Tag Archives: Leadership

Add Value to Your Privately Owned Business

Most corporate governance articles, presentations, and conferences are focused on publicly owned businesses. With corporate and executive scandals galore occurring over the past few years, there have been outcries for better controls, systems, and oversight guidelines. Yet, the same emphasis and attention is grossly lacking in the privately owned business community. One of the areas in which governance best practices could be applied is in the realm of mergers and acquisitions. Nick Miller of Clayton Utz law firm in Australia offers some insights below for this unique situation:

Increasing the level of formal governance can assist in reducing risk, identifying issues that might emerge upon a sale and generally enhancing the credibility with which the business presents itself to potential buyers. Perhaps even more powerfully, governance is a means by which, both in fact and in perception, a business can present as less dependent on the involvement of its founders than it would without governance. This can add very significantly to value.

Many private business owners think that the absence of governance procedures makes them more flexible, more adaptable and more opportunistic. That may be so, but the benefits of that should be weighed against the benefits of formal governance when planning a sale. 

There are a range of ways to adopt some greater formality in governance:

  • without changing the make up of the board of a company, the company could implement a more structured system of monthly meetings. These may or may not be formal board meetings, but should nonetheless involve the directors and those who report into the CEO;
  • a company can set up one or more committees. These can be formal board committees or more informal, but they are set up to address areas of need, to bring in expertise and focus on how risk management can be improved and issues for the business addressed. Examples are an audit and risk committee, a brand development committee and an employee policies committee, to assist in developing those aspects of the business in readiness for sale. These committees might have outsiders on them and they might not, depending upon the need and the expertise available in the business;
  • an advisory board could be established. Properly structured, members of an advisory board will not carry director duties and liabilities and this can be a sensible stepping stone towards a more fully independent board;
  • one or more outsiders can be brought onto the board. This can be very beneficial, but it needs to be right for the business; and
  • governance can also be improved by developing appropriate governance policies and procedures.

Corporate buyers and private equity see many poorly organised privately‑owned businesses. They will take the opportunity to highlight the possible risks to them in undertaking an acquisition of a poorly organized or more risky business. Some investment in governance can dispel most of these apprehensions, and allow private business owners to defend the level of risk in the business and so achieve higher value for a seller. Nonetheless, formal governance should be introduced carefully, to ensure the owner’s ability to drive and control the business is not unduly impeded.

In summary, shareholder value is enhanced in privately owned businesses through better corporate governance. Opinions of value are enhanced by checks and balances, independent processes, and a decreased dependence on the founder(s). Make the necessary adjustments to your business. You will make better decisions, increase the market value of the business, and create an environment wherein others can grow in their roles and responsibilities.

 

Be An Ultimo Entrepreneur

Entrepreneur Country is a UK magazine I enjoy reading for stories that are refreshingly different insights. The views “from across the pond” provide a perspective on entrepreneurship that is distinct from the usual fare in the United States. Instead of a fascination with high-tech start-ups and deal making, the editors choose to feature entrepreneurs from other industries. The stories that are shared bring to light principles that can be applied across many settings.

Identifying a gap in the market to provide a unique solution to a problem can be hard, but very rewarding.  Michelle Mone found that helping women get what they want has been a path to success for her company, MJM International. MJM has made her one of the top 3 female entrepreneurs in the UK. Mone shared key points of her entrepreneurial journey in the July issue of the magazine.

In October 1996, at a dinner dance, Michelle was wearing an uncomfortable bra and decided she would invent her own in its place that would be comfortable, cleavage enhancing and improved in appearance. MJM International was born, (and the Ultimo brand was launched.)

Not only (has) Ultimo (been) revolutionizing the lingerie industry, it (is) now taking on cosmetics, with every product going through several rounds of testing [‘Every product has to be the best, I don’t accept second best’ – Michelle] and perfecting before it reaches the high street. “We have new products launching all the time and we have 13 inventions in total. The gel filled bra that we invented 12 years ago as an alternative to plastic surgery was what made us, because Julia Roberts wore it in Erin Brokovich. Then we have the 24 hour bra that you can’t feel that you’re wearing, and now UTan. I think next year we will expand further with a full on cosmetics range”.

Key points in Mone’s life story included:

  1. Taking a job to support her family as a teen when her father became wheelchair bound,
  2. Tacking Richard Branson posters on her wall instead of teen idols,
  3. Hiring 11 other teens to help her with a newspaper delivery route,
  4. Distributing Avon books,
  5. Working as sales and marketing lead for Labatt’s in her early 20s, and
  6. Launching MJM soon thereafter.

After taking her severance pay and putting it to good use with MJM, she moved from idea to commercialization. Here’s how she described the transition to becoming a successful entrepreneur:

“You have to do your research and find out if you have a viable product. See if you can meet a manufacturer too, because there will be issues in terms of shipping and some factories are too large for a new product. Go smaller, work out the volume and do as much homework as possible.”

“You just have to be incredibly organised, but I’m not super woman and I do get things wrong.” Ultimo suffered an enormous setback in 2002 when a married couple, distributors for MJM, fled with £1.6million.

She exhibited tremendous tenacity in overcoming this obstacle. a divorce, and other setbacks. Kelly Dolan, who conducted the interview with Mone, saluted her “ability to leverage MJM’s press position through PR campaigns (comprised of)  celebrity endorsements and clever marketing” Dolan asked how young businesses can optimize PR, to which Mone responded, 

“If you can’t afford a PR company then remember that there is nobody more passionate about your business than you. Write a press release, send it out to everyone and hope for the best. Hire a PR company if you have the money, but you have to get across to whoever is representing you that real passion for the business.” 

Well put! Every entrepreneur–female or male, in fashion or services, regardless of challenges–will meet with greater success if able to convey passion for the target audience and its needs.

 

Mainstreet Business Demonstrates Strategy Execution

One of the interesting conversations that keeps coming up  revolved around the hyperfocus on technology based start-ups to the exclusion of virtually every category. When I attend networking events, many of the entrepreneurs that I encounter are articulating the value proposition of their high tech start-up. Almost every single one speaks of the next competition they plan to enter to secure financing to fund their idea.

What seems to be missing in these conversations is a focus on executing a business strategy rather then simply a funding strategy. In the hot pursuit of obtaining seed capital, entrepreneurs  can become blind to what’s happening around them with the other important facets of the business. From human resources to operations, marketing & sales, there are many other aspects of development besides the capital raise that warrant attention.

In companies that do not claim to have a technology focus, it is a little easier to talk to the entrepreneur about business basics. Professional development, personal finance, market research, proof of concept, branding, feasibility, organizational design, supply chain, & sales are front and center topics in most companies. Instead of intellectual property, securities and like topics du jour, most of the companies that contribute to our way of life and represent the fulfillment of the American Dream struggle with these topics.

I fear that, by giving so much attention and publicity to technology companies who may have the outside chance of selling at a favorable multiple, we are failing to give earnest heed to companies with issues that are easier to address and that have a higher likelihood of making it to the five years in business mark. Simultaneously, we become so enamored with the perfection of code or intellectual property that we fail to talk about business basics with the technology companies, though they need to think through all of these issues in addition to theunique issues they face.

Please do not misunderstand my intentions here. This blog post is not about bashing technology companies. Quite the contrary, it is suggesting that all companies are best served by focusing on fundamentally sound business principles. In the very next breath, however, I would argue that non-tech companies not be relegated to second tier/ugly stepsister status simply because the multiples they usually generate are lower. The upsides of a “mainstreet business” is that it has less inherent  risk, requires less capital, and can generate revenues sooner. 

How can we, as the American business community, more effectively support mainstreet businesses? (And not fail to challenge tech companies to also execute on key business fundamentals as well?)

 

Antarctic Innovation

If you didn’t have the opportunity to watch the IMAX movie about Sir Ernest Shackleton’s now-legendary 1914-1916 British expedition to Antarctica, you missed out on a big screen adventure. Yet, as can be the case, cinema leaves out key details in non-fiction stories. As it happened, Shackleton had a lot of difficulty recruiting a crew to accompany him in exploration. A LinkedIn acquaintance of mine, Gijs van Wulfen, found that an advertisement was run in a London paper in 1913. The ad could, as Gijs points out, just as easily be an appeal for those looking to become innovators:

Men wanted for hazardous journey. Small wages, bitter cold, long months of complete darkness, constant danger, safe return doubtful. Honour and recognition in case of success.

van Wulfen points out that there are numerous similarities between expeditions and innovation:

  • A promised land. Most people searched for the adventure only when it was really necessary and when they had nothing to lose. This is so familiar in our organisations today. Real urgency is only experienced when ‘old solutions’ do not work anymore and markets are saturated. And it is felt by people expecting big promising treasures.
  • The challenge of being 1st. Explorers strive being first. Amundsen discovering the North-West passage. Livingstone searching for the source of the Nile. Hillary climbing Mount Everest. Entrepreneurs have the same ambition: developing ‘new-to-the-world’ innovations to outsmart competition.
  • A group effort. Explorers almost never went alone. Hillary could not have conquered Everest if he wasn’t saved first by Tenzing Norgay from falling in a crevasse. You can invent a new product, service or business model alone. But within organizations you cannot innovate alone. You need people from every discipline to develop it, produce it, market it, sell it, bill it and service it.
  • A long journey. Discovery voyages lasted many years, due to unexpected setbacks such as an unknown illness, a tropical storm or mutiny by the crew. The average time for the development process of a new product, which takes 18 months from idea to introduction, follows similar patterns.
  • High risk of no return. Many ships perished along the way. On one of the voyages of Magelhaes, four of the five ships did not return. One ship survived and made the expedition worthwhile. It’s similar in innovation. From the seven new developed product ideas only one product enters the market successfully. The remaining six perish along the way.
  • Serendipity leads to even bigger rewards. Sometimes explorers thought they landed on a small island, which proved to be an enormous continent afterwards. As the Vikings did who discovered North America long before Columbus.  Compare this with the development of SMS-services. It was originally developed for the business market, but it did not take off. After young people caught on to the idea of SMS as a modern cheap way to contact each other, it became a worldwide market with more than three billion users.

Entrepreneurship, like innovation, is an expedition for the hearty. Those who aspire to start enterprises must be willing to take risks, have a clear vision of a better solution, work hard for a long time, recognize opportunity, and work through teams. 

 

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!