May 28, 2010

Acquiring the Acquisition Mindset (part 1) – How to Prepare for an Exit daily

By Nitin Khanna, CEO MergerTech Advisors

What is the acquisition mindset?

It is a mindset that says, “Whether or not I ever sell my company I will run it as if it is going to be acquired tomorrow.”  The acquisition mindset enforces a discipline, structure, and rigor in your company that ensures you are running a professional organization that minimizes structural risk, maximizes work satisfaction, and ensures the highest levels of income today and wealth tomorrow (if you do sell).  The acquisition mindset is a tool that helps you in all areas of your company whether you are running a lifestyle company, a venture backed company, a high growth company, or running a company on the side while you perform another day job.

Running the Company

Incorporate very thoughtfully. Spend a lot of time thinking through partnership agreements. 

Think through estate and tax planning issues right at company formation.  Who owns the stock? Where does it reside? What will be the tax implications if you sold the company the next day? Should your kids own some of it now before it has any value so you avoid any estate taxes?

Create goals and metrics and strive to meet them.  Analyze why you did or didn’t meet the goals, refine, repeat.

Build a management team.  A strong one.  Could the business run a week, a month, a quarter without you? 

Equity in your company is valuable.  Treat it that way.  Have really important and good reasons to give away equity to partners and structure it as a future incentive rather than a grant.

Be professional.  Have a professional image, maintain an organization chart, be disciplined, be prone to candid conversations (the more difficult the topic the quicker you should have a candid conversation about it).  A “fun” culture and “discipline” are not mutually exclusive.

Record Keeping

Maintain solid financial records including getting reviewed financials once you get to $1MM in revenue and audited financials once you get to $5MM in revenue.  Understand why you may or may not be using GAAP accounting.  Use the accounting the maximizes after tax income but understand why you are using it and how it reconciles to GAAP.

Maintain solid legal records including articles of incorporation, regulatory and other business licenses, board meeting minutes (yes, these add a huge amount of value by increasing trust and demonstrating professionalism to a potential acquirer), risk and liability records (environmental, various employment policies, insurance, etc.).

Invest appropriately in your IT and accounting systems.  Investing appropriately means your systems are ready for the next 12-18 months of your growth.


The single most important relationship you want is with your bank. Constantly be communicating to your banker.  Always have a line of credit that is 25% – 50% larger than what you need for the current year.  This relationship should be on the same level as the one with your largest client.

Develop a solid professional network of attorneys around you including tax and estate planning attorneys when you incorporate; review these every $3MM in revenue.  If you don’t feel comfortable calling your attorney at the first sign of legal trouble you don’t have the right relationship with them.

Always have an experienced accountant working with you from the very start.  Consider hiring a controller at $2MM in revenue, a CFO at $10MM in revenue, a General Counsel at $15MM in revenue.

Develop a relationship with an M&A Advisor around $3MM in revenue; they can apprise you of industry trends, valuations, exit preparation, and handle incoming offers for you.

Don’t have an irrational fear of financial firms (VCs, PEs, bankers).  Too many people give too much equity away to friends and too little to financial firms that can help them.