Insights

Leading Your Private Company Into 2023

By Steven Keeler

Part II: Strategic and Growth Planning for a Rebound
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In Part I of this post, we discussed near-term planning during the current economic uncertainty, emphasizing that the right survival and growth plan will depend on your company’s stage of life, industry, capital needs and succession planning options and needs. In this Part II, we discuss how we are seeing companies plan for future growth, capital and an eventual exit.

The uncertain 2023 economic and merger and acquisition markets outlook will cause some owners to accelerate capital raising or a sale process and others to wait. Some owners and their businesses are at a life stage where moving forward with a financing or exit makes the most sense. Others don’t have to sell right now, affording them additional time to improve their business and see what 2023 brings. Deals are still getting done, they are just fewer and smaller than during 2021 and early 2022. Valuation pressures and heightened investor or buyer due diligence will make seller preparation more important than in 2021 or even 2022.

Whether you decide to move forward with a financing or sale process or take your time, getting your house in order and making business improvements now will likely make a future transaction more successful. Business planning for today and tomorrow will enhance the value of your equity, regardless of who eventually owns it. Here is some advice from some of companies and professional advisers with whom we have worked.

1. Capital Structure and C-Suite. Take a hard look at your company’s equity ownership and debt structure. Consider sharing some equity with valued executives in order to provide a “golden handcuff” to retain them through an exit. Give careful consideration to the company’s current debt load and potential need for capital expenditures and additional borrowings in the next year or so. Take a hard look at your management team and need to supplement, replace or change the roles of the team members. These considerations are all about aligning the interests of management, right-sizing the balance sheet, and ensuring that potential investors or buyers will be impressed with your management and succession plan.

2. Form a Good Outside Advisory Team. Assess the capabilities of your law and accounting firms and their continued “fit” with your company and its future plans. Each of them will be critical to anticipating needed tax planning and managing risk and buyer due diligence. Seriously consider engaging an investment bank to partner with your business through a strategic options analysis phase (regardless of whether you’ve decided to raise capital or exit). Investment bankers can be paid on a monthly retainer basis and then get a commission on an actual sale, and they are usually well worth their fees. Shop around for your advisers, as personal “fit” is as important as firm “size” or pedigree. Getting your advisory team organized is about cleaning up your business house and positioning your company to allow it to grow and eventually do a deal. The ownership of your company will eventually change, one way or another. Your outside advisers bring critical experience to planning through uncertain times.

‍3. The Case for a Financial Statement Audit. Many successful, growing companies have not had their financial statements audited, perhaps for good reasons. But you should consider getting an audit, as audited financial statements can enhance your understanding of your company’s strengths, weaknesses, opportunities and threats, and can dramatically increase a buyer’s comfort and expedite financial due diligence. As with other professional adviser costs, the expense is likely worth the value-add. Good accounting practices usually lead to better management decisions and higher valuations.

‍4. Own Your Company’s “SWOT” Analysis and Solutions. Every company has strengths, weaknesses, opportunities and threats. The better you, your management and advisers understand yours, the easier it will be to make improvements, mitigate risk, and ultimately “sell” potential investors or buyers on not only your company’s positives but your smarts about addressing its negatives. Buyers like to hear company owners talk about what keeps them up at night and how they propose to solve problems. This openness makes buyers more comfortable with the business and management and creates trust. Addressing weaknesses and threats can produce new strengths and opportunities.

‍5. Watch Out for Your Employees. Buyers prefer companies with a good culture and working environment. This is not only about compensation and benefits, but mutual trust and opportunities for professional growth as well. In terms of business challenges, attracting and keeping talent is near the top of the list with supply chain, inflation and other concerns. Buyers definitely bet as much on the “jockey” as they do the “horse”. This is about keeping your team happy and providing them with the incentive to stay through growth and a possible transaction. People and management matter.

‍6. Good Leaders are Realistic Opportunists; Good Companies Capitalize on Downturns. Successful company owners and executives are pros at dealing with business ups and downs. The economic headwinds have clearly resulted in a shrinking of the number of quality companies to buy. Being one of those quality companies can actually present an opportunity for your business to get a good valuation or EBITDA multiple. If your company’s EBITDA and other value indicators can be enhanced in the next year, perhaps you would be more inclined to wait to go to market.

Most sports involve knowing how to play at home and away. Golf and tennis require players to perform on different courses or surfaces and under unpredictable conditions. Business C-Suite executives need to be more like Tiger and Federer. Lots of smart people predict a “recession” and as many see strength in the economy or at least predict a soft 2023 landing. We have stock market volatility, inflation and higher interest rates (for which we have to depend on the Fed), supply chain “stuff”, and the challenge of hiring talent. Throw in taxes and increased government regulation and weaker foreign economies and, it’s clear: no one knows what 2023 might bring. Is this a healthy market correction like 2001 or systemic shock more like 2008? It’s probably neither, but hopefully it’s more of a healthy market correction that will encourage discipline than either government intervention or Wall Street excess gone wrong. And if you have to make a payroll, it probably doesn’t matter.

It's hard to listen to economists preach that market cycles are good in the long run or that business fatalities are necessary to create the next generation of unicorns. This market uncertainty is like none before - there are seemingly independent “bad” things lingering and some of them present opportunities for innovation and new business models (thanks in part to lessons learned from the pandemic). There’s Wall Street and Washington, world tragedies, changing generational values and priorities, and, maybe the biggest threat to many businesses, innovation. But innovation is also an opportunity for every company.

“Tough” companies pivot and innovate in good times and bad. They operate in a way that makes them an attractive seller, even if they don’t plan to raise capital or exit soon. They understand the importance of the bottom line and even technology innovation but never waiver from putting their employees and customers first. They are loyal to but demanding of and smart about their vendors and suppliers. They aren’t cheap on building a great internal management and outside advisory team. They never say “never” - to a new product or service line, to raising capital or exiting, or admitting their weaknesses and threats. They are really good at responding to economic and market shifts. They are realists who know when to be opportunists. All of the current external challenges and great company internal attributes apply whether you are a pre-profit VC-backed company or a mature business. The challenges will impact each of these differently, but a “we can thrive and not just survive” mindset will be equally important to tech startups and older service, manufacturing and distribution businesses.

Focus on your game and not the score board. It doesn’t matter whether you need to raise capital, sell or restructure your business, or stay the course through future uncertainty - focus your C-Suite both on running the business “as-is” and taking steps to improve the business and make it what it could be. If you have to raise capital or sell, this process will be compressed into months. If you don’t plan to bring on debt or equity capital or to exit soon, you should still make company strategic and operational improvements that add current value and will position your business for better times.