When I was a kid, my father owned restaurants. Growing up, I remember my dad dreading a random visit from the health inspector, who had the power to shut his restaurants down.
Acquirers also perform random inspections, although they are not evaluating your cleanliness. Instead, they are trying to ascertain how dependent your company is on you.
Take a look at how Native Touch inspected Candy Banners before handing over a wad of cash to its founder, Tim Grassin:
- They interviewed employees. The acquiring company sat down with Grassin’s employees to learn about their day to day and who they would report to.
- They tracked projects. Native Touch would follow projects from start to finish, looking at where Grassin was involved or needed by his staff.
- They reviewed emails and chats. The acquisition team sifted through emails and chats to ensure Grassin wasn’t an integral part of the day-to-day operations.
After their inspection, Native Touch was able to confirm Grassin’s claim that the company wasn’t reliant on him.
For Grassin, this was the end of a long journey as he started his agency in 2014 with the intent of selling it. As the owner of a service-based business, Grassin wanted to attract a premium offer and knew he would need to prove his business could operate without him.
As Grassin stated in a recent Built to Sell Radio episode, “We always knew whatever we did, we needed to extract ourselves from operations. The first few months of building this business, we created a flow chart of every task and figured out how we would automate it with technology or human capital.”
Because the daily functions of his business weren’t reliant on Grassin, he was able to negotiate five times EBITDA for his company with a one-year earn-out, contingent on the company matching the previous year’s revenue numbers. Considering Candy Banners was growing 100% yearly, it was more of a holdout than an earn-out.
Whether you know it or not, acquirers considering making you an offer are always evaluating your business. To make sure you pass their inspection, ensure your company can thrive when you’re not around.