| ELLING YOUR MIDDLE MARKET COMPANY Key Points
MOST TIMES, COMPANIES DON’T SELL the first time they are placed on the market. While statistics are hard to come by, it pays to realize that hard fact before you start the process. The company has to create enough cash flow to pay for itself, or have some patent or process someone else wants. Similarly, when entrepreneurial companies look for capital, the statistics are pretty harsh. Maybe two per cent of deals are funded by venture capitalists. Angel investors fund maybe three per cent of the deals they see. The numbers – and they are pretty accurate – say, therefore, that ninety-five percent don’t get funded. Does that mean that they’re not good deals? Some are real dogs, no argument there. But maybe half of the un-funded deals are good ideas that just won’t find funding quickly. Entrepreneurs have a couple choices when they can’t find money – quit, or self-fund. Quitting is always an option. It is not necessarily the first option, however. Some consideration should be given to self-funding. By self-fund, we’re not talking about credit card and home equity funding (although those methods are used a lot). Find a way to go ahead into production. For a while production is probably unprofitable. Managed properly, however, profitability may kick in. It makes self-funding an option that bears looking into. While launching into production isn’t for everyone, it isn’t necessarily a “mad” solution. It requires a plan to succeed. Better planning, better results. [Of course, there is a third option, that of the strategic alliance with one of your suppliers. A local flashlight company needed hundreds of thousands of dollars for a plastic mold in order to go into production. They made an alliance with the custom molder. The molder provided the mold, the tech company provided the idea for the new flashlight, and together they went into production. They split what profits there were.] CEOs SELLING THEIR BUSINESSES have similar problems. Much like entrepreneurs looking for funding, taken in the aggregate, businesses placed on the market do not sell. We can accept that anecdotal “fact” or we can do something about it. Over the years, one of my clients has been courted several times by other firms trying to buy them out. They never seem to reach an agreement. Sometimes it is price. Another time it will be who accepts the little debt that exists. Most times, the real culprit is the likelihood that the company cannot make enough cash flow, i.e., can’t grow quickly enough, to make the deal worthwhile. Now we’re starting to learn something. If you want to sell your company, make sure there is a roadmap for future growth of your company. The roadmap has to take into account that the purchasing company needs to earn back the purchase price for the company in relatively short order. They need to make a profit on top of that. Good financials had better be part of your planning. Having some sort of barrier to entry to your business that is salable also makes sense. The most obvious barrier is a patent. Angel investors almost won’t look at a deal unless it has a clear patent. Another might be a trademark. Finally, a copyright on text in your product or appearance of your product may be salable. Trademarks and patents require specialty knowledge. Having an attorney makes sense. Lists of clients or potential clients might also make sense. Control of all of this is important. Every week or so, the Wall Street Journal has a story about some company whose sales force quit and opened up across the street in the same business. Of course, you thought your employment agreement protected you. The only message is, have a plan to protect your company. If you don’t have a plan, your company is less salable. So, where do you begin? REVISIT YOUR STRATEGY. A company is not real estate. If your home doesn’t sell, you might take it off the market, paint it inside and out, re-do the landscaping, and lower your price a bit. (I suspect lots of us will be doing that in the near future when the real estate market starts to cool.) A company is somewhat different. The classic steps for a strategic plan have you and your management team answering three questions:
Start with a strategic analysis to find out your company’s internal strengths and weaknesses and its external opportunities and threats. Then re-visit your mission statement and values statement. Set objectives for the next year and for five or so years out. Create financial projections that take into account the new objectives. Finally, come up with defensive and offensive strategies. Defensive strategies mainly address internal weaknesses. Offensive strategies take on the opportunities. Remember, growth comes from opportunities. If you are to stoke the growth of you company you need to re-examine your strategic opportunities list. Reformulating your strategy is in order. It is tempting to continue to do things the way you have always done things strategically. Odds are that in order to generate enough cash flow for a new buyer, you need change. Consider the following steps. They take you from the past emphasis on your market segment all the way to re- defining your market for growth: Position from the customer’s point of view, especially when defining your differences from the competition. Sell “before the chasm” products to “before the chasm” buyers. Consider whether your traditional marketing program continues to make sense. Identify key referrers. Focus on Connectors, Mavens and Salesmen. Shift from heavy marketing expenses to heavy product development investment. Re-define your market place. Consider alternative industries, a new chain of buyers, complementary product offerings, a new emotional appeal to buyers or look farther out to new changes that may effect your business. By now I am starting to hear a bit of mumbling from the audience, aren’t I? You’re wondering why you have to complete a strategic plan just to sell your company. Your weakness is the inability to sell your company. Fixing that problem is certainly a defensive strategy. It might include offensive strategies as well, especially if you need to take on a new marketplace in order to make you company more salable. Your objective is to sell. The buyer has another objective, namely, making sure the company, once purchased, will be able to generate enough cash flow to repay the note to you and enough profits to make the purchase worthwhile. The two objectives don’t necessarily work in tandem. But they can if you take the time to address your need, and the buyers’. By now, you are realizing that at least a portion of your management team is participating in these discussions. Believe me, they will be interested in how things work out, so they will be motivated to help. You will be interested in how much to share with them. There are two schools of thought, to share or not to share. Strategic processes by necessity are inclusive. I suspect that ultimately you will want to include your team in at least a portion of your strategic planning. Sharing quite a bit of what is going on definitely makes sense. A sale is more likely. So is a higher price. CREATE A BUSINESS PLAN. One of my clients had a new technology. It didn’t take me long to realize that ultimately, it would be successful in the marketplace. The test I use is always “Is it easy to explain to folks?” and when you finish explaining it, “Do they want some, too?” This deal was like that. I sat back and applauded while they started to approach venture capitalists for funding. I knew it would fund quickly and easily. I was wrong. The venture capitalists not only weren’t interested, they laughed at me when I asked why. The client had made one crucial mistake. It was a simple mistake that was easily discovered. Luckily, it was also easily rectified in this case, at least. What was the mistake? The client focused on describing the technology instead of telling the potential investor about who was likely to actually buy the final product. Literally, the VC weighed the business plan, first with the marketing section included, and then with the marketing plan removed. There was no difference because basically in this eighty-page plan only about two paragraphs addressed who would actually buy the product. (Yes, I know that eighty pages are way too long for a business plan, but that is another whole discussion.) Big mistake. Remember any buyer needs to see how they will make money to repay you once they buy your company. My tech client had forgotten this. The tech management team had worked so long with the technology that they had forgotten that there were other folks who needed convincing including potential clients – and investors. ASSESS – AND ACCESS – YOUR TEAM. Have a look at your management team during the strategic and business planning processes. Look real closely. Why? Buyers are looking just as closely as you should be. I once worked with a very interesting company. Although no one in the planning room realized it, the owner of the company had asked the CEO to prepare the company for sale. The CEO had a very simple strategy that really was elegant in its simplicity. Once you understood the strategy, it was obvious how to proceed. Unfortunately, no one understood the strategy. The company with the strategy was salable only if the management team that would be running things understood the strategy. It took us three days to train the team, then six weeks of follow-up meetings to make sure they could implement correctly. This story has a nice ending. The investment of time in the strategic planning process (really a training exercise for the management team) took a company that wasn’t really salable to one that sold relatively quickly. The CEO did two things. He assessed his management team and realized that while they were excellent at tactical implementation, they didn’t understand what to implement. He accessed his team over six weeks of meetings and teed the company up for eventual sale. An interesting by-product of the process was apparent. The CEO didn’t need to bring in more experienced management. He was able to proceed to the sale of the company leaving the current team in place. All it took was a strategy, which included tactical training at precisely the right time. Ricardo Semler, CEO of Semco Group in San Paulo, Brazil takes access to a new level. While he owns most of the stock in his company and could wrench control at any time, he lets his employees run the whole operation. He applies McGregor’s The Human Side of Management. Employees decide what color to paint the walls. They decide what businesses to involve the company in. They decide who gets paid what. They decide almost by themselves what they are going to do each day. They just make sure every thing gets done – profitably. [Refer to Lawrence Fisher's The Creative Mind. Strategy+Business. January February 2006.] Why bring this up here when we are talking about selling your company? Maybe selling doesn’t make much sense when your management team could run things for you just as well as you can. Maybe they buy you out? Or maybe, you discover that the cash you receive from a buy-out will never equal the cash flow you bank year after year of profitable business operations. START OVER – WISELY. The first time you try to sell your company, it probably won’t sell. You can give up, as sometimes that isn’t such a bad idea, anyway. Or you can take a couple “simple” steps to rectify things. The simple steps aren’t necessarily quick and easy to do. Many times, however, they are successful. Give it some thought. JACK MIXNER 714 449 1040 jmixner@mixnerstrategy.com COPYRIGHT 2006. JACK MIXNER. ALL RIGHTS RESERVED. |
| WHAT TO DO WHEN YOUR COMPANY DOESN'T SELL |
| STRATEGY |
| J A C K M I X N E R |
