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A flood always begins with a single drop of rain

The Denver Post | BUSINESS

By Gary Miller | gmiller@gemstrategymanagement.com | GEM Strategy Management.com

PUBLISHED: July 26, 2020 at 6:00 a. m.

Larry, the owner of a wholesale food company, had not felt good for over a year. He was consistently tired and losing weight. His wife Christi urged him to get a checkup. Last May, Larry was diagnosed with pancreatic cancer and was given four to six months to live.

Unfortunately, he passed away last September. He was survived by Christi and their two sons who were well established in their respective careers. Christi was not involved in the company at all. She was at a loss as to where to begin and what to do next with their wholesale food business. A flood of problems began to emerge.

Mark T. Osler

Gary Miller

She called a meeting of the senior staff as a starter but found that no one had a complete handle on how the business operated. Larry had made all the major decisions. The flood of problems continued.

Revenues were declining and cash was tight. She asked their accounting firm and their personal attorney to help her review the business operations. After several weeks of analysis, both their accountant and their attorney recommended that Christi sell the business. A few months later, a major competitor purchased the business for a fraction of what it was worth.

A year ago, Ben and his partner were managing a successful events planning firm serving major clients throughout the U.S. While the company performed well last year, COVID-19 caused most of their clients to cancel their upcoming events for the year. As a result, most of their revenues disappeared overnight. Ben and his partner laid off over 80% of their staff. But they were still bleeding cash at an alarming rate. And the flood of problems escalated.

In addition to the company problems, Ben’s marriage was on the rocks. He was served divorce papers last November. The divorce was contentious but was finally settled with Ben owing several hundred thousands of dollars to his ex-wife.

Ben had no choice but to try and borrow the money personally — but that failed. So, Ben pleaded with his partner to apply with him for a business loan. His partner refused. He didn’t want to have to personally guarantee a business loan for non-business purposes. With COVID-19 drastically affecting their business, Ben and his partner had to close the company last month. Ben declared bankruptcy this month.

Two years ago, Charlie decided that he was burned out and wanted to retire. He had built a successful marine sales, service and storage business over the past 23 years, but he wanted out. Charlie wanted to spend more time with Lily, his wife, and do some traveling and spend more time with the grandkids.

Last year the business was generating about 23% net income on revenues of $11 million. But last December, he lost both his service manager and sales manger to a major competitor. He was depressed as he began to see that the quality of his service center declining.

More of his customers were returning their boats claiming their mechanical problems weren’t fixed. The service department personnel was not adequately trained resulting in service mistakes.

In addition, sales revenues of new and used boats were declining. After reviewing the sales figures over the past two years, he found that about 65% of the sales were being made by the sales manager — the one that he had just lost. His problems did not end there.

One of his former employees was suing him. Her suit claimed that she had worked in a hostile work environment. With the loss of two key employees, declining revenues, a lawsuit and Charlie being burned out, he had a flood of problems.

In the end, Charlie could not sell his business because no buyer wanted a company with declining revenues, a lawsuit that had not been resolved, and a lack of bench strength in both service and sales departments.

These three examples reflect a number of individual problems (rain drops) that collectively turned into major problems (a flood) that could not be reversed.

In the first example, Larry’s wholesale food business did not have a strategic business plan, a certified valuation, or a succession plan addressing unanticipated events — such as insurmountable health issues. There was no delegation of authority, or a plan for unanticipated problems. The casualty of this flood was his wife Christi.

In the second example, Ben and his partner did not have the business acumen to address unanticipated events — like a divorce and its potential effects on the business. Financially, they had not created enough retained earnings from a profitable business to address Ben’s divorce settlement. Because the company had no certified valuation, there was no way that Ben and his partner could formalize the true value of the company. A formal valuation of the company may have saved Ben a significant amount of money — particularly with the effects of COVID-19.

In the third example, Charlie did not have a business plan or an incentive bonus and an employee retention plan in place (such as phantom stock) or other incentives to reward and retain his two key employees. Further, Charlie had not taken the steps to weed out poor sales performers by hiring more qualified sales personnel and employing higher skilled service personnel.

These three examples demonstrate inadequate management acumen and ineffective business planning. Also, they demonstrate why companies need adequate working capital, retained earnings, up-to-date business plans, succession plans and third-party certified valuation conducted annually.

Remember, a flood always begins with a single drop of rain.

Gary Miller is CEO of GEM Strategy Management Inc., a M&A consulting firm that advises small- and medium-sized businesses throughout the U.S.  Reach Gary at 303.409.7740 or gmiller@gemstrategymanagement.com.

In every cloud there is a silver lining

The Denver Post | BUSINESS

BY GARY MILLER | GEM Strategy Management, Inc.

PUBLISHED: June 28, 2020 at 6:00 a.m.

The old cliché “In every cloud there is a silver lining” rings true today. Clichés always contain seeds of the truth. While the results of the Covid-19 pandemic has had a devastating effect on many large, medium and small businesses, opportunities are emerging as the U.S. economy slowly reopens.

Unquestionably, the beginning of 2020 was the right time to sell a business.  Coming off of a decade-long boom of mergers and acquisition (M&A), sellers were in a position to command high premium for their businesses and buyers were willing to pay. Debt-markets were ready and willing to lend freely for most M&A activity. Then the world turned up-side-down in March. Debt markets became stressed. Today, lenders are demanding more security and stronger loan covenants.

As a result, M&A activity came to an abrupt halt. Deals fell apart. Others were postponed. According to Bloomberg, M&A activity dropped more than a third to its lowest level since 2014.

So where is the “silver lining”?  Some of the conditions pre-Covid-19 and the current business environment are similar. For example, a lot of capital (dry powder) is still on the sidelines waiting to be invested.  According to David Ludwig, Goldman Sachs Group, “Once investors are more confident that negative tail outcomes are unlikely, we expect significant public activity across all sectors and product classes.” “And we expect that to occur in a reasonable period of time.

According to Bloomberg, “While private equity firms have their hands full for now managing struggling portfolio companies, they’re still sitting on a $2 trillion war chest that could be put to work as valuations stabilize.”  “Some of the hardest-hit industries – from energy to tourism and restaurants – might provide the biggest bargains”.

However, according to Patrick Ramsey, global head of M&A at Bank of America Corporation, “Sectors like technology and health care will be at the front end of the recovery.”

No no one really knows what the “new normal” will be when the economy fully reopens. Many businesses are failing, or barely hanging on.  At the same time, many companies are looking to join other businesses as part of their survival strategy while defending themselves against opportunistic bidders.

Five “silver lining” survival strategies and growth opportunities for small businesses:

  1. Stay Solvent. When business owners are in the market to sell, buyers will closely examine how well the cash was managed during the Covit-19 period. Strong cash management is a good indicator of how future cash flows will be managed when the economy returns to normal.  Higher valuations can be attained through strong cash management which further indicates the bench strength and discipline of senior management.

 

  1. Focus on current customers. They are your lifeline and the best opportunity to generate additional revenue. Develop loyalty programs to increase the number of customer interactions. Communicate often with them during these volatile times. Look for ways to improve your customer service. Loyal customers can become strong references for you as you reach out to new customers. Look for ways to service customers remotely without sacrificing quality customer service experience. Ask your most loyal customers for ideas to help better serve them. No one knows better what your customers want than your customers. Build an “idea” tab on your website so that customers can make suggestions online. Personally, respond with a quick “thank you” – regardless of the quality of the idea.

 

  1. Examine “high tech vs. high touch” with customer interactions. Everyone is dealing with social distancing differently. This is an opportunity to examine new ways to interact with your current and potential customer base. Develop and update your electronic data base and customer profiles. Examine your automated attendant systems to determine if the user options are still relevant given the current business environment. Review your website for its accuracy; develop virtual customer interaction opportunities. For example, allow your customers to log on your website to review their invoices, payment schedules and current balances. This is an efficient, cost-saving use of “high tech” without sacrificing “high touch” customers interactions. Examine cloud-based technology to help reduce costs. A careful balance between the use of technology and the use of in person contacts will build loyalty faster than using either high tech or high touch alone. A serious mistake that many business owners make is over reliance on high tech solutions because there can be significant savings when substituting technology for human interaction. The challenge is striking the right balance between the two.

 

  1. Expand your customer base. Become aggressive and go after your competitors’ customers. Make personal calls to them. Ask them for the opportunity to serve them.  Describe your customer service policies and how you are different from your competitors.

 

  1. Evaluate your business practices. During good times, we often neglect what we should be doing all the time. Re-examine your strategic business plan – if you have one.  If not, develop one. If you need help hire a professional to assist you. As the old saying goes, “If you don’t know where you going, you will never know when you get there.” Consider outsourcing functions to decrease fixed costs.  During tough times, outsourcing will give you flexibility in your operations today and in the future.

 Summing it up.

The five strategies above will not only help your survive this pandemic recession but will provide more opportunities to grow your business as the economy reopens. It will give you an opportunity to outperform your competitors and strengthen your senior team. Potential buyers will perceive your company as having strong bench strength and are capable of operating in the most adverse conditions.

More importantly, as you embrace the five strategies above, you are in essence preparing to sell your business – something that many business owners fail to do. If and when you decide to sell, it will sell quicker, at a higher valuation, with more favorable terms and conditions and, at a higher price.

This is the “silver lining” that awaits you during these unsettled times.

 

Gary Miller is CEO of GEM Strategy Management, Inc., a M&A consulting firm that advises small and medium sized businesses throughout the U.S. He represents business owners throughout the transaction process from preparing them to go to market, selling their companies, acquiring companies and raising capital. He has been a frequent keynote speaker at conferences and workshops on mergers and acquisitions. Reach Gary at 303.409.7740 or gmiller@gemstrategymanagement.com.

 

 

 

 

 

Businesses valued with new COVID-19 metrics

The Denver Post | BUSINESS

BY GARY MILLER | GEM Strategy Management, Inc.

PUBLISHED  Sunday, May 31, 2020,  at 6:00 a.m.

Unquestionably, COVID-19 pandemic has negatively affected all aspects of our lives. In the business community, revenues, earnings,  and valuations have plummeted affecting governments, most businesses,  and individuals alike. As both public and privately held companies search for additional debt capacity and/or potential buyers, the COVID-19 pandemic has and is affecting debt terms and availability, company valuations, and purchase prices paid for companies.
As a result of this current environment, a new financial metric for measuring financial performance has been created. It is called EBITDAC (Earnings Before Interest, Taxes, Depreciation, Amortization, Coronavirus/Covid-19) or Adjusted EBITDA. Companies have always tried to flatter their financial performance and earnings by using various accounting treatments. So, creating a new financial performance metric, EBITDAC, is no surprise. Currently, a great deal of discussion and controversy among the largest investment banks, accounting firms,  and financial centers is being debated as to whether this new, non-GAAP (Generally Accepted Accounting Principles) metric is appropriate during this pandemic crisis.

EBITDA discussion

For privately held business owners seeking to sell their companies for the most profit, it is critical that they understand the accounting principle EBITDA. EBITDA is what some advisors call a pure measure of operating profits. Investors looking to invest/or purchase a company, analyze and compare one company’s EBITDA to another. The higher a company’s EBITDA, the higher the valuation of the company.

The EBITDA formula is simple. Start with the net income number, found on the Income Statement, and add to it interest expenses, taxes (federal and state income taxes only), depreciation, and amortization. These add-backs increase the profitability of the company’s operating performance. EBITDA levels the playing field when comparing companies because various companies will have more or less in interest expense, depending on their debt levels. The same is true for taxes, depreciation,  and amortization since taxes vary substantially from one state to another,  and depreciation and amortization schedules vary as well, depending on a company’s capital purchases. Therefore, earnings can be distorted from one company to another if the EBITDA formula is not applied correctly. It is important to remember that interest, taxes, depreciation, and amortization are true operating expenses for any company.

Adjusted EBITDA discussion

Most company owners that are planning to sell their businesses should engage a professional M&A firm or an M&A consultant to help them recast their past five years of P&L statements, balance sheets, and three to five years of proforma statements. This step is taken to provide potential buyers with both the synergies and potential future earnings of the company. Adding back any one-time-only expenses, extraordinary expenses or personal expenses paid by the company that is tangential to the company’s operations will certainly add to the profitability of the company and to its valuation. Some examples of add-backs include:
• Business disruption losses beyond your control (fire, floods, earthquakes, tornadoes, and tsunamis);
• Extraordinary legal expenses due to a lawsuit;
• Cars, boats, planes expensed through the business for personal use;
• Memberships to country and yacht clubs and gyms for personal use;
• Equipment replacement, repairs, and renovations;
• Owner’s compensation or compensation to family members above market rates;
• Payroll expensed through the company for inactive employees or children;
• Travel vacations for you and your family that are not related to the business;
• Losses due to employee embezzlement; and,
• Payroll expenses including healthcare, life insurance, and retirement for the owners.
These add-backs are added to the EBITDA calculations and are labeled Adjusted EBITDA.

EBITDAC discussion

Certainly, the current pandemic situation can be considered a business disruption, since most small and large businesses were near a total shut down ordered by the government. A strong argument can be made that significant profit losses would not have occurred had it not been for the pandemic shutdown. The key is to precisely identify earnings’ losses that can be directly attributed to the pandemic that would not have occurred had the pandemic not struck. Such examples include, among others;
• Supply chain interruptions;
• Employee retention;
• Loss of customer purchases that can be authenticated from past purchase behavior; and,
• Loss of customer traffic due to “stay at home” orders.

When examining the addition of “C=coronavirus to EBITDA, the earnings of the company could be significantly increased. Remember, those companies that are reporting EBITDAC are adding back “supposed” or “estimated” earnings that never happened. And, at best, the earnings add-backs are anyone’s estimates as to what they could have been. For example, this month Schenk Process, a German measuring instrument manufacturer owned by Blackstone, used this new performance metric, EBITDAC, in its first-quarter 2020 quarterly report, (the C is for coronavirus). According to Covenant Review, a financial research firm, The Azek Company, a Chicago-based manufacturer of building products, raised $325m of junk bonds two weeks ago. It used the term that would allow it to add back “lost earnings” as a result of Covid-19. That was a first for the corporate debt market.

The problem is, how does anyone know what the true earnings might have been if COVID-19 had not come about. By contrast, using the EBITDA formula without the “C”, adds back expenses that really took place. There are no estimates or guesses. The added back expenses are taken directly from the company’s income statement for a specific reporting period.

Summary

While many businesses will never recover, many will; therefore, they will look to justify earning losses due to the effects of COVID-19 when trying to sell their companies. Whether they add the “C” to EBITDA or the “C” to the Adjusted EBITDA, it is critical that business owners gather data and documentation that will strongly support this controversial accounting metric to persuade buyers that their company’s pre-pandemic valuation is the same as it will be post-pandemic.

Gary Miller is CEO of GEM Strategy Management, Inc., an M&A consulting firm that advises small and medium-sized businesses throughout the U.S. He represents business owners throughout the transaction process from preparing them to go to market, selling their companies, acquiring companies and raising capital. He has been a frequent keynote speaker at conferences and workshops on mergers and acquisitions. Reach Gary at 303.409.7740 or gmiller@gemstrategymanagement.com.

What’s the impact of the Coronavirus on M&A for small businesses?

The Denver Post  | BUSINESS

By GARY MILLER | GEM Strategy Management

PUBLISHED  Sunday, April 26, 2020 at 6:00 a.m.

Without a doubt the coronavirus is having a significant impact on M&A transactions. Hundreds of thousands of business have closed or significantly cut back on their business operations; millions have been laid off or furloughed; consumer spending has plummeted; supply chains are disrupted; and oil prices are bouncing around at all-time lows since World War II.

At the very least, many deals are being put on hold, acquisition plans are being cut back, and some buyers are walking away from the closing table. Buyers are forced to examine their own companies as they struggle to minimize losses and pay, furlough, or lay off workers. According to Forbes, Xerox walked away from a $35 billion bid of HP this month stating “. . . it [Xerox] needs to focus on the impact of the coronavirus outbreak on its business”. Other examples that Forbes noted was SoftBank terminating its $3 billion deal with WeWork and Hexcel and Woodward calling off their “merger of equals” as a result of the pandemic.

In addition to the widespread lock-downs and shelter-in-place orders, preventing/limiting face-to-face contact, all are contributing to the slowing of M&A activity. For example, due diligence and the manner in which it is conducted is limited since face-to-face interactions are almost always required. Negotiations are strained when the deal team is working remotely. Debt financing is questionable in volatile markets. Securing approvals from regulators and third-party consents are slow.

According to Dealogic, “The value of M&A activity in the first quarter was significantly lower than the last quarter of 2019, down 35% globally and 39% in the U.S.” Investment bankers have concluded “. . . that most all sell-side engagements are being put on hold until things stabilize”.

What small businesses should expect going forward if they expect to sell their businesses or raise capital

  1. Deals currently in the pipeline and deals entered into during the coronavirus pandemic will move more slowly than during pre-pandemic times. Everything will take longer including initial discussions, letters of intent, due diligence, and negotiations of the definitive agreement. One factor affecting the extended period for closing a transaction is simply the lack of face-to-face meetings which is all but prohibited now. In this environment, new issues of risk management arise from buyers who will want to shift more risk to sellers.

 

  1. Valuations of businesses, in certain industries, will be driven down significantly as buyers fear that previous valuations may no longer apply. Public stock market valuations since February 2020 are good examples. Understandings between buyers and sellers about conditions to “walk away” from a deal as a result of future value creation will be more frequent. Prior to the pandemic, almost all transactions were paid in cash or cash and stock. In this environment, sellers should be prepared to negotiate payments in stock only, earnouts and/or milestone payment structures if the sellers’ companies have been adversely affected by the pandemic. Often, these kinds of structures bring buyers and sellers together, particularly when the parties cannot agree on the valuation of the company.

 

  1. Debt financing required by purchasers for funding acquisitions will be harder to find, resulting in delays due to the unstable debt markets and lack of liquidity. In addition, lenders’ closing conditions will be more stringent, affecting both buyers and sellers.

 

  1. Letters of Intent, term sheets, memoranda of understanding (which are non-binding for the most part) will either expand to nail down more specific deal terms or address only the price and little else.

 

Proformas will be examined closely and will be heavily discounted as buyers tiptoe into uncharted waters in the future. Buyers will spend more time in initial discussions with sellers before spending money to conduct comprehensive due diligence reviews and analyses. Sellers should expect more attention being paid to the effects of the coronavirus on the buyer’s business going forward. Sellers, on the other hand, should push hard to limit the time period of the due diligence process to as short a period as possible.

 

  1. Exclusivity periods (preventing sellers from soliciting other offers during the due diligence process) will be longer than the normal 30-45 days, as buyers will insist that they need more time, 60-75 days, to examine potential pandemic issues. On the other hand, sellers should seek provisions terminating buyer’s exclusivities if they see that buyers are unwilling to proceed with the transaction as set forth in the letter of intent.

 

  1. Negotiations of the definitive agreement will include provisions focusing on changes in the business operations of the seller’s company – referred to as a “Material Adverse Effect” (“MAE”). These provisions affect the closing conditions of the transaction. It permits the buyer to walk away from the deal if the seller has suffered a MAE during the period from the signing date of the definitive agreement through the closing date of the transaction. Sellers should be careful about MAE clauses. They should negotiate “carve outs” that buyers and sellers agree to, in advance, that will not constitute a MAE. Sellers should seek expert legal advice from a transaction law firm that protects them, as much as possible, from MAE provisions.

 

Is there any good news during the current pandemic environment?

Yes. Many buyers are cash rich (dry powder) and are hunting for well-run companies at the right price. Dealmaking going forward will favor buyers vs. sellers as it did during the Great Recession. Buyers are taking time to search for the best opportunities. Some industries have benefited from the pandemic while others have suffered significantly. Industries benefiting from the pandemic include biotech, food delivery, online shopping, cloud computing, software, videoconferencing and other technologies.

By contrast, retail, hospitality, travel, hotels, restaurants, automobile, and airlines have been and will be impacted the most dramatically.

Summary

Business owners planning to sell their businesses or raise capital should realize that their options have changed significantly. Whether selling companies or raising capital, owners should take extra care to prepare their businesses for sale. Keeping key employees is mandatory as buyers will put extra emphasis on the bench strength of the business. Individual and collective incentive retention plans for your most valuable employees should be created.

In a world where physical contact is next to impossible, transactions are handicapped to say the least, so sellers should think through, with their advisors, how best to navigate and communicate in a digital environment vs. a face-to-face environment.

Deals are being completed in this environment; so be patient, prepare well for video conferences. Consider choices of background, lighting and clothing for the best impression. Be careful about exposing your non-verbal facial reactions when you are on a video conference call. Finally, if you are unsure of your proportioned response to an issue that could be contentious, ask for additional time to consider a thoughtful response. Handle to the new realities with confidence and optimism! Your positive attitude will instill trust during a time when many are feeling uncertainty.

Gary Miller is CEO of GEM Strategy Management, Inc., a M&A consulting firm that advises small and medium sized businesses throughout the U.S. He represents business owners throughout the transaction process from preparing them to go to market, selling their companies, acquiring companies and raising capital. He has been a frequent keynote speaker at conferences and workshops on mergers and acquisitions. Reach Gary at 303.409.7740 or gmiller@gemstrategymanagement.com.

 

 

 

What to do when preparing for an economic downturn

The Denver Post | BUSINESS

PUBLISHED:  March 22, 2020 at 6:00 a.m

by  GARY MILLER | GEM Strategy Management, Inc. | gmiller@gemstrategymanagement.com

Over the last month I have received numerous phone calls from business owners wondering if the U.S. is headed for an economic downturn, or worse yet a recession due to the Coronavirus. Much ink has been spilled writing about the Coronavirus and its potential effects on businesses. So, more spilled ink about the virus won’t alleviate business owner’s fears and uncertainties. No one can predict accurately when the next recession will occur. Even though the stock markets are gyrating, and uncertainty prevails, Forbes states that economic indicators and consumer confidence remains strong. Unemployment is low.

However, business owners concerns are not unfounded. Since the Federal Reserve has cut interest rates to 0 percent, the President declared a national emergency and Congress has passed several legislative measures to shore of the economy, any prudent business owner would do well to prepare for the worst.

Several steps business owners, particularly small business owners, can take to help his/her business survive a recession are advisable. Business tips from American Express explain that large-scale cuts are not always necessary.  However, taking a commonsense approach to reduce expenses can add up to improving the bottom line during these uncertain times. The six steps below are a good start to streamlining your business operations.

Reduce discretionary spending.

Examine everything from office supplies to office salaries. Look hard at payroll expenses and look for ways to reduce staff expenses. Reducing hours worked by your hourly work force can postpone permanent layoffs later on.

Simply reducing workforce hours now will produce instant results since payroll is one of the largest business expenses. Painful as this is, it is better to land in the business recovery room, rather than landing in the business morgue at the end of the recession.

Postpone any discretionary expenses such as conferences, unnecessary travel, hardware and software, equipment and advertising expenses that are not critical to your business. If you need to buy equipment now, buy used or refurbished equipment (with a warranty). Look hard at every line item expense on your P&L statements to see if you can reduce your monthly “burn rate” to preserve cash. For example, cut down on printing and substitute various internet platforms to replace printed materials. Outsourcing your bookkeeping, HR and IT functions are less expensive than having full-time personnel functioning in those positions. Regarding IT functions, consider outsourcing those tasks to India and the Far East.

Cutting a little of the smaller expenses can add up too – like reducing your office supplies costs. Contact your vendors and tell them that you are price-shopping to cut costs and ask for additional discounts. Search for vendors you do not use currently and see if they can beat the prices you are now paying. Bid out everything whenever possible.

 Build cash.

 Focus on your receivables. Step up the pace of your collection efforts. Start with the over 90-day group and press them hard for paying up or making smaller, but consistent, weekly or monthly payments.  Next jump on the over 60-day group and do the same thing. You may want to offer a small discount for a payment that brings accounts update. Follow-up on the over 30-day group and ask for payment immediately, assuming your invoices are net-15 or net-30.

Build savings by establishing a “rainy day account”, as a reserve for cash-flow purposes. Look at your banking fees and determine if you can consolidate various bank accounts. If you have bank debt, go to you bank and ask them to reduce the interest rate on your loans or your lines of credit. After all, the Federal Funds Rate is 0 percent.

Reexamine your business insurance policies to ensure that you are not over-insured or have duplicate coverage.

Manage your inventory wisely.

This is a good time to take a long hard look at inventory. Most businesses have some portion of their inventory that is obsolete, selling slower than expected or not selling at all. Convert this inventory to cash as soon as possible by steeply discounting prices.  Yes, you may be losing money on that portion of your inventory, but better you generate some cash than no cash at all.

Manage debt.

Many small business owners have more than one business credit card and carry a monthly balance on one or more of them. Interest rates can range from 12% to  33% annually (APR). Pay them off as soon as possible.  If you do not have the  cash to pay  off the balances, seek a bank loan from your primary lender or from  an alternative internet lender, such as Lendingtree, LendingClub, Lendingpoint,  SoFi,   Kabbage, and Marcus by Goldman Sachs, among others.

 Examine your marketing expenses.

Many business owners think that they are wasting half of the marketing budget; they  just don’t know which half. Therefore, they keep spending in fear of cutting the wrong  parts of their budget. A number of functions such as product support, customer service, advertising, sales promotion, sale’s staff and business development  personnel are all marketing expenses can spell trouble.  So be careful which ones you  cut or lower.

Ask yourself, are you spending marketing dollars in areas where your best and largest  customers are located. Second, identify those markets that offer you the greatest opportunity to expand and diversify your customer base. The objective is  to lower your   concentration of risk. A business can be in real trouble during a recession if 80 percent of its revenues are concentrated in 20 percent of your customers.

Expand your online presence to generate more internet sales.

During the Coronavirus outbreak people are staying home. Shopping malls, cities,  airports, and restaurants are empty. Almost every industry, along with its supply chain, is being effected. A mistake that some business owners make, is reducing direct and  indirect expenses that are designed to grow             revenues. I advise clients to increase  business development efforts. Look for new revenue streams generated through    internet platforms.

Customer purchase behavior is constantly changing. This current health crisis may change purchase behavior for years to come. Customers want your business to be where they are.  A virtual presence is critical for long term sustainability. Study after   study supports the conclusion that customers, whether they are B2C or B2B, first go to the internet for information and knowledge first, before their actual purchase is made.

A good practice is to email customers and direct them to your company website. Notify    them of new product/service offerings, new pricing and distribution terms, price and  policy changes, sale items and free shipping, market reports and new technology, and improvements in your customer service.

Summing it up

Getting started is the hardest part of expense reduction. Review your P&Ls and rank expenses from most expensive to least expensive.  Attack the largest expenses first.  Force yourself to cut some of those expenses. Apply common-sense to all of your decisions.

Entrepreneur magazine has sage advice: “. . . use outsourcing, delegation, systematization and automation to take low-level tasks off your plate and begin leveraging tech and [your best] personnel to focus on the most important aspects of your business” . . . generating new revenues while cutting operating expenses where possible. Remain calm, yet deliberate, as you prepare for the unknown future.

 

Gary Miller is CEO of GEM Strategy Management, Inc., a M&A consulting firm that advises small and medium sized businesses throughout the U.S. He represents business owners throughout the transaction process when selling their companies, acquiring companies and raising capital. He has been a frequent keynote speaker at conferences and workshops on mergers and acquisitions. Reach Gary at 303.409.7740 or gmiller@gemstrategymanagement.com.

 

Study the “definitive agreement” carefully, or risk losing the deal

The Denver Post | BUSINESS

Published: February 23, 2020 at 6:00 a.m.

by Gary Miller | GEM Strategy Management, Inc. | gmiller@gemstrategymanagement.com

Mark and his advisers were negotiating the final markup (red line) of the Definitive Agreement for the sale of Mark’s companies. Brian, CEO of the acquiring company, and his advisers, were attempting to buy them. Mark owned several nursing homes and assisted living facilities throughout three states in the Rocky Mountain region. His companies were profitable, but the ownership structure was complex. Some issues had arisen during the due diligence process that needed to be resolved by Mark and Brian and agreed upon in the definitive agreement.

Unfortunately, during the transaction process, Mark had spent little time with his advisers or reviewing the transaction documents, including drafts of the definitive agreement. After the sale price was agreed upon, he depended on his M&A advisers (an M&A intermediary, attorneys and accountants) to keep him informed of the various transaction issues. Mark had disengaged and assumed that most of the other major deal points had been worked out with the Brian, because the negotiations had gone so smoothly.

Gary Miller

As the two sides were negotiating the final details of the markup, Mark became confused. He was not familiar with some of the legal terms, details being discussed, or provisions of the definitive agreement. Numerous, often challenging, issues still needed to be worked out between the parties. Some of the representations and warranties made by Mark became troublesome to Brian — particularly regarding the rights of his company — if Mark’s representations and warranties were untrue in any way.

Brian wanted to hold back $550,000 of the purchase price, set aside in an escrow account, for six months. The escrow account would cover any losses from accounts receivables over 90 days, and for any other undisclosed liabilities or any misrepresentations in the agreement. Mark became annoyed.

The longer the negotiations went on, the more uncomfortable Mark became. He began asking more and more questions and the more he asked, the more uninformed he appeared to all in attendance. Worse yet, Brian was getting cold feet about closing the deal. By the end of the day, Mark demanded that the parties postpone the closing date for 30 days. Ten days later, Brian withdrew from further negotiations. As a result, the deal fell apart and never closed.

How should Mark have prepared for the meeting? He should have worked closely with his advisers to fully understand the provisions of the definitive agreement and the “red line” issues that Brian was focusing on. Had Mark done this, he probably could have prevented the deal from falling apart at the last minute.

What is a Definitive Agreement?

A definitive agreement may be known by other names such as a “purchase and sale agreement,” a “stock purchase agreement” or an “asset purchase agreement.” Regardless of its name, it is the final agreement that spells out details agreed upon by buyer and seller. It includes major provisions such as those below:

  1. A complete description of what is being purchased (i.e. the company’s assets or stock and any liabilities assumed or excluded);
  2. The price (the “aggregate consideration”) to be paid by the acquirer;
  3. The form of the consideration (cash, stock, a promissory note, or any combination of the above)
  4. Terms and conditions that outline the rights and obligations of each party
  5. Representations and warranties;
  6. Covenants;
  7. Indemnifications;
  8. Baskets and caps;

Provisions further explained

For the definitive agreement to be legally enforceable, it must include an “offer,” an “acceptance” and “consideration.”

Representations are a series of binding statements (facts) about various aspects of the seller’s business. The warrant ensures that the representations are true. These statements are important as the buyer may decide to sue the seller, after the sale is closed, if the buyer discovers that the seller’s statements were materially different from the original statements. For example, if the seller had falsely stated that the intellectual property was owned solely by the seller, and it was not, then the buyer may have been harmed or the business may have been damaged in some way – particularly if the buyer was counting on using the IP as a competitive advantage for its future growth strategies. If the buyer can prove that he/she was harmed in specific ways because of misrepresentations, then the seller is liable to compensate the buyer for damages.

When negotiating representations, the seller wants to keep his representations as narrow and as few as possible, whereby, the buyer wants to make them as broad and far-reaching as possible.

Covenants are promises to perform in the future — such as loan agreements; they differ from representations. Representations are statements of past or present facts. Covenants focus on future performance. Sometimes, covenants are restrictive, preventing the buyer from selling assets, or taking on debt, so that no material adverse changes in the business performance will occur before closing.

Indemnification clauses protect the buyer/seller. An indemnification is nothing more than a promise by the buyer/seller to pay for any losses that causes harm to the other party. Indemnifications provisions sometimes include baskets and caps. They limit the liability for the seller. For example, if the basket is $100,000 and the cap is $2 million, then the buyer cannot make a claim under $100,000, and the buyer cannot claim more than $2 million in damages. If a buyer insists on establishing baskets and caps as a part of the definitive agreement, then the seller should insist on:

  • Time limits on making a claim;
  • Liability limits for the seller;
  • A deductible that must be met by the buyer and must exceed a certain amount before a claim can be made;
  • Insurance to cover any losses. The buyer must file an insurance claim before the buyer can sue the seller;
  • Limits on the buyer suing the seller over anything that was disclosed in due diligence by the seller, or that was part of the representations and warranties that was not false.

As you can see, the definitive agreement is a complex document and requires a seller to study the details carefully. Although it is natural to focus on the purchase price of any transaction, the purchase price is only paid if the deal closes. Mark forgot that knowledge is power. Because Mark did not engage in the transaction process, or focus on the details of the definitive agreement, he wasn’t knowledgeable enough to make critical decisions in a timely manner. As a result, he lost the deal.

Gary Miller is CEO of GEM Strategy Management, Inc., a M&A consulting firm that advises small and medium sized businesses throughout the U.S. He represents business owners when selling their companies acquiring companies and raising capital. He has been a frequent keynote speaker at conferences and workshops on mergers and acquisitions. Reach Gary at 303.409.7740 or gmiller@gemstrategymanagement.com.

A new year and a new life by selling your business in 2020

The Denver Post |  BUSINESS

by GARY MILLER | gmiller@gemstrategymanagement.com | GEM Strategy Management, Inc.

Many small-business owners have worked years building successful companies. Their careers peak when they sell their companies and realize the fruits of their success. But, for most owners, selling their companies is, at the very least, an emotional event. Worse yet, most owners have never bought or sold a company. Therefore, selling your company can be daunting. So where do you begin?

Photo provided by Mark T. Osler

Gary Miller

During 2020 through the first half of 2021 looks very good for owners to cash out by selling their companies. There are many buyers with adequate capital, or resources to capital, who will pay high premiums for well-run businesses. However, to achieve these high valuations, sellers must follow a disciplined approach throughout the transaction process – pre-market preparation; go-to-market execution; and careful management of the transaction process.

Preparing your company for sale

Research indicates that business owners who carefully prepare their companies for sale before going to market create higher enterprise values, higher selling prices, and better terms and conditions than owners who don’t adequately prepare. The better prepared you are, the better position you will be in to evaluate future offers. Therefore, most business owners engage M&A advisers to help guide them through the preparation and transaction process.

For example, advisers will help you get your financial house in order. Advisers may recommend that you have your financials reviewed by an independent CPA firm apart from your bookkeeper and tax preparer. Also, they will help you obtain an outside, independent valuation of your company. Expert advisors will assess whether or not you have a strong strategic business plan. They will examine your financial proforma to determine how realistic they are and prepare you for the buyer’s due diligence process. They will guide you to transaction law firms. And, they will help you consider tax-efficient wealth management alternatives and diversified estate plan strategies.

Part of the preparation is examining your exit strategies. For example:

  1. Do you want to stay on after the business is sold?
  2. Do you want cash only, or cash and stock?
  3. Do you want to roll-over a portion of your equity into the buyer’s business?
  4. Do you want to establish a family office, trust or foundation after you sell your company?
  5. Do you have future plans for your life after the deal is completed.

Answers to these questions will often affect the deal structure when selling your business.

Understanding the buyer universe and environment

Assuming that you do not have children, relatives, or others who want to buy your business, you will want to understand the outside buyer universe and environment and think through potential targets to acquire your business. Some examples include:

  1. Strategic buyers, including competitors, looking to expand in your geography or industry. Strategic buyers typically pay higher premiums, but, look for strong synergies for cost savings through the integration process post-closing.
  2. Companies who look to vertically integrate up and down the “supply chain”; or portfolio companies looking for “bolt on” acquisitions to expand their portfolio of similar companies.
  3. Financial buyers who look for consistent revenue streams and profits for their investors. Examples include pension funds, foundations, and family offices. Most often owners would be required to stay on to run their successful businesses after the acquisition to continue to producing strong earnings and grow revenues.
  4. Private equity or venture capital firms constantly look for companies with strong growth histories and future growth potential, deep management bench strength, excellent return profiles and consistent operating excellence.  These buyers look to exit within five to seven years post acquisition.

Managing the transaction process

  1. Find a “deal team” of trusted advisers, compatible to work with, and are aligned with your exit goals. They normally include an M&A consultant to help prepare you to go to market and manage the transaction process. They help you select other advisors needed in the transaction process to work on legal, tax, accounting, and estate planning.
  2. Tell your senior management, on a need-to-know basis, about your exit plans. Develop a retention agreement that includes bonuses for each of them in order that they remain with the company until the sale closes. More often than not, the buyer will closely examine whether or not to rehire your management team.
  3. Develop a strong story line that is a compelling to potential buyers. It should include earning history, growth potential, management strength, operation efficiency and realistic, but aggressive, proformas that will withstand the buyer’s rigorous analyses.
  4. Identify the price that you want to sell the company. Look hard at your independent valuation and its comparisons to other companies sold within the last two years. Determine your “walk-away” number before you go to market so that you will have significantly lowered the emotional impact of price negotiations. Remember that the selling price is not your only consideration. All dollars are not equal. Deal structures can vary significantly affecting the total value of the deal.
  5. Examine the Terms and Conditions of the Agreement. Often, they are as important as the selling price. Therefore, consider the “whole deal” and its total value, not just a few of its components. Often, deal terms and conditions include non-compete provisions, management continuity, customer retention, and representations and warranties. These components vary greatly from deal to deal. Seek expert legal advice before agreeing to any deal terms and conditions.
  6. Limit the time-line of the “No-Shop” provision, often found in the Letter of Intent which precedes the Purchase and Sale Agreement. It forbids you from entertaining, or seeking, other potential buyers. The no-shop provision can span a period of time (usually during the buyer’s due diligence period) that could cause other potential buyers to lose interest. Therefore, limit the due diligence time period and established a concrete closing date.
  7. Vet the potential buyer regarding its reputation within the industry, financial capacity to purchase your company and will the buyer close the deal.

Do’s and Don’ts

  1. Don’t get so involved with the transaction process that you neglect the day-to-day operations during the transaction process. Since it takes from eight to 24 months to sell a company, losing revenues and/or profits can affect the total value of the company’s purchase price. Stay focused on running your business and let your trusted advisers handle the transaction process.
  2. Do take a proactive approach in all final decisions during the transaction process. Take time to review your original exit plans and determine if the sale of your business meets your exit plan goals. If the sell price, terms and conditions, representations and warranties are aligned with your exit plan goals, then close the deal.

With a thorough and disciplined process, you will be likely to sell your company and start your new life with new goals, challenges, and opportunities. Plan to enjoy the wealth you’ve created over a lifetime of hard work.

Gary Miller is CEO of GEM Strategy Management Inc., a M&A consulting firm that advises small- and medium-sized businesses throughout the U.S. He represents business owners when selling their companies or buying companies and raising capital. He is a frequent keynote speaker at conferences and workshops on mergers and acquisitions. Reach him at 303.409.7740 or gmiller@gemstrategymanagement.com.

With our strong economy projected to continue, should you sell your company now, or wait until after the election?

The Denver Post | BUSINESS

PUBLISHED: November 24, 2019 at 6:00 am

By GARY MILLER | gmiller@gemstrategymanagement.com | GEM Strategy Management

_________________________________________________________________________________________________________________________________

Negotiation mistakes that will kill a business sale — a case study

The Denver Post | BUSINESS

By GARY MILLER | gmiller@gemstrategymanagement.com | GEM Strategy Management

PUBLISHED: October 27, 2019 at 6:00 am

I recently witnessed a business sale that went “south” and has not closed as a result of mistakes made by the lead negotiator during the negotiation process. A transaction that was supposed to close in Q4 has been pushed back to sometime next year. Below are some of the mistakes made. The lead negotiator DID NOT:

  1. Negotiate the transaction process and deadlines before negotiating the substance of the sale. As a result, with no process deadlines in place, the buyer controlled the momentum and the pace of the transaction process from the outset. Deadlines work. They are powerful because they force action. Deadlines force people to choose either one option or the other. A deadline’s implicit threat is that lack of action has unpredictable consequences.
  2.  Obtain a signed letter of intent (LOI) after providing a comprehensive confidential information memorandum (CIM) to the buyer before he started the negotiations. Had the negotiator clearly established the need for a signed LOI before negotiations would begin, the negotiator would have known the major deal points and well-defined elements of the deal structure.
  3. Establish the price and terms of the deal initially.  By contrast, the lead negotiator allowed the buyer to “anchor” a “low-ball” purchase price and deal structure from the outset. Anchoring is an attempt to establish a reference point (the anchor) around which negotiation will revolve and will often use this reference point to make negotiation adjustments.
  4. Identify the major deal terms (deal points) that needed to be negotiated before the buyer captured control of the negotiating process and anchored the purchase price. In addition, the buyer had developed an acquisition formula that they used in previous acquisitions and made it clear that they would not deviate from most of the formula as it “had worked well” in the past.
  5. Use various negotiating techniques such as “trading off” (“I will give you this, if your give me that”) and limiting concessions without receiving something in return.  In fact, the lead negotiator did not win one deal point from the buyer. As the negotiations drug on, the buyer’s interest level waned and the closing was postponed until sometime next year, if it closes at all.

The following four steps will help prevent those mistakes listed above.

Step 1. Don’t begin negotiations until you have a signed LOI.

An LOI details the buyer’s proposal and gives the seller a first look at the major deal points including very detailed deal terms and conditions. The details of deal terms of any transaction are crucial. I much prefer a detailed LOI vs. a general Term Sheet.  Difficult or contentious issues are flushed out immediately, allowing the seller to plan his/her negotiating strategy. Typical issues are:

  • The amount and length of the escrow hold back for indemnification claims. The typical scenario for a seller is 10% or 20% for 12 months, but it can be longer;
  • The exclusive nature of the escrow hold back for breaches of the Asset Purchase Agreement;
  • The conditions to closing (a seller will want to limit these to ensure that it can actually close the transaction quickly);
  • The adjustments to the price (sellers want to avoid downward adjustment mechanisms;
  • The nature of the representations and warranties. A seller wants materiality, intellectual property, financial and liability representations, and warranties as thinned down as possible;
  • The scope and exclusions of the indemnity;
  • The provisions for termination of the acquisition agreement; and,
  • The treatment of any litigation, if any.

Step 2. Be clear about what your negotiation needs to achieve.

  •  Know the issues that absolutely must be addressed for the deal to close successfully. Some call these deal-breakers or walk-away deal points. Perhaps you have a price you’re not willing to go below. You don’t want to be unreasonable, but if you clarify limits before entering negotiations, you’ll know when to say “yes” and when to say “no”.
  • What’s being purchased. The assets of your business (an asset sale) or your business entity and all its assets and liabilities (an entity sale).
  • The purchase price, which will likely be 70-90% of the asking price.
  • How the price will be paid, including how much will be paid at closing.
  • How the price will be allocated among the IRS-defined asset classes.
  • How to address issues discovered during due diligence, whether through price concessions or actions that rectify conditions of concern.
  • How to handle the transition period, including how and when to contact customers or clients; whether employees will be rehired; how and when the sale announcement will be made; how suppliers, vendors and distributors will be notified; how work-in-progress will be completed; and, how unknown liabilities that become apparent after the sale will be addressed.
  • Your post-sale involvement with the business, including the transition period, compensation, post-sale decision authority, and a non-compete covenant.
  • How contingencies will be addressed/removed, including acceptable transfer of leases, contracts and other assets.

Step 3. Once you begin negotiating details, consider this advice:

  • Use your objectives as steering devices. If you need to concede on one point, negotiate an offsetting advantage on another point, particularly in price negotiations. If you need to settle for a lower price, your advisors can help you balance the concession by structuring the price for greater tax advantages.
  • Do not increase your asking price. You may begin to think your business is worth more than you asked, but don’t try to increase the price during negotiations.
  • Do not get complacent about protecting your interests. By this stage in the game you may almost feel in partnership with your buyer. Still, don’t let your guard down.
  • Do not issue ultimatums or seize one-sided victories. It’s safe to assume if you’ve gotten this far, you both want the deal to close. So, aim for a win-win conclusion by offsetting each of your necessary demands with a compensating buyer advantage. Work together to address the issues necessary to meet both your objectives.

Step 4. Be ready to keep negotiations moving.

Delays are deal killers — especially during the negotiation process. During negotiations you will need to call a few timeouts in order to obtain input from your advisors regarding legalities and tax implications. But, obtain the necessary information in the same day, if possible. Delays either dampen interest or heighten concern – neither of which supports the kind of healthy negotiations that lead to a victorious closing day.

Most of these “Do’s and Don’ts” are basic to the negotiating process, but in the sheer magnitude and emotion of business negotiations, even practiced M&A advisers lose sight of some obvious negotiating techniques that can lead to successful outcomes of a transaction.

Gary Miller is CEO of GEM Strategy Management Inc., a M&A consulting firm that advises small and medium sized businesses throughout the U.S. He represents business owners when selling their companies or buying companies and raising capital. He is a frequent keynote speaker at conferences and workshops on mergers and acquisitions. Reach Gary at 303.409.7740 or gmiller@gemstrategymanagement.com.

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Negotiations don’t start until someone says “no”

Denver Post | BUSINESS

By GARY MILLER | gmiller@gemstrategymanagement.com | GEM Strategy Management

PUBLISHED: September 29, 2019 at 6:00 am

Countless books and articles offer advice that can help deal makers avoid missteps at the bargaining table. But some of the costliest mistakes take place before negotiators sit down to discuss the substance of the deal. Sellers fall prey to a seemingly reasonable, but ultimately a false assumption, about deal making. Sellers and their negotiators often take it for granted that if they bring a lot of value to the table and have sufficient leverage, they’ll be able to strike a great deal. While those things are certainly important, many other factors influence where each party ends up.

Three of those “other factors” can have a significant impact on the outcome of the negotiations.

Gary Miller

1. Negotiations start when someone says “no”

One of the greatest inhibitions clients have is risking rejection. This is particularly true in the post-’08 meltdown and continuing jobless recovery from the worst economic period since the Great Depression. Our reluctance to negotiate past “no” is even harder because both men and women miss the key point: Negotiation is a conversation whose goal is to reach an agreement with the buyer whose interests are not perfectly aligned with the seller.  Invite the buyer to your side of the table to figure out how both parties can get as much as each party wants as possible.

2. Negotiate process before substance

A couple of years ago, two co founders of a tech venture walked into a meeting with the CEO of a Fortune 100 company who had agreed to invest $10 million in their company. A week earlier, the parties had hammered out the investment amount and valuation, so the meeting was supposed to be celebratory more than anything else. When the cofounders entered the room, they were surprised to see a team of lawyers and bankers. The CEO was also there, but it soon became clear that he was not going to actively participate.

As soon as the cofounders sat down, the bankers on the other side started to renegotiate the deal. The $10 million investment was still on the table, but now they demanded a much lower valuation; in other words, the cofounders would have to give up significantly more equity. Their attempts to explain that an agreement had already been reached were to no avail.

What was going on? Had the co founders misunderstood the level of commitment in the previous meeting? Had they overlooked steps involved in finalizing the deal? Had the CEO intended to renege all along — or had his team convinced him that the deal could be sweetened?

Upset and confused, the co founders quickly assessed their options. Accepting the new deal would hurt financially (and psychologically), but they’d get the $10 million in needed funds. On the other hand, doing so would significantly undervalue what they brought to the table. They decided to walk out without a deal. Before they left, they emphasized their strong desire to do a deal on the initial terms and explained that this was a matter of economics. Within hours, they were on a plane, not knowing what would happen next. A few days later, the CEO called and accepted the original deal.

The gutsy move worked out for the co founders, but it would have been better not to let things go wrong in the first place. Their mistake was a common one: focusing too much on the substance of the deal and not enough on the process. Substance is the terms that make up the final agreement. Process is how you will get from where you are today to that agreement. My advice to deal makers: Negotiate process before substance.

The more clarity and commitment you have regarding the process, the less likely you are to make mistakes on substance. Negotiating process entails discussing and influencing a range of factors that will affect the outcome of the deal. Ask the buyer: How much time does your company need to close the deal? Who must be on board? What factors might slow down or speed up the process?

Of course, you can’t always get clear answers to every question at the outset—and sometimes it is premature to ask certain questions. But you should seek to clarify and reach agreement on as many process elements as possible—and as early as is appropriate—to avoid stumbling on substance later.

3. Control the frame, the psychological lens

The outcome of a negotiation depends a great deal on each side’s leverage—the better your outside options are and the more ways you have to reward or coerce the other side, the more likely you are to achieve your objectives. But the psychology of the deal can be just as important.

In my experience, the psychological lens, through which the buyers and sellers view negotiations has a significant effect on where they end up. Are the parties treating the interaction as a problem-solving exercise or as a battle to be won? Are they looking at it as a meeting of equals, or do they perceive a difference in status? Are they focused on the long term or the short term? Are concessions expected, or are they seen as signs of weakness?

Effective negotiators will seek to control or adjust the psychological lens early in the process—ideally, before the substance of the deal is even discussed. Here are two elements of the psychological lens that negotiators would be wise to consider.

a. Your alternatives versus theirs

Research and experience suggest that people who walk into a negotiation consumed by the question “what will happen to me if there is no deal?” get worse outcomes than those who focus on what would happen to the other side if there’s no deal. When you are overly concerned with your own alternatives, and especially when your outside options are weak, you think in terms of “what will it take (at a minimum) to get them to say yes?” When you make the negotiation about what happens to them if there is no deal, you shift the frame to the unique value you offer, and it becomes easier to justify why you deserve a higher price or better terms and conditions.

b. Equality versus dominance

Not so long ago I was consulting on a strategic deal in which our side was a small, early-stage company and the other was a large multinational. One of the most important things we did throughout the process—and especially at the outset—was make sure the difference in company size did not frame the negotiation. I told our team, “These folks negotiate with two kinds of companies—those they consider their equals and those they think should feel lucky just to be at the table with them. And they treat the two kinds very differently, regardless of what they bring to the table.” Over the years, I’ve seen many large organizations impose demands on their perceived inferiors that they’d never require from those they considered equals. In this negotiation, I wanted to make sure our counterpart treated us like equals.

In “The Art Of War,” Sun Tzu states that every war is won or lost before it even begins. There is truth to this sentiment in most strategic negotiations. While it would be unwise for negotiators to minimize the importance of carefully managing the substance of a deal, they should make every effort to avoid the mistakes that can occur before the buyer has formulated an offer. By paying attention to the three factors discussed here, you increase your chances of creating more-productive interactions and achieving more-profitable outcomes.

Gary Miller is CEO of GEM Strategy Management, Inc., a M&A consulting firm that advises small and medium sized businesses throughout the U.S. He represents business owners when selling their companies or buying companies and raising capital. He is a frequent keynote speaker at conferences and workshops on mergers and acquisitions. Reach Gary at 303.409.7740 or gmiller@gemstrategymanagement.com.

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