Grow through the stages by headcount 22 of 23 in this group
SOP 182
Get the business sale-ready to reach new capital
What this page is for. Use it when a business of 250 to 500 people needs money from outside for its next big bet: someone to invest, to lend or to buy. It carries the finance step of that stage. The fix is to prepare the business as if it were going to be sold, without deciding to sell it, so that others will be willing to put money in. The steps are a quality of earnings review (a maybe), an audit by investment bankers, cleaning house, outside audits and the legal structure. Hedging and debt are offered for some cases only, and a strategic partner is an option the work opens. The whole stage, one function at a time, is set out on SOP 175 — Capitalize the business at 250 to 500 people.
SOP-182-Get-the-business-sale-ready-to-reach-new-capital.md
1. The constraint and what graduates it
Finance means how you manage your money.
| Item | At 250 to 500 people |
|---|---|
| The constraint | Other people will not give you money, because your finances are not legit enough. Think of it as raising money, borrowing money, or having your business bought, so that you can make a big investment in M&A or R&D |
| What the money is for | The product side already has its cash cow. A bet has to be made, buying or building, to get a rising star to accelerate it |
| What graduates it | Prep for sale: make the company sale-ready. The frame is a favored one here, and it comes with a caveat: this does not necessarily mean you are going to sell your company |
The constraint in brief. Raising money, borrowing it and getting bought are named among the ways in to money, and being bought means selling some of your equity. You consider doing some of it, so that you can make a big investment in that rising star through M&A or R&D.
Which of the two routes to take, buying the next product or building it, belongs to SOP 180 — Decide whether to buy or build the next product.
2. Prep for sale, not a sale
Sale-ready does not mean trimmed. Getting the company sale-ready is not a matter of trimming it to show off your margins, or anything of that kind. It is simply a question of how you clean everything up, so that you can double down on the opportunity in front of you and capitalize on it. The process is called a prep for sale, or going through a fake sale.
The business as a product. The view here is that the key is to look at your business as a product for the marketplace. You are working out how to make that product more appealing to buy. That is not only because you want it bought: making it more appealing also makes it a more valuable thing to own.
The house. A favored analogy here: if you have ever owned a house and sold it, you know that right at the end, when the sale is close, you suddenly fix the door and the patio, power-wash the side, and oil whatever squeaks. Then you look at the place and find it is not so bad; maybe you will keep it. You kind of want to do the same inside the business, because there you are the owner, and you do get to keep it. In a line: cleaning up your house always just makes the house better.
A conclusion a lot of people reach. In one example, an owner going through the prep talked it over at dinner. His business had interest in selling a piece of itself, and was being pursued a lot by different investors. Partway through, he said he kept looking at it and asking why he would want to sell. That is kind of the conclusion a lot of people come to, it is said. Going through the prep, it is stressed, by no means says that you need to sell the business.
3. Get a quality of earnings review and a banker audit
Quality of earnings. This is where you maybe want a quality of earnings review. What it covers is taken up in section 10.
The banker audit. Getting a banker audit is called maybe one of the biggest hacks in the world. It means going to investment bankers and asking them to tell you everything that is wrong with your business. They want your business, because they want to sell it later and earn a commission. Even so, experience here counts talking to them as some of the best free consulting ever received. They will tell you everything that is not good about the business as an investor would see it, and, just as important, as a lender would see it.
4. Clean house, then bring in outside audits
Clean house on people. Speak to the bankers, take the free consulting, and clean house on the people who no longer contribute. How to let someone go is on SOP 153 — Fire without surprise and plan who covers the work.
Outside audits past a certain point. You will bring in third-party audits beyond a certain point, to make sure nothing is missed. Internal audits come at an earlier stage; at this point, sometimes, it is just good to have someone from outside, kind of a neutral party, double-check the work of all your internal teams. Running internal audits, and reading the statements each month, are covered by SOP 172 — Audit internally and review the financial statements each month.
Why outside eyes. In one example, an owner went through this same process, years ago. He found out that one of the people on his team had stolen over $2 million, over years and years. It was many, many years ago. His conclusion: past a certain point, it is good to have outside eyes.
5. Reconsider the legal structure
You want to reconsider your legal structure. The reason given is that sometimes being an LLC or an S corporation does not actually make for an ideal structure for a minority deal, say, or some sort of dividend recap, or things like that. Talk to the legal people, and they will tell you where you stand.
As steps: get your capital structure audited, look at your entities, and get legal people to look at them. The capital structure means how the ownership shares are structured, and what the legal entity is.
These statements about entities and deals are a reading only. What a minority deal or a dividend recap involves is taken up in section 10. Entity law and securities law are not covered on this page. Setting up the first entity, at the very start, is on SOP 145 — Run the business at level zero — improvise, section 9.
6. Hedge big investments and purchases
When it applies. Sometimes, and it depends on the company, big investments are hedged.
Why. Say you buy in great volume: you sell products, for example, and they have key ingredients, such as beef, or coffee beans for a coffee chain. A change of a couple of cents per pound, or per whatever the unit is, has a huge effect on the profitability of the business. There are investment products that let you hedge against that.
An example. You make a bet that soybeans go up:
| If soybeans | What happens |
|---|---|
| Go up | The bet pays you, and that offsets the loss from your cost of goods going up |
| Go down | Your cost of goods goes down, so you make more profit, but you lose the bet |
That hedges your bet, so that you can kind of smooth out the profit.
Its scope. This is called big-business stuff. It is offered as something you can consider if you have huge "reliabilities" or huge purchases you need to make in order to grow the business.
Put another way. Sometimes you consider hedging your big investments, so that when you expand, you can smooth out your profit curve, depending on market trends or the prices of commodities that might relate to your business. Or: you might have to make some hedges to even out the cash flow in the future, based on bets you are going to make.
The statements about hedging are a reading only. The choice of hedging product and securities law are not covered on this page.
7. Borrow when you do not want to sell
When debt fits. The big thing here, it is said: if you do not want any kind of sale, but still want more capital, whether to potentially make an acquisition, to buy a team and carve it out of a company, or, maybe on the marketing side, to land two big brand sponsorships that might cost you 20 million a year, then sometimes debt relationships can be really helpful.
Who lends, and what they look at. You can have lenders. Banks sometimes, but usually it will be, kind of, private lenders; which others typically lend is not established on this page. Such lenders are all about the downside. They do not care about your upside. What they care about is how likely it is that you will keep making money, so that you can pay back the debt with the interest they earn their return on.
A credit line. One more point: at this point you can say you are professional enough to hold a credit line of 20 million and go and do something big. Or it is simply good to have it in your back pocket.
What all of this opens. Doing all of this gives you access to a whole new pool of capital, so that you can make the big bet: getting your rising star, or buying the rising star and incorporating it into the business. That is the reason, on the finance side, that a lot of this is called super professionalization: it lets you capitalize on the next big bet.
8. Bring in a strategic partner
With all of that done, you will have the option to sell a small part, get a strategic partner in (whether that is one option or two is taken up in section 10). An example: let's say someone offers to buy 10% of the business and, in exchange, to give you their distribution to 10,000 brick-and-mortar stores. That would be a strategic buyer, one who could help you: give you cash, offset risk for you, and help you expand the business.
9. The checklist
In the order the steps come.
| Step | What you do |
|---|---|
| Frame | Treat it as prep for sale, a fake sale; by no means does it mean you need to sell |
| Quality of earnings | Get one, maybe |
| Banker audit | Ask investment bankers what is wrong, as an investor and as a lender would see it |
| People | Clean house on the people who no longer contribute |
| Outside audits | Past a certain point, have a neutral outside party check the internal teams' work |
| Structure | Reconsider the legal structure; look at the capital structure: the ownership shares and the entity |
| Hedges | Sometimes, hedge big investments or huge purchases; put another way, you might have to |
| Debt | If you do not want a sale but want more capital, sometimes debt relationships can help |
| The option | Sell a small part, get a strategic partner in; whether that is one option or two is left open in section 10 |
10. What this page does not decide for you
- What a quality of earnings review covers. Not established on this page.
- What a minority deal or a dividend recap involves. Not established on this page.
- What "huge reliabilities" means. Not established on this page.
- Which lenders are meant. Beyond banks and private lenders, which lenders are meant is not established on this page.
- One option at the end, or two. Read as two options, you may sell a small part or bring in a partner; read as one, the partner is the buyer of the small part, as in the example. This page does not settle which reading is right.
11. What this page does not cover
Entity law, securities law and tax law are not covered on this page. How a hedge is set up, what it costs, and the terms of a loan are not covered on this page.
Terms defined on this page
- Banker audit
- Asking investment bankers to list everything wrong with the business as an investor and a lender would see it. They hope to earn a commission selling it later, so the advice comes free.
- Prep for sale
- Cleaning up the whole company as if you were selling it, without deciding to sell, so others will invest, lend or buy in. It isn't trimming to show off margins, and cleaning up makes the business more valuable to own, whether or not it is sold.
- Strategic partner
- A partner who brings something that helps, such as distribution to 10,000 stores, and can add cash, share risk and help expansion. In the example the partner buys a small part, say 10%; whether selling a small part and bringing in a partner are one option or two is not settled.