Category Archives: Family Businesses

Need Outside Investors? Choose Wisely

Is private equity in your future? Many closely held businesses reach a point where their capital structure is not supportive of their cash and other financing needs.  When internal resources and bank money is no longer enough, the business owner and/or CFO has to find outside sources. Seeking outside investment is not, however, an easy process. The search needs to resemble a courting relationship that used to be so common in interpersonal relationships. You are, after all, seeking to build a long-term partnership.

Inc. online has a column entitled Herding Gazelles. In a post today, Karl Stark & Bill Stewart point out what to look for in private equity investors:

1. Find the right investor.

Angel investors, venture capital funds and large corporations all have different investment profiles. Each has a specific motivation and a process they typically use to create value.  Partnering with the wrong investor often means that your business will be asked to meet investor goals that may not align with your goals for the business. Find an investor whose objectives are in sync with the business you are building. 

2. Agree to a common view on how to maximize value.

At the outset of your partnership, spend time to align on the facts around the business and its markets, then discuss your strategy and how it will maximize value for the business.   Make sure both parties are clear on the roles they will play and the expectations for how the investors will participate and add value to the business. A successful relationship is all about setting and communicating the right expectations and engaging in open communication when events necessitate a change in those expectations.

3. Align on the right incentives and desired outcomes for both parties.

Clearly lay out the personal, professional, and financial goals for both you and your investor. Identify areas where you can work together to help each other reach his or her individual goals. The investor will likely have a specific timeline in mind for an exit and may have expectations about an exit price. This will have a large impact on their view of various strategic decisions. As a CEO and management team, you may also have specific expectations about how to grow the business. Put these all on the table, especially if they may be in conflict, so you can manage expectations upfront and amicably.

4. Leverage your investor’s experience, not just their money.

Brainstorm with your investor about ways in which he or she might help push the business forward. In some instances this may be obvious, such as a partnership with a corporate entity, but you may be surprised at other things the investor can offer beyond financial support. Investors typically have seen successes and failures and can share their advice.  They may have a wealth of contacts, even potential customer relationships, that could provide value to the business. Don’t overlook these intangibles.

A private equity investor will be a key member of your management team, so you need to build a strong, lasting relationship with them-just as you would with any of your key team members. Using your investor to the fullest will be critical to fueling the growth of your business.

Following these guidelines is just good common sense. We would add to the suggestions that it is important to identify “fit” before anything is on the line. Discussing how decisions will be made, what outside professional services firms will be used, and how the composition of boards of directors and advisors ahead of time is a good way to learn about the investor’s priorities and values. While agreeing on how to maximize value is important, it is even more important to identify what metrics represent value.  Great advice on leveraging an investor’s experience–ask what they plan to bring to the partnership beyond money. You may be very pleasantly surprised!

 

Business Plan Primer

 

Not all business plans are the same; the type plan that is needed in start-up mode should be quite different than what would be used in a later stage. Early stage businesses should document milestones the team plans to accomplish, with mini-plans for describing how the milestones will be accomplished. Mature businesses have the luxury of using broader brush strokes to describe processes, personnel, and performance metrics. Regardless the stage, plans are required by lenders or investors to whet their appetites.

Dave Lavinsky, in a recent newsletter article  for GrowThink entitled The Ammunition Every Business Needs, writes:

When you think about it, this is really intuitive. Here’s why. Business plans are read by investors and lenders for risk management reasons. These money sources realize they are taking a risk with every check they write, and want to mitigate this risk. The business plan explains to them how the business will use their funding, and paints a picture as to the likelihood that they will get an adequate return on investment.

For mature businesses, the business plan is just one of severable variables the investor or lender can assess in their decision-making. For example, if you have a mature company, the investor or lender can speak to your customers, analyze your financial history, assess your team members’ backgrounds, compare your product to competitive offerings, and so on. As a result, if your business plan is weak but the other factors are really strong, your mature company may still receive funding.

On the other hand, for a new company, particularly one that doesn’t yet have revenues, the quality of your business plan is critical; because it is one of very few variables that the investor or lender can review. The investor or lender can consider your business plan, the bios or you and your team, and maybe a product or service prototype if you have one. That’s pretty much it.

General tips Lavinsky recommends for business plans include:

1. Always remember that your business plan is a marketing document

2. Write with confidence, but be careful of superlatives

3. Answer the key questions, but not all the questions

It is up to you, through the power of your written words, to be winsome. Convincing. Persuasive. You are trying to demonstrate that what you are offering addresses a real problem with a viable solution that your organization can provide in a uniquely satisfying way.

Succinctly discuss your process, document the metrics you plan to use to measure success, and share how your team has experience in performing the responsibilities  required to execute the plan. Don’t use ambiguous phrases that make it sound like you are inexperienced. Overstating your hand, however, by using words like “most,” best,” etc will only undermine your credibility.

Make sure you demonstrate your knowledge of  the competitive environment and a winning strategy to secure target market share. Write about your customer profile and how your offering will be appealing. Discuss marketplace trends and how they impact the strategy you are pursuing. Finally, tell the reader how the money you seek will be used, when, and why.

 

Local Client-Focused Innovation Fertile For Consultants

When companies look to innovate, they have a choice of using internal or external resources. One of the chief sources of external assistance is the category of consulting firms (“consultancies”). A study by the Management Consultancies Association (Czerniawska 2006) suggested the top reason consultancies were recruited was because client staff did not possess the relevant skills (66 per cent). While original and creative work took second place (45 per cent), getting access to proprietary methods and tools prompted a response from only 17 per cent of respondents. What does this mean? That  consultancies themselves may need to become more innovative in the way they interact with clients.

Globalization and the ensuing stiff market competition suggests consultancies need to identify and respond to these factors, and then modify their responses to fit their clients’ changing needs and expectations. Improving thought leadership within the consulting industry is critical. Yet, formal innovation processes alone can hinder innovation itself and contribute to loss of market position. One-person shops as well as national firms will benefit from becoming “more innovative and adaptive in their proposals, methods and solutions, while traditional client/consultant boundaries need to be challenged, stretched and even broken. Consultancies may also need to be more open to partnership working with other agencies, such as academia or even competitors, if they are to respond effectively to the pressures of the current high-cost, low-resource business environment.” (Institute of Consulting, 2011)

Clients need to learn how to work with consultants in this new environment. We should be cautious, however, to say that consulting has ceased to be innovative; the creative processes have simply shifted. Rather than looking at the bellwethers of old, BPR or TQM programs, local, client-focused innovations are the new frontier. Such projects are driven by a more discerning client who is often wary of being sold a ‘one-size fits all’ product, and are frequently undertaken as joint initiatives between clients and consultancies. Such arrangements provide clients with more control and consultancies with reduced overheads.

 The Institute of Consulting Report recommends the following to improve innovation inside consulting firms so that the organizations they advise can, in turn, become more competitive: 

For Consultancies:

Think small: clients are more sophisticated and demanding, requiring ideas that are tailored for their local needs.

Share costs and expertise: there is little that can be done about diminishing margins or higher utilization rates, but universities, research institutes, clients and other consultancies will often jump at the chance to share resources on interesting innovative activity if the case is made well enough.

Explore new frontiers: innovation is to be found in bringing fresh ideas in and listening to them. Develop boundary-spanning roles, recruit graduates that are not from business schools, interview new recruits about what could be changed in your company, seek out different sources of research and knowledge and organize cross-silo spaces for discussion.

Enable talent: providing bright, motivated consultants with autonomy and the ear of senior management is more likely to generate useful innovations than trying to formalize the process through bureaucracy. Innovation involves risk so loosening controls is no bad thing.

Be proactive: innovative activity depends greatly upon clients and procurers leading the way in taking risks, having conversations and enabling creativity. This can be supported though communication, education and persuasion.

Develop your people: over half of all respondents reported that training, conference attendance and professional, accredited staff were important enablers of innovation. Continuous professional development, it seems, is crucial for developing innovation as a strategic capacity for consultancies.

For Client Organizations:

Work with consultants: research shows that companies which invest in innovation during a recession are more likely to come out of it faster than their competitors. Co-working with consultancies on management innovation generates a number of benefits: a closer match of solutions with your needs, more motivated and skilled employees, a potential sharing of intellectual property and association with ground-breaking ideas.

Take risks: examine and prioritize the areas of your business where new ideas could put you ahead of the competition. Put aside some of your budget to work with consultancies on new ideas, if possible using a risk-reward form of payment so that risks are shared with the supplier.

Improve procurement: sourcing consultants solely on the basis of cost is risky to both the delivery of the project and the innovation that it might bring. Good procurement practice will acknowledge this and purchasers should have both the expertise and the freedom to select the best consultant for the best price. An over-specified solution may mean you are not getting the best out of your consultants and minimal consultant interaction with the business owner during the tendering process can sometimes mean the project requirements get miscommunicated.

Enable expertise: your consultants will have witnessed the challenges you face dozens, if not hundreds of times, in similar companies. Making the most of this not only involves conversation with the consultancy when defining solutions but also ensuring as much of their skill and knowledge is passed on to your staff before they leave. Clients must enable consultant expertise as much as consultants enable that of clients.

From Think to Execute

“The ability to convert ideas to things is the secret of outward success.”
– Henry Ward Beecher

It is not enough to simply have a good–or even great–idea. Ideas are plentiful. I have them. You have them. The bum on the downtown street corner has them. People whose faces grace the covers of business magazines have them. Why are they on the cover and not us? Quite simply, they have become very proficient at executing their idea(s).

Brad Feld, of The Foundry Group and TechStars says that he gets emails all the time from would-be entrepreneurs with the latest software and internet ideas:

Often these entrepreneurs think their idea is brand new – that no one has ever thought of it before. Other times they ask me to sign a non-disclosure agreement to protect their idea. Occasionally the emails mysteriously allude to the idea without really saying what it is. These entrepreneurs think their idea is special and magic. And they are wrong.

The great entrepreneurs are already focused on the implementation of their idea. They send me links to their website or software. They describe the business they are in the process of creating (or have already created). They point me to what they’ve done to implement their idea and show real users who validate that the idea is important. And they quickly move past the idea to the execution of the idea.

Google? Not the first search engine. Facebook? Not the first social network. Groupon? Not the first deal site. Pandora? Not the first music site. The list goes on. Even when you go back in time to the origins of the software industry: MS-DOS – not the first operating system. Lotus 1-2-3 – not the first spreadsheet.

The products and their subsequent companies became great because of execution. First, they had to execute on building a great product. Next, they had to execute on building a great business. Finally, they had to execute on scaling, sustaining, and evolving a great business.

Notice what Feld says…

  1. Execute on building a great product. As you move from Ideation to Conceptualization, it is important to vet the commercial and market value of the idea. Determine whether the “back of the napkin” math shows that the idea has promise to anyone other than yourself.
  2. Execute on building a great business. Creation is the process of doing one’s initial research and development, followed by producing a prototype or beta version of the product or service. The work done here will reveal what not to do and what to do as you go about determining what you plan to take to market.
  3. Execute on scaling a great business. Evaluation of your strategic plan and markets, validating them and building a strong team around you will allow you to grow with less problems down the road.
  4. Execute on sustaining a great business. Preparation for the launch and Commercialization of your product or service require thinking through what you plan to do with a systems and process mentality so that procedures can be developed that help the business to run itself.
  5. Execute on evolving a great business. Commercialization looks differently at later stages of business growth. Sales organizations and operations must change and  as market data is analyzed and new opportunities for competitiveness emerge.

Be someone known for execution rather than ideas–even if you are not trying to impress a venture capitalist, you will meet with greater success in all that you undertake!

 

Retool for Catalytic Success

Business macrotrends are illuminating. With sufficient data, organizations like BCG, McKinsey & Bain can advise their clients better as to thought leadership positions, best practices, and optimization. As the national economy has improved from recession to stagnation or slow growth, businesses have shifted their focus from expense reduction to growth. Increasing revenues is important to companies providing goods, services, or non-profit benefits.

When Bain performed a study last year, 80 percent of the executives believed innovation to be important than cost reduction for long-term success. Also, 68 percent of respondents believed that taking care of customers and employees should come before shareholders. Bain’s interpretation: executives realize that growth depends on having happy, productive employees and satisfied customers. Shareholder returns will be the natural byproduct.

Growth Catalysts:

In the Bain survey, popular management tools were rated by respondents. Of 25 total tools, the top 3 were:

  • open innovation (expanding the sources of breakthrough products)
  • scenario and contingency planning (testing the “what ifs” to plan for the future/minimize risks) &
  • price optimization (addressing rising commodity prices). 

Social media was seen as an additional emerging tool of choice. Whether websites, micro-bogging, or online communities, there has been a growing commitment to explore the value of the medium to enhance relationships–internally as well as externally. “While only 29 percent of all respondents say they used social media in 2010, usage is expected to surge to 56 percent in 2011. Even so, executives tell us they’re uncertain about how to measure the effectiveness of this tool.”  

The standard approach with the introduction of new tools is to make a limited investment to vet the value of the tool, then make a more sizable commitment if it proves to have merit. Bain study leaders felt that this approach presented two risks:

First, while it’s understandable that companies do not want to make major investments before they fully understand how a tool will work, we have found that using tools on a limited basis consistently leads to lower satisfaction, so caution may inadvertently result in failure. The second risk we have found: companies start using a tool because their competitors are using it, or because it’s the hot topic in the business press, but if they do not fully understand how and why to use it, the experience ends up in failure.

Think of business process reengineering, where we witnessed an inverse relationship between usage and satisfaction rates when it was the hot tool of the 1990s. We witnessed reengineering drop from the tool with the fifth highest satisfaction rate in 1993 all the way to 21st in the late 1990s. It was only after usage rates declined that satisfaction began to improve again. Any time we see high usage but low satisfaction, there is cause for concern.

What Tools Work & What to Degree?

Benchmarking made a comeback a couple years ago and displaced strategic planning, a perennial No. 1, as the tool of choice. In addition to benchmarking, the most widely used tools during the recession period were strategic planning and mission and vision statements. These tools have rated in the Bain top 10 for usage over the years, regardless of the economic climate.

The survey found the least used tools included open innovation, decision rights tools and rapid prototyping. One tool that was surprisingly unpopular was mergers & acquisitions. During a downturn, M&A deals often create bargains that give the acquiring company increased scale and broadened scope. Yet in each recession we see relatively few deals. 

Among the  preferred tools, strategic planning was the tool with the highest satisfaction rating. Other tools with above-average satisfaction scores included mission and vision statements, total quality management, customer segmentation and strategic alliances. On the other end of the spectrum, downsizing, outsourcing and shared services centers–despite being seen as expense reduction tactics–were three of the five tools with below-average satisfaction scores. The other two tools with low satisfaction ratings were knowledge management and social media programs.