Join me at 'Why Your Business Needs a Board (And How To Build One)'

I am excited to be hosting the following Institute of Corporate Directors Southwestern Ontario event. Please sign up by visiting the ICD.SWO site.

Do you have a value-added board for your company? Hear why you should join me on September 23rd, and get the steps to building one.

Speakers include:

• Randall Howard, General Partner at Verdexus (Linkedin)

• Carol Leaman, CEO at Axonify (Linkedin)

• Murray Gamble, President at The C3 Group (Linkedin)

Facilitated by:

D’Arcy Delamere, Lecturer at UWaterloo (Linkedin)

______________

The speakers are absolutely fantastic and have repeatedly built world class organizations in our backyard of Southwestern Ontario. Entrepreneurs who are interested in ensuring long-term growth and sustainability of their organizations should take note. I, personally, have written extensively on the topic and regularly speak to entrepreneurs about their boards. If you’d like my perspective, then here is a short primer on the topic of boards, “The Board is Motivated” (a chapter excerpt from my book Money Magnet).

Here is an invitation we put together for the event:

Financing Pitfalls Made by Rookies

Attracting investors is a financial game, but make no mistake, it is also a marketing game – but get that it is not to your client, but to a whole different beast, to the investor. Just as in marketing, you want to know the investor’s needs, understand their pain and be able to address quickly how you can ease that pain. When your company is presented by a CEO who understands the investor needs – you will the right attention and, hopefully, the investment.

You know how to do marketing to your client - carefully picking your target audience, understanding what they need to hear, and crafting your message. When you market your business products, you learn about your clients’ priorities. When you are raising capital, switch it up. Same methodolgy, but now you are marketing your business to investors. Your prioritiy is to learn your investor’s needs.

By signalling that you understand how to work together, how to be a leader, how to communicate without hiding the truth, or being someone different when they are not in the room, you will get their attention. The next steps of building enough trust to gear up the relationship to get beyond the dating will begin to happen. Soon, you will be going down the aisle together. I will spare you the marriage metaphor, you get the point. To get to this moment of bliss, here are a few major potholes to avoid:

Assuming you are losing control

“Even with a minority position, you still have control,” says Eric Berke, Torquest Partners. “As the CEO, you are the one making the operating decisions and having the ultimate say over strategy.” Berke says that when the Torquest private equity investors pushed for Granby Steel Tanks, a company making storage tanks for fuel, to increase their price, the final decision did rest with the CEO. Once implemented, customers paid the new rates as they recognized there had not been an increase in decades but the CEO had made the choice.

Mistaking Private Equity for the Bank

Each private equity investor takes on the real risk of working side-by-side with your company for the next five to seven years. They are not collecting a comfortable banker’s salary while they wait for you to return their investment. Thomson Financial cites the average holding period of a company investment to be six years. How’s that for harsh? Certainly not for the faint hearted. Why not park that money in real estate instead?  Frankly, it’s because the private equity investor lives and breathes business.

Not recognizing it’s negotiation

Jack made all the usual mistakes of entrepreneurs in love with their business (a good thing) but not realizing that he was in a negotiation situation, not a sales pitch. (Very different.) What was he selling to these investors—his product? No! He was supposed to be selling shares in his company.

Not being a CEO

As he droned on about the product—Jack exposed himself as less than CEO material. The investors want to see you are a leader who can execute. Jack needed to show he thought big and that the business could grow well, even if competitors with deeper pockets tried to copy his product, instilling confidence that others would be unable to wrestle away client contracts. Remember this, as you start to chat with investors: before you even begin, they assume your product is the better mousetrap, now they want to know how you are going to get people to buy it and how much money you could make. History books are littered with tales of smarter products that did not capture the attention of customers, entrepreneurs who did not manage their cash flow and failed. 

Even if you are at start up stage, move from being a marketing guy or a product developer to being a CEO. Product guys do not get out enough to the finance community. When they do, too often they stay stuck to their skill topic rather than speaking like a CEO and talking financial projections, cash flow or balance sheets. Product focused leaders think numbers are for accountants, but mature leaders know the business future cash needs. 

Not gathering a team

When Fund Managers asked Jack who was on the team — who were the people involved — he name-dropped. He knew the head of Loblaws, the head of a large advertising agency was his best buddy and he could get the President of IT at IBM to come over to his place for dinner. Jack missed the point. 

Private equity is not an employer employee relationship. Level 3 Legacy companies understand that dynamic and appreciate why investors are seeking companies run by mature, team players.

Investors are betting on the people who are actually involved, not floating around loosely. You don’t need to have big names working in the business, nor does your team need to be 100% working in your business. You do need to have names and profiles of solid people willing to be written into your plan and ready at the drop of a hat to support your plan in person when asked.

Not talking about return on investment 

It’s not about the money but it’s about the money. Simple as that. Simultaneously, as the investor sees if the size of investment fits their own Internal Rate of Return (IRR) goals, they will take into account far more than the pure financial valuation. 

The investor’s IRR is the rate of growth a project (in this case, investment in your business) is expected to generate. The higher this number is, the more interested an investor will be to invest in your company. This number will also give the investor an indication of how many years it will take to get his principal back. Weighing up all of this, the investor now looks at the market. He asks himself, what is the value of my money now? I want an IRR of 25% to 30%. Why should I take the risk with Jack when I can get an income fund for 10%? If the lower risk is 10% to 12% return, then I want 30% on my money because I am not getting any security on equipment to sell if things go south.

The absolute keystone is the additional money to be made beyond the initial investment. What would be the future revenues and the rate the investors could expect? In a nutshell, the people holding the cash want to know “how much money will I make?” and “What is my risk?” They will want to know the yield. It is much like a mortgage, which gets 5% a year back. 

Assuming valuation of the business is just the money

As one investor said, “More so than a bank, private equity will recognize a strong CEO and team. If I believe in the leader, but the business is struggling or even failing, I will invest and give that business a new life with my time, effort and vision.” Value of the business is around what the future earnings could be, not the present situation.

Not being clear about what you want from Private Equity

“A huge destroyer of value in a business is if you are not clear about the role private equity will play, “ says Peter Carrescia of Information Venture Partners, “I have the most important piece of advice for owners looking for capital — you really want it? Be clear and understand that if you are not clear, then it is inevitable that infighting breaks out between investors and the company team.”

Imagine if you can (and you probably don’t want to) the day you get a cheque for your business. That’s right - a cheque signed by someone interested in your business, perhaps you imagine it’s a 10% or 75% partnership. Whatever. Pick a figure. It’s money for your business. How much do you want to see?

On your desk, next to the money, your business plan lies gleaming. Inside is the outline of the remarkable growth of a well planned and executed strategy. In fact, it tells the tale of a business started from the kernel of an idea with a few people, which has grown (with pain and horrors) to a full oak. Excellent. Now imagine the last day in your business. Write down the year. Don’t panic. No one is going to hold a gun to your head and force you to sell. Whatever you do is not the point. With that final day in mind, and the final money value in dollars clearly set, you are ready to get the financing your business deserves. It’s that simple.

Get my insights sent right to your inbox. Sign up for the newsletter.

The Board is Motivated

The investor will want a board with strong reporting capabilities that are likely absent in your business currently. This brings increased process to your workplace. As an entrepreneur, you chose how to how much information you give. The board is not your team captain, but your coach. Board members are not in a competition to be smarter than you, and once you come to terms with that and their requirement to prepare regular reports, you will realize you are still the glue that makes the board a team. 

“Some companies worry about having a fund manager take a seat on their board and interfere in the business,” says Bob Roy, of Roynat Capital. “What CEOs may not realize is that most funds do not wish to “get in the kitchen,” and will focus their help at a strategic level.” Bob adds, “Owners quickly come to appreciate how the mere presence of the private equity partners on their board brings enhanced prestige and credibility to a business.”

Stage 3 Legacy companies agree that a private equity partner on their board brings professional rigour and discipline to create a vision and ensure the strategy gets done. Legacy companies recognize that they may not set the same standards or bring the same discipline as will be required when partnering with private equity.

Part of strategy is to grow and get access to capital. If an analyst looked at your finances they want to see debt. If the balance sheet is not geared, (loaded up with debt), the business risks being static. That is the trick of cash—use it or lose it. If you want to acquire other companies, you must like debt. If you tell an investor, “I’m ungeared—little debt,”—so what? It shows a lazy approach to business. 

As the company develops, there will eventually come a time to adopt the discipline of debt repayments—which has the magical effect of making management of the large private equity partnerships focus on cash flow. The team will be focused as never before on quarterly payments and not breaching covenants.

Get my insights sent right to your inbox. Sign up for the newsletter.

Common Mistakes by Entrepreneurs

VCs say they are always surprised by the number of investors who seem oblivious to the mistakes that can tip the decision to invest or not to invest.

Lack of personal risk

Do not expect others to put money in your business if you don’t put any money in yourself. You need “skin in the game” or else investors sense you could bail out and get a job at Google when the going gets tough – which it inevitably does.

Poor presentation of financial information

Another big mistake is handing over a spreadsheet with every item listed, including stationary and envelopes. You do not need to provide that information to the investors. If they ask, you can pull out your details but they do not need to see every line of the P & L otherwise they may end up banging their heads on the table. Moreover, the investors will want their information quarterly, no matter when your year-end falls –give it to them based on the common tax schedule.

Not knowing the fund

You’re not the only ones trying to ‘spin.’ VCs spin just as much and they want you to take a big chance on them too. It’s a quiet little secret that fund managers and VCs want to be known and admired too. If you take the trouble to research them, it demonstrates that you are genuinely excited about them coming on board. By now, you recognize there are as many varieties of funds as animals in a zoo: Labour funds, L.P.s, strategic finance funds versus venture equity and focused on industry. Do your research. Who have they backed before and what do you have in common with those companies?

• Ask the other entrepreneurs running companies in the portfolio, “What did your VC do for you lately?”

• Is this fund patient? You want to be comfortable that they are not going to do a quick flip of your business but rather, that they care about your vision.

• Will the fund be there for the next round of financing?

• Do they have a network of contacts?

• What is the reputation of the VC, because when you go for your next round of money (as you grow), the next investors will want to know who went in the first time? If your investors are headquartered in Las Vegas and resemble the cast of The Sopranos, maybe take a pass. If you choose to take the easy route and get your business financed by some heavy in the ‘waste disposal’ business who wears big knuckle rings, know that this short cut will one day be brought out into the harsh light of day and may cost you blue chip funding years down the road.

Lack of standing in the community

You are going to very few private investors and you are selling an extremely expensive item. Put yourself in your investor’s shoes. This person is spending $1 to $5 million of his own money on your company. Is he going to hand over cash to someone who calls up and says, “Hey Joe, I hear you’ve got some extra money kicking around and I have a terrific company for you.” Absolutely not. The investment community is like six degrees of separation and they will find out everything about you.

Jan Carlezon, CEO of a failing Scandinavian airline, turned it around by teaching his employees that each of them counts in the customer experience. When travellers receive a smile at the check-in counter, when they sit on a spotless seat, when they reach for a clean blanket - each of these little elements is a moment of truth, a moment when the brand is reinforced. Imagine if the washroom were dirty. That moment of truth would tarnish the other positive parts of the customers’ experience. The customers would feel that your maintenance of the aircraft was shoddy, that your whole business was like that one carelessly kept washroom. Attracting investors is about each and every experience the investor has with you - from conversations to setting up the meeting, to the paper you use for your investment proposal. It’s all providing a message about how you operate your business.

If you write a blog or chat in Facebook, know that your friends are not the only people reading your words of wisdom. Do not divulge details about your private equity partners, “These VC bozos made me write a sixty-page plan they didn’t even read.” Rick Segal of JLA Albright, obviously a well read VC, blogged about this entrepreneur’s blog gaff on his blog!

If you have something difficult in your background – a lawsuit, for example – be upfront. As Dr. House in the Emmy winning TV Series, House, says, “Everyone lies.” A fund manager who had just won a top businessman of the year award said, “Being a cynic and never believing in anyone these past twenty years finally paid off.” Google makes it easy enough for a monkey to do a surface background check and fund managers have lawyers to do more detailed sweeps. In 110 B.C., Publilius Syrus wrote “A good reputation is more valuable than money.”

Get my insights sent right to your inbox. Sign up for the newsletter.

Stepping Down From My Role With The Atmospheric Fund (TAF)

It has been an honour to serve as a director on the board of The Atmospheric Fund ($100M AUM) and the real takeaway is the joy it has been to be able to contribute to the long-term success of impact and sustainable investing. In my 12 years on the board, we've seen a massive change in the seriousness of how ESG is approached by corporations and the public, and I’ve had the incredible opportunity to be a part of that growth.

The Atmospheric Fund advances the most promising concepts by investing, providing grants, influencing policies and running programs. The best part is how much I learned through collaboration amongst the amazing board directors and the outstanding Atmospheric team. We are all drawn from different spheres; from private, public and non-profit sectors, and bring different perspectives on ideas and opportunities for reducing carbon emissions.

My Atmospheric Fund board work has allowed me to see what impact and sustainable strategies work best in practice, learnings I will apply as I continue with my directorships into the future.

About The Atmospheric Fund

The Atmospheric Fund ($100M AUM) is a regional climate agency that invests in low-carbon solutions for the Greater Toronto and Hamilton Area and helps scale them up for broad implementation.

My Role With the Institute of Corporate Directors

As part of my involvement in the Institute of Corporate Directors – Southwestern Ontario Chapter, I get to meet with and share my expertise and career-long knowledge as a director to the next generation of corporate board members.

I like helping others interested in career growth and in the growth of local businesses communities. It’s an honour to be part of the Institute for Corporate Directors for the Southwest Ontario Chapter.

If this is a topic you’re interested in, please reach out.

Sharing Knowledge as a Speaker, Business Competition Judge, Press Contributor

I’m passionate about sharing knowledge through a variety of outlets. Over the years, I’ve had the opportunity to do so as a speaker, press contributor and business competition judge.

It’s been a great pleasure to have guest contributed to such publications as BNN, Bloomberg, the Globe and Mail and more. In a more hands on approach, I have taken part as a judge for both Rotman’s and Richard Ivey Business Schools and TiE Business Pitch Competitions.

If you have an opportunity you’d like to discuss, I’m always happy to contribute.

ICD Event Takeaways: Critical Board Roles in the Face of a Business Failure

Recently, I had the opportunity to attend and co-host a great ICD event: Critical Board Roles in the Midst of a Business Failure. We had some fantastic speakers, and featured Randall Howard, a serial technology entrepreneur and investor focused on growth and change in startups and social ventures. 

“As a director, apply your duty of care and due diligence. Engage with challenges, and help develop a Plan B that’s better than the cliff that the company is going to run over.” 

Here are some of my top takeaways:

• As an investor, you have a strong incentive to make things happen.

• As an independent director, your goal: Balance among all of these types of roles and stakeholders of the company, including founding management, investors and independents to get good decisions and stakeholder management. 

How do I get involved in one of these companies? 

• 1st: As a director, look for A players that you can work with. The key is to assess the capability and the coachability of the key founders.

• 2nd: Ask the 2-3 questions you wished you had asked down the road. It’s about finding key elements that are going to matter in fast-moving, hyper-complex environments.

• In terms of governance, start slow and improve systems over time, increasing your technological view. 

• Have a whole stack view of risk: understand the technology from bottom to business strategy, understand the cost of cybersecurity analysis. 

  • The best way to build a risk management framework is to evaluate future scenarios. Key areas are operational: sales, marketing, execution. 

  • Keep a smaller, highly-targeted risk list vs a large, overarching one. 

https://vimeo.com/513872504/d9f84f9a6d

A Tale of Risk and Reward

The Tale of The Well Next Door

There’s an old Scottish tale of a frog living in a damp well. One day, another frog from a large pond hopped past the well. Interested in all things, this adventurous frog looked down into the dark depths and leapt inside. 

Intimidated by the interloper, the first frog asked, “Who are you and where did you come from?”

The pond frog said, with a nod at the top of the well, “A large pond filled with water many times the size of this well.”

“How big is this water?” The well frog pointed to a boulder at the edge of the well. “Oh, many times the size of that boulder.”

“As big as that?” The well frog gestured at the shadow of a weeping willow tree.

“Much bigger.” 

The well frog was momentarily struck, “How much bigger, then?”

“It’s many times the size of your well and it’s quite close. We could travel together to see it.”

“Why would I do that?” He regarded the pond frog suspiciously.

“You would have more water.”

The frog in the well gave a sideways look as if to say, “Oh, a wise guy, eh?” and swelling up with enough irritation to pop, said decisively, “Get out! Get out! I want nothing to do with frogs like you.”

“Why, because I can show you a bigger view, more flies to catch?” The pond frog realized that this frog was afraid to go beyond the bricked walls he had known for so long. 

“Nonsense. You are trying to trick me out of my well.”

With that, the pond frog shook his head and hopped back into the sunshine. 

How to Make Your Business More Attractive for Sale

Where is my business in its lifecycle?

When the market fluctuates, it can shift, which means the value you thought your company provided might no longer be that way to investors. Here’s how to mitigate that gap. If you’re contemplating selling your business, there are certain things you can do to add to the valuation of your company.

I penned this piece for the Globe & Mail in 2013, following a few years after the crash of 2008. Learn how to prep your business for a better valuation, regardless of market volatility.

Read the article here: https://tgam.ca/3v6BIY4

6 Reasons to Work With an Exempt Market Dealer (EMD)

To attract investors, you must demonstrate your company’s value.

Public companies have the advantage of IPOs, acting as value signals on the open stock market. For private companies, proving value can be more challenging - a challenge best suited to the hiring of an exempt market dealer.

In a previously published article for PCMA, I outline 6 reasons for hiring an EMD for their capital raising expertise.

Read the article here: https://bit.ly/32xOoet

Five Questions to Ask Before You Sell Your Business

Have you heard of Vega protein?

If so, then you have also likely heard of its founder, Charlie Chang, who sold the company for $550 million. But what’s most impressive about this deal is not the total sum, but the strategic way he went about it. “Mr. Chang brought in private equity experts as partners for a minority position several years before the sale. The result was a far bigger valuation than if he had sold 100 per cent of the business in one transaction.”

If you ask the right questions, the result can be far more impressive than you can imagine. Here are five questions you should be asking yourself to prep long before the sale of your business.

*This was published a few years ago for the Globe & Mail.

Read the article here: https://tgam.ca/32yAJDZ

Do Business Owners Have a Bias Against Risk?

Do business owners have a bias against risk? And if they do, how much does it really affect the business over time?

In a previously published article for EMDAC, I talk through my answer, which is actually, quite a bit. “The penalty to the business owner and their company with this low risk vs. reward bias is that the company ends up with underinvestment and fails to achieve financial performance.”

The good news? There are two great options for both the growth and protection of your business.

Read the article here: https://bit.ly/3n808O4

The Best Mergers Get the Timing Right

What is the intended impact of the acquisition on your business?

For a Merger and Acquisition Strategy to work well, both the acquirer and the acquiree need to understand the bigger vision: What is the strategic alignment? Is there an effective integration plan? Does it account for cultural fit for both companies?

The call to merge for the benefit of fast-tracking your business can be great, both as a small or a large business. But knowing what the long-term end game is will keep the fast-track from hitting a wall.

Previously published for the G&M.*

What are some other questions that need answers when planning a successful merger?

Read the article here: https://tgam.ca/3sGacPo

My Role as a Board Member for the Toronto Atmospheric Fund

One of the best parts of my position is being able to invest my time and money in things that are important to me, even outside of my work. That’s why I am a part of the Board of Directors for the Toronto Atmospheric Fund, an organization moving the needle on lowering carbon emissions (and scaling them) in the GTA - or in other words, close to home.

I enjoy discussing these topics with others who are as passionate about developing and implementing actionable, long-term solutions to some of the greatest issues we face today as a community. If you’re considering impact investing going forward, let’s discuss! Reach out for more information. Happy to chat.

For more information, check out the Toronto Atmospheric Fund website here: https://taf.ca/

Family Firms Tend to Reject Outsiders

“A study by McKinsey found that a key reason family businesses survive beyond the second generation is through the appointment of professional management.”

It’s hard to bring in an outsider to help you run aspects of your business, and to trust that person to put in the same blood, sweat and tears as you do. Interestingly, though, these legacy businesses tend to outperform corporations both Public and private. With data like that, bringing in a CEO that doesn’t know you at all, becomes a lot easier and in the long run, a lot safer too.

I wrote this some years back for the Globe & Mail.*

Read the article here: https://tgam.ca/3erNnKy

Running a Business is "All About the People" for John Rothschild

Food is a “trendy” business, and according to John Rothschild of Prime Restaurants Holdings, there is a good way and a bad way to handle it.

“Keeping all your eggs in one basket, the business, is risky. Diversify long term wealth preservation for your family. Take some money out of the business in a disciplined, mechanical way and by keeping a piece aside, you can take the risks in the business, but have a nest egg for the family.”

If you’re interested in or work in the food sector, this one might be for you.

Previously published in for the Ivey Business School website.

Read the article here: https://bit.ly/3ejkf89

Books That Influenced Me

The Trillion Dollar Coach, gives detailed stories from people who worked with Bill Campbell and these bring alive how Bill pushed, prodded and pulled the leaders of several prominent companies, such as Google, Apple, and Intuit. Bill gave time and built trust which allowed the burgeoning of deep relationships with Silicon Valley visionaries, including Steve Jobs, Larry Page, and Eric Schmidt. Bill spent long walks every Sunday with Jobs, for example, confirming to me the power of how to use a coach for your sounding board and weekly planning.. Bill also used truthful feedback, delivered privately but with a hug to lessen the sting. Hopefully, one day we can get back to that physical style of support.

The chapter on boards was particularly useful to me. If you are a board director who does not read the materials prior to a meeting, asks superfluous questions and likes the sound of your own voice, you would not last with Bill Campbell. There were a great many more concepts generously shared by Eric Schmidt and others which I valued. Bill can be seen on many YouTube videos too, but this book was well worth the time to dig into details about Bill’s coaching, and to think about how you would have listened and applied his gruff guidance.

Trillion Dollar Coach - Bill Campbell

The Leadership Playbook of Silicon Valleys’ Bill Campbell - by Eric Schmidt, Jonathan Rosenberg, Alan Eagle

“The book tells the incredible story of the man behind the successes of some of the titans of technology. When your list of “coachees” includes Steve Jobs, Sheryl Sandberg, Sergey Brin, Marissa Mayer, Larry Page, Mary Meeker, Eric Schmidt,... you have to think he had something worth knowing about. What really hit home was that one of the common themes was the importance of getting to know your team and truly caring about them. “Make the human connection first, then approach the work with that understanding.”

Do Your Short & Long-Term Plans Speak to Your Value and ROI for the Investor?

Show me the money

If you’ve got through the first three questions, investors are ready to get serious and decide if they are going to give you the money. Do not make the mistake of going with your story and expecting them to figure out the amount of money you need and how you are going to pay them back. To get the cheque books flipping open, you are going to prove three things:

1. What is the growth rate to make the business worth backing? 

2. What is the return on investment? This depends on company size, but can range from 8%, 25% to 40% plus.

3. How will your investor get out his money (exit) within his desired time frame? Demonstrate that you get the importance of an exit plan for the investor. 

What Is your financial growth? 

The investor needs a financial model that is built with real numbers from the past and detailed numbers going into the future. This is where many businesses fail. They do not understand the financial funding models built by business analysts. A soundly constructed model separates the wheat from the chaff, the growth business from the plodders.

There are drivers that make the money come into the piggy bank. For example, one of Tim Hortons’ drivers would be the number of customers per day. How would you increase that number? How much would it cost to increase that number? What is in the plan to show that the customer numbers will keep going up? Opening new coffee locations? Specifically, state what you will do with the money. Have clear action plans to demonstrate you know what to do once the money gets you on the runway. What’s the destination and who’s doing which job? The investor can play with the model and increase or reduce the drivers. For example, they could see what the returns would be if you only opened half the number of franchises you said you would. The investor will use your model to test your assumptions of what grows the revenue.

How to value your business

Mr. Deep Pockets ends our lunch with cups of rich Kenyan tea, and I decide now is the time to bring up the tricky subject of valuation. Fund managers think this is their sole territory, but it’s a huge controversy for owners. Valuation is the huge sticking point for all concerned. Some business owners accuse finance people of throwing the bones to come up with a number while finance people argue that owners have too much emotional investment in the business and see it through rose-coloured glasses.

Mr. Deep Pockets pays the bill and mulls over my question. As we stride back to the elevators, he finally speaks, “Value is in the eye of the beholder. It is that mix of art and science. Albert Einstein said that after a level of skill was achieved, science and art tended to blend. He believed the greatest scientists were artists too.”

I nod. 

He was on a roll, “Then throw in the incredible importance of timing because values are cyclical; you need to catch the peaks.”

I nod, “I suppose the baby boomers getting ready to bale, will drive down values soon?”

“Absolutely! Also, different buyers use different valuation methods. A business is worth what a buyer will pay. It all depends on the type of buyer.”

Curious now, I ask, “What are the different types of buyers?”

“Broadly speaking, they can be loosely grouped into two camps. There’s the “Financial” versus “Strategic” buyer. Come into my office and I will show you the difference.”

He sketches a diagram. At a glance, I see that valuation is driven by two simple concepts: financial and synergy. 

Financial valuation is given by laying out expected profitability or the future earnings. This valuation is used by professional fund managers and venture capitalists. A strategic valuation is given by competitors, suppliers or customers who could buy your company to fit into their business and value it more. 

strategic valuation will give you the most cash for your business. The greater the “fit”, the bigger the premium. All this means is plan your exit for years by knowing competitors and suppliers who might buy you.

Valuation by future earnings

Here’s where you show how much they can make on their investment: what is the value  today and what will it be in the future? Value boils down to the future earnings. The best way to see future earnings is to look at the present and make some projections. This is called discounted cash flow and you can find details on these in any introduction to finance text book. Investors get quite huffy about who sets the valuation as they believe it to be their prerogative. Nothing sets them off in a tailspin faster than a presentation or plan with a value attached. Do wait for the investor to throw the first valuation shot but you can have your own valuation estimate. 

The exit

We leave the building and Mr. Deep Pockets jokes, “That brings me to my final point. I want to see the exit strategy defined. How are you going to get a liquidity event?”I shrug, not sure what he means.

“You know, this is really important to know when looking for investment money from private equity. Within five to seven years (or less), the typical investor wants to exit. The entrepreneur will need a major cash infusion event to pay us off. This exit could be done by going public with an IPO. That was the favourite from the 90’s, but today the favourite is management buy-outs. You could target a competitor company that might like to buy your business.” 

This was the exit plan for a coffee shop entrepreneur in London—Big Ben and the Queen and all that. The Seattle Coffee Company owner designed his coffee shops to be bought by Starbucks. He even made his signs the same size and round shape. All the new owner from across the Atlantic needed to do was pop out the Seattle sign and snap in the Starbucks. 

With baby boomers about to start leaving the business world, investors are acutely aware that five years from now there may not be the easy exit. Help out and have a solid list of buyers. 

What exactly is “Investor Ready”

With the long-term view, you can work on how to affect the value of your business. That is the application of Covey’s very good habit: Begin with the End in Mind. Figure out the four questions. To summarize how to get investor ready, the investors’ hot buttons are: 

• Your Team

• Proof of concept: The investor wants to see that you have designed a light bulb, have made it, turned it on and sold it to a happy customer. 

• Competitive strength: Patents, barriers, partners and alliances: If Sony has offered to give you some chips to use in your technology, this is newsworthy. Alliances can be a deal maker.

• ROI: Are you going to be able to grow the business sufficiently?

We will go into more detail but there’s the big view. As I take leave of Mr. Deep Pockets, I see nervous looking people fidgeting in the waiting area and smile. Mr. Deep Pockets has given the inside scoop on the questions the plan and presentation must address.  As Leonardo da Vinci said, “Simplicity is the ultimate sophistication.” We need to work at refining down your business to a simple, but sophisticated concept. You will need:

1. The initial two sentence pitch—the infamous elevator pitch. 

2. A written investment proposal document—the financial plan 

3. A practiced verbal presentation and PowerPoint presentation

Each investor you are going to approach will judge why they should give you money. Your job is to make that process as simple as possible—you will show that you are beyond the string and chewing gum stage. You are ready to maintain a mature partnership. Let’s carry on reading and you will learn how to show future value and to put together a financial opportunity that gets investors shouting, “Yes—go straight to GO!”

** This is an excerpt from part 3 of my book.

How Private Equity Can Help Your Business

The benefits of private equity

When the announcer yelled out, “The winner of the Media category, Ernst & Young Entrepreneur of the Year—Somerset Entertainment!” Andy Burgess grinned and bounded up to the stage to collect the award.  It all looked so easy to be standing there in a tuxedo waving the trophy, but this moment of appreciation came from painful years of slogging late into the night. 

Andy Burgess is one of the owners of Somerset Entertainment, which produces and distributes specialty music initially to gift stores and other non-traditional retailers using those interactive displays where you can push a button and listen to the CDs.   They have 28,000 displays in over 18,500 locations, which now include mass merchants and specialty stores.

With business and Juno Awards filling their shelves, Somerset Entertainment did various acquisitions and moved from $5 million in revenues to $11 million, until eventually they were achieving $21 million in revenues. They bought a distributor and in 1998, levered up with four flavours of debt: term debt, mezzanine debt at 17% interest rate, revolving credit and a vendor take back loan. Then the cracks began to show. 

The Buffalo distribution fulfillment centre had been shipping comfortably to over 100 different retail points when Andy asked, “Can you do higher volume?” Naturally, they answered, “Yes!” when in fact that was far from the truth. Somerset had been a company with $8 million revenues and $2 million in EBITDA (earnings before interest, tax, depreciation, and amortization—see glossary) but had grown into the supply chain approach with a distributor turning out to be slow and with the uncanny ability to mess up orders. They would say they had shipped goods—the display case with CDs—and Somerset would then invoice the retailer who, turns out, had not received anything except a bill. It was October—prime pre-holiday selling time with the Christmas season around the corner. Not good.

American retailers are the toughest sons of guns and were furious at being bamboozled. They told Andy they did not get the goods, but then told him not to bother coming around any more—they were through. Yikes! In one fell swoop, Somerset had gone from being swift deliverers of orders to slow, unreliable duds. 

“We hit $36 million in sales with $8.5 million EBITDA (see glossary) but our debt was at $15 million and for the first time, we stressed about breaking covenants. We got a valuation of $15 million and, with reluctance, we decided to go with a private equity investment of $21 million.”

In hindsight, Andy says getting private equity was good for the owners’ motivation. It took the edge off of the worry about money and retirement. “With private equity buying part ownership, we were allowed to take a large chunk out for ourselves straight away but still retain control. I had been working very hard and it was good to get $6 million out for the founder and owners.” 

The money meant Somerset could pay off their debt straight away and still have $4 million to make acquisitions. Andy says, “With that extra cash, we set up an office in Chicago, which has turned out to be the vital springboard into the American market, taking Somerset to the next level. We’ve had a bad year in there, but we did not have to worry about the business blowing up. The peace of mind meant we could focus on buttoning down the hatches to the storm and finding a new way forward.”

The private equity partners proved to be great sounding boards when Somerset were making acquisitions. The investors were more aggressive in wanting the growth but respected Somerset’s decision to step away from some identified targets.

“Also, when we nearly lost a key person,” Andy adds, “the investors did bring him around and get him to stay.”

Andy says, “When you are an entrepreneur working your butt off, it is great to get that cash pay out as well as have cash to grow the business. With private equity you get the best of both worlds—the cash liquidity without the rigorous scrutiny of the public market.”

Not every company can go public as this is an intense process and you may not get the necessary tick marks next to your chart, i.e.: 

• you are making enough money

• you are profitable

• you have a strong growth curve for your revenues

• you have a decent management team

• you are a good size

Andy says, “At the time of the private equity deal, we were too small. With private equity investors, we got to retain control and we got liquidity. Private equity took us back from the brink with risky debt and looming covenants. They were the stepping stone to getting big enough until in 2005, Somerset did our initial public offering (IPO). Selling those secondary shares was sweet, too.”

As Andy Burgess stood on the stage and let the applause of the audience sweep over him, it struck him how far Somerset Entertainment had come and what a ride it had been so far.