Focus on CustomersFocus on Suppliers
Focus on Technology
Actually Implement
Confidentiality
FORM BOARDS as quickly as possible in the process of increasing the value of your company. There are three of them, advisory board, board of directors and your planning team. Some of them you will already have up and running. Maybe you need to create one. Creating boards starts you down the road of creating new value for your company.
A potential buyer for your company is looking very closely to see if your company is capable of creating the cash flow to pay for itself. Sometimes, there may be a contract to keep you around for a while either in a management position or in a consulting role. That is fine for you, but the buyer is looking for the team to run smoothly, without you. Thus, form the teams.
The advisory board is a very special group. Many times, especially in entrepreneurial ventures, they are not paid. Other times companies about to go public may pay with cash or stock. It doesn’t matter. The folks you entice onto your advisory board have “been there, done that” in your industry.
Since your revenues may exceed $5 million, you do not need an advisory board to address start-up issues. Focus on the crucial issues for your company like landing large clients, dealing with a highly compensated sales team or preparing to raise capital. Find someone in your industry who has already sold his or her company. Bring them aboard to give you advice. The advisory board is perfect for them, as it usually retains no fiduciary responsibility. A past CEO is not going to be interested in joining your team if it will put her personal wealth at risk in some sort legal battle. Make this clear in a written a written agreement if necessary.
Sometimes, you do not actually meet with your advisory board, although most times it makes sense to have a face-to-face meeting at least quarterly. Use the team for advice as often as it makes sense.
The board of directors is different. Depending on how you set up your company, they may retain fiduciary responsibility. [Always, consult with proper legal counsel.] That might mean that you have a committee structure and reporting requirements. It also means that you will need to provide compensation, including insurance for errors and omissions and maybe directors and officer’s insurance coverage as well. What does this do for you in terms of increasing your company’s value? It shows that you are serious about taking your company to the next level. In these days of close examination of CEO performance and Sarbanes-Oxley, make a clear signal to buyers that performance comes first.
The planning team is the most important group so far. They focus on implementation strategies that increase the value of the company. There are tactical plans as well, all normally reviewed with the approval of the planning team. While we will talk about confidentiality later, it is important to note that many strategies when successfully implemented increase the value of the company. Keep the focus on increasing value. You do not have to belabor your other goal of selling the company at this point. It makes sense that the objectives, as they are set, address financial issues in addition to other goals like selling the company.
The planning team is composed of the senior management of the company. It might also include consultants, customers and maybe even competitors or industry experts. Having everyone in the room in these days of personal digital assistants, sales people located all around the world, and 24/7 responsiveness is tough, but crucial.
It is always a pleasure to watch a team work together until they experience what I call a “crystalline moment” where suddenly, for the first time, every one understands what they need to do and how to do it. Sometimes the moment occurs, literally, in a second of recognition for everyone. Creating the plan and communicating it to the entire company is easy after the “moment.”
You do not need to bring up the sale of the company in the planning sessions, especially if there is some time before a sale occurs. You use the sessions for an annual review of current strategy and for quarterly updates to specific strategies. Annual planning should start with a clean slate. Perform a situation analysis using new information each time to make sure your planning is relevant to the current period.
Another group, the scientific advisory board, is special, normally reserved for pharmaceutical and medical device companies. I have watched it be most useful for finding hospitals and doctors to perform clinical trials. Usually, management teams in biotech or medical device companies already understand how to manage scientific advisory panels. Done correctly, a scientific advisory board will ultimately increase the value of your company.
FOCUS ON CUSTOMERS, especially if you have but one single large customer.
I met up with a CEO friend recently in the Dallas-Fort Worth airport. He was lamenting the fact that his company had a single large customer at the same time that raw material costs were rising. He spoke to his customer about the need to increase prices. The customer’s immediate response was to suggest that they take the product out to bid with other suppliers in the mix. That was the last time the CEO brought up price increases. He is now focusing on decreasing manufacturing costs, while trying to find additional customers. I hope that the customer will not take the product out to bid, as off-shore companies might be able to provide the product a better price.
Early on in my consulting practice, I had a client that sold many of its services to the State of California. That was fine for most of the year. My client could price its services properly and provision of services was easy. There was only one problem. Come June of just about every year, the State of California goes through a budget crisis and stops paying bills until things are resolved. That was not such a good deal for my client, as its margins were relatively small and its payroll large. Finally, we got a line of credit to bridge the gap between budget approvals each year. The single large customer was profitable as long as it paid its bills. It was a disaster when it did not pay its bills. The single large customer “syndrome” is a red flag to anyone looking to buy your company.
Involve customers in your annual strategic planning to help you decide where to spend your product/service development budget. There are some interesting discussions going on in the business press about whether it is better to spend scarce dollars on product development or marketing. Interestingly, at least for now, the focus is on product development. Having customers in the loop as you create new products makes a lot of sense.
ONE LARGE SUPPLIER is just as bad as having but a single customer. The supplier has you in an awkward position on price, certainly, and delivery, possibly, if there are other parties interested in purchasing what you were buying. A local flashlight designer made a strategic alliance with a local plastic molding company. The plastics company made the molds, the designer did the marketing and they split the profits. A sole source agreement worked in this instance. It is not always that easy. The injection molding company had a lot of power in marketing decisions that would normally fall to the distributor. I have not seen the product in the markets lately, probably because its price was higher than the competition.
Involving suppliers in your planning is tricky, especially if you are planning to sell your company. It is not unheard of for a supplier to consider investing in your company with better terms or lower prices when they understand that your planning forecasts higher volumes. Occasionally, suppliers can help generate larger sales with their own contacts.
Going to market with a company with a single large supplier does not make a lot of sense if you want the highest price for your company. Diversify your supplier base just as you would diversify your customer base.
FOCUSING ON TECHNOLOGY can help you increase your valuation in all sorts of ways. Upgrade inbound and outbound logistics, manufacturing, sales and product service with technology. Web based sales support programs make sense for middle market companies. Warehousing costs along with inventory control are also areas with great potential. Burying technology in your products also makes sense. Electronic products are obvious places to invest in technology. Even agricultural processes are having major technological impacts from GPS out in the field to branding apples instead of individually labeling them. It all comes back to return on investment. An investment in technology, while helping the income statement, probably increases net worth at the same time, especially if payback periods are short.
Making your reporting processes work better is a perfect use of technology to increase your valuation. Casinos managing cash are an easy example. Installing rapid cash counting might ultimately reduce the amount of cash needed to “float” all the games in a casino. New slot machines are electronic in order change the game and the size of the bet instantaneously according to the time of day and the crowd expected. Hourly profit and loss statements and cash flow statements in real time are easy to prepare, and very useful.
Figuring out new ways to price your technology-based product is a possibility. A friend recently told me about reworking a folding machine for a laundry company to reduce labor investment. We talked about pricing the machine by the “click” instead of selling the machine outright. Technology could handle the click counting and reporting in real time. The new folding technology expands the profitability of both the hotel and the inventor. My guess was that the inventor could give away the machine while charging the customer for each single use. This is the way the Japanese copier makers entered the American marketplace way back in the 1980s. They would give away the copier to sell toner, paper and service. HP is basically giving away their printers in order to have us hooked buying proprietary ink cartridges.
STRATEGIES FAIL in implementation frequently. The excuses I hear would fill a book. Most times, they are about things that “intervened.” Not enough time to implement. A major account got away. The CEO had to spend time somewhere else. Who is in charge of making things happen? Work the teams together, have them continue to meet together, report together, and hold each other accountable. An implemented plan will increase your valuation. The CEO is involved. He just is not the cop. Working together will make everything work faster and easier. It is a win for everyone.
One last planning topic needs discussion. What is the role of the business plan? We used to call them “show” plans. You made a business plan with the intent of raising money. Many times, a company would receive new money and immediately forget to follow their plan.
Times have changed. The business plan is now the “go” plan used to launch a new business or increase the valuation of an old business.
Remember that an effective plan spends as much time on the marketing of a new product or service as it spends on the technology involved. It lists the early adopters as well as the market segments likely to buy your product later on along with a road map for approaching each buyer group. The best use of a business plan for a going concern is first to convince some entity to invest in your company. Then it is used increase sales.
From the point of view of someone buying your company, the business plan shows commitment to success, to actually implementing the plan. It also lays out the marketing plan enough that the prospective owner understands where you are going to get new sales the week after he buys your company, and the year after. It is crucial to showing how committed you are to success of your company, either in your hands, or his.
CONFIDENTIALITY is crucial in all types of planning. We have given you all sorts of reasons to entice employees, customers, suppliers and maybe competitors (well, maybe not) to join your planning team. You do not want to show your hand to quickly, especially with the competition, as they are likely to hatch a strategy to steal a portion of your clientele. What do you do in the interim? Focus on growing the business. Do not create a public strategy focusing on selling the company, at least not in real terms. Bring trusted employees into your confidence slowly, entice them to stay with your company and continue to focus on building value.
With John Bates, Avalon Advisors, Inc.