The Five P’s
It was my pleasure to hear a talk recently by Dr. James Doti, President of Chapman University. Years ago his mentor told him about the Five P’s – “Preliminary Preparation Prevents Poor Performance”. Dr. Doti still employs this lesson as he continues to lead Chapman from success to success. As I recently reflected on this important message, I realized that these “P’s” apply not only to running a major university, but also to the merger and acquisition process.
To sell a company, one needs to start early. Really early. If selling your company is going to be your exit, as it is for most small business owners, then from the very first day you form it you should do so with your “eye on the prize” at the end. Should you be a C corporation or an S corporation? (Most usually S.) What should your organization of people look like – now and later? How many different products or services should you plan to offer? These questions should all be answered within the framework of selling it someday. How will your company look to a buyer?
When should you begin planning for the sale? Right now! At the beginning!
By the way, what you think is Preliminary may turn out to be timely. You do not know whether a buyer might come knocking on your door before you anticipate it. Always be ready.
Not only is it important to prepare early, but it’s also important to prepare well. Normally, what is good for your business will be good preparation for selling your business too. For instance, prepare a Five Year Strategic Plan with a financial section and keep it current. Be sure you have monthly financial statements and that you understand what they say. Create a password-protected virtual data room on the internet where all important documents are stored. Once you do create this storage site, you are on your way to being prepared for the inevitable due diligence process.
Speaking of due diligence, it is always a good idea to do periodic seller due diligence on your own company. You should never be surprised at what buyers might find during their due diligence.
Preparing for the sale process is also very important. Research the buyers you may want to contact. Create materials that describe your company well pointing out all the achievements you have made over the years. If there are any flaws in the company that need correcting, point those out too before the buyers point them out to you. Understand how professional buyers are going to value your company and why. Have a strategy worked out as to how you are going to respond to buyers’ offers. Clean your company up like you would a house that you are going to sell.
Remember, a good sale takes good preparation. Start now and you’ll set yourself up for success when the time comes.
“Prevent” is a difficult word in an M&A context. Things are done in the sale of companies so as to navigate as efficiently as possible through the process and to maximize value and minimize future risk. Risk and reward often play off each other in interesting ways. The least risky deal structure is to have the total price paid in cash up front. It will also probably minimize the value one will get. Do you want more money than the buyer is willing to pay in cash up front? Take part of the payment in a promissory note, which is riskier than cash. Take some of the money in a contingent payment based on performance – an earnout. This could be the riskiest form of payment but it also could be the most rewarding if it is structured properly and everything goes well. Prevention could come into play by buying an insurance policy to avoid having to pay a penalty in case a promised legal representation you make in the purchase agreement turns out to be untrue.
Poor performance in an M&A transaction can mean settling for a sale less than the value you anticipated or just having the process take too darn long. Preparation is the key. Maximizing value might not be the goal. That’s fine too. Timing, for life reasons, may be more important. For some people selling one’s company is a life decision more than it is an economic one. We all want to do as well as we can but recognizing life’s priorities is so important. This is also where the risk/reward paradigm comes into play. One might take the smaller deal just because a seller likes to sleep at night and does not want to worry whether or not future payments will be made on time or at all.
So “Poor Performance” is a relative term – not absolute. Owning a company is often a lifetime proposition. When it comes time to sell it can be a very emotional decision. Success or failure is relative and it should only be judged by the seller. No one can judge what success is for someone else.
Ronald Glickman and Associates LLC is devoted to helping owners achieve success in the eventual sale of their businesses – however the sellers define it. We can help sellers anticipate what value they will receive, and help them fully understand the process into which they are about to enter. People come to us to benefit from our decades of experience. People come to us because of our reasonable hourly fees (no success fees). People come to us because we have helped them see how preliminary preparation prevents poor performance and instead can lead to incredible success.
I look forward to discussing this further with you or your clients.