Author: Dr. Don Sweet

by: Dr. Donald N. Sweet

This past week I had a conversation with a former client and friend of ten+ years. We’ll call this friend, Tom, for purposes of this post. Tom runs a business with four locations in four states with over 100 employees. Recently he has run into cash problems because of a classic dilemma Mid-Market companies face – too few resources.

In Tom’s case, the problem was not initially too little cash, it was too few management resources. Tom and his management team embarked on two large capital projects at the same time. To compound the resource issue, both of these projects were over 100 miles from headquarters and in different states.

Individually, both projects made sense for the company to undertake. However together, they became too complex for the team to manage when coupled with the inherent business challenges that present themselves from time to time. This is a common error many Mid-Market companies make.

As the onion was peeled back a bit further, it was discovered that the company had suffered a weak Controller. The ripple effects of this held up calendar year end financial statements which are still not done and it is now late July! Probably even more damaging was the lack of any meaningful cash forecasting.

Tom’s company was careening down the hill without being able to see out the windshield, or even the rear view mirror. Meanwhile the management team was consumed with two major projects, their resulting issues, and running the business. They were hoping against hope there would not be a fender bender.

The first major accident happened last week when they ran out of raw materials when they were put on credit hold by a critical vendor. This shut down their production which in turn also shut down an important customer. As any CEO knows, this is one of the most deadly of business sins.

So now, on top of all of the other issues Tom’s management team faces, they have a credit crunch. As everyone knows who has weathered that situation, all issues now seem to become amplified. The Financial Statements from the outside accountant are at best a couple of weeks away. The bank loan extension is good for another five weeks and little cash relief is in sight.

Tom and his team will have to do their best to manage their way out of this serious issue, there are no silver bullets. That said, what are the major lessons the rest of us can take away from this dilemma? Mid-Market companies with limited resources need to be sure they don’t reach too far beyond their capabilities.

This does not mean that our organizations shouldn’t stretch themselves. That can be just as problematic as overreaching. That said, what are the three most important resources a Mid-Market company has? In this writers opinion, they are its people, cash and customers.

People rank first because without good people the other two don’t last long. People make all the decisions in a business. They then execute those decisions. Of course those two are joined at the hip. I once worked for a CEO who used to say give me a fair plan, well executed over an exceptional plan poorly executed any day. This CEO had similar things to say about management teams and their working well together.

At Vital Growth Consulting Group, we find that it is the people and, in particular, the management team that adds the most value to the business. Some of the questions that we ask, and suggest you do too, are as follows: Does the management team take good care of their employees? Do they consistently communicate the company direction clearly and concisely to all stakeholders? Do they work well together? Are they able to intensely debate major issues, get outside points of view, reach timely decisions and get everyone behind those decisions? Are they realistic about risks without being risk adverse? Do their skills, outlook and experiences complement each other?

When the answers to those questions are in the affirmative, the chances for success are much higher than when they aren’t. Just as in Tom’s situation, there are no silver bullets in any business venture. There are no absolute right and wrong answers. But Mid-Market companies can improve their probabilities of success, with limited resources, by making sure they have a strong, balanced and well-functioning management team.

The days of the 100 plus page annual business plans have ended. Business dinosaurs might continue to produce them, but they won’t for long as they follow the original dinosaurs into oblivion. Let’s face it; in the old business planning process, which began by gathering data over the summer for next calendar year’s plan, was hopelessly out of date even while it was still in use.

How can we possibly know what will happen in detail some 15 months from now? We can’t. More importantly, how can we expect ALL our employees to know what the critical business elements are in all that paper? Again, we can’t.

The time has come to radically change your business planning model. A number of our clients are moving to a quarterly planning model using the Gazelles One Page Strategic Planning tool. This keeps their plan fresh and vibrant. It also allows them to take advantage of near term opportunities in the market place and, sometimes more importantly, respond real time to threats.

How does a company make the shift from the old sluggish business plan to a new more nimble process? At Vital Growth Consulting Group we have a migration path available for you and your company. As you can imagine, having a solid foundation in place is critical for the process to be effective. We believe that foundation, at a minimum, consists of Core Values, Brand Promise and BHAG (long term goal).  Our thanks to Jim Collins for his work in this arena.

With those items in place and as your business base, you can then determine what next quarter’s priorities are. We find the best way to accomplish this is in a facilitated meeting with your management team. Having a handful of good minds batting around the business issues consistently provides the most robust solutions. Using an experienced facilitator/coach involved in the process provides both guidance and an outside business perspective. We suggest that you pick no more than five quarterly priorities and designate one as the top priority for that quarter.

We have all seen what happens when there are too many items on our “to do” list. Usually we try to knock the majority of items off them. Often times the completed ones are not the most important. The main items are usually big and/or difficult and require more time and effort than we have at any one point in time. So we consistently spend time getting the less valuable ones done. That’s human nature and it applies to the folks that work for us too.

Once the top five priorities and top one of five are agreed upon we must develop a plan to inform all employees. We want everyone in the company to understand the quarterly priorities so it is important to have, and execute, a robust communication plan. Some clients will try the process internally with the management team for a quarter or two to work out bugs before bringing in the entire team. Others jump in with both feet.

Of course for priorities to have teeth they must be specific, have one person responsible for getting them done (that person often has others to assist them) and have a target due date with regular progress reviews. Sometimes priorities require additional resources and occasionally they run into major obstacles. Regular top management review helps to overcome those issues.

We think of the Quarter as a thirteen week race. Arriving at the handful of important priorities every three months keeps your company focused on the most important matters. The BHAG provides you and your team with the compass reading so you can ensure that your quarterly priorities are always moving you north.

Take an important step toward making your company more nimble in this difficult economy. Get a leg up on your competition. Contact us at Vital Growth Consulting Group (www.vitalgrowthllc.com) to see how we can help you more effectively accomplish your goals.

One of the keys to health and growth of any organization is innovation, often times known as R & D.  Innovation comes in many forms and is often thought to refer to products or service offerings.  But those aren’t the only important forms of R & D.   Innovation can also take place in the management systems of an organization.

Gazelles International provides coaching and technology services to help mid-market companies around the world build and execute a strategic plan. The Gazelles are probably best known for the One-Page Strategic Plan and other one-page tools.  Certified Gazelle coaches focus on helping executive teams make the right decisions when it comes to four key decisions areas: people, strategy, execution and cash.

This program helps teams get company alignment around key points like, strategy, priorities, brand promise, goals and core values.  It is a straight forward way of communicating the important aspects of the business to all stakeholders.  How much more effective would your organization be if EVERY EMPLOYEE UNDERSTOOD the company’s strategy and their role in its execution?  For a number of our clients, that “secret weapon” has been particularly innovative.

How can that happen, you ask?  Simple, get some professional help from a certified Gazelles coach to focus on the four key decisions in your business: people, strategy, execution and cash.  If you don’t, you risk leaving significant revenues, profits and time on the table.  Furthermore, you leave the door open for your competition or the market to pass you by.  Now please allow me, with help from Verne Harnish, founder of the Gazelles, to provide some guidance on the four decisions.

People Decisions
In general, you know you have People challenges when you’re not enjoying running your company. You either have a partner issue, a customer with too large a piece of your business, a supplier delaying your success, a key employee or two who’s disrupting the rest of the organization’s effectiveness, or challenges at home. Or you might simply lack enough employees to serve your customers, though I caution executives to avoid tossing employees at problems.

Until you settle these relationship issues, they’ll continue to consume a tremendous amount of emotional energy, making it difficult to focus on the other three main decisions. Focus first on getting the right people, doing the right things, with clear accountabilities and metrics.

Strategy Decisions
Strategy challenges are indicated by a slowing in top line revenue growth. If revenue is not growing as quickly as you like, then it’s time to re-examine your strategy i.e. what you’re selling, at what price, and to whom. It’s important to have a concise articulation of that strategy so you can get everyone aligned and on the same page without wasting sales or operational energies on activities not useful to the business.   You will know you’ve gotten the strategy right if revenues are growing as rapidly as you want.

Execution Decisions
Execution challenges surface when your increasing revenues are not generating increasing profits. We’ve seen firms double and triple their revenue, because they have capitalized on a differential advantage, only to see their profitability drop because of the sloppiness of their execution.

The other indication of poor execution is pure hours spent delivering your products or services. When execution is haphazard, the organization has to rely on the “heroics” of their people putting in incredible hours to just keep the wheels from falling off the organization. By simply tightening up your execution habits, you can dramatically improve gross margins and profitability while reducing the time it takes for everyone to complete their work.

Cash Decisions
The last, but not the least, challenge is Cash.  Cash provides both oxygen and options for an organization.  Without cash, a business is in trouble.  Furthermore, the first law of entrepreneurial gravity is “Growth Sucks Cash.”  We take client companies through a process to help calculate their Cash Conversion Cycle (CCC).  This measures how long it takes from the time you spend a dollar (on sales, marketing, proposals, rent, inventory, wages, etc.) until you get that dollar back.

In the early days of Dell, the CCC was running 63 days and caused Michael Dell to almost run out of cash. By focusing on decreasing this cycle, they got it down to close to minus 35 days. That meant they generated more cash the faster they grew. We believe all growth firms can accomplish this or at least dramatically improve their CCC giving them sufficient internal cash to fuel their growth.

We suggest executives read Neil Churchill’s famous Harvard Business Review article entitled “How Fast Can Your Company Afford to Grow” which provides the formulas for calculating your cash conversion cycle.

Secret Weapon
The secret weapon is the way Certified Gazelle Coaches help organizations get all employees aligned with the company’s major goals and objectives.  Everyone on the team knows where they are going and what their individual duties are to help complete the big picture.  Through some simple techniques and procedures, your management team will be shown what they need to do to innovate your management system and get your organization firing on all cylinders.  The power this alignment brings is incredible, as any Gazelle coached company will tell you.

Innovation of your management system can rejuvenate your team and your business.  You, as leader, must take the first step to make that happen.  May your business be healthy, happy, and help you reach all your goals.

“In business you cannot discover new heights unless you have the courage to leave the ground.” ~ Seth Godin

Recently we’ve had a couple of clients ask us if they should have an advisory board and, if so, how they should go about building it.  First, we think all businesses should have an advisory board.  Perspective and experience on a wide variety of issues is an important commodity for a business owner to have available.

Often times, within our companies, we have accepted common views on topics.  As a result we are not able to generate enough perspective to accurately assess opportunities and problems.  Outside perspective is critical so that we don’t fall victim to group-think conformity and uncritical acceptance of ideas and conclusions.

Advisory boards also bring additional business knowledge and expertise to the table.  Verne Harnish of Gazelles has also written about Advisory Boards, or Councils, “The three most important pages ever written for business leaders are pages 114 – 116 in Jim Collins’ landmark book Good to Great. It’s a bold statement, but I’ve seen the transformational impact on leaders and their growth companies when the concept on these pages is implemented.”

The key, as in building a strong company, is getting the right people to serve on your advisory board.  Look for people who are not afraid to speak their mind when they disagree with something.  The last thing we want are folks who agree with almost everything and anything.  Those folks won’t bring valuable perspective.

Adding some people who don’t know the industry can be valuable because they don’t just accept the “norms” without question.  Look for specific skills like IT, HR, Finance, Marketing, etc.  Have a written and agreed understanding of what is expected of them,  such as being prepared for quarterly half day meetings and committing to making at least three a year.

Be willing to pay them an appropriate stipend for their meeting and prep time.  Consider what a senior level person would make and pay accordingly.  When you pay them well you can hold them accountable, too.  Finally, run all meetings with an agenda sent out at least a week before the meeting.  To get the most out of your advisory board, you must be prepared and model the behaviors you expect from them.

Building an Advisory Board is similar to building a management team.  It takes time, some trial, error, and corrections to get it right.  At the end of the day it is an extremely important part of any successful business.

It can be said the family businesses serve as the brains behind innovation, the heart behind local philanthropy, and the nerve system of our entire free enterprise system.  Over 90% of all US firms are family owned.  They employ 62% of the country’s work force and create 78% of the new jobs.  Furthermore, they contribute some 64% of our total GDP.

A recent University of Connecticut study showed that 79% of family-owned businesses incorporate socially responsible practices into their business.  And 80% of them emphasize family or core values in the operation of their firms.  They are less likely to lay people off when times are bad, looking instead for other ways to keep the “family” together with atypical measures such as reduced work hours, etc.

We, too, suggest that companies that have strong core values have an advantage in the marketplace.  As Jim Collins in his Harvard Business Review article “Building Your Company’s Vision” states, “Core values are the essential and enduring tenets of an organization.  A small set of timeless guiding principles, core values require no external justification; they have intrinsic value and importance to those inside the organization.”

Family businesses often grasp this concept well.  When people are hired who share the core values of the business, its culture is strengthened.  When people are hired for experience only, businesses can run into value conflicts.  Keeping US family businesses at the foundation of our economy requires a defined set of core values.

Contact us if you would like help identifying and/or getting your employees to live your core values.

In our first two blog posts in this series we discussed preparing a list of potential acquirers and a couple of strategies to contact them.  In this post we will discuss milestones and some of the typical documents you may encounter in the process.

The first sale milestone is arriving at a memo of understanding or MOU.  The MOU is a document describing a bilateral or multilateral agreement between parties.  In the sales process it usually indicates the desire to work out the preliminary purchase and sales issues to allow both parties to sign a letter of intent or LOI.

An MOU is often used in cases where parties do not yet want to imply a legal commitment.  In essence it is a more formal alternative to a gentlemen’s agreement.  The MOU process allows you to proceed with several companies at the same time, keeping more options open.
The next step is more formal, the signing of a letter of intent or LOI.  The LOI is a document that outlines the terms and conditions of an agreement between two parties before the agreement is finalized.  Such agreements may be Asset Purchase Agreements, Stock Purchase Agreements, Joint-Venture Agreements etc., basically any agreement which aims at closing a financial deal.
LOIs resemble written contracts, but are usually not binding on the parties in their entirety. Many LOIs, however, contain provisions that are binding, such as non-disclosure agreements, a covenant to negotiate in good faith, or a “no-shop” provision promising exclusive rights to negotiate. The purposes of an LOI are to 1) clarify the key points of a complex transaction for the convenience of the parties, 2) declare officially that the parties are currently negotiating, as in a merger, sale or JV, and 3) provide safeguards in case a deal collapses during negotiation.
Some time before the LOI is signed, the selling company should perform their own due diligence on their business with the help of a trusted advisor.  As the business owner, you should know where the potential issues are.  First, you should look to fix as many as possible.  Second, you should disclose the remainder to the potential buyer.  Buyers use due diligence issues to negotiate down the price of the business.  Disclosing them at the LOI level takes that card out of their hand.   Some owners feel that some issues will go undetected.  That, however, seldom happens with a savvy buyer.

The final steps in the process are the negotiations and closing.  There are books written on the negotiation process itself.  Suffice it to say that if the up front work is done well, uncovering the value your buyer perceives, the internal due diligence and negotiating the LOI, then the final negotiations should be much easier.   For more information and insights on selling your business, just complete the form of the right sidebar to download our e*book Exit Planning: The Guide for Business Owners.

In our last post we discuss how to develop a target list of potential acquirers.  In this blog post we will discuss the next steps in the sales progression.

The two foremost ways to proceed with sales process are the direct and indirect methods.  In the direct method the seller and trusted advisor put together a prospectus on the company.  This document will discuss the selling company’s market, the overall health of that market and it’s growth prospects, where the selling company adds value to customers, its technology/services.  There will be charts on market and company growth, broad narrative on opportunities, high level financials and the general location of the company, i.e. New England or Northeast.

Potential buyers are contacted by the trusted advisor to see if they would have an interest in looking at this generic type opportunity as the company is not mentioned at this point.  If so, they are sent a copy of the prospectus.

The indirect method involves contacting the same group to see if there are areas both your company and theirs can collaborate profitably.  This can be on a particular project, to private labeling each others products, to forming a joint venture.   These discussions give you the opportunity to get to know the other players in the industry better and assess the value that can be created from a sale.

The three main upsides of the indirect approach are 1) you get to know the other players in the industry on a more personal basis, 2) you get a better view of what is going on in your industry, and 3) the word, or rumor, about your company being for sale doesn’t get out into the marketplace.

If there is a downside with this indirect approach, it is that it takes much more of the owner’s time and personal involvement.

In our final post on the process of selling your business we will discuss some of the documents and milestones you will encounter.

We will assume that you have completed the preliminary steps and thoroughly prepared your business for sale.  Your balance sheet is in good shape, your market share and profits are growing, and your team is solid and firing on all cylinders.  It’s now time to consider the selling process.

After the vital preliminaries above, the first step is to prepare a list of potential buyers.  These can include companies in and around your industry.  They can also include family members or the management team.  The majority of sales are to third parties, so that will be the focus of the remainder of this blog.  The other avenues follow similar paths.

When preparing the list, do so without judgment.  List all the competitors you can think of including the indirect customers with complementary products.  List all of your big vendors and customers then look for the newer ones that are growing or have a special niche.  In this part of the process we are looking to be as thorough as possible to avoid leaving any potentially good prospects off the list.

Once you’ve gone through this process, divide your list into A, B and C players.  Companies in the A group would be the most likely buyers because of what you know about them.  Companies in the B group are less likely, but potentials, while the C group are the long shots.

Now the heavy lifting begins.  You and your advisors review the companies in the A group and analyze for 1) financial strength, 2) management team capabilities, 3) market and product trends and 4) reputation.  Next you record where your company would bring value to the business.  Uncovering this value is what drives the sales process.

Often times the owner has difficulty being objective about the value their company brings to potential buyers.  It is critical that value is accurate, neither significantly under or overstated.  Both the B and C companies are kept on the radar screen for major changes in their status, i.e. a B company starts buying up some of your smaller competitors, etc.

At this point some sellers go through the process of calculating what value their company would bring to each “A” company.  This step includes assumptions on additional channels and market share, geography coverage, cross selling opportunities, economies of scale, complementary technology and/or services, etc.  This gives the seller some idea who the best targets will be and how to position their company in the sales process.  However, it can not calculate some important intangibles such as desire, risk tolerance and ego.

The seller needs to prepare a credible forecast for the next several years that shows reasonable growth rates.  It will be important to hit the near term part of the forecast as that will be under scrutiny during the LOI and negotiation process up to closing.  Shortfalls in that period will readily translate into reductions in price.

In our next blog post we will discuss the two main avenues to take in contacting potential acquirers for your business.