Exit Planning Exchange

By The Bigelow Company LLC

Every business owner who’s thinking of selling his company “someday” wants to know:

“Will a strategic buyer or a private equity buyer value my company more highly?”

There’s no one-size-fits-all answer. Nor is there a one-size-fits-allanswer to how private equity groups value their target acquisitions. Inthis Lesson, we’ll explore three hot-button issues that concern everyfinancial investor – as well as most strategic buyers.

It’s a Seller’s Market

The past ten years have seen explosive growth in private equitytransactions; there is an abundance of capital chasing a limited supplyof solid investment opportunities. With over 1,300 private equity firmsin the U.S. alone, no one can claim to know all the ins and outs of theirvaluation methodologies. Our experience with private equity groupssuggests that there’s almost always a wide value range among competing offers. We have had first hand experience that, when given exactlythe same information about a company, sophisticated financial buyers’purchase offers will vary as much as 50% from one another.

Financial Buyers Focus on Three Key Drivers

Despite the wide variance in private equity offers, they do all share the same common focus: the target acquisition’s potential for future growth. In this regard, they focus on three key indicators of that potential:

• The growth rate in your revenue and profits.

If your growth over the past 3-5 years has been static, they’ll likely look the other way, or assign a modest multiple of cash flow.

• Your EBITDA.

Private equity buyers love companies with high EBITDA margins and low capital requirements. A high EBITDA percentage on revenues validates that your customers value your product and service highly, and find it worth paying for. (The reverse is also true.)

• The amount of debt your business can reasonably carry.

The formulas for determining how much debt a business can supporthave changed significantly as the capital markets have become awash in sources of low-cost secured and unsecured debt capital.

Capital providers are willing and eager to provide both senior secured and subordinated debt to most private equity-backed buyouts. Instead of looking at your fixed assets and receivables for coverage, they’ll look at your EBITDA.

A general rule of thumb in today’s market is that investors will take on senior and subordinated debt of up to four times your EBITDA to finance a recapitalization. For example, we recently helped to sell a company with $5 million in EBITDA, but less than $10 million in total assets.

The purchase price was $35 million – 7x EBITDA. The private equity buyer recapitalized the company’s balance sheet with $20 million in debt (twice the amount of the business’ underlyingassets) in order to finance the purchase – $13 million in secured debt from a bank, and $7 million from a subordinated debt lender.

Every buyer will also look at important qualitative issues such as:

• What industry are you in and what opportunities for futuregrowth exist?

• Are you an industry leader or a “me too” player?

• Is your management team seasoned, solid, and stable?

This qualitative issue will enhance (or depress) the quantitive valuation.  Above all, however, private equity groups are driven by one thing – their potential rate of return on investment.

Given These Key Drivers, Why Do Valuations Vary So Widely?

Every private equity group has its own unique attributes. Some focus on industries in which they have experience and expertise, while others look for synergy with the existing companies in their portfolios. New funds are particularly eager to make acquisitions in order to develop a track record, while mature funds may look aggressively for one final investment in order to wrap up the Fund.  The challenge for an intermediary is to find the best-fit investor with the greatest motivation.  That investor will usually value your business most highly.

A Game Plan for Attracting Rich Suitors

Knowing what private equity buyers care about points the way to an action plan for increasing the future valuation of your business:

• Follow a business plan that represents strong opportunity for growth.  For some companies, that may mean taking on more risk than they’ve been accustomed to in the past – especially if their owners have been investing only their personal capital in order to grow (See Lesson #1).

• Focus on your EBITDA.  If you can raise your profit margin onrevenues, it will validate your attractiveness to potential suitors.

• Be careful about marginally useful capital investments in your business. A financial buyer will want to know the history of your capital requirements. A pattern of inordinately high, ongoing capital investment can scare off an acquirer.

By Thinking Like an Acquirer, Forest Frames Earned an Exceptional Valuation

When Woody Beeman tapped into the growing demand for prefabricated lumber products, he quickly outstripped his mom and pop lumberyard competitors. He developed a supply chain and processes that saved time, waste, and errors, and built a loyal customer base. After15 years of steady growth, Woody was ready to hang up his hammer, but saw that the company was not yet ready to attract its full potential valuation.  Knowing that he needed diamond blade talent to carve a compelling story, Woody hired a visionary CEO and designed a program for him to receive a 15% stake in the business.  Tom Barrett understood capital gain events, and what both strategic and private equity buyers look for in an acquisition. He started with a blueprint of buyer expectations – and worked backward to map their goals to Forest Frames’ existing business plan.  He knew that private equity groups want a solid ground floor (exceptional EBITDA over several years) with a well-designed stairway to a lofty future. He also knew that acquirers tend to devalue capital-intensive operations that are likely to demand ongoing investment in fixed assets. And they like ideas and processes that can bereplicated.

Tom developed an aggressive growth plan for Forest Frames Industries based on a strategy that changed his competitive playing field. Realizing that on-time, predictable delivery was the perennial concern for both Big Box retailers and independent contractors, he invested in equipment that allowed him to produce custom framing products on a just-in-time basis. With guaranteed 24-hour delivery, most customers were happy to pay a premium for a higher quality product, delivered exactly when they needed it. They couldn’t get this service from any of Forest Frames’ competitors.

When Woody and Tom asked The Bigelow Company to represent Forest Frames to potential investors, the company had a solid, three-year history of outstanding EBITDA, minimal capital requirements, a loyal customer base, and a concept that could be replicated in other regions. Motivated on an incentive piecework plan and profit sharing, their workers ran three shifts to achieve better throughput and productivity.

Not surprisingly, Forest Frames received more than a handful of high-multiple bids.  They picked a private equity group with other construction-related companies in its portfolio that was willing to pay 8x EBITDA. Woody cashed out and Tom continued on to build and capture an even higher value for the new majority owners and himself in a subsequent transaction.

This “Lesson Learned for Building and Capturing Value” reflects knowledge and insights we’ve gained working with dozens of privately-held companies throughout North America.  For more information about The Bigelow Company, visit www.bigelowco.com or call us at 603-433-6000 for a confidential discussion of your unique situation.

By Chris M. Mellen

“The EBIT and EBITDA Multiples”

In general, the three rules of business valuation are: earnings, earnings, earnings. Getting back to the fundamentals, if stockholders want to receive a fair return, the underlying company must at some point generate sufficient earnings to allow potential subsequent owners to achieve the same. However, the term “earnings” is a broad term that can have many meanings from pretax income to net cash flows. Earnings can be measured and used in discounted cash flow analyses, public company or transaction multiple analyses, or in one of many other types of analyses.

Two of the most common multiples used to value a business are the EBIT and EBITDA (earnings before interest, taxes, depreciation and amortization) multiples. These represent two of many possible levels of earnings used within both the guideline public company method and the M&A transaction method of the market approach to value. EBIT is often defined as net income plus income tax expense plus interest expense. Both EBIT and EBITDA are what the company would have earned if not for obligations to its creditors and the tax authorities. Both multiples are pre-tax and pre-debt, and thus reflect a level of earnings available for debt service, stockholders, and in the case of EBITDA, capital expenditures (assuming depreciation and amortization on average reflect the required level of capital expenditures). As such, they measure earnings at a level that captures solely the company’s underlying operating performance. Therefore, it does not matter if the company being valued has a significantly different capital structure or tax position as compared to the guideline companies from which the multiples are being derived (one of the significant weaknesses of the P/E multiple). EBIT multiples are useful where differences in accounting for noncash charges (e.g., depreciation) are not significant. EBITDA multiples are particularly favored to eliminate differences in depreciation policies, and get closer to a company’s underlying performance.

EBITDA multiples1 are typically referred to as “unlevered”, debt-free, or invested capital multiples, which means that the numerator in the multiple is the sum of all common and preferred stock and interest-bearing debt in a business enterprise. Therefore, if common stock is being valued using these multiples, the value of senior securities (e.g., interest-bearing debt and preferred stock) must be subtracted from the resulting “unlevered” indicated value to arrive at the indicated value of the company’s equity.

EBITDA was originally used to gauge a company’s ability to service its debt in the short-run, by indicating whether there was sufficient operating income to meet interest payments. However, when using EBITDA multiples, one must be aware of the many traps leading to their misuse. How was the multiple derived? Was it by a rule of thumb, which may have no direct relevance to the company being valued? What public companies or acquisitions were used to derive the EBITDA multiple? How was the multiple ultimately determined from these sources? Does the EBITDA of the subject company reflect proper economic adjustments? Is it based on current year, an average of prior years, or a weighted average of prior years? Is it properly reflecting future growth potential?

There are several other limitations to be aware of when using EBITDA multiples as an indication of value. By definition, EBITDA ignores interest and other expenses that can account for a material portion of a company’s cash outflow. In addition, it ignores cash outlays for capital expenditures and changes in working capital, and thus may not be realistic. That is, EBITDA multiples ultimately overstate value in times of working capital growth and significant capital improvements. In addition, it says nothing about the quality of earnings and ignores distinctions in the quality of cash flow resulting from differing accounting policies.

The Bottom Line: Despite their shortcomings, EBIT and EBITDA multiples are often legitimate indicators of value. But they are just two ways to get such an indication. They are inadequate stand-alone measures of a company’s value. They do not reflect future cash flow, which is the level of “earnings” ultimately available to investors and thus the source of equity value. Their misuse can lead to a wrong valuation. Their mishandling has been at least partially responsible for the bad deals done in recent years and the decline in company values, and thus increased goodwill impairment, today and in the future.

Valuations play a part in many tax, litigation, financial reporting, transaction, and strategic matters.

If we can provide additional information or advice on a current situation, please call us.

Delphi Valuation Advisors, Inc. Values Your Business!

Chris M. Mellen, ASA, MCBA, MBA

President – Delphi Valuation Advisors, Inc.

Boston Affiliate of the American Business Appraisers® National Network

By David Hoffer

As a CEO in a competitive industry, you know who’s likely to buy your business. You’ve been watching these companies since the day you opened. You’ve tracked their every move. You’ve followed their successes and failures. You may even know their senior managers personally. And why not? There are only a few of these companies — the leaders in the very same industry you’ve staked out. If anyone’s going to buy your business, it’s one of these companies.

If you’ve been thinking along these lines, you’re not alone. Nearly every CEO who considers selling his or her company starts by assuming that potential acquirers will come from inside the industry. In reality, buyers from outside your immediate line of business may offer a better deal. In this month’s Viewpoint, we’ll talk about why strategic buyers from outside your industry may, in fact, significantly outbid your competitors, present some case studies of successful cross-industry transactions and show you how to increase the rewards of selling your business by widening the pool of potential buyers.

Bulls-eye! An expanded approach to targeting buyers

At Mirus, we think of potential buyers as a series of concentric circles — like a bullseye target. However, unlike in archery, it’s often the periphery, not the center, that’s the most interesting part of our target.

That’s because the center of the target contains the most obvious acquirers, companies that are in the same industry as yours, serving the same kinds of clients with the same sorts of products and services. You already know these companies. You can probably draw up a short list of these firms off the top of your head. Yet even though these candidates are easy to identify, you do your company a disservice if you do not consider other kinds of companies.

So to expand the circle, we ask a series of questions. We look at our clients’ customers and think about what other sorts of companies might like to get access to that customer base, even if they don’t have the same sort of product or service offerings. We think about the products or services our client provides and try to identify companies that might want to offer those products and services to their customers. We also think about geography. A company with a strong presence in, say, Boston, might be attractive to an acquirer looking to raise its profile in New England. In these cases, the businesses should be complementary, but do not necessarily have to be the same.

You might wonder why we spend so much time looking for a wider pool of buyers. Essentially there are two reasons. First, and most obviously, more buyers mean more competition for any given target and, in general, higher prices. Yet there is another even more important difference. Buyers within a target’s industry generally expect to pay a multiple on earnings or multiple on revenues that is consistent with industry standards. Buyers from outside the industry, however, are not merely buying more of what they have. They are making a strategic inroad into another area of business, whether it is an entrée into a new market or access to a valuable customer base. As a result, these buyers may not be constrained by an industry consensus on appropriate multiples as they value a target. They are making an acquisition that they hope will transform their business, and that may be worth more to them than the going price within the industry.

Creating demand for core products

Now let’s look at how this kind of exercise might work with regard to a specific company. We’ll start with Daticon, a well-established provider of electronic discovery and document conversion services based in Norwich, CT, that was recently acquired by Xiotech.

As you’ll see, litigation services companies sit at the center of this diagram. These are the “obvious” acquirers, companies in essentially the same business as Daticon. A bit further out, Mirus identified companies in related businesses, such as electronic evidence management, litigation consulting and facilities management. It is only in the third concentric ring that we get to companies in the electronic compliance management, archiving and storage industries. Further out, we have possible matches in compliance infrastructure, enterprise search and information services.

Daticon is an interesting case because it was sold in a public auction process, which allows Mirus to disclose bids from various companies. It attracted a bid from Xerox Corporation, a document management company which would fall quite near the center of our diagram. However, the winning bid came from Xiotech, a storage equipment company that Mirus identified as a potential buyer even though it had not previously been actively involved in electronic discovery or litigation support.

The critical point was that Daticon’s electronic discovery services required a great deal of disk storage, to archive vast quantities of emails, memos, documents and other data sources. It also demanded a good way to manage and selectively retrieve documents out of this enormous pool of information. Xiotech saw Daticon’s core business as an opportunity to enter a higher value added business than disk manufacture — and, as a side benefit, to generate additional demand for its data storage products. As a result, it was willing to pay more than companies directly involved in Daticon’s business, outbidding all competitors with a $30 million offer. Its bid exceeded Xerox’s final offer by $3 million.

Enhancing offerings to existing customers

Now let’s look at another company that was recently acquired by a firm outside its industry, DxCG, a health care software company. DxCG’s main business was developing software that helps healthcare providers, payers and employers to forecast healthcare costs. By understanding these costs, companies can more effectively negotiate insurance premiums, set rates for treatments and budget for care. DxCG had grown rapidly. When it came up for sale in 2004, it had more than 175 clients, including Blue Cross Blue Shield of Michigan, Highmark Blue Cross Blue Shield, Kaiser Permanente, and Pacific Business Group on Health.

About a year before it was sold, Mirus had advised DxCG on an offer from another health care software company, but the deal had not been consummated. Interest in DXCG’s software remained strong, however, and we continued to evaluate and communicate with a wide swath of potential acquirers — health care companies, software companies, and other more tangentially-related businesses.

Eventually, through these efforts, DxCG received an offer from Insurance Services Office (ISO), a company started to serve a consortium of insurance companies. ISO had emerged as a leader in providing risk management tools to a broad spectrum of clients not just in the insurance industry, but in finance, real estate, government and human resources. Even though the company had not, up to that point, operated in the health care space, DxCG’s health care cost models seemed like a natural fit into its suite of data analytics offerings.  Buying DxCG would give ISO a foothold in risk management in an area that had become increasingly important to its clients: health care cost management.  Because of the deal’s strategic importance, ISO was willing to pay a premium over the original same-industry bid, allowing DxCG shareholders to maximize the value of their holdings.

Different companies, complementary technology

Sometimes companies acquire targets outside their industry not to gain access to products, customers or markets, but to obtain complementary technology. That was the case when PixelVision, a leading developer of LCD technology, began to look for a strategic buyer.

PixelVision’s main business was serving financial traders with high-end flat panel displays; however, in developing this business, the company had generated 26 discrete, differentiating technologies. These technologies were protected by six patents, including a patent for analog-to-digital image conversion that allowed digital display devices such as projectors and LCDs to be connected directly to the analog CRT jack on a PC. After identifying all of these technologies, many having numerous applications, Mirus brainstormed with the engineering team to identify additional applications–outside the financial vertical–for the technology. Mirus then presented these technologies in the offering memorandum.

Ultimately, the buyer for PixelVision was not a display company, but a switch company. Cybex, now Avocent (AVCT), was the leading manufacturer of analog KVM switches that allowed a single keyboard, display and mouse to operate multiple computers in a server room or network operations center (NOC). PixelVision had already developed a digital KVM for its financial application that Cybex could use in the NOC market (a multi-billion-dollar market opportunity). It was this application, teased out in the Mirus brainstorming session, that resulted in Cybex coming to the table with a strong offer.

Similarly, when Tellabs, a maker of data, voice and video transport, switching/routing and network access systems, bought DSP Software Engineering, technology was the main draw. At Mirus, we identified DSPse proprietary digital signal processing software as an important tool in Tellabs’ strategy to develop voice-over-IP communications capabilities, a dynamic and fast-growing segment of its core business. We highlighted this technology in our presentations to Tellabs and elicited an attractive winning offer for DSPse.

Looking outside the box for buyers

All these examples point towards one core principle: when looking to sell a company, the best offer may very well come from outside your immediate industry. These buyers often have compelling strategic reasons for purchasing companies peripheral to their core business — whether to access new customers, sell additional products and services to existing customers, fill gaps in proprietary technology or expand into new distribution channels and markets.  Because they are making strategic acquisitions aimed at transforming their companies, these buyers may be willing to pay more for your business than your closest competitors.

The key to identifying potential buyers is to think expansively about your company’s products, its clients, its technology and its marketplace strengths. Then you can look both within and outside your core business for companies that might benefit from what you have to offer.

At Mirus, we’ve helped dozens of companies widen their universe of potential buyers and seek out attractive offers from acquirers inrelated, complementary or even completely different businesses. If you’d like to find out more about our bulls-eye approach and how it might work in your specific situation, please contact us.

David Hoffer is a partner at Mirus Capital Advisors, Inc. Founded in 1987, Mirus Capital Advisors is a middle-market investment bank that specializes in merger advisory, capital-raising services, fairness opinions and valuations to entrepreneurs, corporations and professionalinvestors. By combining a proven process, industry and transactional expertise, and personalized service, Mirus has completed hundreds oftransactions for both public and private companies. Our affiliate Mirus Securities, Inc. is a registered broker-dealer and FINRA/SIPC member. Additional information about the firm is available on our website www.merger.com.

By Laura Kevghas

The phone rings unexpectedly one day, and on the other end is a CEO wondering if you would be willing to sit down and talk about selling your business. You may or may not discuss a purchase price. You may or may not commit to even a meeting, let alone an exchange of information. But nonetheless, that single unexpected phone call can touch off one of the most significant, emotional and time-consuming events in your life as a business owner: deciding whether to sell your company. The way you respond, both initially and in the weeks that follow, can have an impact on your company, your employees, and the value you can realize from the sale of your business.

For this article we asked experts in accounting, law and business consulting for advice on what to do when you receive this kind of phone call. Their suggestions – on everything from evaluating pricing, to managing proprietary information, to establishing a team of advisors, to performing due diligence on the buyer – can help you navigate the complexities of your unsolicited offer, and make the most of your opportunities, whether you decide to sell or not.

Why This Matters:

• Planning ahead can make the unexpected offer manageable
• Contemplating selling your business is the most significant and emotional decision you’ll ever make
• Even considering an offer can affect your company, your employees and your family

Top ten rules for evaluating unsolicited offers

Though every company – and every deal – is different, we have found that there are a number of simple principles that can simplify the process of responding to an unsolicited offer and help you make the right decisions. Here are ten things to keep in mind when someone offers to buy your business:

Rule #1: Don’t wait until the offer comes to plan your response

“Unsolicited offers can come at any time,” says Tom Sherwin, founder of the consulting firm CEO Resources,Inc. “Ideally, CEOs should have a strategic plan in place before they get an offer.” That plan doesn’t have to be complicated, he adds. CEOs simply have to know whether they plan to continue to manage the business over the next three to five years, or whether they would be open to the possibility of a sale.

Linda Swerling, founder of Level II Solutions, adds that business owners should consider their personal, as well as financial, goals. “How long were they planning to work? What was their exit strategy for the business? All these things need to be written down,” she says.

Sherwin says that he regularly meets with CEO’s who maintain that they have no interest in selling theircompanies; yet it’s often merely a question of price. “We play a game of ‘what if’ scenarios, usually over lunch,” he says. “What if someone offered you 20% more than you think your company is worth? What about 50%? You end up constructing a game plan. Say, for instance, that you would consider offers above 25% of some benchmark. At 50% you would actively pursue a deal. And at 100% above the benchmark, you schedule a closing. Then you put that game plan away until the time comes.”

Rule #2: Know what your company is worth

Of course, you can’t evaluate an offer without having a very good idea what your company is worth. Public companies learn their value every day when the market closes, but for private, closely held companies, it may be worth spending the money  required to get a good valuation at least every three to five years, Sherwin suggests.

Amy Mastrobattista, an attorney with the Boston law firm Ruberto, Israel & Weiner, says that the first stop should be your CPA, who can walk you through the most appropriate valuation techniques for your company and industry. “It’s also not a bad idea to develop a relationship with an investment banker far in advance of any planned exit,” she adds. “They can incorporate their knowledge of market conditions, recent transactions and prevailing multiples in your industry to give you a more accurate view of your company’s value.”

“To truly understand your company’s worth, though, you need accurate and timely financial information,” asserts Swerling. “Your current performance relative to last month,the year-earlier period and budget all influence the value of your company.”

The integrity of your financial data is important, not just in understanding the value of your business, but in presenting it to outsiders, comments Margery Piercey, a CPA with the accounting firm Wolf & Company. “First impressions are important when you put numbers in front of a potential buyer.  And it can have an immediate impact onvalue if your financial statements aren’t in order. You reallyneed to make sure that your numbers are presented in sucha way that you’re going to be maximizing value, by ensuring that your financial statements are in compliance with GAAP and industry-specific reporting norms, and that you’ve identified any owner-related or other expenses that won’t continue post-closing.”

Rule #3: Protect your company’s proprietar y informat ion

Very early on, potential buyers will often request extensive proprietary information about your company.  It’s important to provide information in stages – very little early in the process, and further information in pieces, only as you become comfortable that a transaction with this potential buyer is desired and likely.

However, Mastrobattista points out that “Before you share any information at all with a prospective purchaser, you need to have a good confidentiality agreement inplace. This is the case even if the potential acquirer is not a competitor. You don’t want your confidential business information to be used for any improper purpose, even if youthink it’s innocuous.”

Piercey concurs. “Usually in the early stages of getting to know your potential buyer, you are going to be disclosing a good deal of information,” she says. “It’s important that your attorney has put a strong confidentiality agreement in place to make sure you’re properly protecting trade secrets, customer lists, and other things that contribute to the value of your company. That way, if the deal doesn’t go through, you haven’t given away some of these things of value.”

Rule #4: Keep it quiet

These negotiations should, in most cases, be kept confidentialfor as long as possible. “The impact on the employees of even considering a sale of a business can be very unsettling and actually can reduce the value of the business,” says Piercey.

“Control of information is critical,” adds Mastrobattista. “Rumors about your deal can affect not just employees, but customers, vendors and lenders. If the transaction falls through, it can even have a negative impact on your company’s reputation, since people may assume there was something wrong with your business.”

Mastrobattista advises CEOs to think carefully about who within the company needs to know the details of a transaction and to limit the access to this information to a small group of top managers for as long as possible.

Rule #5: Put together a team of expert s

“Acquisitions take up a good deal of time – incremental time over what the CEO is already spending on the business,”says Piercey. “Moreover, they require experience and insight that most CEOs don’t have. As a result, it is critical that the CEO bring in people who are experienced in transactions: investment bankers, accountants, lawyers and tax advisors.”

“You’re only going to sell your business once, and it’s a steep learning curve,” cautions Sherwin. “Why would you try to do that yourself?” He advises seeking out experienced transaction professionals, people who specialize in M&A and work on multiple transactions every year. He recommend stalking to other CEOs who have sold their businesses for referrals to investment bankers in your market.

Mastrobattista adds that you can often find these people by asking your current team of advisors. Your regular accountant, for instance, canusually recommend a taxspecialist experienced in M&Atransactions to augment his or her expertise. Your general counsel may know an M&A lawyer. “The best place to find good people is from good people,” Mastrobattista says.“Talk to your trusted sources for business referrals and evaluate independently.”

Rule #6: Scrutinize deal structure and provisions carefully

Price is one key factor in a deal, but it’s not the only one.“You and your team should look closely at the structure of the transaction,” says Mastrobattista. “Is it cash? Is it notes? Is it stock? Are there hold-backs? Are there earn-outs?” There are tax implications to all of these different purchase price methods that a good tax advisor will help you evaluate. Each structure has different risk implications as well, with payment in seller notes or earn-outs increasing the risk that you won’t receive the value you expected from the transaction.

Rule #7: Think about other possible acquirers

“Just because one person is interested in buying your business doesn’t mean you have to sell it to them,” says Sherwin, adding that there may be multiple offers out there, in addition to the unsolicited one.  For CEOs who are interestedin pursuing a sale, he recommends widening the circle of potential buyers, not just approaching known competitors, but a larger circle of complementary, often larger potential buyers.

Unearthing these buyers may require an investment banker’s help, Sherwin adds, and Mastrobattista concurs that their insight can be invaluable. “You need to look at the state of your company and of the market as a whole when you think about soliciting other offers,” she says.

Deciding to widen the circle of potential buyers carries with it the risk that the buyer who gave you the unsolicited offer may not wait for you to test the market. This is when an investment banker can be particularly helpful to determine if the offer on the table is pre-emptive enough to be worth accepting to the exclusion of other potential buyers.

Mastrobattista adds that bankers can tell you more about the market’s appetite for deals like yours, but that ultimately, the transaction should be done on your timetable. “There’s nothing worse than rushing a deal through, not understanding all the implications of price and market conditions, and then getting bitten in the end.”

Rule #8: Check out the buyer carefully

CEO’s should also scrutinize their potential buyers carefully.  Sherwin says he is always astonished when a company owner agrees to a transaction without first verifying that the buyer can pay. “There are a lot of people out there who can’t close,” says Sherwin. Particularly in today’s tight credit climate, you want to know that the buyer has the financial capacity to close the transaction.

Rule #9: Plan your post-transaction role car efully

You sell your company, and what then? Every one of our experts maintains that you should think carefully about what, if any, role you play in the acquired company.

If the transaction is structured to include an earn-out, you may wish to continue to run the business through the earn-out period to ensure that the maximum incentive payment is earned.

However, Swerling suggests that CEO’s consider the implications of their shift from owners to employees, if they continue in the business. “You’ve been managing this business for years or decades. You’ve been doing everything your way, maybe with the support of some hand-picked managers. Now it’s not yours anymore, and the company you built will change,” she says.

Rule #10: Don’t be afraid to walk awa y

Given the intense and emotional nature of negotiating a sale, our final rule is perhaps the hardest to follow. If a transaction turns out not to be in the best interest of you or your company, you need to be willing to pull the plug.  Not every deal is a good one.  Sometimes even attractive transactions can turn sour over the course of negotiations, or as market conditions change. Even if you’ve spent months working on a transaction, it may still be better, at a certain point, to simply walk away.

Unsolicited doesn’t have to mean unanticipated

Unsolicited offers happen more often than you think – and they can be a welcome wake-up call to business owners caught in the day-to-day details of running a company. Yet they shouldn’t take you completely by surprise. Sound preparation for an unsolicited offer is good strategic planning.

By developing a strategy that says whether, when and for how much you would consider selling, by obtaining accurate valuations of your business on a regular basis, and by developing relationships with seasoned M&A advisors now, you can make sure that you maximize whatever opportunities come your way in the future.

Laura Kevghas is a principal at Mirus Capital Advisors, Inc. Founded in 1987, Mirus Capital Advisors is a middlemarketinvestment bank that specializes in merger advisory, capital-raising services, fairness opinions andvaluations to entrepreneurs, corporations and professional investors. By combining a proven process, industry andtransactional expertise, and personalized service, Mirus has completed hundreds of transactions for both publicand private companies. Our affiliate Mirus Securities, Inc. is a registered broker-dealer and FINRA/SIPC member.Additional information about the firm is available on our website www.merger.com.

By William A. Duratti

Recent changes to Mergers and Acquisitions accounting has given rise to new questions, confusion, and sometimes even hesitation over completing a deal. Requirements under FAS141R are behind it all, and companies will have to comply beginning in calendar year 2009 – a date that looms large for many who are considering business combinations.  However, the challenges presented by FAS141R should not stand in the way of intelligent deal making. Buyers and sellers alike will adapt to the salient changes and base their decisions on whether an acquisition is a good deal at the right time for them.  Even as their accounting and valuation teams make the necessary adjustments, they know that advantages can be gained from the new system. The changes under FAS141R complete a joint effort by the FASB and the IASB to improve financial reporting for business combinations and to promote the international convergence of accounting standards.

FAS141R will cause some major changes and fluctuations to post-merger balance sheets. Understanding the new guidance, modeling deals accordingly and gauging impact on the financial statement before closing the transaction will help reduce any potential negative effects.  Complications arise due to the tricky nature of fair value and deal modeling, especially when estimating intangibles like unresolved contract contingencies. Calling in valuation specialists mitigates the damage that can result from poor assessments. When financial analysts evaluate transactions and earnings, they’ll be looking for how fair value was applied and what normalized earnings will look like on a forward looking basis.  This is especially timely as fair value under FAS141R will follow the guidance of FAS 157 and is defined as: “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measure date.”

Major changes to this definition include the marketparticipant perspective, exit price and more reliance on observable inputs, all of which create more difficulty in financial reporting for business combinations.

When all is said and done, these revisions mean that company leaders can expect ups and downs. When it comes to M&A activity, an acquired entity will likely cause turmoil in financial statements until the merger stabilizes over a number of reporting cycles.

The most significant changes coming under FAS141R include:

1. TIMING OF DEALS AND REPORTING

The biggest challenge for financial departments may come with the increased emphasis on timing and a growing list of disclosure requirements. FAS141R provides a more stringent timeline for reporting business combinations, and if deadlines are missed then provisional amounts must be reported for incomplete terms. That means not having the most qualified information, which can lead to more serious issues down the road.  There is a grace period of one year after the deal is closed – called the “measurement period” – during which provisional items can be adjusted.

Also, the expanded disclosure requirements make meeting the deadlines even more difficult and often will force a company to speed through the process. A deeper planning process and having the right team in place early will help avoid sacrificing quality and accuracy for speed.

2. CONTINGENT CONSIDERATION

Perhaps the most significant accounting change is the requirement that the purchase price of a business combination now include the fair value of contingent consideration. This change could significantly increase the upfront purchase price recorded on deal transactions, as well as increase the volatility of subsequent accounting.  The contingent consideration will be recorded by the acquirer as a liability at fair value as of the transaction date and will need to be adjusted to fair value at each subsequent reporting period. Given the major uncertainties as to future amounts and timing of payments of the contingent consideration, the fair value of this liability may materially fluctuate over time as more information is obtained.

Companies putting contingent payments into the deal structure will need to closely assess fair value of the 2 contingency. There is no predicting the future, but modeling and understanding the shapes that a deal can take will help mitigate the potential fluctuations in reporting.

3. IN-PROCESS R&D (IPR&D)

Under previous regulations, companies could record the fair value of IPR&D as a period cost of a transaction.  FAS141R, however, requires that the fair value of IPR&D be recorded as an intangible asset on the balance sheet. If the IPR&D does not come to fruition, it will subsequently need to be written down to its fair value, potentially zero, resulting in an impairment charge to the income statement.

4. DEAL COSTS

Acquisition-related costs such as negotiations that involve banking and legal fees were traditionally reflected as deal costs that could be capitalized along with the purchase price, but FAS141R calls for these items to be expensed immediately as period costs.

5. ASSETS AND LIABILITIES ARISING FROM CONTINGENCIES

FAS141R improves the completeness of the information reported about a deal by changing the requirements for recognizing assets and liabilities that arise from contingencies. An acquirer is now required to recognize these elements as they arise from both contractual contingencies and noncontractual contingencies as of the acquisition date, measured at their acquisition-date fair values. Again, post-merger adjustments to the fair value of these contingencies can create significant fluctuations in reported earnings.

ACTION ITEMS

With these items and others looming large at the beginning of 2009, companies that are pursuing acquisitions should take a few important steps to solidify their position.

• Re-assess current deals to determine the impact that FAS141R might have, and consider if it will be beneficial to close after the deadline passes.

• Be certain that the right teams are in place to understand and apply new fair value concepts to aspects of a transaction.

• Instruct teams to prepare for the new guidelines and adjust their approach as best as possible to minimize impact on the balance sheet and fluctuations in future reporting.

Despite the changes and action items that accompany FAS141R, the reasons for sourcing and completing deals should remain the same. Company leaders will still strive to make decisions that are strategically sound for their business or come at a good investment price at the right time. The fact is, pre-141R accounting was already a mystery to many. Adjustments will come from the valuation and accounting side to ensure that deals go through smoothly and under the best possible terms.

Material Discussed in this Insight is meant to provide general information and should not be acted on without obtaining professional advice tailored to your firm’s individual and specific needs. This information is for general guidance only and is not a substitute for professional advice.

By Andrew Crain and Rod Robertson

The knockdown wave that paralyzed merger & acquisition activity in the lower- and middle-market since September 2008 has rapidly receded, promising a rising tide of dealmaking in 2011.  All the components for an active M&A market are in place:  pent-up deal supply, as frustrated sellers adjust valuation expectations and private equity funds seek to realize long-held portfolio investments; pent-up buyer demand, as corporations replace their recent fixation on cost cutting and liquidity preservation with an increased focus on top-line revenue growth and as private equity groups put uninvested funds to work; and increased capital availability, as credit is once again available at favorable rates and companies once again have healthy balance sheets and cash to invest.

M & A TRENDS AT 2010 YEAR-END

Dealmaking began to rebound in the second half of 2010.  Thomson Reuters reports that “as of December 14, dealmakers have announced 7,258 U.S. transactions worth $773.5 billion this year though some may not be completed.  Last year, 6,503 deals worth $731.5 billion were completed.”   PriceWaterhouse Coopers found a similar trend in the middle market, “logging 724 deals worth a combined $240 billion in disclosed value, up 54% over 2009.  Average deal size also grew, elevating to $247 million, compared to $219 million last year, a trend PwC attributes to the availability of debt, strategic buyer optimism and the substantial private equity overhang,” as reported in Mergers Unleashed on December 10.

Our conversations with buyers and sellers indicate that many more deals were pushing to close by 2010 yearend, but sellers motivated to close for tax reasons paused for breath once the Bush tax cuts were extended and those deals will now kick off a strong 2011 instead.

SELLERS RELUCTANTLY RETURN

The decade-long run up to the recession, with both earnings and valuations (as multiples of earnings) growing year after year, set sellers’ expectations at levels reminiscent of the internet bubble.  The downturn paralyzed most M&A activity as the new playing field was met with dismay by owners of small- and medium-sized businesses.  Depressed valuations, the return of in-depth due diligence, and the disappearance of covenant-lite purchase & sale agreements all combined to drive patient sellers to the sidelines.  Those left to sell in 2009 and early 2010 were, typically, distressed companies selling at distressed prices in bankruptcy or liquidations.

As the economy steadied and credit loosened in mid-2010, valuations began their return to pre-recession levels.  According to GF Data Resources, which tracks private equity deals ranging in value from $10 – $250 million, enterprise valuations across that size range averaged 6.0X in the third quarter of 2010, and even the smallest size subset ($10 – $25 million) reached an average of 5.8X EBITDA.

Sellers today have reconciled to the fact that valuations have rebounded to sustainably sensible levels, and they are no longer sitting on the sidelines in hope of higher returns.  Many owners who plowed ahead funding losses, counting on an economic rebound for rescue, now see economic forecasts for slow growth at best.  Aging owners who postponed retirement are now ready to sell.  Private equity owners who held portfolio companies beyond planned time horizons are now rushing to realize their investments, especially those who will be fundraising in 2011 and 2012. Thus we foresee a steady flow of sellers coming into the M&A market this year.

A FIELD DAY FOR BUYERS

Well-capitalized strategic buyers remained active acquiring distressed competitors throughout the recession and, armed with inexpensive credit and abundant cash, continue to be opportunistic.  Other companies are entering the fray as confidence returns and leaders shift their focus from preservation to acquisition.  Others, faced with a sluggish recovery and prospects for slow growth, seek acquisitions to drive growth externally.  The combined impact of these motivations will be substantial, as a recent mergermarket.com survey showed that 82% of US business executives expect increased M&A activity over the next 6 to 12 months.

Private equity buyers are equally motivated to do deals.  With the “overhang” of uninvested PE funds reaching a reported $500 Billion, there is urgency to put those funds to work.  PE managers are also cognizant that acquisitions done during and after economic downturns historically yield higher returns than those completed during boom years.  As a result, according to GF Data Resources, “private equity groups are becoming less discriminating in their choice of targets given the pressure on them to invest funds.  There are more B and B+ properties on the market now and sponsors are willing to pay a little more for them.”

Entrepreneurial buyers, driven to the sidelines in the boom years by larger and better-financed financial and strategic buyers paying high valuations, are now re-entering the game.  The recession flushed many senior- and middle-management executives into the job market through downsizing and corporate closures.  Many of these talented executives are taking matters into their own hands, using their strategic skills to identify and acquire companies with favorable investment characteristics.  However, many entrepreneurs find that they must rely on seller financing or private equity backing in order to credibly pursue and close acquisitions of even modest size.

THE TIPPING POINT

We believe that this confluence of events will lead to a resurgence of M&A activity in 2011.  Orphaned companies and firms mortally stricken during the recession have been purchased, cannibalized or are seeking a buyer as we write.  Sellers realize that if they want to exit, now is the time as the economy rebounds and as favorable tax rates have been extended for another two-year window.  Strategic, private equity and entrepreneurial buyers have returned to the market and enterprise valuations have rebounded to pre-recession levels.  Commercial banks and mezzanine lenders are permitting buyers to place more debt on pragmatic deals.  In sum, sellers, buyers and lenders have all returned to the M&A market and are converging on common ground where excesses have been curbed and sensibility should reign once again, permitting dealflow to flourish in 2011.

By Michael Oleksak

Over the next several decades, millions of U.S. businesses will be sold, merged, recapitalized, gifted, closed, or liquidated. In any of these events, both the owner and the company’s value will benefit from advance exit planning. Financial executives, whether internal or external, play a key role in educating company owners on the basics of exit planning.

If you are the lead financial officer of a privately-held business, such as CFO or VP Finance, part of your fiduciary duty is to protect the company from the risk of an unplanned change of ownership, through sudden death, of both the shares and the operation of the business.  You also play an important role in increasing the company’s value by strengthening it for the possibility of a future transition or transaction.

Whether you are an internal or external financial advisor, you should make the business owner aware of three things every owner must have: a will, a succession plan, and an exit strategy.

The will protects the ownership of the firm in case a tragedy or sudden death affects the owner.  With a will, the shares will stay out of probate court and land in the hands of the person or people chosen by the owner, thereby ensuring some sense of business continuity.

The succession plan will help with the orderly transition of the operation of the business if the owner is suddenly incapacitated.  The exercise of preparing a succession plan will also help establish whether internal management is strong enough to handle running the company without the owner.

The exit strategy will be the catalyst to determine whether the company is ready for some other entity to assume ownership. Are the books and records, processes and systems, management and employees, business model, brand, public image and reputation desirable enough for someone else to pay to acquire it? If the answer is yes, the next question is would the acquirer be external or internal?

Exit Options

The owner’s external exit options are sale to a strategic buyer or sale to a financial buyer or private equity group. Internal transfer options include a management buy-out, a sale of shares through the Employee Stock Option Plan (ESOP), or gifting of shares, usually to the next generation of the owner’s family. Each of these five exit options has a different valuation range, with external transfers generally having higher values. The owner will also relinquish control of the firm after the external transaction, giving up the ability to subsidize his or her lifestyle through internal expenses. The external exit option also eliminates the owner’s control over his or her legacy, so the owner must determine his or her financial and emotional readiness to exit the business.

If the owner is emotionally ready to leave the business, but needs the highest financial return, as the financial advisor you can recommend that a sale to a third party strategic or third-party financial buyer should be considered. Under these arrangements, it’s important to calculate investment banking and legal fees, as well as taxes, because all will be subtracted from the amount of the check the owner will cash at the end of the day. Due diligence by the third party buyer will be thorough. If there are family members working in the business, their employment may be at risk if the current owner is not calling the shots.  The owner may be required to bridge any financing or value gap with seller notes or earn-outs over time.

A management buyout (MBO) creates a different risk to analyze: is the management team capable of continuing to generate enough cash to pay out the owner over time? Some industries lend themselves to MBO’s better than others, such as construction. Such a deal will require outside financing from a bank or another source, and management may be required to pledge personal assets to support a bank loan. Seller notes will also likely be part of the financing. After the buyout, the owner may still be involved and may retain some financial expense benefits under the deal. The further in advance this option is considered, the better the owner can prepare the team for the execution.

An ESOP is a tax-advantaged, though administratively complex, way for the owner to take some money off the table by selling shares to employees and management. Under a buyout or transfer through an ESOP, the owner will likely remain in control if less than 50% is sold, and will continue to have some personal expenses paid by the company.

Gifting is also a tax-advantaged way to transfer ownership, usually to (hopefully capable) family members. The owner can stay in control and have expenses paid for by the firm. This option will cause complications in relationships, especially as you get deeper into the second and third generations of the family.  Capable outside consultants with experience in family business issues should be considered to help smooth out issues.

All the options that financial executives can suggest for exit strategies carry different valuation ranges, with external transfers having higher valuation ranges (and higher tax impacts). However, a clear awareness of each will help the owner and the company mitigate risk and prepare for the future.

Published in Financial Executive

Michael Oleksak was a commercial lender for 17 years at Bank of Boston. He is a principal at Trek Consulting LLC, Woburn, Massachusetts and co-founder of the Exit Planning Exchange. He works with small and medium-sized businesses to improve performance and value and to prepare for exit.

Contact him at oleksak@ trekconsulting.com - www.trekconsulting.com

© Copyright 2010 Michael Oleksak. All rights reserved.

By Larry Girouard

Terms like strategic plan, business modeling, data collection, data generation, business “Outcome”, algorithms, and the like, are not words that are commonly used in today’s business meetings. (Note: Outcome is defined as all the goods, services and touch points that a customer encounters when dealing with your company. The company outcome is what the company delivers, and the customer experience is how the customer relates to this outcome.) I am reminded of presentations that I made in 2007 at a half dozen conventions around the country. I role-played with the audiences of CEOs and senior managers, asking them to pretend that I was the decision maker at a target account that they were trying to penetrate. If they had just 15 minutes to convince me to buy a product or service from their company versus their competition, what would they present to me?

I asked them to take 60 seconds to write down five items that they would discuss. At the end of the minute many had not completed this short list of five items. Surprised! Try it yourself … one minute and five key items. The fact that this was not an easy exercise for these senior managers is significant.

The second question I asked, with a show of hands, was, “How many of your company’s measure the performance on the five, or less, items listed on your sheet?” I would be exaggerating if I said that more than 1%-2% raised their hands.

The fact is that very few companies measure anything beyond financial performance. If I am the buying influence at a target account, I am inundated with sales people telling me how great their companies are, yet, almost no company presents the historical performance data to convince me that their value proposition has any punch behind it. As the buying influence, on what basis do I make my decision?

I had one attendee that listed “Our experienced people” as one of their five. To that point I responded as the buying influence, “So what, what does that mean to me?” I understand what “on time delivery” means to me, but I do not have a clue how “having experienced people” impacts my company. The measured quality of the work from these “experienced employees”, and how this quality impacts what I am buying from your company, will certainly play a part in my decision making.

When you think about it, the buying influence at a customer or target account only cares about the ”Outcome” from your company, and how it meets their needs. The buying influence could care less what happens inside your company. As the buying influence, I am only concerned about minimizing my risk and the validation of my decision through superior performance when I choose to buy your goods and services.

Experienced people mean little to me unless the ”Outcome” of their work is better, faster, and more accurate than that of your competition. How do you measure the “Outcome” of your experienced people that will convince me that it is worth the risk to use your company as a supplier? Dave Nash, President of Engage Marketing, a RI consulting firm, says it best when he states, “You must give me a real reason to believe!” Looking at your business from the customer’s perspective, and listing (modeling) the elements of the ”

“Outcome”, will help you to begin to identify the customer experience, the real product/service that you are delivering.

Five Required Elements for Designing the “Customer Experience”

“If you can’t measure it, you can’t manage it”, and “What gets measured gets done”, are both terms that we have all heard many times. Bringing measurement into the corporate culture is a challenge for any company. By focusing on the company ”Outcome”, management and employees can now concentrate on what the customer is receiving. In total, this represents a company’s product, product offering or value proposition. There are five fundamental elements that must be addressed by any management team before beginning to design a company’s ”Customer Experience”.

1) Management must accept the fact that quantifying the business “Outcome”, or “Customer Experience”, is the cornerstone for building and sustaining an effective market penetration program.

2) Management must passionately and unconditionally embrace the quantification of all elements of the “Outcome”.

3) Management teams must come to grips with the fact that measurement will be met with resistance from many people up and down the organization chart. Management must work through the acceptance process of measuring, and being measured, for both management and the employees.

4) Management must apply measurement evenly throughout the corporation. Rank does not have its privilege, especially for the CEO and senior managers.

5) Management must empower its employees to both help develop the measurement system, and to implement the resulting system. Employee involvement in this process is critical ensure “buy-in” throughout the organization.

The Importance of Employee Involvement

In general, most people resist being measured because its very mention recalls past memories where being measured had negative results for them. Perhaps low test scores in school, or unattained goals in the business community were the reasons. Whatever the cause, in most cases, measurements were used to punish, or take something away, rather than inspire or reward for performance excellence.

The value of the ”Outcome” from any company to its target market is directly proportional to the value added sum of its components. The employees add most of the “value added” components to the “Outcome” because they are the people that interact with your customers on a regular basis. Employees answer the phone, and they get back to customers with answers to most questions like order status and technical issues. They are on the production line running the machines that make our products, etc.

Employees make the “Customer Experience” happen. Most of the communication between a customer and the company is impacted by the performance of these employees. It’s their system to create and drive. It’s management’s role to motivate and empower their employees to do it, and provide them with all the tools and support they need to succeed.

To effectively improve the ”Customer Experience”, the employees must be an integral part of the process. The CEO and senior management add relatively little to the “Customer Experience”. Management just sets the stage for employee performance.

Where do you start? Customer “Touch Points”!

A business associate of mine, Tom Pesaturo, President of Exceeda Consulting, clearly states that, before you march too far along the thought process of establishing the vision for your company, it is important to define the “as is”. The “as is” defines the current performance level for the “Customer Experience”. It’s the “as is” that cements the starting point for a company’s journey to performance excellence. Easy to say, but because most companies measure very little, defining the “as is” in terms of concrete measurements offers up a challenging task.

I suggest that you look at the current state of the company from the standpoint of the customer as the starting point. Conversely, starting this process by defining the internal workings of your company in measurement terms would be a much more complex undertaking and likely to be met with high employee resistance. Looking at the ”Outcome” of the company is more approachable, and not as threatening to management or employees. The ”Outcome” is the summation of all the touch points that represent the totality of the “Customer Experience”. It begins with the initial contact between the customer and the company, usually starting with the first phone call, and is ongoing through every touch point that a customer experiences such as:

a) Initial call into the company

b) On Time Delivery

c) Product quality

d) Response time to questions of any nature … technical, order status, billing status, and the like.

e) In retail or hospitality, anything that impacts the customer’s senses are all considered part of the family of touch points.

f) The quality of all written or oral communication

g) Website and Collateral

(Note: This list could be 20 – 30 elements, or more).

Different types of companies will have varying families of touch points, but the approach is the same.

Once a company makes a comprehensive list of the key elements that make up their customer’s ”Customer Experience”, they can then begin to look at each element, one at a time, with respect to their corporate performance on each. This is the first step for a company to determine the “as is”. True to form, the results of this exercise are usually very revealing, and disappointed to most companies, especially if all these elements are looked at objectively.

Most companies must look at other means to differentiate their products. There are few options. Optimizing the ”Customer Experience” is a great way to do it. Few, if any, of a company’s competitors really focus on this aspect of their businesses in a formal and structured manner. This presents a real opportunity for your company to differentiate your product offering and value proposition in a quantifiable manner.

Once the ”Customer Experience” is outlined, and the appropriate measurements applied to each element, the “as is” will be well defined. This then begs the question … Is the “as is” good enough” to be used as a sales tool to penetrate the market? This is the moment of truth for most companies. Keeping it real, what comes next?

For the initial steps, I suggest you try the following:

1) Break the ”Outcome” down into all the elements that have been identified and look at each one as a stand alone entity. To develop a list, have a 60-minute brainstorming session with your managers and employees and generate a list of customer needs, wants and complaints. You might have 30, or more, items on this list but it will represent a good starting point and a very large percentage of the actual “Outcome”.

2) Rank each element in the order of importance with respect to the ones that you feel are the most important to your customer.

3) Pick one of the key elements, like “on time delivery”, and begin to track and measure the reasons why you are late for each order, or request, over a period of time … say 1-2 months. The important point here is that every order, or request, must be included in the analysis. (Note: You must first establish the criteria for when an order is late, and this criteria must be in line with your customer’s criteria)

Do the same for the other elements of the ”Outcome”. By the way, once you start measuring corporate performance levels, and listing the reason why something was not met, employees will automatically start paying more attention to their role in any specific element of the ”Outcome”. When you think about it, employees control well over 85% of the “Outcome” or “Customer Experience”. As a result, they must be 85% of the solution. It cannot be forced on them by management or push-back is guaranteed. Some elements of the ”Outcome” are more difficult to measure. For example, how does the receptionist answer the phone? One of my clients has given the receptionist the title, Director of First Impressions, and this person was trained in how to deliver “great phone”. It is not measured specifically, but it is addressed.

4) After a period of data collection you will begin to see patterns. For example, one company had issues with the length of time it took for them to get back to a customer with lead times for any order. It could take up to 2 weeks or more. They modeled the process of where the request went and the time that the request stayed in any one location. It was a very simple model. As they collected data they were able to define the key contributor(s) to the delay. Customer Service (CS) collected all the data because they owned the particular customer request.

It was initially explained to all employees the importance of getting back to customers quickly with answers to all their requests as part of the overall ”Customer Experience”. Engineering was the bottleneck in this case and it really stood out. Now responses to lead time requests are well under one week, except for unusual circumstances.

Because this particular example was only a part of an overall program to improve the ”Outcome”, there were many examples where other departments represented the bottle neck. Once a management team begins to model the elements of the “Outcome” in a very graphic manner, it is much easier for all the stakeholders to see the value of their role in optimizing the “Outcome”. Also, with historical measurements applied to each segment of the model, corporate performance and performance improvement becomes more visible.

There is a visual process called “Value Stream Mapping” that has been used very effectively in organizations that have the real passion for continuous improvement.

While some business elements are more complex to model than the example presented, the approach is the same. Eventually, as all the elements are integrated together, you begin to get a visual representation of your business ”Outcome” in real time, or close to real time. I call this the Everest of business modeling because few companies ever have the resolve to follow through on modeling the complete ”Outcome”, with all, or most, its elements. Changing business culture can be a herculean challenge. There are many reasons why it doesn’t get done, but if the CEO has the vision, commitment, humility and passion to see it though, the rewards are great.

The Optimized “Customer Experience”

Real Market Differentiation for market penetration

Step back for a moment and envision that the ”Outcome” for your company has been modeled, measured, and optimized. Your company employees are tuned in to the measurements that frame that “Outcome”, and are using these recorded measurements as one of the tools to help direct their day-to-day behavior. Your sales department is now utilizing the ”Outcome” data as an integral part of their sales presentation. Your company collateral refers to the “Outcome” (“Customer Experience”), using historical data to present your corporate commitment to performance excellence.

The image of your company in the market place is largely derived from the company’s ability to drive the “Customer Experience” to higher levels. Remember, it will be very rare for competition to utilize this same selling technique because few, if any, have brought measurement into their business culture as a vehicle to differentiate their product offering and value proposition. Your company would stand alone in the competitive field, taking the “top of the hill” because of your exceptional service level.

Based on your company’s historically measured performance, in time you will be able to make guarantees that will be the envy of your competition. Your sales team can sell with confidence because they know the performance data is real. They will resist the temptation to oversell because they will not need to.

Self-Sustaining Measurement Culture

As mentioned earlier, bringing measurement into the business culture is a difficult process. Initial resistance from all, or most, employees will be high. That being said, with the resolve of the CEO and senior management, and empowerment of the employees to implement their input, measurement will slowly be embraced by both management and the employees if there is a clear “win” outlined for all involved.

For example, one win for the employees may be a bonus based on the profit/employee number. As the  ”Customer Experience” improves, corporate efficiency will also improve. The “Customer Experience” cannot improve without some proportional improvement in corporate efficiency. As sales from the improved “Customer Experience” increases, it will do so without a proportional increase in the number of employees and, by default, the profit/employee will increase. Again, this represents one win for the employees.

If you accept the fact that modeling and measuring the ”Customer Experience” (The “Outcome”) of your business is a common sense approach to start your corporate change process, congratulations! That is the first step, and you are on your way.

While measuring performance can be very intimidating, measuring the corporate “Outcome” is a much easier concept to embrace as the initial step because real teamwork between corporate functions will be required. The members of the cross-functional teams will work out the processes to optimize the “Outcome”. Solutions will come from the bottom up and, therefore, more sustainable. Also, with this level of employee involvement they feel much more like they are part of the team. This culture is one where their efforts are better recognized. Improved corporate efficiencies has a direct impact the lowering the stress levels among employees.

The CEO must encourage and allow this process to evolve through employee empowerment. You have heard the term “journey” used throughout articles and books written on the subject of change. The Malcolm Baldrige National Quality Award constantly describes the road to performance excellence as a journey. I have had the opportunity to be involved with many journeys and can attest to the fact that it is well worth the ride.

Differentiation, The Customer Experience, EBITDA, and Business Valuation

There are many factors that impact the overall value of a business that a buyer is willing to pay for. Consider the approach outlined above with respect to business valuation:

1)  Optimizing the “Outcome” …. in order for this to happen there must be a corresponding improvement in company efficiency.

2)  Market Penetration … a measured and improved “Outcome” provides the foundation for any Market penetration initiatives, and help establish a corporate brand.

3) Corporate Efficiency … As employees improve corporate overall efficiency and begin to penetrate the market, sales/employee and profit/employee will increase because the improved efficiency will enable employees to do “more with less”.

4) Impact on EBITDA …. improved efficiency, driven by the employees, will result in additional monies dropping the to bottom line. These monies can be allocated to EBITDA, bonuses for employees, and business reinvestment. Regardless of how you slice the pie, EBITDA will be positively impacted.

5) Business Valuation … A strong sustainable business culture, and solid EBITDA performance, will better position your company for a higher business valuation, regardless of the business segment served.

So few companies approach their business in the way described above that, in doing do, your competitive position will be greatly enhanced.

*** END ***

Larry Girouard is the CEO of The Business Avionix Company, established in 2002

Published as a 3 part series in the Woonsocket Call, a Northern Rhode Island newspaper … February, 2010

by Sarah Richmond

The media is filled with reports of the red hot merger-and-acquisition market. In the technology sector in particular, the volume and transaction value of 2007 M&A deals are both forecast to approach levels not seen since 2000. And despite improvements in the IPO market in recent years, M&A remains the liquidity event of choice for venture-backed companies.

These trends bode well for entrepreneurs hoping for a sale to a strategic buyer. However, for many of these aspiring sellers, a deal will never be concluded even though their business’s fundamentals are solid and buyer interest is strong. These “M&A casualties” occur because too often entrepreneurs do not exercise sufficient planning, realism and creativity.

An early mistake that sellers make is not having a realistic picture of how much their business is really worth. Much as many parents overestimate the intelligence and beauty of their own children, many founders overestimate the value of their own company, causing them to expect an unrealistic price. If you are a seller thinking about your exit, finding comparables in the marketplace will help you arrive at a realistic valuation. Much of this type of data is available online, and there are also outside advisers who can assist you.

Even realists sometimes find that their expectations are out of sync with a buyer’s willingness to pay, so thinking of creative solutions that can bridge the gap is important. One solution that is frequently employed is an earnout, which defers some of the sale price to future payments, which are contingent on sales targets, product developments or other milestones. An earnout satisfies the seller’s desire to be compensated for the expected future value of its assets, while also satisfying the buyer’s desire not to overpay for value that has not yet been realized at the time of the sale. However, sellers should be mindful that earnouts are only successful for the seller when very careful attention is paid to the structuring of the earnout when negotiating the deal.

The due diligence process is another contributor to deal failure. Major problems result when a seller fails to disclose important information about the company, and this information is later ferreted out by the buyer or its attorneys in their due diligence review. This can result in a purchase price reduction midstream, or even the suspension of negotiations. At the very least, because the “trust factor” has been impaired, the buyer will now feel the need to dig deeper and spend more time on due diligence than they otherwise would have.

Entrepreneurs can help smooth the way by doing their own due diligence on their company before the negotiations even begin. This will provide an opportunity to fix problems in advance, and even if this is not possible, at least it allows the seller to frame the issue for the buyer with the appropriate context, while retaining the buyer’s trust.

Many things outside the entrepreneur’s control can kill a deal midstream, and reducing the time-span of the due diligence period minimizes the likelihood of these events occurring. Priorities at the acquiring company may change during the process, making the acquisition seem less compelling. In addition, market conditions can change at any time, and a drawn-out process is the seller’s enemy.

Lastly, the acquisition period is an intense and distracting time for the entrepreneur and the company’s senior management team. Since a significant amount of time and effort is typically required to negotiate the deal documents and coordinate the due diligence review, many of the seller’s key people may not be able to focus as tightly on their day-to-day responsibilities. If this impairs the business’s performance leading up to the closing, the buyer will get nervous and the acquisition itself may be jeopardized. Management should be sure to keep its eye on the ball and continue to focus on running the company despite the distractions of the deal.

Deals fall through for a number of reasons. Anticipating the types of things that can go wrong, and working to address them with creative solutions, will contribute to ultimate deal success.

Sarah C. Richmond is a partner at Gesmer Updegrove LLP, a Boston law firm focused on entrepreneurial companies and their investors. She can be reached at sarah.richmond@gesmer.com.