seen situations where these tax consequences more than made up for lower overall valuations.
A sometimes overlooked area is the “holdback,” a portion of the purchase price held in escrow for some agreed to time period. This money is intended to be used to guarantee the accuracy of the seller’s representations and warranties about the business. In a competitive market, and where the purchase prices exceeds $10MM, a seller may consider asking the buyer to purchase insurance to cover this guarantee. It’s expensive (2% to 5% of the holdback, generally) and comes with an underwriting fee in the mid five figures. It also has limits as a percentage of the purchase price (10% in many cases), and may not eliminate the need to hold back a portion of the proceeds as well. However, it helps assure the holdback will be returned as the underwriting requirement brings a lot of objectivity to the holdback negotiation.
Another term to prepare for is a request for exclusivity in negotiations.
At some point in a successful sale, buyers may request that sellers sign an exclusivity agreement by agreeing only to negotiate with them until a conclusion or breakup is reached.
There are good reasons for a seller to enter into an exclusivity provision in negotiations. If the seller has seen several offers and has quantitatively-based reason to believe these offers are representative of the market price, is satisfied with the proposed price and terms, and the buyer has demonstrated consistent, documented, trustworthy behavior, a provision to enter into an exclusive negotiating period may reduce burdens on management, speed the transaction and build toward a good relationship. It also potentially reduces information leaks that may be harmful to the company in the event of a busted transaction.
However, exclusivity periods can be used to stall while watching performance, especially if managers are distracted by the process itself and valuation discussions have included forecast results in the next quarter or two. Disclosing information can be used to squeeze the company during the same process.
Buyers who believe exclusivity makes sense in a given negotiation may consider limiting their exposure to risk by limiting the time period to very short intervals, and requiring reaffirmation of price and terms at each (biweekly?) time period. If there is any slippage, consider reopening conversations with others.
(In one case, the seller disclosed the investor’s and employee’s eagerness to exit. In addition, the seller’s balance sheet was not strong. The buyer asked for and was given an exclusivity period and direct access to key managers.
The buyer then persuaded the seller and his managers to suspend new sales activity during the course of the negotiation for “market confusion” reasons.
The seller had no advisors to rely upon for decision making.
Unfortunately, the tactic worked all too well. The Company did not have a good alternative to a sale.
The employees were convinced this was a great event for them by the buyer and were obviously eager to close.
Diligence dragged on for months, based on a variety of new issues that arose each week.
As sales fell and cash pressure built, the buyer lowered the offer and in the end the company accepted a 50% reduction in the sales price as an alternative to running out of cash. Part of the leaders rationalization for doing this was the promise of a bright financial and career future at the acquirer. A year later he was suing them for wrongful termination.)
In retrospect, the right answer here was to develop more alternative buyers and only then, if the original buyer was still favored, to agree to a short, exclusive diligence period. A reference check may have provided information about the aggressiveness of the buyer. It wasn’t done either. Of course, agreeing to full employee access coupled with the “stop selling” decision and lack of good advisors are all mistakes.
II. Construct an Attractive and Believable Alternative to Selling.
Decide what the minimally acceptable price and terms are, considering the factual information gathered. Then build an alternative plan contingent on the inability to obtain a desirable transaction. Included in this thinking should be a broader definition of selling to include leveraged recapitalizations, ESOPs and family succession planning. These may prove to be better alternatives than the contemplated sale.
Plan for Capitalization Requirements
The ability to continue the business, strong capitalization and an excellent sales force, product development, positive cash flow and marketing plan are substantial components of an alternative scenario. The unfettered ability to simply continue the business, especially when obvious to buyers, is a strong alternative. More cash enhances seller alternatives and diminishes buyer power.
In the case in which a sale is highly desirable, and not all of the above are present, the plans for a good alternative may include the ability to attract short-term investment from current investors, or to extend lines of credit from your bank.
The assumption here is that alternatives come into play when the seller is down to one buyer who may try and create negotiating pressure, or an array of unacceptable terms. Absent a good alternative (especially when it becomes apparent to the buyer), price and terms pressure increase.
(Recently, a buyer, late in the process made an 11th hour reduction in price believing the company had no good alternative. The well-prepared seller presented his alternatives and explained that they were all superior to a reduced price. The buyer withdrew his offer, walked away and returned three weeks later, reluctantly agreeing to the original terms.
The seller explained that the alternatives were working pretty well and raised the original, previously agreed to, price. The buyer complained, but complied. This was all based on having that real alternative locked and loaded. The seller had also designated one person – not her – to negotiate with the seller. This layer of separation provided time to continue to grow and manage the business free from transaction distraction. Interestingly, it also increased the buyer’s respect for the business and its management.)
III. Construct a Diligence “Room”
Ask knowledgeable advisors what information the buyer will likely ask for. (If you were buying rather than selling, what would you want to know?) Use standard diligence checklists to thoroughly review all possible information requests. Prepare this information carefully, and cautiously.
Standard disclosures include financial matters, an overview of intellectual property, customer sales history and contracts, supplier agreements, litigation history, employment contracts, practices and issues; past and current performance to budget; tax matters; regulatory issues and insurance, for instance.
Disclose in Layers
Savvy sellers and their advisors can, and usually should, disclose information in layers. Summary data about employees, customers and suppliers can be provided initially, for instance. However, access to detailed information and access, for example, to employees, customers and suppliers shouldn’t come until late in the process. A best practice would be disclosure of sensitive information tied to final buyer commitment.
Sellers need to be cautious about the actions of the buyer related to information they’ve gained in the process. For instance, it’s possible for buyers to influence employees and create divergent incentives in the post sale period. These incentives can potentially cause the employees to create pressure on sales price and terms.Sellers should assure themselves that management incentives are completely aligned with the seller’s goals for the transaction.
(The seller’s company was growing very rapidly. The seller’s budgeted sales growth in the next quarter would be up 20%. Buyers had submitted offers and the leading buyer found out what the next highest bidder’s price was.
The buyer then asked for and the seller agreed to an exclusive negotiating period.
The buyer extended the diligence process till the end of the following quarter and built an acquisition model using the sales growth as the primary factor in the price. When the distraction of the transaction caused sales to slip, the price was reduced by the buyer to just more then the second offer. The company sold for about two-thirds of the original sales price and eventually doubled market share.
Management was differentially incented from ownership and “moved over” to the the buyer’s point of view, hastening the acceptance of the lower price.)
By the time this has happened, it’s probably too late. As previously noted, developing an alternative that aligns management with sellers is an imperative in the selling preparation process.
Seller’s Goals Are Important
Be aware that a substantial portion of diligence is the seller himself. Buyers assess not only negotiating strengths and weaknesses but also personal goals and aspirations. That process can also form the basis of a good working relationship going forward. Sellers who can get comfortable with honest and appropriate self disclosure can be disarming and help achieve a good outcome. Of course, several competitive offers make self disclosure less risky!
Check out The Buyer
Sellers should always ask for and check buyer references early in the diligence process. Thorough vetting will assure sellers of the quality of offer and background of the buyer. Buyers who are motivated to build strong relationships as an essential part of a good business will welcome sellers who take these actions.
IV. Assign Roles to Advisors
These may be Company directors, advisors, investors, attorneys or accountants. This may include reviewing buyer requests, seller decisions, terms and risks. Agree in advance who will need to approve negotiated terms. Plan for short term review requests and meetings.
Use Process to Provide Time to Consider Requests
Consider informing the buyer that you have to seek approval from your advisors for proposed terms and concessions. In this way, you buy yourself time to carefully consider requests. The discipline created by agreements to review steps with advisors, even if they do not have decision making authority, can create a safety valve to avoid pressure to make decisions hastily.
V. Choose an Intermediary
An experienced and skilled professional is often the biggest advantage a seller can have.
This is often an investment banker. Prefer one who is experienced in your industry and if possible who only sells, and whose transaction sizes closely match what is anticipated in this specific transaction. Get a firm commitment in advance about who in the firm will lead the deal.
Expert intermediaries should have very good knowledge of the market and be able to identify buyers and their appetites and risk profiles as well as their typical deal terms. They make money by getting better prices and terms for sellers. One major component of their process is to bring multiple buyers to the table and add their expertise to help balance the relationship between buyer and seller.
Check References and Style
Good reference checking on the seller’s part is a requirement.
In my experience, the best intermediaries have an orientation to be cooperative, positive, and seek to complete the transaction while single-mindedly seeking a fair, evenhanded transaction.
It’s amazing how often I see advisors who think aggressiveness and tough behavior is the right card to lead with. While this may get deals done, it has the potential to derail a transaction.
The ultimate balance between buyer and seller is to not have to sell and be able to have good, confirmed walk away alternatives. This is usually not an easy position to get to but it pays great rewards to sellers who have the discipline and savvy to achieve it.
About the author:
Tim Keane is President of Keane Consultants and founder and director of Golden Angels Investors. He was the founder and chief executive officer of Retail Target Marketing Systems, which was on the leading edge of consumer data-driven marketing for retailers and banks, and is now part of Fidelity Information Systems. Keane is a director of First Business Bank, sits on the boards of several growth stage firms, and is a limited partner in several venture and private equity funds.
BY SEAN MANNION
Many mid-sized businesses correctly worry that mistakes in new product introduction or revisions can be very risky. Customer dissatisfaction often results in shifting market share.
The price of being wrong is very high.
When faced with the challenges inherent in customer perceptions of new product introductions or revisions, companies, especially mid-sized companies, have few good choices:
Make a well-informed guess about product features and launch; use online surveys and their inherent weaknesses; or use expensive, costly, and time consuming focus groups.
We’ve developed a new way to effectively gather information that is accurate, inexpensive, and dynamic to the day to day shifts in your business. We would be glad to demonstrate in a no-obligation conversation and assessment how this may work for you.
Aside from being expensive, traditional focus groups reflect a reaction to a snapshot in time, and only get responses relevant to that snapshot. The participant interaction has to be well managed to avoid a domineering personality and group makeup is limited to a geography and/or a collection of people willing to devote time to the process.
Real time moderator skills are essential as the group only persists for a couple of hours and nuanced followup is often not possible.
This “single-shot” qualitative approach can provide impact, but is limited in that insights that were relevant at a time can quickly become obsolete, follow up is not possible, and participant segmentation is not easy.
At Keane Consultants, we turn the traditional model on its head. Through dynamic, virtual online focus groups we give businesses the ability to rapidly test and reiterate concepts.
Groups are built on specific participant criteria.
Members dialog over a period of weeks on specifically assigned topics and interact with each other in a thoughtful, persistent way.
As results come in, a moderator can ask for direct feedback on the concept and re-test based on what the group produces. This constantly iterative process employs the type of analytical strategies that have only previously been available in quantitative research settings. The new qualitative model marries the voice of the customer with sophisticated analytics, while following the constantly changing state of a company over time.
Here’s an example:
One of our clients sells to elementary schools. We gathered a group of teachers in our best performing, previously identified segment (based on our customer analytics algorithms), and asked them to commit to a month-long engagement in an online focus group.
In the first week we gave the teachers a survey and discovered that the product we are selling needs more teacher instruction on how to use. That week, the company created an infographic that helped explain each of the steps and what was required of the teacher. In week two we showed them that infographic and asked them to comment on its individual aspects. By week three we we had a refined, teacher approved infographic that we immediately implemented as part of the product.
Under traditional circumstances, the company would have only realized the initial insight that it needed more instruction. At a fraction of the cost, we were able to take that insight and produce multiple iterations of its solution while, at the same time, asking our group a series of other questions about its preferences.
The New Qualitative Model Recruit – It is imperative that a company uses a segmentation model to guide its recruiting processes. The most relevant segmentation method will vary, but it is absolutely crucial to the recruiting process in order to marry the results of the conversations to the eventual implementation of the concepts. We build these segments from both specific customer behavior and market data.
Beyond careful selection and random sampling, the number of participants must be significant. For the average group, twenty is a solid number. A good moderator will encourage participation over the duration of at least a few weeks. By offering compensation – usually no more than $50 depending on the product and title of participant – group members will remain engaged.
Iterative Questioning and Discussion – The content of each activity is obviously exclusive to each company, but a consistent engagement over several weeks testing multiple iterations of a concept is universal. The varying methods of discovery at this phase include, but are not limited to, surveys, content discussion, and product and messaging ranking.
After each wave of activities the company can internalize the information, make adjustments accordingly, and test the new ideas in the marketplace.
Quantified Reporting – While immediate insights are digestible at a granular level, week to week, activity to activity, the overall pattern of responses at the conclusion of a group’s engagement tells a story that can transform the overall marketing trajectory of a company.
Depending on the format of the group, it is easy to track each of the participant’s responses and tag them with the according segment and category of response. Some examples response categories could be “emotional,” “functional,” or “aesthetic.” Paired with participant segment labels, the aggregation of these descriptive tags tell a story that goes beyond an informative response to specific material. It gives companies insight on the behavior patterns of specific segments. It’s possible that young men in large cities with median income respond in a drastically different way to the overall stream of questioning than elderly women in the country. The ability to pinpoint what these differences are, and act on them not only on specific projects, but throughout company-wide targeting strategies can be transformative.
By implementing this model at Keane Consultants, we have seen the type of transformation that is possible. It can at first seem astounding what this level of engagement and reporting can do for an organization, but the logic of it quickly becomes obvious.
Contact us for a free assessment at email@example.com or at (414) 737-3644. To hear what our clients have said, check out keaneconsultants.com.
BY TIM KEANE
A week ago, Belk Stores (BLKIA:OTC) announced it was considering strategic alternatives (We’re for sale) and had hired a banker.
Whether the outcome is a strategic acquisition by another retailer in the department store or adjacent business, a financial buyer, or no-sale, the data room inquiries are all running to Belk Stores customer data, because aside from the financial engineering that is a stock in trade for M&A professionals, customer analytics are where any remaining deal leverage resides.
For either type of buyer, the future value of the investment has to exceed the value paid. In retail terms, this means an increase in average annual transaction size, and/or an increase in the frequency of transactions (whether brick and mortar or online), a longer customer lifetime (retaining customer purchasing over time) and/or the ability to generate new customers at a favorable price point. To be successful, they have to do these better than Belk could themselves. For a strategic buyer it’s a tall order. For a financial buyer it requires an awful lot of acumen.
While the underlying value of the real estate (of Belk’s retail locations) will be of significant interest (look at the bounce Dillard’s got a couple of years ago when they announced a never completed REIT) the big leverage is in their customer purchase history.
Here are the essential questions to the Belk transaction:
For Strategic Buyers:
All of the answers to these questions now exist in the Belk customer data. They can provide a very good snapshot of Belk as it stands today. For strategic buyers, the combination of their customer data with Belk’s reveals a detailed picture. For the financial buyer, comparing Belk actuals to available comparables describes the probability of a good outcome.
Every business should know the cost – in time and money – to acquire a customer, how much that customer will produce in revenue, and for how long. This gives them the ability to identify customer segments and target acquisition cost, budget for results, and measure performance.
Unfortunately most don’t know the cost of customer acquisition, but we do.
When you partner with Keane Consultants, you get a proven track record of success in bringing costs down and driving win rates up.
Contact us at www.keaneconsultants.com or firstname.lastname@example.org, (414) 737-3644.
BY TIM KEANE
All Growth Strategy is Quantitative. You can’t grow what you can’t predict.
I was in Ireland not too long ago in a meeting of a company board of which I’m a member. The company had a very good year – a great one, really – based on a executing a good strategy very well. Success has been several years in the making, and their efforts have now paid off for them.
In most companies, growth challenges are greatest at sales of $10MM to $15MM. Growth is impeded by a company’s inability to extend its reach and effectively attract resources required for growth. The big question on the table is how to move from efforts based on great experience and instinct to systems, processes and structures that allow growth to continue as more people and resources are added to the business.
In other words, become more quantitative.
This means moving to rely on accurate factual data to teach managers how to make key decisions that incorporate both their best instincts and and quantified facts.
Examples include marketing analytics, sales forecasting, and disciplined unit economic analysis (cost accounting) for all non-sales related activity.
In this introduction to managing by analytics, I cover three topics: Segmentation, A/B Testing, and Comparables. In this short blog, you will learn how to segment customers, how to determine an optimal approach for your target, and how to compare your results.
In the ecommerce world, there’s lots of talk about “growth hacking.” Whether you like the title or not, the point is that solid, quantitative discipline will produce much better results than any other process. Any company who regularly acquires new customers, or would like to, can use these same quantitative disciplines whether they sell by e-commerce exclusively or not.
Today, tracking acquisition – where each incoming sale or lead came from – on your website isn’t only easy; it’s an entry level requirement. This is a preliminary step in the segmentation process — describing in some way the commonalities and differences in each group of new leads/sales/customers.
This leads to several questions – what are the better segments (meaning ones who produce more growth per dollar spent)?
The next question, tho, is critical – how can you generate more from that source? How do you get from these “better segments” to finding more of them in the marketplace?
One way is to use the same sources you’ve been using — SEO, advertising, social media, adwords, websites, and the like. This works and can be quantified in cost per lead/sale/customer.
However, if you want to proactively solicit potential prospects, you need to be able to identify them – and reach them – you need to be able to identify them by findable descriptions that can apply to the entire market.
Segmentation is based on being able to apply the segments to the universe of potential customers and economically find the segments your product appeals to. This may require a combination of social, SEO, adwords, and other tactics that, when combined, result in a formula that is predictably repetitive. Or it can be a description, along behavioral or demographic lines, that point to people or sources that can be “found” in the marketplace.
Good information like this will increase the velocity of growth, as well as the predictability of future results.
Analytics make growth repeatable.
What offer or product description appeals most? This is basic A/B testing. Every program or campaign – whether inbound or outbound – ought to present, randomly, many different approaches. (We often set one up to be what we currently see as the winner, the “control,” and others, served to a smaller percentage of incoming leads, “the tests.”)
Think about the power here. The presentation, the copy, the method of presentation – all can be tested – and pretty much in real time. Results are evident in hours and days, and the “winner” quickly becomes the control.
What would happen if…
The A/B test means you can finally know:
We use comparables every minute in our lives. A good comparable is a standard – the best margin, the highest sales rate, fastest result. More important it tells us what the best possible has been in a category. (I’ve seen many business plans that rely on results that are two or more times better than the best historical comparable – and the author didn’t know it. While it’s not impossible to achieve, it’s imperative to know what the height of the bar is.)
Good quantitative growth management comparables mean we know:
In many pre-growth companies, measurement is budget-based. Budgets set goals that the business has to achieve but don’t provide any information about comparable performance. Without comparables being included in the budgeting process, both on the revenue and cost side, it’s hard to tell if the business is achieving more than it
should, or less.
Every business should know the cost – in time and money – to acquire a customer, how much that customer will produce in revenue, and for how long. This gives them the ability to identify customer segments and target acquisition cost, budget for results, and measure performance.
Unfortunately, most don’t know the cost of customer acquisition.
We do. When you partner with Keane Consultants, you get a proven track record of success in bringing costs down and driving win rates up. www.keaneconsultants.com
BY TIM KEANE
Last night’s game, like Saturday’s ended with a losing-team player disconsolate in the dirt, but this time without an attached ruling to talk about. Kolten Wong, a ninth- inning Cardinals pinch base runner, was cleanly picked off first base by the Boston closer Koji Uehara, for the last out of the game. No excuse: Sox win, 4–2, knotting the series at two games apiece.
In Business, as in Baseball, scoring is the heart of the competitive game.
Without it, Roger Angell’s meaning is gone.
Now, baseball isn’t scoring, of course, and no scorekeeper ever made it to the Hall of Fame. That’s reserved for the great players who inspire us with skill, courage, grit – American virtues that built this country. But without the humble scorekeeper, and his offspring, the statisticians and analysts, it is hard not only to cite the deeds of the heroes, it’s also hard for those same heroes to know what to do.
It isn’t a game if there isn’t a score.
For business owners and their companies, it’s not a game without a score, either. While a baseball score may turn into cash in several ways, none of them are as direct as sales and sustainable cash flow in a company.
Most growth plans include the unexamined hypothesis – the “estimate” of budgeting for sales and marketing – based on historic practices, averages, and guesstimates. This leads to spending patterns that are often not optimized, and, if understated, cause serious sales risks.
In the online world, where either leads or sales arrive from a variety of sources like search, online advertising, outbound programs, and the like, sorting out where prospects came from, and what made them come, is complex. Having this information allows the company to make proactive acquisition actionable, however. If your company isn’t doing it, you can bet your competitors are.
And yet we need to find new customers!
For most companies, acquiring new customers is required for their viability. The customer acquisition component of the business model usually drives the entire business. Every business owner wants to know how long it will take and what it will cost to obtain customers, how long they stay, what they’ll spend, and over what period of time how much contribution margin they’ll contribute. An accurate customer acquisition cost – one that is actionable – allows the company to budget acquisition expenses on a regular basis, expect them to yield the targeted results, and hold the owners of the process accountable for results.
So do this:
Tim Keane consults with growing companies.
Reach him at Tim@KeaneConsultants.com Keane Consultants uses company and external data to point the way toward integrated sales growth for its clients.