Business Model

The plan implemented by a company to generate revenue and make a profit from operations. The model includes the components and functions of the business, as well as the revenues it generates and the expenses it incurs.

Acquisitions: The Buyer’s Corporate Culture Can Impact a Seller’s Price

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corporateA 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?

The Downward Spiral of Gross Profit Blindness and Write offs

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.

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.

Should You Still Want Your Very First Customer? Really!

Recently I heard a business owner bragging that his 15 year old company still serves their first client.  That sounds pretty good.  That statement implies that the business has high levels of customer satisfaction, repeat business, and referrals.

For some reason I started to reflect on my early years in business.  Frankly, I wouldn’t want to still have the first client we were able to attract when my first business started out.  If memory serves correctly, we made two cents an hour on that project! When I share that story in speeches for owners of startup companies, they laugh.  But then it is interesting to watch their faces as I ask if they even know how much money they make (or lose) on each account.  At least we knew we only made two cents an hour so we could change what we were doing!

That reflection caused me to have another conversation with that owner of the 15 year old business.  Just out of curiosity I wondered if they had some magic sauce and had generated a solid profit from their first client’s first project and if subsequent requests from that client have worked out well too.

It turned out that, like the majority of owners of startup companies, they hadn’t analyzed how much money they had gained/lost from their first client 15 years ago.  And unbelievably, they still didn’t know.  Until 2008, their overall net profit seemed strong enough so they hadn’t drilled deeper to really look at client-specific or service-specific gross profit. Yikes! Talk about a ticking time bomb!

I heard from this guy again. Keeping the initial client hadn’t resulted in the many referrals he had hoped that it would.  Plus it turns out that the client is rather unappreciative and takes his company for granted. But the worst part (readers may find this very hard to believe) is that the average gross profit generated from this client is – 300%!

That means that for every $1 this particular client pays, the company spends $4 to provide the service and then has to cover all of the operating costs without the benefit of gross profit to cover it and has to make up the difference from higher prices charged to other clients.

Your situation may be less dramatic, but if you are not changing the terms and expectations of long term clients that generate below a minimally acceptable gross profit level, you too could be bragging about retaining clients that no one in their right mind would want.

Questions To Ask Yourself Before Investing In Someone Else’s Business

Often successful entrepreneurs become interested in investing in other companies.  Not just the stock market.  They are curious about the role of private investor or angel investor.  What would it be like to be a member of the board of another company and have some “skin in the game” but NOT have to run the business on a day-to-day basis?  The process of screening potential investments, learning new roles, doing due diligence, and taking some chances is very enlightening for entrepreneurs.  Becoming an outside investor is a career change for some. You aren’t just evaluating the companies, you learn about yourself, your security/risk ratio, your skills to influence decisions, etc.  Many never realized the complexities involves with board service. Some, who thought they knew a great deal, start to recognize the limitations of their experience having only led one midsized company.

Here’s an excerpt from an email I recently sent to a client who is venturing into the world of “private investor.”  See if any of the questions I posed for him resonate for you:

Apparently, you can see that XYZ is well positioned for growth, is in a rapidly expanding industry, and their products/services provide superior value.  Your emails suggest that your primary questions, at this point, are more about how an investment in XYZ should be structured.

 

  1. Ask yourself how much money you are interested in earning from your interaction with XYZ, Inc. over what period of time. Is this a 5X, 7X, or 10X opportunity?
  2. How much money are you willing to risk on XYZ over what period of time? How much of your time and effort are you willing to invest?
  3. See if you can quantify your value to them.  Would having your input reduce their need for a full time (real) CMO, COO, CFO, or CIO for a while?  Would your influence result in more revenue? More profit?
  4. What part of the earnings you hope to achieve (see #1 above) can come in stock (to be turned into money at a time of your choosing) and what part should come as payment to you for board (influence, pressure, advice, C level counsel) participation?
  5. How many shares of stock you get is driven by the valuation and the investment you make.  How much stock would you need in order to influence results?
  6. What valuation process do you prefer and trust?
  7. Would you base all of this on today’s valuation, the projected valuation for 5 years from now, or a combination?
  8. Since leadership seems to be your primary question, what can you do up front to learn more before investing? 
  9. What would you do if, in a few years, you concluded that another person should become the President? As a board member, that subject is always open for discussion (is the primary responsibility of the board, frankly).  When you speak with other board members before investing, listen carefully to their reactions and responses when you ask direct questions about the quality of leadership that is currently in place.
  10. Try to take charge of this process so you see how the executive team responds. We’ll have phone conversations, exchange emails, edit drafts. But start with YOUR numbers. Ask your questions. Enjoy surfacing what seems important to you. This is about money, but it’s also about your life, your interests, your skills, what you want to learn, if it complements other things you are doing, and with whom you wish to be associated. 

 

Aldonna R. Ambler, CMC, CSP has earned the right to be called THE GROWTH STRATEGIST®. She has won over 2 dozen national and statewide “entrepreneur of the year” awards for the resilient growth of her international businesses across 4 recessions.  Her midsized BtoB clients get on…and then stay on…the published lists of the fastest growing privately held companies. She owns and operates a suite of companies that help privately held midsized companies achieving accelerated growth with sustained profitability® through opportunity & resource analysis, 4 approaches to strategic planning, executive advisory services, growth financing, and targeted search.  2013 is Ambler’s 9th year hosting a weekly peer-to-peer-to-peer syndicated on line talk show that features interviews with CEOs/Presidents of midsized companies (typically between $20 and 200 Mil/yr.) sharing success tips about the growth strategy-of-the-week. An archive of over 300 interviews is available at www.GrowthStrategistShow.com. She can be reached toll free at 1-888-Aldonna or at Aldonna@AMBLER.com.

One Way to Predict Your Next WAVE OF CHANGE

Accountants. Architects. Consultants. Designers. Engineers. Counselors. Speakers. Trainers. You know the list…companies who sell time, expertise, advice, analysis, guidance, etc.

Typical Numbers:

Imagine that the typical billing multiplier in the market place has been running around 2.5 so an average billable employee with a compensation package totaling $75,000/yr could be reasonably be expected to produce $187,500/year in fee related revenue.  The average hourly price for the professionals would need to average $150/hr and the professionals would do billable client-related work 60% of their time for those numbers to result. Since fees often constitute as much as 80% of a service firm’s gross revenue, a $5 Mil/yr firm would have about 21 billable professionals producing $4.0 Mil/yr in fee revenue.  A firm like that would probably generate 40% gross profit which could fund $1.5 Mil (30%) for operating expenses (business management, marketing, and overhead).  The owners could end up with a 10% net operating profit of $500,000/yr. There would be as much as $900,000 available to cover salaries for a few managers, a marketing coordinator, a small accounting department, and maybe an administrative or IT professional. That’s 28-30 employees.

A similar series of metrics could be run for distributors.  The difference is: by the time a profitable distribution company reaches the 25-30 employee mark, they are typically generating closer to $10 Mil/yr in gross revenue.

In general, are service firms that generate $5 Mil/yr in revenue with 25-30 employees (or distributors at $10 Mil with 25-30 employees) positioned for growth, a plateau, or free fall?

Does the well-known phrase “5 MILLION DOLLAR WALL” answer that question?

A stubborn plateau often occurs at 25-30 employees…and it happens across a wide variety of industries. The managers have become tired. The complexity of dealing with that many people becomes too difficult. The amount of money available for management salaries is too small to encourage the business leaders to hire more non-billable employees. The need for additional departments becomes evident, but the time to deal with re-organization doesn’t exist. Account profitability often starts to slip backwards at the 25-30 employee level as experienced people delegate and lack the time to provide sufficient training.  Systems used by a core group of 10-12 employees are still in place but no longer work.

Ironically, we are helping a client with 175 employees that is experiencing the same kind of span-of-control plateau faced by $5 Mil/yr companies and 25-30 employees. It’s just their 7th wave of change.

Aldonna R. Ambler, CMC, CSP has earned the right to be called THE GROWTH STRATEGIST®. She has won over 2 dozen national and statewide “entrepreneur of the year” awards for the resilient growth of her international businesses across 4 recessions.  Her midsized BtoB clients get on…and then stay on…the published lists of the fastest growing privately held companies. She owns and operates a suite of companies that help privately held midsized companies achieving accelerated growth with sustained profitability® through opportunity & resource analysis, 4 approaches to strategic planning, executive advisory services, growth financing, and targeted search.  2013 is Ambler’s 9th year hosting a weekly peer-to-peer-to-peer syndicated on line talk show that features interviews with CEOs/Presidents of midsized companies (typically between $20 and 200 Mil/yr.) sharing success tips about the growth strategy-of-the-week. An archive of over 300 interviews is available at www.GrowthStrategistShow.com. She can be reached toll free at 1-888-Aldonna or at Aldonna@AMBLER.com.     

How My Various Roles Provide Important Perspective

As a growth strategist/executive advisor, I have noticed that:

despite high unemployment, the primary barrier to growth for midsized companies is not sales or financing…it’s difficulty attracting bright employees who are continuous learners.  The executives are quick to say that their companies are ready to train new employees to “do things [their] way.” But job applicants show up late or ask about the number of vacation days during early stage interviews. Our clients ALL have unfilled job vacancies.  Several clients are looking for sales professionals. So…how many high-potential people are settling for their current jobs despite feeling uninspired?

As the host of a syndicated peer to peer talk show, I have noticed that:

most of the Presidents of INC 500 listed companies have a laser focus on customer driven innovation. Yes, they spend time attracting/retaining top talent and financing growth; but those efforts are approached in ways that enable the development and delivery of innovative products/services that customers need and want.

These Presidents also utilize dashboards, balanced scorecards, or other similar tools to keep a watchful eye on important performance ratios. And they expect department heads to hit goals, initiate improvements, and prevent slippage.  It’s not OK for a key ratio to be missed without a corrective action plan.

They stay informed about things like the value of the dollar, but none of the guests from INC 500 companies whine about the economy.   

As a growth strategy speaker at business conferences, I have noticed that:

owners of mid-sized businesses are initially skeptical when I pose the concept of tripling gross revenue while only doubling operating costs.  Uncertainty has sucked many business owners down into incremental thinking and survival mode.  In many ways, those companies no longer have Presidents or CEOs. They have regressed to duplication of effort and micro management.  Too many department heads are no longer expected to optimize productivity and customer satisfaction…the President is.

But it doesn’t take long for Presidents/CEOs to recognize that their job is the big picture, growth strategy, and long term resilient success.  No excuses.  As business leaders, if we can’t even imagine several options that could triple our gross revenue, how on earth could we actually do it?

As a growth financing intermediary, I have noticed that:

business owners are still complaining about the process. Although interest rates, ROI, and board participation demands are more favorable, the due diligence step has become more detailed.  A company that receives growth financing must prove that it has a scalable business model, provides a differentiated product that customers clearly want, and can consistently generate a reasonable profit. 

Too many applicants for private investor financing ask investors to cover their day to day operating expenses instead of solving their profitability issues before approaching investors. And too many applicants are looking for small amounts of money, which just wastes the potential investor’s time.

Too many applicants haven’t taken the time to learn about various financing instruments.  A mid-sized company that could/should finance growth through stronger joint ventures or clearer equity deals with key stakeholders will probably be turned down by a venture capital fund.  I’ve seen business owners look right past licensing, franchising, and corporate sponsorship opportunities.

As an advocate for mid-sized companies, I have noticed that:

the lobbying of many statewide chambers of commerce is focused more and more on large corporations and micro sized businesses… sometimes to the exclusion of mid-sized companies. This is happening, in large part, because owners of mid-sized companies have been letting our memberships in statewide chambers of commerce lapse.

When association dues are compared to the electric bill, this may seem like a frugal thing to do. But the national and statewide chambers of commerce can provide a strong voice for members. The thing is, they can’t help change the policies and regulations that stunt our growth if we aren’t members and let them know our priorities.

The needs of huge publicly traded corporations are often very different from the priorities of privately held innovation driven mid-sized companies.  Plus the largest corporations have their own government relations departments and directly pay professional lobbyists. Being part of an effective statewide chamber of commerce can feel like you have your own government relations department and professional lobbyists on staff. A few hundred dollars of dues to have some say about the issues that encourage or stunt business growth seems a small price to pay.

As a Business Owner/Executive/Employer, I have noticed that:

targeted market research is more important than ever…and needs more frequent updates than ever. Baby Boomer business owners who wanted to continue to work for 5-6 more years will suddenly decide that their succession plans must immediately change because they “have had it” and will retire soon. Leaders of growing businesses that had been fighting industry consolidation are quietly entertaining proposals from “roll up artists.”  Leaders of stagnant companies suddenly awaken to the need to clean house, create new products, go global, or upgrade technology.  Readiness for dramatic change is impossible to read if your market research is too infrequent to catch the changes.

Aldonna R. Ambler, CMC, CSP has earned the right to be called The Growth Strategist™. She has won over two dozen national and statewide “Entrepreneur of the Year” awards for the resilient growth of her international businesses across four recessions.  Her mid-sized B-to-B clients get on…and then stay on…the published lists of the fastest growing privately held companies. She owns and operates a suite of companies that help privately held mid-sized companies in Achieving Accelerated Growth With Sustained Profitability® through opportunity and resource analysis, four approaches to strategic planning, executive advisory services, growth financing and targeted search.  2012 is Ambler’s 8th year hosting a weekly peer-to-peer-to-peer syndicated online talk show that features interviews with CEOs/Presidents of mid-sized companies (typically between $20 and 200 Mil/yr) sharing success tips about the growth strategy-of-the-week. An archive of over 300 interviews is available at www.GrowthStrategistShow.com.

[video post] AND Instead of OR

AND Instead of OR

Relatives on my father’s side of the family have long been in the shipping business. They not only build huge ships, they also transport people and goods.  Today the RICKMERS family owned business is a major transporter of goods between Europe and CHINA. The RICKMERS Group provides maritime assets, management services and logistics.

As you can undoubtedly imagine, the family stories that have been passed down through the generations are fascinating, including stories about how they made the transition from wind to engine propelled during the industrial revolution. Somehow I can picture the artisans who crafted the wood, created the sails, and carefully placed the three massive masts on the schooners. Think about how different those people would be from engine mechanics, the folks who shoveled coal, and sheet metal workers.

The RICKMERS family had earned a great reputation based on crafting beautiful sturdy wooden ships.  That is what paid the bills, attracted employees, and kept customers coming back. Should they actually turn their backs on the business they loved and understood to take a chance on something so strange? The leaders of the enterprise wondered how quickly metal would replace wood and engines would replace cloth sails, and they cared deeply about their extended family of employees.  Could the artisans who worked in fine wood accept the changes and learn new skills? Would the company need separate workgroups with younger people applying the new technologies and the more experienced employees doing what they knew how to do?  But if they did that, wouldn’t their loyal employees be left behind at some point? Would trying to build both types of ships hedge their bets or be too expensive to sustain?

To this day, my relatives remain convinced that the decision to combine approaches helped the RICKMERS enterprise and the extended family to survive two horrific world wars…despite the fact that they were/are based in northern Germany.  Employees who had been forced to disperse when Hitler took over transportation companies returned to work together after WWII.  They are convinced that the family’s commitment to lifelong learning and mutual respect across generations has made a huge difference in their long term resilience.

So often we think that today’s technology driven changes in businesses are unique to today’s generation(s).  The scenario sounds the same to me.  I can’t help but wonder if more companies could value experience AND new technologies while embracing lifelong learning AND respect across generations? 

Do we really need to treat so many people like they are expendable?

 

Aldonna R. Ambler, CMC, CSP has earned the right to be called THE GROWTH STRATEGIST®. She has won over 2 dozen national and statewide “entrepreneur of the year” awards for the resilient growth of her international businesses across 4 recessions.  Her midsized BtoB clients get on…and then stay on…the published lists of the fastest growing privately held companies. She owns and operates a suite of companies that help privately held midsized companies achieving accelerated growth with sustained profitability® through opportunity & resource analysis, 4 approaches to strategic planning, executive advisory services, growth financing, and targeted search.  2012 is Ambler’s 8th year hosting a weekly peer-to-peer-to-peer syndicated on line talk show that features interviews with CEOs/Presidents of midsized companies (typically between $20 and 200 Mil/yr) sharing success tips about the growth strategy-of-the-week. An archive of over 300 interviews is available at www.GrowthStrategistShow.com. She can be reached toll free at 1-888-Aldonna or at Aldonna@AMBLER.com.    

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