Sep 24, 2020
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Middle Market M&A: Making Money After Your Sale — Part 2

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In the first installment during this series we identified that some sales of companies are structured in a fashion that the sellers proceeds vary with post-deal performance of their firms. An adjustable note – different from the concept of an adjustable mortgage in which the rate of interest varies – typically sees a hard and fast rate of interest however the principal amount varies


Not continuously but usually a single adjustment at a predetermine point in time. And the adjustment is in accordance with a specific metric. For example the initial principal amount on the note carried by the vendor is $10 million and on the first anniversary of the sale the principal amount adjusts in accordance with a percentage change in revenues


If revenues are up by 5% the principal amount becomes $10. 5 million. If revenues are down by 5% the principal amount becomes $9. 5 million. Then there’s the earn-out. It possibly described at a continuously varying adjustable note. While it has a notional dollar value it always manifests itself as a percentage of revenue


For example 25% of gross revenues every calendar quarter for the subsequent five years. The purpose is made that some deal structures motivate the vendor to support post-deal success of the buyer. So what are things that you may do as an owner of a middle-market firm to support post-deal success of the buyer? First thing you may do – which actually benefits you within the here and now – is to get your organization tuned up


Between now and the time you sell your firm you ll have a far better running (and more profitable) firm. Without a doubt this could translate to a far better sale price as well. For those people who remember cars before fuel injection we all know that carburetors always needed tuning


Just ask someone who owned a Jaguar. (Have ample tissue for the tears that ensue. ) For those people who remember cars before electronic ignition we all know that the points and condenser were finicky. Then there was setting the timing in your distributor. If everything was in tune life was great


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Inside Look: How COVID-19 Is Deepening The Migrant Crisis In Honduras For many companies the systems that you wish to maintain in tune can be grouped as business development operations finance and company infrastructure. Company infrastructure might include human resources information technology facilities maintenance and the like


As a business owner these groupings will make sense to you. It possibly which you group your personal firm into slightly different categories but you get the idea. So the question becomes whether each of those groupings is in tune and what you do about it. Napoleon Hill is a celebrated author from the early 1900s who wrote as regards to success


Among the Captains of Industry had retained Hill to identify that traits and habits of successful companies and their leaders. Among the keys to success he found was participation in mastermind groups. These are groups in which people in a given discipline – but from different companies – come together in a collegial setting to share ideas and best practices


For middle-market business owners one such mastermind group is Vistage International. Vistage groups are organized locally and are led by seasoned executives who now consult. KnowledgeConnect is a facilitator of mastermind groups for Fortune 500 companies. NYU-educated MBA John A. Jack Borelli is KnowledgeConnect s Director of Operations. We asked Mr


Borelli what key themes – irrespective of which system a given mastermind group makes a speciality of – KnowledgeConnect emphasizes to its member firms. This is his guidance: Understand (and codify) the DNA of the company. It s crucial for company leadership to have a transparent understanding of the DNA of the company


This includes the corporate s present condition: its place in the market (how the corporate adds value) its customers and distribution channels the way the corporate s brand is perceived and the main products or services characteristics that are winning customers today. It’s also ideas concerning the company s future: organizational core competencies (which function guidelines for smart growth) insights on the markets into which the corporate should consider expanding and knowledge of the strengths and skills of the interior team


Invest in your company s technology stack. The standard of an organization s technology stack isn t always directly observable in financial reports but deferring investment in technology will hinder an organization s post-sales performance. It s important for companies to leverage the benefits of new technologies (cloud IoT analytics) but with a view to make the most of these revolutionary new technologies existing systems must be updated or overhauled


Technical debt doesn t appear on an organization s balance sheet but underinvestment in technology can create challenges when scaling and disrupt business operations. Tie individual and team goals to organizational goals – help employees hook up with a far better purpose through their work. Define each individual s role when it comes to benefit to their team and the organization


Create aspirational goals that cascade down the organization. Within the event of a sale or significant organizational change the transition will be made easier with employees which could communicate their work when it comes to organizational benefit. Moreover employees with a transparent sense of their purpose within the organization will find it easier to cope the strain and uncertainty of leadership changes and restructurings


Conduct ongoing thorough employee training. Conducting employee-training events is particularly important before a sale or restructuring. Training is a necessary portion of company culture and maintaining training sessions through the sale of an organization supplies continuity of culture for the team. Further it s valuable to conduct cross training among team members in order that employees can more easily assume workloads when team members depart broadening the skill base of the organization


Let s focus on Mr. Borelli s advice on employee training he notes it is very important conduct consistent employee training before an organization sale. Selling your firm isn’t your last goodbye. The sale of your organization will be a transition for everyone at your business. Your team needs to be able to adapt to change beyond the straightforward incontrovertible fact that new management is steering the ship


As a seasoned leader once told me the sign of a great leader is that the organization still functions in your absence. When considering the sale of your firm it s important to ask yourself: is your team at that point? In our next episode during this series we ll move into transition and post-deal integration


For a free PDF copy of my book about tax savings when selling your small business please email me at todd@integratedwealth. com

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