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The Downward Spiral of Gross Profit Blindness and Write offs

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AMB-gross-profitMaybe your company is within a segment that provides innovation and leading edge products so you can use premium pricing. But far more companies function around mature products and aren’t viewed as “cutting edge”. Their (maybe your?) pricing is under pressure every day.

Two businesses that contacted us recently each need to generate a minimum of 33% gross profit on their projects to cover reasonable operating expenses and produce a modest net profit. But they each keep finding themselves responding to corporate bids that provide a skinny 5-7% gross profit. That’s if everything goes well! If they win the bids, they’ll end up with a net loss of 25 – 27%.  In other words, every time they go after those bids, they are unknowingly volunteering to donate huge sums of money to corporate clients.

How can bright executives of midsized companies do that?  Gross profit blindness happens when folks are in survival mode for too long. These two companies are both involved with commercial facilities. The recession of 2008 impacted the commercial facility industry hard.  That recession was the implosion of the financial and real estate markets. So, yes, in many ways, the cannibalization of the facility management industry is a lagging side effect of the recession of 6 years ago!

Lingering high unemployment within an industry can also fuel gross profit blindness. Purchasing agents and operations managers have increasingly taken vendors for granted. When abusive behavior becomes “the norm,” vendors can actually develop a “victim” mentality.  It is a powerful downward spiral. A vendor that has tolerated verbal abuse and below reasonable pricing can also lose objectivity about the value of their products and services. When customers yell, the vendor can have a knee jerk reaction and quickly accept the blame. Increased “write offs” make low gross profit contracts even worse. Every time the vendor does that, the customer is rewarded for negative behavior…so, like a spoiled child who gets what he/she wants when he/she has a temper tantrum, the abusive behavior escalates.

We have recommended different approaches to each of these businesses. No two situations are exactly the same.  In one case, we recommended that the executives start targeting their marketing and sales to a completely different industry.  We suggested that they do some field trips/site visits to see how people in other industries treat one another. They have tolerated so much blame, last minute changes, screamed demands, and unreasonable pricing they have lost perspective and think everyone is awful everywhere.

The other company has connections with trade association leaders who want to spearhead an initiative addressing culture, behavior, values, ethics, shared responsibility, fairness, etc.

What would you tell a woman who lives in an abusive marriage to do? She has lost her self-esteem. She has come to believe that she doesn’t deserve any better. She has lost objectivity about her skills, abilities, and value. Business owners who become beaten down and think/act like victims also need to go elsewhere to recover!

Too Much Startup Financing Can Sabotage Growth Financing & Exit Valuation

amb-financingEntrepreneurs should raise as little [venture capital] as they can until it works for their business, then raise as much as they can to scale,” says prominent angel investor Gil Penchina. “If you raise too much before the correct formula is achieved, it can mean bad news for the valuation outcomes.”

Wise words.

Exitround (a hub for small tech M&A deals) recently reviewed relevant factors of 200 deals. In their study, the startup companies that had raised $3-10 million in venture capital actually ended up with lower valuations upon exit than startups that had raised $2-3 Mil in venture capital.

That conclusion matches what we have been seeing over the past few years. As specialists in accelerated growth for mid-sized companies (not startups), we have noticed that companies often had to overstate their valuations to attract $5-10 Mil in startup venture capital. They then struggled to actually become the valuation they had promised.

The leaders of those companies tend to be the people who forget that big ticket exits typically require about 10 years to happen. Therefore, those entrepreneurs end up spending an inordinate amount of their time chasing higher and higher levels of venture capital and/or glamorous IPOs…when an acquisition could have been an excellent exit strategy within five years.

What could your existing business do to deserve the infusion of $5 Mil of growth financing?  Now that’s a more exciting question to ask.

Keeping the Entrepreneurial Spirit Alive

The word “entrepreneur” gets thrown around so much that the meaning has been diluted.

amb-innovationThe true spirit of being entrepreneurial is about the process of innovation…but not just for the sake of having something new! It is applied innovation to solve problems and create value.  The solving problems piece is about the customer. The creating value part is about the business entity within which the entrepreneur functions.

Being able to solve problems for others involves awareness, actually caring about what other people are doing and being curious about where they are going and what they will be trying to do tomorrow. Self-serving EGO can quickly get in the way of the entrepreneurial spirit.  A little success can go to one’s head. Business owners can start believing their own media clippings.

It pays to sustain investment in externally focused research.  Encourage team members from various disciplines to surface potential customer problems for the company to solve.  Thinking that innovation and product development is the divine right of the R&D department is passé.  Some of the most significant products can be traced to collaborative effort across departmental lines.

Being able to create value also requires awareness.  Products/services need to be scalable for value to be built.  Over dependence on individuals may fuel EGOs but is the enemy of value creation. Replicating processes and looking for sustainability rather than depletion of resources are not academic phrases or idealistic pipe dreams.  These things are at the core of building real value.

Ask yourself if the concepts of scalability and sustainability come up early in your product development process. If not, could they? It is surprising how many business models are obsolete before they get off the ground.

Entrepreneurial spirit isn’t about EGO.  I know that is difficult to believe with the “celebrification” of entrepreneurs. Be careful who you and your team members emulate.  Some of the celebrities may have made big piles of money once…when he/she sold software for billions of dollars to another company and the software never worked for anyone. That person may be a shrewd sale person. But is it entrepreneurial? Are self-serving EGO-driven transactions what you want your employees to celebrate and emulate?

The Ripple Effect of High Profile Acquisitions

The Ripple Effect of High Profile Acquisitions

As an investor, perhaps you are a shareholder of APPLE stock. When you review news clips or IR reports, you might wonder what is behind the acquisition of the headphone company BEATS. You have invested in APPLE because they have been a major innovator and industry leader, so you wonder if this acquisition will add or detract from APPLE’s position as leading innovators.

As an APPLE customer, you wonder if your iPhone or iPad will now benefit from improved audio quality, or will you yet again be forced to buy a completely new product to get upgraded technology? You also can’t help but wonder why APPLE needed to do such an expensive acquisition to improve sound quality? Won’t this acquisition just raise the prices on APPLE purchases?

Perhaps you are a “techie” and get a kick out of analyzing product engineering. You quickly figured out that the BEATS technology isn’t all that special. You assume that APPLE has grown to prominence because its executives understand marketing. You wonder if the acquisition of celebrity-driven BEATS is more about marketing. If that is all the acquisition is about, wow…that is expensive marketing.

Maybe you oversee a sizable portfolio or are an asset manager within a wealth management firm. You saw how FACEBOOK recently made some acquisitions to slow competition, control emerging technology and buy time. Maybe that is what is going on at APPLE. After all, Steve Jobs is no longer at the helm. Is APPLE using its resources to buy time? Maybe APPLE’s strategic direction isn’t all that clear right now.

As a President of a midsized company, you watch the moves of major corporations like APPLE. You wonder if maybe APPLE’s research department has surfaced a trend that your company is too small to see. Perhaps there is a hot target market that APPLE can penetrate more aggressively. If your company’s products/services are tied to what APPLE does, will this be something important to explore or a distraction?

What do you hope that the directors on APPLE’s board are asking?

Directors of industry leading corporations have greater impact on all of our lives than most people realize.

The Limitations of Interdependence

InterdependenceWhat do you think? Will Joe stay or leave?

And, more importantly, what would you do?

Joe had worked in the operations side of his uncles’ technology company for ten years before he told them that he wanted to run his own business.

Good for Joe. That conversation led to the creation of an installation company that was actually separate from the base business, and Joe had his opportunity to be a President. Since they financed the startup, Joe’s uncles owned the new installation business. Within a few years, Joe became a minority shareholder. Today with ten more years now under his belt, Joe and his uncles have equal shares.

Whether you handle computers, telephones, furniture, sun rooms or sound systems, growing an installation business has its challenges. It’s labor-intensive with lots of moving parts, conflicting schedules, union versus non-union jobs, tight budgets, high expectations and too little control over what’s promised.

Installers are dependent on salespeople to make reasonable commitments. In a highly competitive environment, that becomes almost impossible. To get the account or the project, a sales person can feel forced to agree to just about any demand. This pressure is tough enough to handle when the installers are in a department within the core business. Installers in a separate business are dependent on promises made by salespeople in someone else’s company.

So Joe and his uncles negotiated a deal to help the companies be interdependent. The core technology company would get discount pricing and give Joe’s business right of first refusal on their installations. For a few years, the majority of Joe’s installation projects came from the family’s technology business. However, he wanted to grow his business faster and learn how to work with a broad range of customers. Joe can’t hire, train or supervise the sales people in the technology company, but he can develop his own sales department. Today, less than 20% of Joe’s business comes from his uncles’ technology company. Hmm…They are his partners. That could be awkward.

Who gets to decide which companies Joe’s salespeople can approach? What about companies that directly compete with the family-owned technology company? How many other customers can be extended the right-of-first-refusal discount before its value is diluted? Have the installers lost the influence they once had with the technology company salespeople? If the promises made by the family-owned technology business become unacceptable, could Joe charge them more money? Could Joe ever buy his uncles’ shares and become the majority owner? If the family-owned technology company continued to be his largest customer, could Joe change his pricing? If independence is Joe’s primary life goal, could he focus “his” installation company on completely different products or customers than the family-owned technology business?

What do you think? Will Joe stay or leave?

And, more importantly, what would you do?

As an Entrepreneur, Have You Lost Your Authentic Swing?

Businessman ThinkingI love the 2000 movie The Legend of Bagger Vance.

Remember it? Directed by Robert Redford, the movie was based on Steven Pressfield’s 1995 book with the same name. The actors include luminaries Jack Lemmon, Will Smith, Charlize Theron and Matt Damon. This was Lemmon’s final movie which makes it even more important to many people.

In 1931 (during the depths of the Great Depression), the City of Savannah, GA sponsors an exhibition golf tournament with great golfers Bobby Jones, Walter Hagan and the town’s golf prodigy and hero, Rannulph Junuh.

As he caddies, wise Bagger Vance (played by Will Smith) provides sage advice to help Junuh recapture his “authentic swing.” They talked very little about the fairway, sand traps or greens. They talked about post-traumatic stress, the meaning of life, guilt, regret, a broken heart, giving up, accepting responsibility and hiding. You know…light conversation (lol).

As many golfers of today can tell you, finding one’s authentic swing in golf is not just a matter of repetition. Golf is a mental game as much as it is a physical one. When a golfer’s muscles are tight from being angry at work, his/her slice or hook returns on the golf course. When a golfer’s optimism or confidence is compromised, the short game on the green becomes another nightmare. An executive’s capacity to make great strategic decisions is another version of one’s authentic swing.

Presidents of privately held mid-sized companies often don’t have time to play golf or have another similar outlet that offers feedback on whether the president is still centered. It is impossible to maintain your authentic swing when you aren’t centered. Often the all-important feedback comes in the form of poor business results. The president’s loss of his/her authentic swing is taken out on the business.

Sometimes executives just keep showing up when he/she knows he/she is “just not right with the world”. Continuing to show up is important, but just going through the motions can solidify bad decisions (a hook or a slice). Finding what keeps you centered is worth the effort. An executive coach could be your Bagger Vance.

Maybe No One Should Buy the Clippers from Sterling

SterlingWhat happens from here forward regarding Donald Sterling’s ownership of the Los Angeles Clippers has the potential to change the definition of business “ownership.” In my opinion (in addition to all of the lawyers), NBA Commissioner Adam Silver should consult with the National Association of Corporate Boards (NACD). I’ll bet they could provide insight and expanded options.

“The market” knows how to punish a disgraced business owner. Employees and customers who do not respect the owner(s) of an enterprise can hit owners where it hurts the most…their pocketbooks. Products can be boycotted. Lawsuits can be opened.

In this instance, millions of people hope Sterling feels pain swiftly. The sooner the better!

There are numerous examples in the world of professional services where a disgraced owner has lost everything when a new competing enterprise has been established, and the top talent from the previous team was “cherry picked.”

Can’t well connected people like Oprah Winfrey and Magic Johnson start a new team? I would buy some shares of a business owned by Winfrey and Johnson. Why pay Sterling a dime?! Could player contracts be broken? Could the NBA support the new entity?

If/when the NBA forces Sterling to sell his business, a statement of disgust will have been expressed by the employees, the fans and the NBA. But his racist beliefs will not have been changed. If the NBA can legally force Sterling to sell, he will end up with a multi-million dollar windfall (gain) and a precedent will be established that could have an adverse impact the rights of all business owners from here forward.

What constitutes business ownership?

Having FUN Can Be a Powerful Growth Strategy for Attracting Top Talent

Growth Strategy - Have FunFrom a marketing perspective, one of the most valuable awards a company can win is inclusion in published lists of “best places to work.”

The nomination forms for those lists often require information about the company’s participation and donations to the surrounding community (civic responsibility), data about financial stability and profitability, evidence of providing fair compensation and reasonable benefits to employees, details about career advancement opportunities and statistics about employee turnover. Also, the nomination forms also include questions about the all-important “happiness” factor.

Being an accountant has not been viewed as a glamorous career, so it is interesting to see CPA firms included on the lists of “best places to work.” Go ahead…Google Withum Smith + Brown, PC. You’ll see information about a regional accounting firm that has been included on the lists of “best places to work” for several years. They also appear on several lists of “fastest growing” companies.

The readers of NJBIZ frequently see WS+B display advertisements that feature a photograph of their Managing Partner Bill Hagaman. A tall thin man, he played basketball and still coaches. I know Bill. He is also a good person.

Go to YouTube, and you will find videos of WS+B’s annual flash mob to celebrate each New Year. If you can’t imagine conservative accountants dancing to modern music, watch their videos. Who wouldn’t want to work where the managing partner dances?

Generation X, Y and Millennial employees crave challenge, inclusion and more frequent celebration of little successes.

Does your company need to take a hint from an accounting firm about how to attract and retain top talent…by being more fun?

Business Lessons Learned from the 2014 NCAA Tournament So Far

2014 NCAA TournamentEven when a team has over 34 consecutive wins, some jerks will question the legitimacy. Wichita State. Their game against Kentucky was as exciting and well played as any NCAA Tournament game I have ever seen.

You wouldn’t expect an organization to be motivated and succeed if its CEO keeps telling the media that his team really isn’t that good. It’s time for Jimmy Boeheim of Syracuse to retire. He has forgotten that one of his responsibilities is to build team morale, energy, and their drive to win.

Industry ranking doesn’t predetermine success. In the first round of this year’s NCAA Tournament, a team that had been ranked # 14 in its bracket (Mercer) beat the better known # 3 ranked team (Duke). And three of the four # 12 ranked teams (Stephen F. Austin, Harvard and North Dakota State) won against 5th ranked opponents.

Just because an organization was top ranked the last time around, doesn’t mean that they will continue to be #1…or even “play” that well the next time around. Louisville finally won against St. Louis in the second round, but it sure was a low scoring, uninspiring game.

Team chemistry, mutual respect and experience matters. I think that fact that the seniors had played together at MERCER for 4 years helped them beat DUKE.

It is not your imagination. Sometimes a situation is set up for one organization to succeed or for another to fail. Ask any informed fan if Wichita State had a tougher bracket than Florida.

Corporate Sponsorships: Investment Brings Involvement

One of my roles is as a growth financing intermediary. Recently, I have been seeing more and more situations in which Corporate Sponsorshipowners of mid-sized companies haven’t learned enough about the various types of growth financing and are inadvertently chasing the wrong kind of money.

One of the most common mistakes is the assumption that the company must be able to follow through on its plan ALONE, and the only thing a possible funding source will provide is MONEY. Financing from a commercial bank works that way (loans and lines), but just about every other type of financing involves PARTICIPATION. A venture firm won’t want to stand on the sidelines if/when the decision to invest has been made. They expect to be required to provide an expert “at the table” (on your board) to help growth and success happen. Similarly, growth financing achieved through joint ventures involves an expanded leadership team. Also, corporate sponsorship isn’t about handing over money to just watch your company “do its thing.”

Non-profit organizations have figured this out. Maybe their development officers can only talk about their cause when requesting contributions from foundations, but when corporate sponsorship money is involved, the corporation’s marketing department expects their sponsorship money to fund a partnership, produce something exciting, fit their messaging and accelerate the generation of prospective customers…which after all is the goal of marketing.

The folks at Frito-Lay are intimately involved and visible at the golf tournament they sponsor. The people from Dunkin’ Donuts are involved with the Thanksgiving Day Parade in Philadelphia. They don’t just hand parade managers a check and then stay home. IBM and AT&T have been involved with the National Association of Women Business Owners (NAWBO) for over 30 years.

Over the years, my companies have successfully worked with over 50 repeat corporate sponsors (IBM, SNET, Bell Atlantic, Bell South, Northern Telecom, Wachovia, Entrepreneurial Edge magazine, etc.). That would not have happened if the projects were small or if they weren’t economic development strategic initiatives to help mid-sized companies to continue to grow.

Does your organization have a big bold project in mind that is not happening only because you have convinced yourself that you must go it alone and you lack sufficient funds to execute on a large scale? Why stop? Why ask for a loan or a line when you can do something that could really make a difference with corporate partners?

IEG is an excellent resource for information about corporate sponsorship. I agree with their promotional description: IEG is the global authority on sponsorship and the leading provider of sponsorship consulting, analytics, measurement, valuation, research and publications. Visit IEG at www.SPONSORSHIP.com.

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