Treasure that Unicorn – Beginning Now!
Author: Chris Young, PhD
What is a Unicorn? A unicorn is something highly desirable but difficult to obtain. A unicorn is a mythical animal that is hard to find. In the world of finance, a unicorn is a business with a value greater than $1 billion. It is a company with so much success that people go out of their way to purchase a piece. A unicorn is highly sought after; a unicorn is a treasure to those seeking wealth.
With respect to the business owners I work with, so many of them do not see their business as a unicorn for one reason or another. For some of these hard-working business owners, they see their business as a burden, or something that holds them back, or something that drains them of time and resources. I equate this sort of relationship between the business owner and the business as an unhappy marriage, where one party decides to stop investing in the relationship, stops cherishing and respecting the other. In these sorts of companies, I see enormous failure on the part of the entrepreneur. The failure stems primarily from the entrepreneur not knowing what they really want from a business and, even worse, have a tough time explaining their purpose. When prompted, most entrepreneurs have a hard time answering this question – "what do you want to get from this business today and in the future?"
After spending some time with an entrepreneur, we get to an answer. Some of these entrepreneurs want to enjoy the work they do and create a lifestyle business. These sorts of businesses are those of individual services, predicated on the goodwill of the entrepreneur performing the service. Most of these entrepreneurs have no desire to sell their business until they become a sensation. Once that occurs, they are featured in a major media event, skyrocketing their business to the moon. Sometimes these sorts of entrepreneurs come to realize that it is not fun working so hard, without obtaining some new wealth creation, and give away their business or shut it down, seeking more lucrative opportunities. Sometimes here we see a resentful relationship develop over time.
The other sort of entrepreneur is the person who wants to build a business with the sole intention of selling it in three, five, or more years. This type of entrepreneur is often a visionary or an incredible sales/marketing person, most often focusing on the big picture and having little time for the details. This entrepreneur type does not achieve their dreams of selling in three to five years at a price they deem appropriate because they fail to focus on the little things which give a buyer comfort. The third sort of entrepreneur is the one who starts a business without asking themselves these sorts of questions and later comes to realize that they do not know what they want from the business – and most often fall out of love. This third type of entrepreneur should not be in business in the first place because they have no passion, and no drive to build a sustainable business. However, in each of these entrepreneurial types, the same question comes up, time after time, after time. How does one sell a business and obtain the highest value possible?
This is not an easy answer, but I will begin with the most straightforward solution. DO THE LITTLE THINGS PERFECT! Below, I provide a list of items that must be proven perfected to a seller. There is absolutely nothing better for a buyer than when a seller has perfected their internal operations, financial reporting, client contracts, legal documentation, human resources and make sure that all paperwork is in perfect order. Although perhaps a buyer may not say it, they will develop a bias against a deal when the seller does not care about the topics mentioned above. At some point, the buyer no longer wants to hear about the vision and growth but wants to see the results for themselves; they want to touch the results, observe first hand the truth of what the entrepreneur has been saying. For the lifestyle entrepreneur, the following items are effortless to implement in a small business, and will be a lifesaver, should you decide to develop a wealth creation plan, with the purposes of an exit.
Here they are, in order of importance. The items listed below are not too time-consuming and do not cost much to have completed by your professional service provider.
Do not use your tax returns to share financial information with a buyer. Spend the time and resources to have your financial statements completed yearly, and maybe quarterly or monthly, depending on your business size. Make sure to have your financial statements prepared on an accrual basis.
Ensure you can quickly understand and provide documentation for non-operational and one-time expenses that can be removed from the financial statements. These items would be for things such as automobiles, quasi-personal travel, entertainment, and related costs.
Develop a sales pipeline, and keep it up to date.
Make sure to keep records of annual revenue by client. Retain this information for the past five years. Also, do this for your vendors. Make sure you know the vendor and their payment totals for the past five years.
As part of this exercise, try your best to have your revenue and vendor expenses spread to many different clients and vendors, so that you can prove the business revenue is not too risky.
Develop a two-year financial forecast, with supporting schedules, showing how you will achieve the goals you set out to accomplish.
Make sure to identify for a buyer, any asset which is not part of the company's everyday operations. These would typically include a building owned by the company, an exotic automobile, a whole life insurance policy, and similar assets.
Draft an Operating Agreement with your partners or shareholders if it does not exist. Make sure to include share purchase provisions and valuation metrics required when buying out a shareholder, piggyback, and tag-along rights. Have the operating agreement completed with the advice of a competent corporate attorney. Email me if you need a great lawyer.
Hold annual shareholder meetings, and keep records of these meetings. Be transparent with shareholders and board members of your intentions for an exit—document this and document it well.
Shareholder Agreement. If you have more than one type of share, such as preferred shares, make sure you have fully executed copies. Make sure you can speak well to each of the major provisions in the agreements.
NEVER – NEVER – NEVER allow yourself to give up more than 49.9% of your business shares, even if your mother is your partner. The number of lawsuits that we work on at Red Maple concerning 50/50 ownership is incredible. PLEASE DO NOT DO THIS.
Succession Plan. Make sure you have a succession plan for the CEO, COO, CFO. Perhaps more importantly, you should have documentation clearly showing that you have been executing on these succession plans, and that you can communicate when the successor will be ready to assume the senior role – if necessary.
Make sure that all employees, and shareholders sign confidentiality agreements.
Have a non-solicitation and non-competition agreement with all of your employees. Considering giving highly paid and key people shares in the company, for the main reason of protecting yourself, should they leave and start a new business.
Make sure your vendors sign a non-compete, non-solicit, and intellectual property agreement, ensuring that they will not compete against you.
Enforce signed employment contracts with all employees who are not 'at-will' employees.
Develop a long-term relationship with a banker, advisor, or business broker – well in advance of selling. Your banker will be able to give you free information on multiples, what to expect upon a sale, etc..
HOWEVER, do yourself a favor and call an independent valuation professional for an objective valuation, or call us at Red Maple and ask us about our Value Aptitude offering. Our Value Aptitude offering allows you to continually update your valuation, while it also shows you areas you must and should improve.
Consider working with a trust and estate lawyer before selling your company, with the primary goal of assisting you with legal tax minimization strategies upon a sale.
Depending upon the expected proceeds from a sale, begin conversations with wealth managers who can assist you in the proper direction of your post-tax funds. This is so important! I can tell you horror stories of successful entrepreneurs who took all of their post-tax proceeds and decided they were going to invest it themselves – only to be broke and penniless a few years later.
Above are essential items that you must look at now. You will need to have about five conversations or so.
First, call your corporate lawyer and work on the information she can provide. If you don't have one, let me know, and I will refer to the best in the business. You need to find someone based on your budget and needs.
Next, call your accountant and get an idea of cost and timing to create accrual financial statements on a yearly, quarterly, or monthly basis.
After this, call a trust and estate lawyer, and start the discussion of tax strategies.
Once these conversations occur, then begin discussions with a wealth manager about post-sale investment strategies.
Finally, once the above is complete, begin the conversations with your staff and confirm the execution of documents. Inform everyone of the importance of the internal workings, when trying to increase the value. The above documentation and process should be in place three or more years before considering a sale. By doing this well in advance, you will have a substantial financial return on the effort.
What my clients say after they complete the above processes:
Man, I am glad that is over, but I feel so clean now, I know where everything is, and I am ready to jumpstart this business again.
That helped refocus me – I now remember what was important, and I am driving toward it.
PLEASE NOTE: The above information is a quick summary, and all of it is required for you to master the processes for running your business. As you master the process, you will become emotionally engaged again, driving you to do more. This is the easy stuff, so get at it. In future blog posts, I will begin the conversation on evaluating your purpose, discuss the sales growth process, and then discuss ways to make sure it gets done.
LIVE WELL - Chris