CEO hits the jackpot by growing his business with the buyer in mind

I saw this article posted in ‘Smart CEO’ today and wanted to share it with you. In telling the story, the authors, John Starling and Adam Goddard, provide relevant and pragmatic advice that just may effect how you approach your strategic exit planning. Enjoy!

They say that when you start a company, you should hire as many paperboys as possible. The paperboys, the dog walkers, the babysitters, the woodstackers, the lemonade stand operators and the like — they are the entrepreneurs. When those kids grow up, they will be the ones growing your organization from the inside. They will work for you for a time, yet long-term you’re much more likely to end up working for one of them; they’re owners and CEOs waiting to happen. But where do they come from? Are they born? Made? Shaped? What makes them tick? Why are some of them successful and others not — and by what measures?

By most standards, a successful business is one that earns income for the owner in such a way that the business can eventually be sold or transferred to another party, creating liquidity for the selling party and value for the buying party. It would seem simple, but the vast majority of people involved in the sale of a business are disappointed with the results and don’t consider it a success. At the same time, nearly one-third of all companies in the U.S. will change hands over the coming 10 years, as the largest generation in American history leaves their businesses, according to a 2009 Grant Thornton study.

The typical path of retiring boomer business owners has been described as “cattle over a cliff.” They can’t see what is in front of or beside them as they move toward their exit, often guided only by the attorney and accountant they “grew up with.” This makes sense, considering many middle-market companies don’t operate from a current strategic plan (more or less an exit plan) and have little idea of the range of expertise it takes to do it right. And since most owners only exit once, they don’t usually have the benefit of experience. They arrive at the table to sell their companies, flanked by a few trusted advisers, staring down the barrel of a better armed, more experienced deal team, who has one mission: find ways to devalue the company’s asking sale price.

Blind spots
Even with years of experience, CEOs, their management teams and their trusted advisers have blind spots, and that is why I founded The Business Exit Forum, a nonprofit educational institution for business growth and exit. The reality is that private equity firms that buy middle-market companies have the resources that leave the sell-side CEO feeling a little outmanned, but education levels the playing field.

A well-informed, sell-side CEO should have access to over a dozen different types of advisers as he or she moves across the growth and exit continuum.

Access to top-shelf corporate attorneys and CPAs is within reach of most CEOs, but what about mental readiness consultants, business valuation experts, growth strategists, investment bankers and the countless other professionals with specialized expertise? These are the players who can make the difference in maximizing both the financial and non-financial outcomes of your business exit.

So how do CEOs like Cliff Webster — who successfully grew and sold his 100-person government contracting company in 2011 — succeed when they typically come into business knowing none of this? How are they successful when so many others have failed? These are the questions that my co-author, Adam Goddard, and I are going to ask — and hopefully answer — in the Profiles in Growth series.

Opportunity knocks softly
At 16 years old, Cliff Webster could paint a house, side it and put a roof on it. He wasn’t afraid to knock on doors to get business. His father (who had a small business servicing mainframe computers) provided him with opportunities and experiences that enriched him, but he had to work for them and be willing to ask for what he wanted. He learned early on, even just in lobbying his pop, that sales are a game of probability.

At 26, Webster was recruited by a defense contractor and realized pretty quickly that he was being billed out at a rate of three to one. He decided to go direct as an independent contractor to the same company, which then brought his rate to near par.

The math made sense to him. As a kid he knocked on doors and got work fixing houses, so when the numbers weren’t working for him, he was ready for an opportunity. “Opportunity knocks often, but it knocks softly,” he says.

In 1998, he started Webster Data Services. With his first contract clocking in at just under $400,000, he wanted to grow the company, but no one was willing to take a chance on him. So he did what most entrepreneurs do: he did it himself.

Looking back, he’s thankful he didn’t bring in a partner early on. “It would have complicated things unnecessarily,” he says, though he wishes he’d sought the counsel of advisers earlier in the growth cycle of the company.

Opportunity knocked again in 2003. It was a high-risk move to put 12 people on contract overnight, but Webster didn’t see it that way. “I saw the opportunity to expand as the polar opposite of taking on risk,” he says. “Being an employee was where the risk was. The days of lifelong employment in one place were long over.”

Two years later, his company had grown to 70 people, and he knew he was in business.

Failure is the greatest teacher
After an incredible three-year run and nearly 1,000 percent growth over the same period, Webster Data Services drew attention and awards, putting it on the radar of a public company that offered to buy it. Webster would say later he “successfully failed to sell.”

Everything seemed right. The company’s top-line revenue had been rocketing, and it felt like the right time to sell. But then there was a change in the tax law that affected the ability of the buying party to fund the deal. The desirability factor had changed. Cliff would have taken the deal, but it was now off the table.

Failure can often be the greatest teacher. Webster took the lessons of the failed deal to heart; he learned “the difference between revenue and value,” and he committed to building value in his company.

Looking back, the deal falling through was the best thing that could have happened to Webster. He hadn’t built a management team strong enough to operate without him, and that had to change. He could make more money downstream by just growing it properly. From 2007 to 2010, the company continued to grow steadily but with a laser focus on documentation and scalable, repeatable processes that drive value.

He learned to look at the company from the standpoint of the buyer. Until he saw enterprise value through the eyes of others, he didn’t realize his personal knowledge and expertise might actually be a liability in successfully selling and transitioning his company away from his leadership.

So he upgraded his management team to a group that could in many ways outpace him, and it won some large, valuable contracts (as a standalone prime contractor). Value creation started here.

Then he built a company around the mindset of niche business development. The buyer saw Webster as the primary salesperson, which lowered the value of the company in their eyes, so he decided to build leveraged growth into the business model. He created incentives for management and staff to grow the organization and changed the company culture. The company became a proposal shop going after prime contracts, the winning of which gave them a “license to hunt.”

Next, they made the conscious decision to start acting like a big business. Early on, everyone wore many hats, but they moved to a point where all players were in their proper roles — and when they did have redundancies, they were built in with a purpose.

Finally, the company documented things thoroughly and built repeatable processes. Before his failed attempt to sell, Webster disdained documentation, but he learned that he had to harness and consolidate the corporation’s knowledge base. When proprietary knowledge is kept in the CEO’s head, it gives the would-be buyer opportunities to devalue the company at the bargaining table. Building an independent process engine to develop business across the management team was a maturation point that required the company to bring in staff from larger organizations. They pulled in senior people from companies like Siemens who would make them act like a $200 million business and stay focused on value creation.

Getting the handshake
Within just three years of the failed sale, Webster’s organization was operating at a point where, at the end of every month, they could produce two reports, one financial and one technical, on the status of anything and everything in relation to the company. When buyers came in, it showed well. The company was under $20 million, but it was organized like a company 10 times its size — and that affects multiples.

When he got to the due diligence stage with the buyer, he had four people with him to defend the value of his company. The buyers had a conference room of people at the table, and their job was to find ways to lower the asking price and market value of his business. Six days before the scheduled closing, it looked like the deal might be going south, so Webster decided he would, too; he went to Mexico to put himself out of touch, geographically and emotionally. “You have to be willing to walk away,” he explains.

It was a roller coaster ride, but it was one that he had been on before, and that made it easier. Most business owners don’t have that experience to bolster them for a second time around.

His new approach worked. Webster was back in the U.S., and it was 9:30 p.m. when the closing finally wound down. The new owner came down from his office, and they shook hands. The deal was complete.

Be sure to let me know what you think by sharing your thoughts in the comment section below.

Steve