The Deal Room: Your Secret Weapon for a Profitable Exit
In this episode, we explore the critical concept of the Deal Room with host, Lani Dickinson.
Discover how to prepare your business for a successful exit by creating a secure online space for due diligence. Learn about the essential documents and information needed to impress potential buyers, from financials to key employee retention strategies.
Whether you're considering selling now or in the future, this episode provides invaluable insights to position your business for a satisfactory exit.
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Transcript
>> Lani Dickinson: So today we're gonna talk about the deal room.
Speaker:Welcome to the Freedom to Exit podcast. I'm Lani
Speaker:Dickinson, former Fortune 175 CEO, bringing
Speaker:you expertise in private equity, insights,
Speaker:turnarounds, sustainable growth, and positioning
Speaker:yourself for a very satisfactory exit. So let's dive
Speaker:in. The deal room is a place, some people will call it
Speaker:the sandbox, where it's a safe
Speaker:and secure online file where things
Speaker:are kept over the course of your business. These are
Speaker:the files that the due diligence team will be
Speaker:digging around in, trying to find out, is
Speaker:this business everything the seller says it is, or is there some
Speaker:hidden risk that we need to either walk away from this
Speaker:deal or give the deal a, discount? It's
Speaker:important to maintain this. The minute you have
Speaker:this exit idea in your head, you need to start taking
Speaker:calls sooner than you probably believe or are
Speaker:ready for. When people take an interest and say,
Speaker:hey, I'd love to buy you, this is probably
Speaker:when you're on an upswing, not when you're plateaued.
Speaker:Typically a, plateaued business is very hard to sell,
Speaker:but you're probably on an upswing and other people are
Speaker:taking notice. Or a competitor says, wow, they do
Speaker:this thing really well. This would make our business
Speaker:grow quicker, faster, reach their customers, those
Speaker:kinds of things. But you might start getting phone calls you need to
Speaker:deal with sooner than you think you're ready. Having a
Speaker:deal room to start that due diligence process
Speaker:will allow you to embark on the due diligence
Speaker:process, but also continue to run your business.
Speaker:The first questions that somebody who wants to buy the company is
Speaker:gonna ask is, number one, are they profitable,
Speaker:what are they making? What are the profit margins? Then they're
Speaker:gonna go into management and key employee
Speaker:risk. Do you have a team that's gonna stay after the
Speaker:deal is done, and are we at risk of losing?
Speaker:And if we are, how hard is it to replace that key
Speaker:team? And then, of course, they wanna know, how much do you want? We let
Speaker:the market decide that, and they wanna know, who are you
Speaker:talking to and what is the process? The first thing they're gonna look
Speaker:at is your financials. Having audited
Speaker:financials is really important. If they're not audited,
Speaker:there's gonna be some question and some doubt and
Speaker:some discussion. Discussion almost always
Speaker:leads to the discussion about a discount in price.
Speaker:They're also buying future cash flows and
Speaker:potential for growth. That's gonna give them
Speaker:returns more than they can make in the market at a
Speaker:reduced risk, or if they have more risk the price goes
Speaker:down. You wanna have in there a list of
Speaker:top five who should buy you and
Speaker:who should you buy to accelerate your growth if you
Speaker:had the cash and the position to be able to buy them?
Speaker:If you've done the work to investigate why you would
Speaker:fit for these other companies that might wanna buy
Speaker:you, that's also particularly interesting
Speaker:for the deal room and the conversations you wanna have
Speaker:information about growth, your
Speaker:business, the industry in your location,
Speaker:nationally. What is the industry trend saying
Speaker:about this business? They're buying growth and future cash
Speaker:flow. So knowing some information about
Speaker:what's going on in the industry and the trends will
Speaker:support the price you want or the terms you
Speaker:want or not.
Speaker:Most people aren't bringing a team that they
Speaker:want to employ. They need your team to stay.
Speaker:They're gonna want the organizational chart and
Speaker:the bios of all of your key employees,
Speaker:the plans for their future development, what have
Speaker:they contributed to the company and how do we know that
Speaker:they will stay? You're basically marketing why your team
Speaker:is awesome. You will have done some work in the background to make
Speaker:sure that they will stay post transition. That's largely
Speaker:through the way you build their compensation plans.
Speaker:You'll wanna have a history of the company, the
Speaker:milestones that have been achieved. What is the DNA of
Speaker:this company? Are you a company that always fights and
Speaker:always wins? Are you a company that takes a few
Speaker:hits and learns the lessons and then comes
Speaker:out stronger? Why did we get started? What drives
Speaker:us? What are the milestones we've achieved? If you were in business in
Speaker:2008 and 2020, you certainly want
Speaker:to tell the 2008 and 2020
Speaker:peake a trough story. Anybody who was alive in
Speaker:2008, alive in 2020 and now wants to sell
Speaker:their business probably has the DNA that
Speaker:says we're always going to win. You want to have a listing
Speaker:of what products do you sell and
Speaker:then what is the margin by product? How
Speaker:profitable is each product that we sell
Speaker:on a spreadsheet well in advance. You wantna have an
Speaker:assessment of your top 20 customers
Speaker:and show the volume and the profit by
Speaker:customer. Remember, we need a diversified
Speaker:customer base. We need a diversified supplier base.
Speaker:Showing that we have this diversified base
Speaker:decreases risk. If we have one customer
Speaker:type, we're at risk. If they go out of business, they have a
Speaker:bad day, then our business isn't going to do so well.
Speaker:Then showing the volume and profit by customer
Speaker:tells them very quickly who the strategic relationships
Speaker:are and the relationships we have to protect in
Speaker:the transition. Anybody buying a business is Worried
Speaker:that when you, the founder go away, the
Speaker:employees and the customers may go away too. You're
Speaker:gonna have to have a key competitor assessment in there. You
Speaker:have to know your market, who are the people around you
Speaker:who are competing against you and trying to take your market. A,
Speaker:transition, is a rocky time and
Speaker:the buyer knows that they're gonna be looking at what can we
Speaker:do to win against the competitors? Could we maybe also
Speaker:acquire the competitors down the road? If you have
Speaker:any intellectual property, any patents,
Speaker:trademarks, anything that makes you
Speaker:unique, you have a certain type of access to a
Speaker:resource, anything that makes you unique
Speaker:or you need a certificate for, or you can prove that this is
Speaker:authentic, having that in there
Speaker:helps drive your value. If you have
Speaker:IP and patents and trademarks and in this
Speaker:incredible brand story, you're driving up
Speaker:the value of your company and proving that right there in the
Speaker:deal room. The other thing you wanna have is an asset
Speaker:listing and the replacement
Speaker:timeline. Nobody is trying to buy an
Speaker:opportunity to buy more machines. You wanna keep your capital up
Speaker:along the way. Having a listing of every asset
Speaker:we have in the replacement timeline tells them
Speaker:right away what investments are they going to need to make. That's
Speaker:gonna lead to negotiation in price and then the working
Speaker:capital on the other side of the deal. If you don't have that,
Speaker:you're gonna have to create all of this stuff, which is gonna
Speaker:be incredible pressure on you to create all
Speaker:this stuff and also run your companies. As you get
Speaker:these things developed, putting them in a deal room,
Speaker:you will be that much more prepared. When somebody calls and you say, I'll give
Speaker:you access to the deal room and they can start answering their initial
Speaker:questions, it's an incredibly favorable
Speaker:impression of you and the way you do business. As you
Speaker:think about the people who would be in your deal room, I want you to
Speaker:be thinking about who are the people it would make
Speaker:sense to buy you. Even if you're not looking to sell
Speaker:today, if you're not looking to sell in one
Speaker:tooth, that's okay. Even if you're looking at
Speaker:a five or ten year timeline, knowing
Speaker:who you would be a good fit for and how you
Speaker:could solve their problem more easily, that helps
Speaker:you to make decisions in your business today about how you
Speaker:build it and then put that information in the deal room so that you look
Speaker:very attractive when you're ready for that exit. As always,
Speaker:if this information is helpful, I would love for you to
Speaker:like share and subscribe and also return
Speaker:next week where we further dive into this
Speaker:whole freedom to exit thing.
