Anatomy of a Deal’s 2021 New Year’s Resolutions
The Anatomy of a Deal Newsletter December 18, 2020
- The New Year is a perfect time to re-focus your efforts on the things that will drive greater value in 2021.
- Clean up your business and financial records, including your cap table, employment agreements, customer contracts, and privacy policies.
- Finally put into place the mechanics of that succession plan you’ve been thinking about for years.
- Get a grip on your intangible IP assets with an IP audit of your key employee agreements, know-how, brand value, and confidential information.
- Be ready to adapt to a new M+A market in 2021, whether that means planning to sell sooner than later or becoming more acquisitive.
As 2020 mercifully comes to a close, it’s time to look forward to hopefully brighter days. We know that oftentimes New Year’s resolutions are long forgotten by spring; after all, unless your resolution for 2020 was to go 9 months of the year without putting on pants, I’m guessing you didn’t achieve your lofty aspirations for this year. But the New Year is always a good time to think about some tangible steps you can take in the coming year to put yourself on the path for success.
We’ll suggest some easy but potent steps business owners can take in 2021 to build transferrable value in their companies. Given the focus of this series, we’ll naturally approach this through the lens of a business owner who may be looking to eventually sell his or her business, but these same actions will produce long-term value for all business owners.
Resolution #1: Clean-Up Time
Remember all those little things you said you were going to do, but never quite got around to?
“Yeah, I know the company’s business and financial records are kind of a mess, but I’ll get to that later. I’ve got a business to run!”
Well, it’s time for “later” to become “now.”
I know it’s not fun, but it’s critically important to keep the business’ records and policies up to date. Does it directly affect your day-to-day operations? Maybe not. But if the goal is to sell your business down the road, those records and policies are literally the only thing you have to show a potential buyer what your business really is and what it can do.
- Are your financials in order?
- Do your financials conform to accepted and understandable accounting practices?
- Is your cap table up-to-date?
- Do you need to do annual minutes?
- Have you filed all necessary annual reports and tax filings in states that require them?
- Are you qualified to do business in every state where you’re required to do so? Is your registered agent address up-to-date?
- Do you have an updated employee handbook and appropriate employment policies?
- Do you have up-to-date and valid contracts with your key customers and vendors?
None of these are particularly hard, but over time, a lax attitude toward these types of things can spook a potential buyer or cause a buyer to devalue your business. If the ultimate goal is a sale, these relatively simple steps directly impact the amount of sale proceeds you take home—and keep.
Also, with the upcoming power shift in Washington, changes to the tax laws could be on the horizon. It’s good to periodically reassess whether you’re operating in the most tax-efficient structure, both in the short term and the long term. Waiting until a transaction is on the table will often be too late to do much in the way of meaningful tax planning.
Remember when mom said that it’s easy to keep your room clean if you pick up a little bit every day? The same principle applies here. Make mom proud and get in the habit of cleaning-up your company a little bit every day.
Resolution #2: Review (or Establish) Succession + Continuity Plans
Here at Anatomy of a Deal, we conducted a super-scientific study and found that 100% of business owners exit their businesses at some point. And yet, too many businesses have an outdated succession plan, or no succession plan at all.
Every business—regardless of stage—needs a succession plan. Of course, the focus and detail of these plans will be different depending on a number of factors, including where your business operates on the business lifecycle.
For earlier-stage businesses, the succession plan may be as simple as identifying the key person/key people who will be empowered to make decisions if the owner is unable to do so. For more established businesses, the succession plan often focuses on how an owner transitions ownership and/or liquidates the investment. Maybe there’s a family member who will continue the business. Maybe the business is to be sold. All of these situations require specific planning.
And succession planning doesn’t solely focus on the owners. Key management team members may leave, die or become disabled. Do you have sufficient plans and structures in place to ensure that the business can withstand the loss of the owner or a key manager? If not, start thinking now about how to institutionalize that intellectual capital.
For most business owners, the business represents the owner’s most significant asset. A basic estate plan—while necessary—may not solve the much more difficult question of making certain that the business can be capably sustained when the owner is out of the picture—temporarily or permanently.
Too many business owners spend so much time in the day-to-day grind of the business without thinking about how to protect against one of the greatest risks to the business’ continuity. If you’re one of the many business owners still looking for a good reason to prioritize succession planning, let me humbly suggest that perhaps the greatest public health crisis in a century might be a good reason to do so. Consider 2020 your wakeup call!
Resolution #3: Review Your Intangibles
Once upon a time, the value of most businesses depended largely on their capacity to produce and sell stuff. Tangible assets were the primary driver of value for these businesses. If we have more widget-making capability than our competitor, we’ll build more value.
In today’s idea economy, the value of many businesses lies instead in the business’ intangibles. The difficulty with intangible assets, however, is that they largely exist in people’s heads.
If you want to transfer a business that’s heavy on tangible assets, you simply sign over the assets to a new owner. But how do you transfer a business that’s heavy on intangible assets? The answer: find ways to identify and protect those intangibles!
People often get intimidated by the idea of intellectual property (IP) because they think only about “hard” IP, such as patents and copyrights. However, virtually every business has some intellectual property, including its brand, know-how, confidential information and relationships. While these are harder to identify and protect than a plant or machine, there are still things you can and should be doing to preserve and protect these intangible assets.
The first step is to do an IP audit. Identify the key intangibles that drive value. Then, figure out how to protect those intangibles. If a patent, copyright or trademark makes sense, that’s great. In many cases, however, you’re going to be focusing on policies and procedures that ensure the continuity and availability of this information. For example, you should have (at minimum) all personnel involved with developing your products or services sign confidentiality and work-for-hire agreements, and potentially non-competition agreements. Key salespeople should have contracts in place that restrict their ability to take those customer relationships to a competitor. When there are individuals who hold the company’s critical information in their brains, you need to figure out how to extract and record that information in some form.
IP seems daunting, but it’s actually much more intuitive than you might think. Simple steps taken now can strengthen your business and build value in 2021 and beyond.
Resolution #4: Be Ready to Adapt!
On January 1, 2020, most of us certainly didn’t have any idea of the freight train that was about to hit us this year. And while we all hope for brighter days ahead, none of us really knows what 2021 will bring.
What is going to happen with the new administration in Washington? Will the Senate remain in Republican control or will the Democrats take both houses of Congress? Will medical treatments or vaccines bring an end to the pandemic? Will the public be ready to resume “normal” life, and what will that even look like? Will McDonalds dare to keep the McRib a regular part of the menu this time?
While we all hope for less turmoil and more healing in 2021, are you prepared for whatever may come in the New Year? Merger and acquisition markets have been remarkably resilient through this topsy-turvy year. If markets stay hot and if your business was able to survive 2020 relatively unscathed, it may make sense to sell in the short term, even if that wasn’t the original plan. On the other hand, if all of the uncertainty in the world finally causes M+A markets to take a nosedive in 2021, courageous business owners might actually look to become the acquirer and seek out strategic acquisitions that may help position their businesses for future growth.
So let’s bid good riddance to 2020 and hope for a much brighter 2021 for all. By following through on these simple resolutions, you can make 2021 your business’ best year yet.
As for that resolution to lose all of the quarantine-induced weight gain, you’re on your own.
Next Month: Equity Rollovers
Read last month’s piece: Deal Protection