Alright…I admit…I am probably too close to this topic.
Those of you who have known me for a long time know that (although it sounds corny to some people) my personal mission has long been to be “a positive force for economic development.” Think about all of the time and money you and other parents have (and continue to) invest in your children! Once it was clear that I was never going to become a MOM, I decided to invest an equivalent amount of time, money, and effort in economic development to help generate jobs, improve policies, encourage continued growth of existing businesses, support innovation, etc.
Over the summer, I found myself wondering if all of the effort that I and so many other people have put into economic development is working. The economy still has dramatic swings and is incredibly vulnerable. Disincentives to growth of existing businesses stubbornly persist. Jobs seem to bleed through borders like water. Yes…strengthening the economy is difficult but what’s the alternative?
Personally, I am grateful for what I have learned through my 35 years as an economic development advocate. When I hosted a weekly talk show to shine a light on what it takes to keep growing midsized companies, I got to interview and meet 300 of THE most amazing, bright, ambitious people. Serving on chamber of commerce boards, I have been fascinated by the complex blend of diplomacy and influence executed by many corporate CEOs. There are more steps in that dance than in a number choreographed by Napoleon and Tabatha. Most of us must resist the urge to solve problems in our own companies. We provide vision and lead strategy but must depend on our great employees to prevent and solve problems. Sometimes, executives find participating in broader problem solving initiatives is a refreshing change of pace. Plus, Governors seem to appreciate when business leaders find ways to solve problems.
When you have presented alternative approaches to legislators as often as I have, you can’t help but notice that their time is thinly distributed across hundreds (if not thousands) of issues and is often dominated by fundraising and campaigning. Important people are often grateful for the provision of constructive suggestions instead of being subject to yet another diatribe of complaints. Providing expert testimony at a public hearing is very scary the first few times you do it, but having survived that experience, you are better prepared to face media scrutiny as the CEO of a significant business.
Trying to PUSH THE ECONOMIC ROCK UPHILL is not a one person task. I value being part of the collective village of the business community that keeps trying. And frankly, the effort has consistently influenced our employees to also think about issues that are larger than just themselves.
A recent pre acquisition due diligence process raised a fascinating question for the leaders of both entities.
Like most due diligence processes, the leaders of each business began with valuation formulas and a series of questions. If the industry multiplier for acquisitions is currently averaging between 5 and 6, would 5.5 X net profit be an affordable purchase price? If so, will the seller accept payment over time to reduce strain on the buyer’s cash? Could a lower purchase price be acceptable to the seller if more cash is involved up front? What percentage of the seller’s existing customers should the buyer realistically expect to retain and at what revenue/customer? What’s the value of the seller’s equipment, inventory and vehicles? How should the seller’s sales pipeline be valued? Which prospective customers might hesitate if a new owner is involved? Would there be additional costs associated with any differences in geographic areas or target markets/customers? Which employees are most important? Should anyone be paid a bonus to stay and give the buyer a chance? What additional costs should be anticipated due to employee turnover? Could the possibility of an acquisition simply invite employees to leave and start their own competing business?
We slowed them both down and asked that they consider if and how the goal of profitable business growth would be served by an acquisition? The answers and values related to the questions listed above are impacted by whether the purchase being considered will eliminate a competitor, increase the buyer’s production/capacity or add complementary products/services to the buyer’s offering.
In this situation, the services provided by the seller’s business require more experience and training. The acquisition would add a desired complementary service to the buyer’s offering. The people-related questions became the major variable in these pre-acquisition valuations. The fact that the seller’s business has a collaborative culture and the buyer’s corporate culture is more autocratic became the most important variable. The employee and customer retention and the projected growth and profitability of the combined entities could be higher IF the buyer is invested in learning how to be a more collaborative leader. They might have to leave the businesses completely separate (even when/if the ownership changes) if the buyer has no intention of changing. And if the collaborative leader (the seller) values keeping a team of people together, a sale may not be possible at any price.
It’s been our experience that the purchase price and long term ROI is adversely impacted when an autocratic buyer is involved. Would acquiring a collaborative business raise, lower or have no impact on the purchase price for you? What could you do to be more collaborative and be more ready to acquire businesses at more affordable prices and increased ROI?