In June 2006, 15 years after founding content marketing agency Redspring Communications, I sold the business to McMurry, Inc. A few months after the deal was consummated and the integration largely complete, CEO Chris McMurry asked me to share with our combined staff what I learned from the experience. The presentation I developed was titled “15 Things I Learned When I Sold My Baby.”
Recently, Chris and I were emailing back and forth about his latest business venture when he surprised me by sending a copy of my old Powerpoint presentation. He’d come across it in some files and thought I’d enjoy seeing it. Looking it over, I was struck by a couple of things. First, all the observations I shared—about building my business, readying it for sale, negotiating a deal, and, eventually, integrating with the buyer’s operations—held up well. What’s more, my 10 years of M&A experience after the McMurry deal, far from disproving my early insights, actually reinforced their veracity.
My second realization stemmed from the almost palpable relief evident in my presentation. The fact is after going it alone for 15 years, I was ready to sell my business. All those years alone at the top of the org chart had me feeling like the Chief Anxiety Officer; and I was ready for someone to share the burden.
I thought it would be interesting to share insights from the presentation on All of That. The original presentation was an hour-long, so I’ve divided it into three posts for ease of reading. Perhaps some young entrepreneur can obtain a better multiple by following some of this advice.
1: Focus on building business value—whether you sell or not
It doesn’t matter whether you’re planning to sell your business or not: Building long-lasting value is the entrepreneur’s number-one job. Assets and capabilities that increase business value, like proprietary products, technologies, and processes are healthy for your brand, your bottom line, and your employees. A fiscally robust business with a solid competitive position in its industry is a magnet for the best employees, as well as a salable asset.
To build value, encourage employees to think and act like shareholders—and explain how their contributions help the company and create opportunities for them. Then, if you sell, prove to them their investment was warranted. Post-deal employee payoffs might be in the form of access to advancement opportunities, cross-selling possibilities, better and deeper technical or creative resources, improved benefits, etc. In a service business like an agency, staff and their client relationships are the major assets, so treat them that way and you’ll realize substantially better value long-term in the form of revenue retention and a higher multiple of EBITDA (the most common gauge of profitability: earnings before income tax, depreciation, and amortization) at sale.
2: Treat overhead like an existential threat
At Redspring, despite ongoing conversations with our managers and Board of Directors, we let overhead get too high. Recognizing that high fixed costs were choking off growth opportunity, we took steps to rein them in—but it was long overdue and incredibly painful. There’s always a persuasive reason to increase overhead, I found: Managers complain of being understaffed, sexy new technologies beckon, or the wrong people lead your vendor negotiations. None of these is an excuse for running a loose operation.
Every entrepreneur should religiously track overhead as a percentage of revenue and regard that discipline as essential to company success. It’s also key to help staff understand the dangers of bloated overhead and what their roles are in controlling it. As nice as it feels to make another hire, nothing is worse than laying off staff because margins have shrunk. Teach your managers to understand these dynamics and charge them with protecting margins as central to their jobs.
3: Be fierce in negotiating direct costs
Direct costs can profoundly affect your pricing in the marketplace. If those costs are too high due either to lack of negotiating clout or mismanagement, you won’t be price-competitive and growth will slow. At Redspring we spent a large percentage of revenue on printing client magazines. We generally felt we drove a hard bargain with our print vendors while still maintaining good relationships. In retrospect, however, we weren’t nearly as aggressive as we should have been. We felt that, because we often asked print and mailing vendors to turn on a dime, pushing pricing too hard might jeopardize service. That was nonsense, of course. The result was that we left a lot of money on the proverbial table—money we could have put toward staff bonuses, invested in new technology, or used to expand our sales and marketing efforts. Vendors won’t agree to any price they can’t live with, so there is every reason to drive a hard bargain.
After we consummated the sale of Redspring, we witnessed how effectively McMurry managed its vendors—without compromising on relationships. When we applied their disciplines to our vendor negotiations, we added over $1 million to the bottom line. I was more than a little bothered we hadn’t found those savings on our own. Thankfully, McMurry’s valuation of Redspring accounted for that margin improvement as an EBITDA adjustment. Still, for years before the company sale, every dollar of direct costs we didn’t negotiate was a missed opportunity.
4: Hire people you can trust, then be trustworthy yourself
When you sell your business, you’ll need to trust your team in a big way. After I signed a Letter of Intent (LOI) with McMurry, I opted to tell my staff about the looming transaction. That was much earlier in the acquisition process than is typical, which meant we faced three months during which a deal was possible—but not certain. Doing so exposed us to competitive encroachments, client uneasiness, breaches of confidentiality, and a host of other dangers. Consequently, I had to trust my staff (particularly my managers) with confidential disclosures. Whether you inform your staff at LOI or wait until after closing, there’s always a danger that someone will jump ship with client lists or cause problems in due diligence or integration.
During our 90 days of due diligence I learned how much I depended on the trustworthiness of my team—and they repaid my trust tenfold. Everyone (except for one misguided salesman) was loyal, upbeat, and discreet. I came to realize that my team’s skills and talents were meaningless if I couldn’t trust them. In turn, it was my job to cultivate their belief in me—every day. A trusting relationship between employer and employee will last longer, yield better results, and make everyone a lot happier. A company without those bonds will struggle through a transaction and likely underperform against expectations.
5: Know thy business—because the buyer certainly will
Having built my business from the ground up, I knew its operations exceptionally well. But with dozens of employees and 15 years of history to complicate matters, it was inevitable I didn’t know everything. When you sell your business, due diligence explores all the tiny nooks and crannies of your company operations and history—right down to hiring and firing decisions, client contracts, bonus structures, vendor invoices, and legal disputes. It’s an amazing process because you’ll probably learn a great deal about how the buyer assesses value and risk. But it’s not a process you want to enter unprepared.
Whether you sell your business or not, you must know its operations inside and out. Problems that escape your scrutiny now can fester and cause long-term, even irreversible damage. In a due diligence situation, you risk blowing up the entire transaction over an undisclosed or under-estimated issue. It’s also awkward to be caught flat-footed by a probing question from the buyer’s attorneys. You can avoid those unpleasant surprises by taking the time to know every facet of your operation—ask tough questions and get your hands dirty. That knowledge will pay enormous dividends.
Look for parts 2 and 3 of this presentation in future posts.