December 8, 2020

Summiting Your Business Everest

Achieving your Business ‘Everest’

Are you a business owner who may be thinking about eventually exiting by selling your business? In a 2012 study of business owners, 88% do not have an exit plan yet 61% expect to sell to a third party. Mmmmmmm.

If you are one of these business owners, it can be helpful to consider a metaphor to envision what you are proposing. Imagine for a moment the idea of climbing Mount Everest, a lofty goal no doubt, (pun intended). Few would consider such a climb without significant planning and preparation.  

The first expedition to successfully climb Mt. Everest led by Sir Edmund Hillary consisted of over 400 people, including 362 porters, twenty Sherpa guides, and 10,000 lbs of baggage, and like many such expeditions, was a team effort. Even today many attempt this feat and some do not survive.

The Hillary Expedition was a very risky, demanding, and painful experience for all involved. The fact that it succeeded even with all the experience and planning that went into it was in many ways through luck as much as anything. Imagine if they had set off without the experience, support, and knowledge that they had as a result of a strong team?

Just as climbing Everest involves these elements, selling your business involves them as well. At Virtualboard, we have broken the elements down into 9 steps or stages and compare them to the steps involved in climbing Everest and returning safely.  In the following brief articles, we will look at each stage and help you better understand the critical factors in each.

The Transaction Expedition

Stage 1) Preparing for the Expedition

Preparation for the sale of a business should ideally start between 3 and 5 years before a transaction. Preparation involves a huge effort to ensure a host of variables have been addressed including things like audited financial statements, registered intellectual property, a track record of growth in revenue and profits, to name just a few. This article will outline in detail many of the elements needed to be fully prepared for a transaction. 

Stage 2) Trek to Base Camp

The path to base camp during an Everest attempt is a time for reflection and assessment and it begins long before you even leave home. Are you ready? Do you know and have what you need? What have others done to be ready etc?  The Transaction Expedition involves four critical elements: the setting of goals and milestones; the review of your current financial systems and processes and the readiness of your management team; your personal preparedness and honest examination of your personal strengths and shortcomings; and finally the potential risks in beginning the process and the contingencies you may have to create to make it all come together.

Stage 3) Base Camp

As you can see in the Hillary story, the creation of an effective team was key. Each was selected for their skills, experience, and knowledge. For the Transaction Expedition, it is putting together an effective support team, your Sherpas if you will who will be doing much of the heavy lifting on the trail. You will be interviewing CPAs, M&A Attorneys, Estate Planning Attorneys, Investment Bankers, Wealth Managers, Valuation Specialists, Insurance Advisors, and more.

Stage 4) Khumbu Icefall 

On Everest, the first major barrier is the Khumbu Ice Fall. This ever-changing glacier filled with bottomless crevasses and towering ice blocks that can collapse at any moment is a major threat to any expedition.  On the Transition Expedition, the major barriers can often be the exploration of transaction options that can include a strategic buyer, a financial buyer, an ESOP, or a Management buyer.  You will also be wary of the various valuation elements you must address including the value of IP, real estate, and perhaps production equipment. What is each buyer looking for and who will pay the most for your business?

Stage 5) The Valley of Silence

Some of the most difficult days on Everest are in this unique glacial bowl where even at 20,000 ft temperatures can reach 95 degrees. On the Transaction Expedition, this is a time of intense, focused work. The heat is on. You will be tackling the real value drivers in your business and comparing yourself with the industry on KPI’s and will be looking at your strategic plan, your management team, and the current financial model and banking relationships. You may need to make acquisitions to reach critical mass for your future buyer and you will be monitoring the performance of the business against your plan.

Stage 6) Lhotse Face

The Lhotse Face is a 3,700 ft wall of blue Glacial ice with pitches of 40 to 50 degrees and bulges up to 80 degrees. 20 climbers have died on this face alone.  Sherpa and lead climbers set ropes and climbers use toe crampons and a special piece of equipment called a ‘Jumar’ or ascender. On the Transaction Expedition this is the stage when you are examining the asset protection elements of the journey; everything from insurance, employee retention, estate tax minimization, business risk assessment, etc. It is the grind it out segment of the expedition and it sets the stage for the due diligence.

Stage 7) Death Zone

The death zone is the area on Everest above 26,000 ft. where atmospheric pressure is about 1/3 that of sea level. A sea-level dweller exposed to the atmospheric conditions at an altitude above 28,000 feet (8,500 m) without acclimatization would likely lose consciousness within 2 to 3 minutes.  During the Transaction Expedition, the focus becomes very intense. You are doing pre due diligence, an audit review, evaluation of your management team, market research, setting up a virtual deal room and conducting buyer analysis, and looking at deal strategies. Without acclimatization and supplemental oxygen (time and cash), the deal can collapse.

Stage 8) Summit

Summiting Everest is one of the last great human challenges. The oldest to the summit was 78 yrs old, the youngest 13. Amputees have done it and a blind man has done it; yet, 300 people have died in the attempt. Completing a successful Transaction Expedition, while perhaps not as dramatic as summiting Everest, is a significant accomplishment for business owners and often the culmination of a life’s work. This stage of the Transaction Expedition is the peak of the experience. You will be screening buyers, negotiating the final price and terms, managing the due diligence process and the final purchase agreement. 

Stage 9) Descent

In 2012, 4 climbers died on the descent. They had reached the summit only to die on the way down. You will note that much of the emphasis on this concept of the Transaction Expedition was to not only climb the mountain but to make it back. What you may ask are the risks on the back-side of the transaction? Surprisingly, a number of things. Depending on the structure of the deal the owner may find him or herself with residual performance contracts, employment contracts, real estate, etc. that require them to maintain a continued involvement with the business for two or three years. Add that to the need to now manage personal wealth and to perhaps lose some sense of personal identity and life just got more complicated. The final stage of our transaction expedition is to prepare for life after the transaction. 

Source: 2012 survey by John Warrillow and his company called “The Sellability Score” has some interesting findings; especially for those business owners