Internal and external factors to consider before a deal
In determining whether a deal is right for him, Michael Cavanaugh, CEO of Malachite Innovations Inc., says it’s important for business leaders to ask themselves: what do you want? how do you define success? This, he says, is going to vary depending on who you are, the type of business, your outlook, etc.
At the Cleveland Smart Business Dealmakers conference, he talked about a private equity fund that, for example, seeks to generate a return on investment typically five years — for them, that would be a hit. A multi-generational family business has a very different sense of success, especially when the person running it isn’t the founder.
“It’s one thing to be the founder,” he says. “But when you’re third or fourth and you’re selling grandpa’s business, you start having a lot of emotional and psychological concerns or issues that really need to be thought through.”
And in the case of Cavanaugh, when it comes to a public company, the considerations are very different. There are stakeholders and shareholders to think about.
“You really have to start at the beginning and understand what success looks like? If everything goes well, what does it look like? And you can at least chart it,” he says. “Without that, it’s like the saying of the Mad Hatter, Start at the beginning and when you get to the end, stop. That’s not the right strategy. You have to start and what I call ‘read the book upside down,’ and know where you want to go.”
He also advises having flexibility in your thinking. And when discussing a strategy for your business, be a good listener. Be humble. Find good people around you who can advise you and listen to them.
“It doesn’t mean you have to do what they suggest you do. In the end, it’s your decision. But the biggest success I’ve had is attracting people around me who are much smarter, more brilliant and sophisticated than me, then to listen. And I think that’s a very important part of the strategy.”
Barnes Wendling CPAs Inc. director Laurie Gatten says she’s found that typically about 40% of an owner’s equity is tied to their business. This means that building and maintaining that net worth is critical to their success. So if they decide to build or grow through organic means or through acquisition, it encourages a focus on accelerating the value of their business annually. This should be done by focusing on four areas. One is human capital.
“Look at your management teams,” Gatten says. “How do you recruit? Do you need to recruit? Are you missing key leaders in certain areas and how are you going to get there? How do you motivate your talents and how do you retain them? Do you have bonus programs? do you have retention programs? Why does someone want to work for your company? »
The next area is customer capital. This means examining your customer base. Businesses tend to have concentrations of just a few customers, which creates risk.
“So when you’re looking to grow, whether you’re an acquirer or building your own, can you reduce the risk a bit and expand your customer base, or at least are you so engaged with your customers that whatever it happens they’re going to stay with you? That’s important too,” she said. “Also, is it transferable? Who on your team has these connections? With a private (company), if everything is with one owner or a few owners and they don’t transfer those relationships to their key leaders and those who manage them, it’s going to be difficult to get a deal or it’s going to reduce the value of an agreement.”
Another area is business infrastructure – facilities, technology, etc. documented, they are not transferable, making it difficult to train the next person or get someone to step in.
“If you’re going to another company or selling to another company, there’s this transition you’ll have to go through,” Gatten says. “So it’s important to have those systems in place and that infrastructure.”
Social capital, culture and brand awareness are other areas to highlight. Culture, however, is a challenge in a deal because there aren’t as many metrics – it doesn’t fit neatly into the balance sheet (although the revenue percentage can be used as a metric). But it’s critical, especially post-deal, when you’re trying to integrate two companies. If the cultures do not harmonize, it leads to turnover and leads to an unsuccessful agreement.
“I focus on these four areas, all with the goal of creating these intangible assets – and that’s what I consider to be the tangible assets of your business that will drive your EBITDA, your multiple, so that you become the best of your business. category. You really should focus on that all the time, not just now start thinking about doing something and now start looking at that. It should be something that you review every year with your advisors, whether it’s CPAs or lawyers.