We all go into business to make a living, to create freedom or to solve a problem, but if we're lucky we also have passion about the field we're entering into. Passion is great, and you definitely need it in spades if you want to make it through long days at the office and stressful nights worrying about cash flow. But you cannot build, or sell, your business solely around passion, or you'll fail.
As a serial entrepreneur, I've learned a lot about what it takes to successfully launch, grow and sustain companies. What I've found is a business' success largely comes down to the quality of three aspects: its revenue, its product and... its contracts. I know... take a second to let the last one sink in.
Contracts are one of those underpinnings of a company that are easy to gloss over and half-ass, until the time comes that you're looking to make your exit. Then, all of a sudden, they're everything. Okay, not everything, but they do matter an awful lot.
Fresh Off a Sale
One of my companies was recently acquired. And I've got to admit, the entire process was exhausting and incredibly frustrating. A good friend, who had been through this several times, quipped, "before the process is over you'll have three heart attacks." He was right.
I know a lot about business, and yet I still wasn't prepared for all the hoops I had to jump through to get the sale finalized. At the end of the day, I learned a really critical lesson: you can have a solid business with strong revenues and high margins, but if your contracts are sloppy, you'll be making the selling process--and your life--much harder than it has to be.
Here's everything I wished I had known when I was still building the company so I could have not only been more prepared for the sale and how I could've further maximized the revenue multiple.
Cross your "T"s, Dot your "I"s
With any client engagement, your contract must be one of the first things you pore over. This means approaching legal review at the beginning of the sales process, not the end as is often the case. It's a given that contracts should be comprehensive about the details of product or service being provided, but it also needs to stipulate what happens if someone cancels (along with the penalty for doing so).
Working in the payments space, we had cancellation stipulations but hadn't associated penalties to early termination or reductions in payment volumes. This really hurt us when it came time to sell.
Although we established strong relationships with our customers through critical integrations and a network of value added-resellers (VAR), on paper none of that counts. A strategic buyer will want guaranteed revenues and if your contracts don't go the extra mile to securing your revenue line you'll be taking a discount on your total buyout figure.
Pay Attention to the Nuances
Contracts are only useful if they're specific--meaning setting rules of engagement. Your sales and operations management should clear and should align with your own internal business "law." This was a big issue as the diligence teams poured over our VARs and their agreements.
We had loose terms denoted, but much of the day-to-day responsibilities were left to relationships managed through handshakes and phone calls. To a third-party, any contract that doesn't stipulate specific performance is a liability--especially when paying VAR's big bucks on a monthly basis.
Handing the reins of your business over to another party will cause friction--partner relationships can take a big hit. Your acquirer will want to know that performance is guaranteed and the won't be left holding the bag by paying a reseller yet getting little in return.
Don't Make Exceptions
I get it--your family and friends (and friends of their friends) love working with your company because of the close connection. And you want to help them out, so it seems like a match made in heaven... except that this couldn't be further from the truth.
We made a few exceptions in my company and engaged with clients outside of our typical hyper-focused vertical market, because of the personal relationship. We then skimped on the contracts as well, and it left us vulnerable.
Think of how it looks through the lens of due diligence (hint: sloppy). Any potential buyer would see these engagements--and the lack of formal contracts associated--as liabilities. And even worse, when they try to view them through a layer of profitability, it just doesn't add up.
The Price is Right...Repeatedly
Just like making exceptions for family and friends, it's also easy to make concessions on pricing from client to client. Yes, there will be times when this is unavoidable, but train your team to stick with standardized pricing as much as possible. This allows customers to know what to expect, and will give an eventual buyer the confidence that you've been consistent, fair and honest across the board with your pricing, too.
At the time of sale your customers will eventually become a scatter plot of revenues. That big customer you extended the huge discount to land? They simply don't look as attractive when you remove the emotional layer and accomplishment of landing the whale.
Nuts and Bolts
How often have you gotten to the end of a deal cycle and it happens: that kiss of death email or phone call that rings out from the other end asking,"Can we use our own paper?" Using a contract other than your own to solidify a customer relationship will almost always end up working out against you.
I know it's very attractive to accelerate the procurement process, you may even be up against an ultimatum from the buyer--I've been faced with this conundrum many times. I've trained our sales teams to push unrelentingly to use our own contracts, and we compromised from time to time.
Every single one of those compromises led to a problem, whether it was related to portability (ability for the agreement to be assigned to a 3rd party), term or cancellation--each and every time it will lead to a discount. Bad news.
A New Wave of Innovation
Poorly constructed or easily circumvented contracts can mean the loss of up to nine percent of annual revenue--when that revenue is the basis for your buyout multiple, this becomes a big deal very fast.
We focus on innovation of our products and services, and even our business models, but there's also the very real--and necessary--innovation in terms of contract usage. When you approach contracts as the tool that they are, how they can protect you and how they can get you to the sale you're hoping for, you're innovating in a very important way.
There is nothing worse than holding up cash flow by focusing on every last detail of contract structure. But take it from someone who's seen the value that contracts provide--the devil is in the details.
And it takes a shift in thinking: building your business, and contracts, from the get-go, with the goal of maximizing your business value can save you a lot of headaches and put large sums of cash in your pocket.
Is it just me, or are contracts starting to sound a whole lot sexier?