Business Confidential: how sensitive is your data?

September 27, 2010 Leave a comment

Do you find sometimes that you are swimming in a world of non-disclosures (a.k.a. NDA), whereas most of them are not really needed? Honestly, I believe that we could live without the majority of NDA’s that we are signing. In this day and age, people qualify anything as sensitive or confidential data – including their business address and who does the cleaning – lol. But seriously, how confidential is the data you want to share? Most of the time, we spend way too much time around the definition of a NDA, only to find out that there is very little information that is being shared.

What are you really afraid of?

How much can someone else do once they learn about your secret sauce? Can they just go and do what you’re planning to do? Information that needs protection is either information that would have an impact on the market (mostly if you are a public company) and specifically hurt your business if it becomes public knowledge. General direction of a business or a vague idea about your business plan does not cut it.

What competition would do?

That’s one of the most important question you need to ask yourself. What would be the impact if your competitor were to learn about this so-called confidential information? If the impact is low or nil, then there is not much you should be concerned about. Of course, if you have specific trade secrets or revolutionary new product coming, you want to make sure to safely guard this information.

Do you have just ideas?

You are in trouble if you have just a bunch of ideas but without the ability to execute them – NDA or not. People should spend more time on execution that to worry about others stealing their ideas. Beyond accusing others of taking your ideas, focus on making your ideas and plan a reality. If you execute well, competitors should never have enough time to beat you to the market. Nothing in an NDA is stopping you from badly executing – so stop blaming the others if you failed.

How much do you really need to disclose?

Again, learn to be selective about what you disclose. We actually say less when there is no NDA in place. People have a tendency to talk a lot more because “we can do it in confidence”. Staying quiet is the best method to protect confidential information. Let me burst your bubble and let you know that people still talk even with an NDA in place. Maybe not officially but people like to talk. Companies that have a culture of staying quiet have a better chance of keeping confidential information to themselves.

Learn to sign NDA’s when they are really needed. Talk less and focus more on your execution – these are the best tricks to stay ahead of the game and keep your information confidential.

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Note to investors: hope is not a strategy

June 2, 2010 2 Comments

How many times do you see companies that are not doing the right things or do not have the right management or strategy in place? You would be surprised to see how many times these same companies have investors hopeful that things will work out at the end. Well I have bad news for you: hope is not a strategy.

A good strategy does not happen by miracle
Unless a company has spent the time to build a proper strategy, it won’t fall from the sky. And when I say a good strategy, I mean one that can be actually executed. Nothing worse than a strategy that while fantastic on paper, will never be close to be well executed or realizable. A strategy needs to be realistic, something that you know that the management team can really accomplish. Expecting something amazing to happen without execution is a pipe dream.

Does the management team really know what they are doing?
Anyone can blame outside elements for lackluster results: economy, weather, customers, competition, etc. How capable is your executive team in foreseeing potential problems? Do they have a plan of action if these occur? Are realistic are these sales targets? How sustainable are these marketing activities (and at what real cost)? No matter how hard the market conditions are, a great management team is capable to navigate in difficult waters and find the best path possible (don’t mean it will be easy or flawless).

The role of the Board
A Board is not just about adopting resolutions and reviewing budgets. There is a great responsibility in making sure the company is well managed, with a well thought out strategy and the means to execute. How often is the Board meeting in difficult time? Are there any special committees being put in place when the tough gets going? How accurate is the information flowing back from management?  If you’re Board is not taking attention to red flags, there just as part of the problem as the executive team. And there are a lot of red flags we just prefer to ignore (it’s amazing on how much you can discover by doing a few internal reviews and ask a few questions). We should not just be diligent when we acquire a business. Everyday should have its share of on-going reviews.

Shareholder return does not happen by chance
If your executive team is not building a sustainable business and a competitive advantage, you might just end up failing to successfully sell the company; at the right valuation that is. Any investor should never accept hope as a strategy. Expect more from your Board and executive team. They are playing with your money and you should make sure they know it. If something is not working out to your liking, you need to make some changes – and sometime at both levels. Often enough, just getting a new Chairman or CEO can make a lot of good in cleaning up a business and making it better. Don’t wait until hope is your last chance.

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Change of management: when is it good?

May 17, 2010 1 Comment

From my latest blogs on due diligence, employee ranking and succession management; I wanted to write about change of management and when is it good for the business. The business has been doing all right lately and things seem to be going in the right direction. So why would you want to make a change now?

Calm before the storm
Too many companies are making changes when things are going bad. Perhaps it is because we want to give a last chance to someone or that we have a hard time improving the executive team? Nonetheless, making changes when things are at a low point is a lot more difficult than making them at the cusp of bad news. Of course, it is easier to justify a change when the Company is in a downward spiral but the energy and pain required to fix this while you are joining a Company is far more likely to fail. Plan ahead the bad news. As a visual, do you prefer to bring an umbrella before it rains or you are the kind of person that will just get completely wet; having forgotten to check the weather beforehand?

From good to great, to greatness
Every Company can improve on what they’ve been doing. But this is very much linked to the potential of your executive team. How far can this team take you? How capable can they make this Company great? How can they build a plan to achieve greatness? Recognizing the limitations of a team is fundamental in doing better things. Some people are great at the startup level while others strive at the 100 million revenue mark. No matter how much someone has done in the past, you need to be aware of where this executive can take you (of course, this does not preclude coaching or mentoring).

Not everything in the past was bad
The reverse effect of change management is having a new executive team come in and pretend that everything that was done in the past was just wrong and that everything they will be doing is good. New management needs to spend the time to recognize the good things and how to improve on them while fixing what’s needed to make the Company better. It is imperative to acknowledge the good stuff from the past if you want the employees to support the new plan going forward. Take the time to explain why you are making certain changes and get them involved and accepting this.

Start with one thing; fix more stuff over time
There is also temptation to want to improve everything at once. While this is a noble idea, it is practically impossible. Identify what’s more critical and get at least one thing going better before planning to change a lot more things. Once employees can see that the changes you are proposing are beneficial for the business and for them individually (at least in general), you will get less resistance for doing more in later phases of improvements.

Communication is at the heart of it
No matter what you are doing as a new executive team, the most important item on the agenda is to properly communicate to the employees. For example, putting in place a weekly employee newsletter (which can include status reports of top initiatives) can be a fantastic tool to inform and get people to follow your work. It does not take that much time and goes a long way. Well informed employees always better collaborate and can even bring up solutions that you did not think of. Other useful tools can include a Company blog, monthly or quarterly employees meetings or end of week beer & wine in the cafeteria.

Planning a graceful exit for those executives leaving the Company
Whether you like these individuals or not; it is irrelevant to how they are appreciated by their employees. As a new executive or CEO coming in, you need to recognize this and make sure you provide the right kind of graceful exit (if possible of course). Some people are very sensitive with their title and will want to have some special role as they are exiting (special consultant, VP of strategic initiatives, fellow, etc). Others just want to make sure they are well treated (severance package, not being abruptly escorted outside, etc). But everyone wants to feel respected. While sometimes tempting, you should always refrain from referring to a past executive in a negative way. Assume they did what was thought to be the best for the Company and just focus in making things better; there is no value in bashing the past.

Change of management is not an easy thing to do but with enough patience, respect and communication, you can make this a good experience for everyone. The better you do, the greater you will be and get the Company closer to greatness.

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Due Diligence : Customers

May 5, 2010 Leave a comment

Another piece of the due diligence is the customer base. As part of the checklist, you want to get of course the list of all customers but also you want to get a good understanding of who is the authorized representative for each of them (direct, channel, web). As well, you want to see customer growth for the past five years, including revenue per customer (sales, maintenance and services). If you are offering a service-based solution (mobile or web), you also want to get info about usage and churn. You also want to get reports on all credits given to customers as well as a detailed list of accounts receivable.

Another challenge for companies being reviewed is to provide a list of all non-solicitations (for and against the Company). You also want to gather all correspondence sent to and received from any customers regarding problems relating to the services or products offered by the Company. As you can imagine, this can be quite a task if the Company has not been properly keeping all their archives and records.

Finally, you want to get any information about advisory councils or other form of customer interactions that the Company is handling. It is also a good idea to ask for permission to talk to a few customers. Of course, the Company will offer to provide names of selected customers. This is quite fine but most likely these are clients that are very favourable to them. You might want to add a few more names that you previously selected from the customer list. In this line, you should also ask for any form of customer win/loss analysis that they might have conducted in the past couple of years.

This was the last segment covering the key components of a due diligence check list. Hopefully you found this to be quite useful. Next on my list is to talk about integration planning, namely employee reviews, budget consolidation and change of management.

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Due Diligence: Marketing

May 4, 2010 2 Comments

Marketing. There a many things you can ask for in here but I have a few specific items that I find to be important benchmark in determining the ability for a company to continue to successfully market their products and services – a key indicator on their capability to sustain market demand.

Obvious items
So you want to see all past press releases and newspaper and magazine clippings covering the Company’s launches and coverage for the past 5 years. This also includes any customer testimonials and use cases. This goes as well for any marketing collateral such as brochures, advertising, web banners, etc. As such, you also need to get all advertising agreements signed for the past 5 years.

Not so obvious items
Did the Company conduct any forms of customer surveys, user studies, product validations? What kind of intelligence does the Company have on their market and their respective buyer persona? You also want to get a list of all associations or organisations that the Company is member of. As well, how many events and trade shows that the company is usually attending or sponsoring? But more importantly, you want to have access to all latest product and marketing launch plans developed by the Company. This is important to see how structured they are but also to see how impacting their marketing strategies have been when compared to results such as media coverage, etc.

The new frontier
How much as the Company has embraced Web 2.0? What is the current strategy when it comes to social networks such as Twitter & Facebook? How successful are they in getting their brand out there? What about their plan in converting web traffic into tangible leads? Does the web site provide the right entry points for SEO, Adwords? Does the Company have been actively contributing to a Blog? How much does the Company knows where to reach out to their target market? Without a well defined and clear strategy, a lot of this might just be running on good luck.

Beyond some cool tag lines and snazzy t-shirts, today’s Marketing is a lot more about a well defined process where there is a tangible synergy between Product Management, Marketing and Sales. As part of the due diligence process, it is imperative that you need to identify how well organized the Company is and how much this can be sustained. Beyond sporadic marketing activities, you want to see a plan that shows what needs to be done and how they can execute in order to get market demand that ultimately leads to achieving your sales targets.

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Due Diligence: Operations

May 3, 2010 Leave a comment

Ok, another week and we should be good to finish covering the key components of a due diligence process. Let’s now move to Operations. This is an important part as this will help determine how much does it cost to run the core of the business (minus expenses such as Marketing, T&L, etc). For one, the buyer wants to know about all your place of business, specially foreign operations that might not be familiar to them.

Leases and promises to purchase
You will need to get a list of all on-going leases and promises to purchase with a value greater than $3,000. This is a another good test to see if your CFO or financial controller is keeping a good tab on all our financial obligations

Joint ventures, partnerships
Another rat hole where a lot of companies love to sign contracts left and right. You know need to provide a detailed list of all these agreements. You can imagine the work that needs to be done in order to track all of this if you don’t have the right kind of database. Of course, your law firm can assist you in scanning all these legacy documents but this will cost you an arm and a leg.

Consignment or conditional sale agreements
Does the Company have any consigned (with a customer or distributor/reseller) or any conditional sales agreements (linked for example to the delivery of custom development or services)? Companies should be careful when it comes to declaring revenue before it can be formerly recognized.

Contracts with any agent, agency, broker or brokerage firm
What about agents or brokers? Does also applies to verbal agreement that some companies have a tendency to have here and there.

Organization chart or internal organization plan of the Company
This is a very good indicator on how you are running your business. Does the Company have a straightforward structure or is it so unique that most people have a hard time understanding it? Any unusual structures can be seen as a risk. For example, having support reporting under R&D might work for you but will be a problem once integrated into a bigger company. Also, you can ask for the last couple of org charts, it is interesting to see how the Company has evolved in the past few iterations.

Documents relating to any certification granted to the Company
Is the Company ISO compliant or member of special associations? Some industries might have tougher requirements on this matter.

Documents relating to every warranty granted by the Company
Finally, the Company needs to produce all active warranties ever produced for products or services sold. This is another fun task if you don’t have the proper database to keep track of all this.

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Due Diligence: Products and Services

April 30, 2010 1 Comment

Next is the detail on products and services. It is important for the Company to list not only all current product offered and manufactured (including services), but also all products that have been manufactured and offered in the past. Don’t be surprised either if you are being asked to explain the reason for all product discontinued in the past. This also requires you to indicate all pricing for product and services offered.

Simplicity in pricing
Nothing better than a due diligence to scare off a buyer or investor if your pricing model is not simple enough. Some of you might smile but it is amazing how many companies have convoluted and complex pricing models. As a good test of diligence, you can ask the Company to supply sample sales quotes that are most often given to potential customers. Don’t be surprised to be requested to list all special deals and discounts offered in the past couple of years (more on this on my next post).

The inventory factor
If your Company has inventory, this can be a factor as part of diligence. Too much of it could reduce value. Not enough (and depending on your manufacturing process and delivery time) can also be a problem. Be careful if you also have inventory for legacy and obsolete products – can be  reason to discount past financials if you have too much of it.

The quality of your suppliers
How you are selecting for supplying you can be an important factor. While you might have chosen someone that cost you less but it could become a liability as part of a due diligence. Don’t forget that the objective in doing a due diligence is to properly adjust Company value in consideration of assets, intellectual properties but also all risks and potential liabilities.

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Due Diligence: Intellectual Property

April 29, 2010 4 Comments

Ok, now on to the big whale of the due diligence process: intellectual property. This is where the buyers needs to weed out what is really valuable and for the seller to stuff as much as possible the value of the business. What are the trademarks that are truly valuable? What copyrights are worth something? That goes without saying about a well developed portfolio of patents.

  • Trademarks: list of the Company’s used & proposed trademarks, licences granted to third parties (including assignments). Is there is trademark claims for or against the Company?
  • Copyrights: what are the copyrights (registered or not) owned by the Company? What are the copyright licenses granted by the Company? Is there any copyright infringement for or against the Company?
  • Patents: what are the patents (registered or not) owned by the Company? Does the Company have any applications for registration? Did the Company license any patents. Even more importantly, has there been any discussion, claims or dispute regarding patent infringement (for or against the Company). This needs to be well documented – I’ve seen deals called off at the last minute just for on a risk of a patent infringement …
  • Industrial Designs: this is also a very important point. Your engineering team and product design team might have a lot of very interesting designs up their sleeves.  While these might not yet help the Company, they can still be quite valuable for the buyer.
  • Trade Secrets: this also applies to trade secrets. The seller needs to list all work done by the research team and other highly secret software development done.
  • Technological Processes: does the seller have any innovative processes? If so, this is key to identify here.
  • Confidentiality and Non-Disclosure: this is an area that I find too many companies are easy going when it comes to signing NDAs. A big portion of NDAs are often signed just because that’s how things are done. And I can’t disagree more. There is a lot of situation where non-disclosure are not needed (and will be a topic of an upcoming post). In any case, the seller needs to provide the complete list of all agreements signed. This is where having a paralegal and a good system to archive agreements makes the due diligence process easier to go thru.

The key takeaway point for me when it comes to intellectual property is all about the quality of the content that the seller can provide. If you don’t have any decent system to manage and retrieve all this information, you will spend a huge amount of time to assemble the data room – let alone forgetting to disclose important information. And this gets even more complicated as the Company gets older. And since many elements related to Intellectual Property lasts more than the usual five (5) years, you can actually drown yourself in a sea of content in trying to provide that the buyer is requesting. The worse of it all is that can be planned ahead – every deal requires for the same core of content (but not always formatted the same way).

So start-ups, start gathering and maintain your data in preparation for any due diligence you might encounter. Don’t wait until you get an offer …

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Due Diligence: Legal Information

April 28, 2010 3 Comments

This morning I am covering the legal portion of a due diligence. I look at this as the appetizer before we dig in Intellectual Property. Some of key elements you need to ask for include:

  • The name of all the law firms and professional services contracts signed with these law firms for the past five (5) years.
  • Did the Company make any claims in the past five (5) years? This includes injunctions, procedures, whether these were judicial or administrative. This also applies to any claims received against the Company or its directors and shareholders. From a sellers point of view, there is no reason to hide anything. With today’s day and age of the Web, there is a lot of info circulating out there and that last things you want is for the buyer to find something without you telling them first – even worse when this happens before the deal is closed.
  • If the Company has been in court, was there any Judgments or out of court settlements?
  • Ultimately, is there anything from a legal perspective that could raise the liability of the directors and shareholders that the buyer needs to know about. Again, if the seller has a well managed database, such things are easy to dig up. Otherwise you might just forget about something. And forgetting gives an immediate impression of hiding something…
  • In the context of IP (and we’ll get deeper on the matter in my next post), the seller needs to supply any form of Legal opinions prepared by any lawyer or law firm regarding the actual and potential liability of the Company.
  • This section also relates to compliance. The seller need to list all permits that they have in order to run de business as they do. This can also include components such as the Office of the Langue Française that we have here in Quebec. There is an obligation to comply to specific rules once a Quebec based Company is more than 50 employees. While the Company can still run their business without being 100% compliant, this is something you want to raise as you are looking to buy the business.

What is important to capture here is not only any information that indicates issues from a legal and compliance perspective but also the level of precision on how legal was managed. Too many times, legal is managed by an outside firm and the management of records is not really being kept in order. Due diligence is as much about how you get the info as the info itself. This is why I always suggest that start-ups invest just a bit more on legal (for example, by hiring a junior paralegal) and make sure that everything is tidy and clean. Again the whole point of doing a due diligence and purchase agreement is to make sure that you are fully aware of all potential risk and liabilities – getting no surprises once the deal is done. And this applies also to the seller; you need to minimize risk and liability for the shareholders as they will mostly have a portion of the deal under escrow.

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Due Diligence: Financial Information

April 27, 2010 2 Comments

Now lets move on to financial information. Not only you want to get the latest data but as many things in a due diligence, you want to get historical information for the past 5 years:

  • All the financial institutions that the Company has dealt with
  • For each of the Company’s bank account, obtain the monthly bank statements
  • Does the Company have any loans or line of credits with any financial institution, institutional lender or private lender
  • Is there any real restate mortgage agreements (Immovable hypothec agreements) ?
  • Same questions goes for any personal property mortgage agreements that a founder might have contracted (you want to eliminate any links to share ownership to debt, etc)
  • You also need to receive any documents such as acknowledgement of debt, promissory note, letter of credit, etc.
  • Did any of the executives or Director receive personal loans?
  • You also need to get copy of all form of government grants, subsidies, etc. that the Company has received or have on-going …

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