What Outcomes Do Advisory Boards Deliver?

Most owners of middle-market companies are hands-on, action-oriented people. They want tangible business results from a board process. Here are several outcomes they want from their advisory board:

  • Survive. Get the professional guidance and resources needed from outside that will lead to making the right changes, quickly.
  • Grow sales and profitability. Generate innovative ideas for sales and instill financial discipline to build sustainable value.
  • Prepare their company for sale. Identify potential buyers and ensure the company is positioned to be an attractive acquisition target.
  • Provide wise counsel to the CEO. Help him or her confront difficult ethical, personnel, or customer issues.
  • Strengthen the organizational structure. Assist the CEO in selecting game breakers for key positions and designing a meaningful succession plan.
  • Raise equity capital. Work with management to prepare the plans, design the measurement processes and deliver the performance that will attract outside investors. Make introductions to the right investment partners.
  • Support the CEO. Mentor the CEO by helping him focus on what is important, coach him on his decision-making process, and enhance his leadership skills. Hold him accountable for doing what he says he will do.
  • Mitigate shareholder issues. Provide unbiased counsel and coaching to the owners, family members, and the CEO.
  • Define a sustainable growth strategy. Identify alliances and acquisitions that will augment the growth targets.
  • Bring in breakthrough strategic thinking. Devise an innovation strategy to grow the business.
  • Build a strong culture. Move from a lifestyle to a professionally managed environment.
  • Increase accountability. Provide a reporting atmosphere for management to improve tactical and strategic execution.
  • Results. Show positive, reproducible and predictable outcomes.

If the advisory board delivers these outcomes, it will have enabled the company and its owners to overcome the challenges we talked about in earlier posts.

Advertisements

Rules of the Road to Freedom

“Almost anything can be achieved in small, deliberate steps. But there are times you need the courage to take a great leap; you can’t cross a chasm in two small jumps.”

David Lloyd George

If you decide to sell, here are a few “rules of the road” gained from our many transactions:

  • Manage the company as if you’re going to sell it so you can when the opportunity arises. Always be building something valuable.
  • Follow the guidelines for building sustainable value as shown in the Sustainable Value Wheel (link to last week’s blog). They build options and freedom for owners and their companies.
  • Identify and nurture target buyers and investors early.
  • Identify and connect with a transaction team well before you actually need them.
  • Build a valuation map to drive extraordinary multiples.
  • Be prepared for a dose of reality. Valuations often do not meet owner’s expectations.
  • Get as much cash up front as you can if you sell. Earn outs and seller’s notes are usually not paid in full.
  • If you choose to sell and stay, have a top-flight attorney negotiate your employment agreement.
  • Your buyer may offer to let you reinvest in the newly structured company. Do not reinvest in the deal unless you have a graduated recovery of your investment if you leave involuntarily. Evaluate all the risks with the help of your advisory board.
  • Update your estate plan and have pre-determined investment alternatives for the proceeds.
  • Understand buyers/investors motivations. Where are they taking the company? What changes are they likely to make? How will these changes affect the owners, financially and emotionally?
  • Before and after the deal consummation, build a paper trail from the meetings with the buyers. If it isn’t in writing, it often doesn’t happen. You cannot predict human behavior.
  • Always introduce competition. It modifies behavior. One buyer is no buyer, and it is not an auction.
  • Do not give up control unless the shareholders are completely satisfied with the cash payout and will be willing to walk.
  • Beware of “loan to own” scenarios.
  • Remember, everyone has an agenda—everyone.
  • Loyalty too early comes at a high price.
  • Buyers/investors value predictable earnings. They can hold shareholders hostage to what was represented as future results.
  • Beware of the representations and warranties in your selling, as they will be used against you.
  • Everyone needs to know where the exit is.
  • Be ready to live a life beyond your business.
  • Be patient. This may take years.
  • Remember the people who got you there. Share.

 

EBITDA Is Not EBITDA

In our book, Game-Changing Advisory Boards, and throughout every business book, you see EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) used as if it is an easily measured figure. It would be easy to assume that EBITDA is earnings, plus interest paid, plus taxes paid, plus depreciation, plus any amortization taken by the company. Logically, all these measures would be made to conform to commonly accepted accounting principles. It would then be easy for any sophisticated buyer and seller to agree on the EBITDA and multiply it by an evaluation multiplier that is the industry norm to get the value of the company…more or less.

And there is the rub—the more or less.

In every sale of a company, there comes the time when the buyer says something like, “I think we need to adjust the EBITDA to reflect a proper depreciation schedule.” Or, “Your interest payments are made on working capital, and that varies dramatically by quarter, so I think we need to adjust the EBITDA to reflect the normalized interest payment schedule.” Or the seller says, “I took a higher salary than the industry norm, so this EBITDA should be adjusted to reflect what would be paid to a normal executive after you buy it.” Or an accountant says, “That is the EBITDA today, but in two years we will be on the international accounting system. Then the EBITDA will need to be adjusted.”

Notice the word “adjusted” in each of those sentences?

A major part of the value of any sale is determined by the negotiation between buyer and seller on what is the true EBITDA. After the accountants and valuation firms on both sides have excluded and added back earnings, they arrive at their EBITDA number.

EBITDA is not EBITDA until both buyer and seller agree on the number.

Alignment, Execution, and a Viable Exit Strategy

The Five Challenges

We have seen CEOs and owners struggle to meet the challenges to building sustainable value in their companies. These challenges are shown as a progression from low value at the survival stage to a high value exit plan at the top of the stairs.

Challenge Number Four—Improving Alignment and Execution

A fourth challenge is company alignment, both internally and externally. Many owners are not aligned on strategy, investment options, compensation, and other critical areas. Family-owned businesses may not have “one voice” from the owners to management. The result is a management team that is out of sync on company goals, purpose, business philosophy, and even ethics. This misalignment leads to inefficiency, false starts, misspent capital, products that add little value, and management turnover. The outcome is weaker financial performance and lower value.

Challenge Number Five—Developing a Viable Exit Strategy

An old adage says, “It is easier to get into business than it is to get out of business.” Middle-market companies usually fail to focus on how to create sustainable value. They do not know how to align the company’s capabilities and position it to appeal to targeted investors and acquirers. Planning a viable exit strategy forces companies to ask, “What is attractive about the business, who would be attracted to it, and what needs to change so that it is more valuable?”

These companies often disregard the notion of scalability, brand equity, bankable management teams, and recurring revenues. These are just a few of the important factors in designing an attractive exit strategy. Owners might not choose to exit a business, but they should know the factors that build sustainable value. The challenge is to have a plan for building sustainable value that can be measured, managed, and executed.

If the exit strategy leads to the sale of the business, owners must decide the acceptable price and terms. They must be prepared emotionally to sell if their terms are met.

How to Meet the Challenges

Overcome the challenges with a strong internal team supported by an advisory board and the governance process it brings to the company. The authors have created an effective advisory board process called the professional advisory board process or PABoard process. Learn more in Game-Changing Advisory Boards, available soon.