Will you be happy at your finish line?

Have you figured out what you want to have, or to be, when you reach the end of your personal run in this business life?

It is a fair question.  Most of us work in our businesses, either as managers or owners, and rarely step outside to think about how this will end in a perfect world.

Investors call this discussion “exit planning” and of course they include themselves in the

Crossing you personal finish line…

discussion.  But this is more personal, isn’t it?  If you are relatively young, you probably think of this question as too distant to consider seriously.  Of course, you’ll find another exciting venture and start again.

But for most of us, this question is or should be real and very personal.  And obviously, the answer depends upon the circumstances of our lives, our age, and our health among other factors.

And the truth is that sometimes our business runs end badly, not with a crazy–large wire transfer or retirement bonus, but with a quick goodbye or a failed enterprise.

[Email readers, continue here…]  But this question begs for a positive answer.  How would you like to see your finish line?  If you own a significant piece of the business, is this a time to consider planning an eventual exit or liquidity event?  Or do you plan to pass control to the next generation if appropriate?

Considering the alternatives early in the timeline helps you to monitor growth in terms of valuation, weigh the value of continued investment, bring family members into the discussion, and picture the end game in your mind.

In this series of insights, we continue to examine issues related to all phases of business management, including a piece on “evergreen companies,” where your picture of success is one involving the next generation continuing your good work, and not a sale of the company.  But where we have examined your management style and given insights for you in your business life, now we ask you to consider – even if just for a few minutes – that next or last stage.

Perhaps for the first time, this is a question to share with family.  From considering retirement to plowing right back in to another run, family is deeply involved in this, and should be.

So here is my wish for you.  Consider what you want in the end from your years of work, often years of sacrifice between business and family, with business often winning more of the time battles.  And picture how this should finish.  Make that picture vivid and actionable.

Then work toward, and enjoy someday crossing that finish line just the way you envisioned.

Posted in The liquidity event and beyond | Leave a comment

Control your euphoria!

One thing a senior manager can count on is that someday, something will go right, very right.  Well, after all the disappointments, pressure and outright failures, this is NEWS.

So we tend to go overboard a bit.  As a member of the board, I’ve received calls on weekends, at night and texts at hours I didn’t even think existed – from CEOs who couldn’t control the euphoria.  A successful test.  Completion of a software project by the remote workers in (Philippines, Brazil, Armenia, fill in the blank… Just name a country whose daytime is our nighttime.)  You get the idea.

Now, even those late night awakenings don’t bother me. I can get behind the excitement as well as anyone, especially when my money is riding on the outcome.

The problem sometimes comes shortly thereafter.  Guided by the enthusiasm of the moment, management orders (fill in the blank from your own experience here) an early release, increased spend for marketing, hiring more people to handle expected demand or early manufacture, or maybe just feeling so optimistic – that the conservative approval of spending is suspended in anticipation.

[Email readers, continue here…]  A moment, please…

Remember to think of the many steps in the supply chain.  That success is by definition just one of many such steps, and others will be affected almost always in negative ways not yet considered.  Early release?  What happened to the careful rollout plan?  The capacity analysis? The cash requirements forecast?

It isn’t hard to be optimistic, and it is a joy to see others be euphoric, or to be so yourself.  And yet, I’ve seen and heard stories of companies that ramped prematurely directly as a result of management euphoria, especially in the software and medical device niches.  But no–one is immune to this disease.

Feeling a bit euphoric?  Congratulations. Now calmly analyze the next steps to success before placing your foot on accelerator…

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Avoid the race to zero…

When do you sell your company?  Obviously we all want to sell at the top.  And there is the problem.  How do you know when you are at or near that right point to sell for maximum value?  Those of us in the business of calculating (guessing) this mythical peak in value often make the same mistake as our entrepreneurs.  We hang on just a little bit longer, expecting continued or accelerating growth and value as in previous periods of the same.

But there are wolves in the woods when it comes to entrepreneurial growth.  Companies sometime run out of cash in the midst of success, and often find that sources of loans or investment are not freely flowing at the moment of need.   Young companies have been known to outgrow the abilities of management to focus and direct them, failing to make the transition to organized, stable growth.  Competitors, seeing a successful development of a niche, flock into the competitive void with products or services built with a fresh view of the current environment.

Think of major companies, public and private, that have lost their shiny appeal over time, including Zinga, LivingSocial and Fisker in this generation – and Alta Vista in the last.

[Email readers, continue here…]  For young companies, often the question is whether to suffer a new round of dilution to stimulate growth, or to sell earlier and not share the (presumably) increased proceeds with additional investors.  Not so long ago, Basil Peters wrote his book, “Early Exits,” after analyzing 150 young companies and their exits.  He concluded that the sweet spot for valuation was in the $20–30 million sales price range, and that many, many times more deals were completed in that range than above $100 million in valuation at exit.  Adjusting these numbers to fit your circumstance, the conclusion is that waiting for higher value after sustained growth becomes more and more of a risk in the majority of early stage cases.

There are only a few Uber or AirBnB investments to point to – where the street value of the company may ultimately validate that amount of investment.  LivingSocial took in $583 million in capital in 2010 and 2011 with little left in time to show for the investment and tremendous dilution to the founders.

And some of us know from experience that, in a retrospective view, some of our entrepreneurs and their boards of directors pay the ultimate price of erasing all economic value by waiting too long.  In such instances, the phrase, “race to zero,” perfectly describes the result of a miscalculation in the name of either optimism or greed.

 

Posted in Protecting the business, The liquidity event and beyond | 4 Comments

About personal use of corporate assets

It is no secret that the IRS looks carefully below the surface for personal use of company assets (including cash) in its corporate income tax audits.  This insight addresses more the impact of such behavior upon the actions of employees and others who observe that behavior from a senior manager or owner of a business – and know that they cannot say anything about it without jeopardizing their jobs.

Use of a corporation as a personal piggy bank seems to be an earned perk in the mind of some entrepreneurs and some CEOs, reasoning that the only harm in doing so is in taxes never paid to the IRS.  The truth is that there is a much deeper degree of damage done to the moral and ethical fiber of the company itself, and certainly to the credibility of the executive or entrepreneur with employees.

The culture of a company is created from the sum of many parts, most all coming from the top.  One of the most toxic shocks to good culture come when a promise of ethical decency and mutually fair behavior is breached by a senior manager, observed by others.   Think of the effect of locking the supply cabinet only to take from it whatever the person controlling the security of the cabinet wishes for personal use.  Or of the reaction of your accounting person when asked to book obvious personal uses of the corporate credit card as company expense.  Or flaunting the privilege of that corporate card by charging expensive meals with high priced wines when not entertaining outside guests.

[Email readers, continue here…]   And there is another degree of damage to measure in more extreme cases – the robbing of the entity’s ability to finance its own growth, sometimes causing reliance upon bank loans or other sources for capital.

Those in charge, even if one hundred percent owners of the business, have a special obligation to be open, lawful and ethical in the use of those assets upon which others depend for their continued jobs and living wage.

Posted in Protecting the business | 2 Comments

You name the price; I’ll name the terms.

I admit that my dad taught me this when I was just a fifteen–year old kid starting a business and negotiating with suppliers for the first time.  But I learned it again and again in my various business lives.

The most striking example was the one hundred–million–dollar purchase of one of my companies by a New York private equity investor using only five million of its cash.  The rest of the purchase price was concocted from a brew of zero coupon bonds (where the face value is many times the invested amount until the reduced cost bonds mature thirty years later), and borrowing using the target company’s accounts receivable and other assets as collateral for a loan to purchase the company.

Offering too little in an acquisition to satisfy the seller?  Satisfy the seller’s need to claim a higher sales price victory by moving a substantial part of the price into a future earn–out, or using the target company’s own assets to pay part of the price, or asking the seller to finance a significant piece of the sale.  With the latter, you can make the price seem higher just by calculating the full amount of interest to be earned by the seller over time, adding that to the stated purchase price, and announcing a price much higher than the present value of the purchase.

[Email readers, continue here…] There are so many ways to satisfy a seller, sometimes a seller’s ego, by making a price seem higher than the reality of the purchase.  In the investment world, if we are unable to come to terms over the valuation of a company, we sometimes add penny warrants to sweeten the deal, allowing the investors to own a larger stake in the company at any time merely by exercising the warrants.  If there are enough of these, the CEO or founder can announce a valuation as high as double the actual negotiated enterprise value of the company.

And how about a product purchase where you cannot come to a successful negotiated price with your supplier?  Ask for extended terms well beyond sixty or ninety days.  Not only do you save the value of imputed interest, but you most likely will use, resell, collect from your customer and even earn on the excess sales revenues deposited in your bank before you ever have to pay the supplier.   Almost always, such an arrangement is more favorable than factoring or private asset lending, does not take away from your ability to borrow from other sources, and allows you to make customer promises and profits you could not have made otherwise.

Don’t rule a too–high negotiated price out until you think carefully about the terms of purchase as a tool for leverage.  Sometimes, the person on the other side must keep to a minimum price you cannot understand or afford.  Just think of the second tool, terms, you can use creatively to bridge that gap, whether driven by seller’s ego or competitive necessity.

It’s an easy rule to remember.  You name the price; I’ll name the terms.  What power!

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Press release partnerships: Worth the effort?

Many of us make it a priority to find and partner with companies that can add to our offering or extend our reach.  And we rightly celebrate each such pairing, often with a mutual press release.

And sometimes that’s all we end up doing.  Call it a “press release partnership.”  Or an opportunity missed.  Or a relationship not nurtured.

Finding a supplier, distributor or other partner is the easiest part.  Carefully planning the mutual activities to move toward a stated goal is something else.   It takes real effort and planning on both sides of a partnership between companies to make it work.

Depending upon the size of the companies and complexity of the products or services involved, it is fair to assume that you’ll need to dedicate a resource to this effort, sometimes a full time resource at that.  Consider a sales relationship where your product will be in the bag of salespeople from the partner company.  After an initial focus perhaps during an introductory meeting or training session, the salespeople hit the road.

[Email readers, continue here…]   And that’s the last you often hear about their promotion of your product – because they are commissioned upon their own company’s products and measured by the success of those sales, not yours.  Yet, the partnership was intended to help their people sell their products by enhancing or completing their line.  Why would this partnership – one that benefits both companies – fail to succeed?

In spite of the best efforts of senior management in creating such a partnership, the success always lies in the hands of those closest to the end customer.  The only way to assure continued success in such a relationship is to permit those in sales to be in direct contact with their counterparts in the other company, something often discouraged by sales management from the selling organization as a distraction from achievement of quota for both the salesperson and manager.

Which brings us back to senior management and the original reason such a partnership was created in the first place.  Such a partnership requires much more than a general agreement at top levels.  Consideration of pricing strategy, mutual compensation, training of salespersons, creation of custom collateral material, availability of technical sales support, continued contact between sales counterparts, access to those who act as technical liaisons to sales, and updates to the field of changes and enhancements are all components of a successful partnership.

None of those components are easy or cheap.  Without a plan, these partnerships usually end up merely as press release partnerships, fading into the sunset shortly after announcement.   Do you recognize the symptoms?

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Can you pierce layers in supplier–customer partnerships?

I recently experienced an amazing effort of outreach by a vice president of a large national customer asking for a meeting with the product development team of a critical supplier, one of “my” companies.  The goal, the VP stated, was to “see if these guys are battle hardened veterans that have dealt with the real-world product and delivery problems” of a nationally important customer.

Wow.  The VP apparently has done this often enough to create real relationships with supplier teams, not just senior management.  And according to his staff, the result is a cementing of relationships in which all members of the development team of the supplier feel a personal obligation to make efforts to meet the needs and satisfy not just the customer but the VP personally as well.

Usually executives meet with executives and promises are made then passed down through the ranks.  But in this unusual case, the customer made a real effort to break through the usual chain and be comfortable with the full team in a critical supply chain environment.

[Email readers, continue here…]   What could be construed as a threat to management of the supplier turned out to be a cementing of relationships through the two organizations.  The worrisome risk that opening the meeting to those subordinate employees not prepared for such an encounter was never realized.   Problems that might have later created stress between the companies became mutual challenges worked on by the whole team – not just because they were directed to overcome a problem but because team members felt a personal obligation to the customer’s VP.

How often have you worried over having to be the protector of your team, the intentional barrier between team and customer?  Most of us would be motivated to do so to promote team efficiency and to filter messages into a form all could understand and follow.  Yet here is an example of personal outreach by a major customer that resulted in better outcomes for all.

Sometime management has to let its guard down to promote communications between those actually performing the daily work.  In this case, the risk paid off.  Would you have taken that chance?

Posted in General, Growth!, Surrounding yourself with talent | Leave a comment

Time, talent and treasure – Spending each wisely

In the non–profit world, the term, “time, talent and treasure” has been used so often it is almost at the edge of being trite.  It’s used in that arena to describe a volunteer’s sacrifice in support of the non–profit enterprise.

I have been surprised to discover that it seems undiscovered in the business world. So, let’s bend the meaning to help us focus on resources while preserving those words.

Here is a way to think about resource management as we make critical decisions that obligate our personal and corporate assets for growth.  Take, for instance, time.  I’ve written often about the critical management of corporate time, an asset often squandered by management in inefficient operations that don’t advance the company toward the goal, or worse yet, operations that over–obligate scarce resources creating stress, cost and loss of reputation.  “Corporate time” is quite different from individual time management.  We should always be thinking of how to maximize the efficiency of our most critical resources constrained by limited time, whether they be in R&D, on the production floor, the chief software architect, or even you in management.

We can always tell when that critical resource has been over committed.  The bottleneck created becomes obvious and painful.  Is a process or machine too slow to absorb and pass on work coming through it?  Is there a virtual line at your virtual door waiting for decisions before proceeding with a task?  Is the R&D department being sucked into solving problems for customers instead of developing new products?  All of these are critical breaks in the management of corporate time, and as a manager, you must attack quickly and completely to remove the bottlenecks.

[Email readers, continue here…]  Jim Collins, in his book, “Good to Great,”  addresses talent by describing the managerial skill of “putting the right people on the bus” and culling out the bottom ten percent of low–performing employees.  I’d focus on the former, and to be sure that you’ve trained enough and supplied resources enough for every person in your charge to do an excellent job.  And if a person is not able to perform to expectation, then you have a right and obligation to focus upon a solution to what seems obviously as a talent mismatch.

Treasure is obviously a proxy for capital, whether earned or invested.  There is no doubt that money is a most valuable corporate resource that can be leveraged by good management, great talent, and effective allocation of corporate time.

Think of it as three opposing forces in a corporation.  Poor allocation of time pulls talent and treasure into the void.  Ineffective talent draws down corporate time and treasure to correct errors and solve for inefficiencies.  And too little treasure causes stress in keeping the supply of the other resources necessary for growth.

Quite different from the non–profit use of the terms, these three linked words remind us of our need to balance our critical resources and make efficient use of each.  Time, treasure and talent.

 

Posted in Growth!, Protecting the business | 1 Comment

How to make your recurring revenues oil and not glue

Some types of businesses generate more and more recurring revenues over time, often growing to a size where recurring revenues pay all of the overhead of the company – an enviable position.

There is a phenomenon I have observed time after time with mature companies receiving Raising moneyover 75% of their revenues from recurring sources.  Management undertakes a simple exercise of calculating the increased profitability of shutting down all R&D, sales and subordinate operations, and universally notes with shock the high net profit that results – from shutting down all operations except customer service to recurring customers (as in software support operations.)

Depending upon the type of business, customers are loyal often because they are creatures of habit, enjoying the existing relationship and service, not wanting to disrupt a working resource.  In fact, I am involved with one such company whose customer base extends back to the 1980’s when first purchasing their systems, still paying a regular quarterly maintenance fee to a company that services them well, but has no remaining sales staff or R&D functions. The customers are happy and the company profitable.  What’s not to like?

[Email readers, continue here…] Well, there are two problems here. The company dooms itself to a slow death over the passage of time as customers desert to newer products.  So the decision to “go into maintenance mode” is known as “milking the cash cow” for a reason.  And second, there is no excitement in such a company to retain employees looking for advancement.  Employees who leave are replaced with people who are likely not “A” players, often causing future levels of customer service to decline.

And yet, there are many companies where the cost of product renewal and R&D are just too high to keep up with competition.  Companies in this predicament often can be sold for their recurring revenue stream, but the multiples they command are not high.  In such a case, milking the cash cow may well be the best decision for management rather than selling the company.

Recurring revenues are oil for companies growing, reinvesting in R&D and expanded sales efforts. Those same revenues are glue to those choosing the alternative route of milking the cash cow.  In those cases, they are attractive slow, sticky streams of glue, slowing a company until it ultimately dies of old age.

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How to plan to make a successful acquisition

One of my company CEO’s recently described his rule for acquisition success, and it resonated with me as a great goal for planning during acquisition exercises.  This CEO states that he has made it work twice when acquiring companies, and that is enough for him to make it his rule for all future acquisitions.

If the target company is able to show a ten percent EBITDA (earnings before interest, tax, acquisitionsdepreciation and amortization), then the acquisition team should be able to create a way to make the resulting acquisition yield forty percent EBITDA after re–engineering the combined entity.

That’s quite a goal to achieve.  But there are obvious and not–so obvious ways to make it happen, even if over time.

Dual layers of senior management remain only during the transition period and transfer of institutional knowledge from acquired to acquirer.  The best performers from the acquired become candidates to outrank or replace their counterparts, showing that a business combination is not all one–sided.

[Email readers, continue here…] Accounting and HR operations are combined as quickly as possible, as are customer service call centers, retaining specific product skills on the front line from the acquired company.  R&D efforts may remain separate for a period or forever, but R&D management is consolidated as soon as possible to avoid territorial disputes and retention of inefficient development processes.

Sales organizations may or may not be combined, but senior sales management is consolidated so that commissioning, territorial management and product management functions all harmonize.

Facilities may become redundant or oversized after these efforts, allowing for consolidation of facilities as well.

If we follow the reasoning of our CEO who proposed the rule, we can drop an additional 30% of the net revenues (after cost of sales) from the acquired company to the bottom line.  Not a bad goal, and certainly not a bad result.

Posted in Growth!, Protecting the business | 1 Comment