Business owners have been known to refer to due diligence as “the entrepreneur’s proctology exam.” It’s a crude analogy but a good representation of what it feels like when a stranger pokes, prods, and looks inside every inch of your business.
Most professional acquirers will have a checklist of questions like:
- When does your lease expire and what are the terms?
- Do you have consistent, signed, up-to-date contracts with your customers and employees?
- Are your ideas, products and processes protected by patent or trademark?
- What kind of technology do you use, and are your software licenses up to date?
- What are the loan covenants on your credit agreements?
- How are your receivables? Do you have any late payers or deadbeat customers?
- Does your business require a license to operate, and if so, is your paperwork in order?
- Do you have any litigation pending?
In addition to these objective questions, they’ll also try to get a subjective sense of your business. In particular, they will try to determine just how integral you are personally to the success of your business.
Subjectively assessing how dependent the business is on you requires the buyer to do some investigative work. It’s more art than science and often requires a potential buyer to use a number of tricks of the trade, such as:
Trick #1: Juggling calendars
By asking to make a last-minute change to your meeting time, an acquirer gets clues as to how involved you are personally in serving customers.
If you can’t accommodate the change request, the acquirer may probe to find out why and try to determine what part of the business is so dependent on you that you have to be there.
Trick #2: Checking to see if your business is vision impaired
An acquirer may ask you to explain your vision for the business, which is a question you should be well prepared to answer. However, he or she may ask the same question of your employees and key managers. If your staff members offer inconsistent answers, the acquirer may take it as a sign that the future of the business is in your head.
Trick #3: Asking your customers why they do business with you
A potential acquirer may ask to talk to some of your customers. He or she will expect you to select your most passionate and loyal customers and, therefore, will expect to hear good things. However, the customers may be asked a question like ‘Why do you do business with these guys?’ The acquirer is trying to figure out where your customers’ loyalties lie.
If your customers answer by describing the benefits of your product, service or company in general, that’s good. If they respond by explaining how much they like you personally, that’s bad.
Trick #4: Mystery shopping
Acquirers often conduct their first bit of research behind your back before you even know they are interested in buying your business. They may pose as a customer, visit your website, or come into your company to understand what it feels like to be one of your customers.
Make sure the experience your company offers a stranger is tight and consistent, and try to avoid personally being involved in finding or serving brand-new customers. If any potential acquirers see you personally as the key to wooing new customers, they’ll be concerned business will dry up when you leave.
Know your business inside and out, share your vision with your team and be ready to impress.
What’s The Worst That Can Happen With A Disgruntled Silent Shareholder?
Whether a shareholder brings capital to the business, experience or connections, you need to ensure everyone has the same vision and values.
While we often hear that it can be bad to have a silent shareholder that does not want to play ball, it is not often that we make enquiries about how the governance of a company can be hindered by a disgruntled shareholder.
Most of us assume that as long as they own more than 50% of their own company, they are entirely in control of all aspects of the company and how it is governed. This is not true: Even if you are a majority shareholder, holding less than 75% of all the shares in your company can still result in headaches if a minority shareholder, holding at least 25% of the company, becomes disgruntled and neither participates in the decisions of the company, nor consents to the decisions being made.
What is set out below highlights, among others, why it is so important to give shares in a company to prospective shareholders over a period of time, rather than from the outset. This allows for shareholders to prove their worth without you potentially placing your company in a position where it could be held at ransom for many years.
The illusion of holding more than 50% of the shareholding in a company
- Many people assume that by holding more than 50% of the shares in a company they are free to do with the business as they please. This generally only holds true for basic decisions of the shareholders, such as the removal and appointment of directors. The most important decisions of a company are based on special resolutions. A special resolution requires that shareholders, either individually or collectively, holding at least 75% of all the shares in a company, vote in favour of a specific decision.
- Examples of decisions that require a special resolution include:
- Amending a company’s Memorandum of Incorporation
- Approving the issuing of shares or granting of other similar rights
- Authorising the basis for determining directors’ salaries
- Disposing of company assets
- Mergers and acquisitions.
So, what does this mean for you and your company?
- If you are a start-up looking to raise funds, apart from some exceptions, you will not be able to issue further shares to new shareholders or anyone other than existing shareholders if there is a shareholder that is effectively dead weight.
- Should you manage to vote a new director to the board, you will not be able to determine the basis on which they are compensated (their salary) without a special resolution.
- If you intend to merge with another company, you will not be able to pursue this without a special resolution.
- If you plan to raise money by disposing of or selling most of the assets of your company you will, once again, be prevented from doing so.
Accordingly, it is always best when starting a venture to vest your shares over a period of time. This means that, for example, shareholders are only entitled to have their shares allocated to them after a certain period of time to avoid a situation where you have a dead-weight equity shareholder hindering the governing of your company, and requiring possible litigation to remove them.
There’s More To Team Management Than Leadership
When you’re running a business you need to ensure that your employees are on your side, helping you to make profits. Giving them job security, taking them seriously and treating them with respect, will go a long way in enhancing loyalty and productivity.
The staff that work for you determine:
- How happy your customers are with your business
- The quality of the things that you sell
- The costs that you incur to sell your products and services
- Your risks – the things that can go wrong and how much it costs you
All of these things determine your profitability and how competitive your business becomes. How do you ensure that everyone is on the same side and helping you to make profits?
At work everyone believes that they are getting something (such as money) and are giving something in return (such as time and effort). They are weighing up in their mind “how much am I giving, how much am I getting in return and is this fair?” If they believe that they are:
- Giving too much or
- Getting too little
- Then this is unfair, and they won’t work well (poor productivity – how much they produce).
The manager needs to:
- Know what people are thinking about what they are giving and getting and
- Manage the giving or getting side
- So that people become more productive
In a smaller business you sometimes cannot afford to pay more or provide the sort of benefits (pensions, medical aid, bursaries etc.) that larger firms can and so the staff may be unhappy, not be productive and be on the look-out for something better.
How do you increase happiness without money?
- Job security – knowing that you will still have a job next year – and that you will get paid on time.
- Contributing to the success of the business. If you train staff to have the knowledge and skills to do a better job and you then encourage and support them to do this then they are happier, and you increase profits. If you then share some of these profits with the staff that helped you to make them then everyone wins!
- To be taken seriously and treated with respect. If you do this then staff are happier, and they will also treat your customers with respect.
- To be part of the team. You can often do this by having a regular briefing on what your plans are and discussing ideas. Because staff are doing the actual work they will often have good ideas and then will be motivated to implement them – it was their idea after all!
Staff leaving you all the time is a can destroy significant value. If you implement the strategy above, you will have happier staff that are more productive and a more profitable business.
Jeff Bezos Reveals 3 Strategies for Amazon’s Success
One of the richest men in the world shared his leadership tips for running a company.
“It remains Day 1.” That’s how Jeff Bezos, founder and CEO of Amazon, signed off in his 2018 letter to shareholders. He’s been propagating the “day 1” mantra for decades, and it’s meant as a reminder that Amazon should never stop acting like a start-up – even though the company now boasts more than 560,000 employees and more than 100 million members of Amazon Prime, the company’s paid service for free shipping on select items.
Here are some of the most useful nuggets of wisdom Bezos shared in his letter and during a recent onstage interview:
1. Standards are contagious
Bezos says he believes high standards are teachable rather than intrinsic. “Bring a new person onto a high standards team, and they’ll quickly adapt,” he writes. “The opposite is also true.”
If a company or team operates with low standards, a new employee will often – perhaps even unwittingly – adjust their work ethic accordingly.
He also says that high standards in one area don’t automatically translate to high standards in another – it’s important for people to discover their “blind spots.”
Try making a list of your duties, then ask trusted colleagues to tell you which responsibilities are your greatest strengths. If certain things from the list don’t come up during the conversation, it might be useful to think about how you can up your personal standards in those areas.
2. Set clear, realistic expectations
If you’re looking to raise your standards in a particular area, the first course of action is to outline what quality looks like in that area. The second is to set realistic expectations for yourself – or for your team – regarding how much work it will take to achieve that level of quality.
Exhibit A: You won’t find a single PowerPoint presentation at an Amazon company meeting. Instead, teams write six-page narrative memos to prepare everyone else for the meeting.
Bezos says the quality of the memos vary greatly because writers don’t always recognise the scope of the work required to reach high standards.
“They mistakenly believe a high-standards, six-page memo can be written in one or two days or even a few hours, when really it might take a week or more!” Bezos writes.
3. Stay involved with the people you’re serving
Whether you’re selling a product or service, it’s a good idea to make sure you never lose touch when it comes to the people you’re serving – no matter how high up the ladder you climb.
Bezos says he still reads emails from his public inbox (email@example.com) as a way to keep his finger on the pulse of what’s happening with Amazon customers.
He says he believes focusing on what customers are saying is much more important for success than focusing on what competitors are doing, and he often compares customer feedback to company data to see where they misalign.
“When the anecdotes and the data disagree,” Bezos said at a recent leadership forum at the George W. Bush Presidential Center, “the anecdotes are usually right.”
This article was originally posted here on Entrepreneur.com.
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