To figure out if a deal is right for him, Malachite Innovations Inc. CEO Michael Cavanaugh says it's important for business leaders to ask themselves, What do you want? How do you define success? That, he says, is going to vary depending on who you are, the type of business, your outlook, etc.
While speaking at the Cleveland Smart Business Dealmakers Conference, he points to a private equity fund, which, for example, is looking to earn an investment return typically five years — for them, that would be success. A multi-generational family-owned business has a much different sense of success, especially when the person running it is not the founder.
"It's one thing when you're the founder," he says. "But when you're the third or fourth and you're selling grandpa's business, you start to get into a lot of emotional and psychological concerns or issues that really need to be thought through."
And in Cavanaugh's situation, when it's a public company, the considerations are very different. There are stakeholders and shareholders to think about.
"You really have to start at the beginning and figure out what does success look like? If things go well, what does that look like? And you at least can chart that out," he says. "Absent that, it's like the saying from the Mad Hatter, Start at the beginning and when you get to the end, stop. That ain't the right strategy. You've got to start and what I call 'read the book backwards,' and know where you want to get to."
He also advises having flexibility in your thinking. And when you approach a strategy for your business, be a good listener. Be humble. Find good people around you who can advise you and listen to them.
"It doesn't mean you have to do what they're suggesting you do. Ultimately, it's your decision. But the most success I've had is pulling around me people who are much smarter, brighter and sophisticated than me and then listening. And I think that's a really important part of the strategy piece."
Barnes Wendling CPAs Inc. Director Laurie Gatten says she's found that typically some 40 percent of an owner's equity is tied up in their business. That means building and maintaining that net worth is critical for their success. So, if they're deciding to build, or grow through organic means or acquisition, the focus she encourages is on annually accelerating the value of their business. That should be done by putting an emphasis on four areas. One is human capital.
"Look at your leadership teams," Gatten says. "How do you recruit? Do you need to recruit? Are you missing key leaders in certain areas and how are you going to go after that? How do you motivate your talents and how do you retain them? Do you have bonus programs? Do you have retention programs? Why does somebody want to work for your company?"
The next area is customer capital. That means looking at your customer base. Businesses tend to have concentrations of just a few customers, which creates risk.
"So, when you're looking to grow, whether you're an acquirer or build your own, can you derisk a little bit and expand your customer base, or at least are you entangled with your customers so much that no matter what happens they're going to stick with you? That's important as well," she says. "Also, is it transferable? Who on your team has these relationships? With a privately held (company), if it's all with one owner or a couple owners and they're not transferring those relationships to their key leaders and those handling it, it's going to be challenging to get a deal done or it's going to discount the value of a deal."
Another area is business infrastructure — facilities, technology, etc. She says often when a company gets into due diligence and quality of earnings, the sophistication level of the talent varies depending on the size of the company, but also the business processes are often not documented, they're not transferable, and that makes it difficult to train the next person or for someone to step in.
"If you're bringing in another company or you're selling to another company, there's that transition you're going to have to go through," Gatten says. "So, it's important to have those systems in place and that infrastructure."
Social capital, culture and brand awareness, are other areas to highlight. Culture, however, is challenging in a deal because there are not as many metrics — it doesn't sit neatly on the balance sheet (though turnover percentage can be used as a measuring stick). But it's critical, especially post-transaction, when you're trying to integrate two companies. If the cultures don't mesh, that leads to turnover and that leads to an unsuccessful deal.
"I focus in those four areas all with the premise of building those intangible assets — and that's what I consider the tangible assets of your company that will drive your EBITDA, drive your multiple, so that you become best-in-class. You really should be focused on that all of the time not just now start thinking about maybe doing something and now start looking at this. This should be something you look at every year with your advisers, whether the CPAs or attorneys."