Wayne Wilson on Companies in Transition

Spinning up the fly wheel

I am currently involved in a new business development project – you know the kind: Constant wheel spinning trying to get traction while at the same time sucking all of the oxygen out of your life.

And there are good days and bad days. Good days when you feel euphoric and bad days when you just want to stick your head under a faucet. This week has finally seen two good days in a row where pitch meetings with potential partners went very well. (They will sign up officially, won’t they?) I can feel the wheels occasionally grabbing hold a bit even if they are still spinning a lot.

And then you have one of those kindred spirit encounters that really put a glow on the end of a long week. I had one of those yesterday.

A brief chance meeting turned into a quick lunch and three hours later we were still sitting at the window table of this little café delving into the who, what, how, and when of a significant potential business initiative tangentially related to the biz dev project.

The new initiative may or may not click, and it may or may not leverage the biz dev project, but it was one of those exhilarating intellectual moments when you feel yourself connecting with someone, whom you have previously known only casually, on multiple levels at the same time with ideas flowing rapidly between you as the energy and excitement about the prospects build.

Now if I good just gen up a day like that every week or so…

The Business Advantage Show Features Wayne Wilson June 30th

Consider this a special invitation.

On Tuesday, June 30^th, Wayne will be the featured guest on the Business Advantage Show on WKXL1450 Radio in Concord, New Hampshire (www.wkxl1450.com) hosted by Christopher Thompson. The show runs from 11 am until noon. Listen on WKXL 1450AM, 103.9FM or listen live from any PC, Blackberry or Iphone @ www.wkxl1450.com (click "listen live")

The Business Advantage Show addresses a wide range of business related topics with a particular focus on sales and business development. The purpose of the show is to provide solutions and advice to sales professionals, business professionals and entrepreneurs.

Christopher Thompson is the Founder of Catch 22 Solutions, a sales performance consulting company, based in Manchester, New Hampshire. Catch 22 Solutions helps companies and sales professionals accelerate sales performance by enhancing and improving their current selling process.

The Business Advantage Show is broadcast live over the air and at www.wkxl1450.com and recorded for future listening or downloading at WKXL1450 – The Business Advantage Show.

Please join us on Tuesday, June 30th at 11 am.

Where have all the growth companies gone?

A few years ago, a growth company [1] from a public investor perspective [2] was any company whose revenues and earnings per share were growing at rates greater than 20% per year.

Earnings growth drives valuation and revenue growth is the essential precursor for earnings growth. And owners of privately held companies aspired to the same growth rates, especially if they wanted to go public company or sell out to a public company.

Where is the growth bar today?

In a recent conversation with bankers from a major Wall Street firm, I asked that very question. Their answer: “anything in double digits.”

How times have changed. But some things have not changed - above average revenue and earnings growth rates are still the keys to above average valuations.

Management’s three financial priorities remain the same:

1. Keep costs under control
2. Manage cash carefully
3. Plan for growth

Now is the time to set in motion those plans and strategies which will drive growth and profitability when the economy emerges from recession.

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[1] “Any firm whose business generates significant positive cash flows or earnings, which increase at significantly faster rates than the overall economy. A growth company tends to have very profitable reinvestment opportunities for its own retained earnings. Thus, it typically pays little to no dividends to stockholders, opting instead to plow most or all of its profits back into its expanding business.”  Investopedia at http://bit.ly/QIVRc

[2] Excludes companies that have not yet reached operating profitability.

Using Web 2.0 Tools to Run Your Business

David Spark just published a fascinating article at Socialmedia.biz about using web 2.0 tools to run and promote your business. He describes the experience of Stephen Jagger, CEO of Ubertor when he decided to take his entire company virtual:

"Rarely, though, do we get an opportunity to see one person or one organization completely open up the kimono and show us step by step how they deploy all of these time and cost saving techniques to actually run their business.

"Last week, Stephen Jagger (@sjagger), CEO of Ubertor (web pages for real estate professionals), Reachd (web marketing training courses) and Outsourcing Things Done (high level virtual assistants), spoke to a group of entrepreneurs of the San Francisco Entrepreneurs Organization (EO) at Samovar Tea House at the Metreon in San Francisco. Here’s a summary of his presentation in which he talks about each of the tools he uses and provides an explanation of the value it brings to his business."

Read David's article and learn about the latest web productivity tools.

Measuring your ROI on acquisitions

Many CEOs rely on acquisitions of other companies or product lines as an important component of their overall growth strategy. However, they seldom look back through rigorous post-acquisition financial analyses to measure their return on investment (ROI), especially how the deals performed versus expectations at the time of the deal.

I prefer two relatively simple measures: annual cash-on-cash (COC) return on capital invested and cash payback or how long will it take for the buyer to recover its investment on a cash basis. Other methods such as discounted cash flow, while more theoretically pure, suffer from complexity of calculation and estimation bias when trying to determine appropriate discount rates. If not done properly, the analysis is worse than worthless.

A proper analysis should be performed on an annual basis covering all significant acquisitions made by the company (or the current management team). EBITDA (earnings before interest, taxes, depreciation, and amortization), adjusted for significant changes in the level of capital expenditures and working capital, is often a reasonable proxy for cash. Some would argue that free cash flow is a better proxy. Pick a method and use it consistently.

The real question and value is less in the numbers than whether the management team holds itself accountable for results through an open and honest “lessons learned” analysis.

One company recently completed its annual exercise indicating somewhat mixed cumulative returns for several transactions over several years with COC returns barely exceeding the company’s weighted average cost of capital. On the qualitative side, one acquisition was truly transformational and displayed excellent returns.

It’s better to do deals with your eyes wide open than your eyes wide shut.

The day goes as the day begins

On days without early scheduled commitments, I have noticed that the day goes as the day begins. A feverish early commitment to a priority project usually results in a very productive day, while more leisurely early time spent with the morning’s papers and news sites frequently becomes one of those, “what did I do today?” days.

What gives? The same hours (excluding the newspaper time) may have been committed to work on both days, but the intensity clearly differs. Start strong; finish strong. Start slow; well, you know….

Business owners, free-lancers, and independent professionals all have the same problem: How do you hold yourself accountable for performance without someone constantly looking over your shoulder?

Here is my formula:

1. Focus – Be very thoughtful and clear in your own mind about what you are trying to accomplish. Write it down if that helps, but be very clear.
2. Prioritize – Some tasks simply matter more than others. Concentrate your most important tasks during those hours of the day when you are personally most productive.
3. Commit – There is no shortcut; just put your head down and get going.
4. Decline – Don’t get distracted. Decline to participate in the daily time waster activities. (You know what they are.)
5. Deadline – If you aren’t facing a real deadline, create one. Nothing concentrates the mind like a deadline.

The recession grinds on

At ground level the recession grinds on, despite recent optimistic comments by various government and other public figures, A recent survey of corporate chief financial officers [1] highlights the gap between hope on the one hand and reality on the other.

Fifty-four percent of U.S. CFOs surveyed were more optimistic this quarter than they were last. But on average, the “CFOs say the recession will last another 10 months,” and they are continuing to maintain tight control over spending.

This is a classic pattern: management actions tend to lag changes in the environment. At the beginning of a recession, managers hope for a quick rebound. They begin to seriously reduce spending only when it becomes clear that the revenue decline is not a brief aberration. On the rebound, managers must be absolutely convinced that revenues are turning up before they ease up on spending controls.

The key strategy is watchful waiting. Those business owners who have the courage to begin investing again before the pack does will have an advantage over their competitors.

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[1] CFOs Hoping for the Best, Planning for the Worst, www.CFO.com, June 3, 2009

Do you love what you do?

Do you wake up in the morning excited to go to work? Do you look forward with eager anticipation to the day’s challenges and tasks? Do you become so engrossed in your work that you lose track of the time? Do you have a passion for what you do?

Passion and commitment have long been associated with the lives of successful people. It’s not always about the fame or the money or the power. It’s about commitment to something larger than your self. It’s about what you can accomplish that might make a difference in the world.

Jonathan Fields has written a great new book, Career Renegade: How to Make a Great Living Doing What You Love. [1] While not cutting edge new material, the book does compile a range of useful information about ways to make money from your passion – a sort of primer for those seeking to gain personal traction on the issue.

The book includes exercises to help you find your passion, tips for conducting research and launching a new business and stories about the success of others to inspire you.

If you are not currently pursuing your passion, Career Renegade might be a useful read.

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[1] Jonathan Fields, Career Renegade: How to Make A Great Living Doing What You Love, Broadway Books, 2009, 288 pages.

How can I protect myself from supply chain failures?

Michael Gonnerman had some great advice for business owners in his “Ask Mike” newsletter this week.

Question: "We depend on a lot of companies in our supply chain, from vendors who supply components to several retail chains who sell our finished goods. I'd love to get an early warning about companies that might be in trouble so a failure won't catch us by surprise. Suggestions?"

Mike: In my experience, there are always warning signs whenever a big manufacturer or distributor begins to have financial problems. Industry rumors, news reports, SEC filings, layoffs, an uptick in "lost" paperwork, declining stock prices, negative opinions by auditors, high turnover among key executives--it's all evidence that you're dealing with a supply chain partner with problems. Especially during tough economic times, you should make a serious effort to track information about all the companies you rely on.

And if you depend on a company that's public, buy a few shares of their stock and attend their annual shareholder meeting. Chances are, you'll be the only customer or creditor there, and you'll have plenty of face-to-face access to the directors, the CEO, and the CFO. Feel free to ask questions like, "Why aren't you paying your bills on time?" or "What are you doing about the defective goods your Oshkosh factory is shipping?" Believe me, you'll get attention.

Bear in mind that your warnings may ruffle some feathers inside your own company. Your purchasing department may be sending too much business to a single vulnerable supplier, or your sales reps may be happily writing big orders to a distributor who can't pay his bills. Make sure your have a company-wide buy-in on reducing supply-chain risk, or the information you collect won't do any good.

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Michael Gonnerman is the Founder and CEO of Michael Gonnerman, Inc. (http://www.gonnerman.com) in Sudbury, Mass. He may be reached at 978/443-1340 or through email at michael@gonnerman.com .

Catching the Social Media Wave

The May issue of our periodic email newsletter to clients and friends has been posted to our website at Companies in Transition – May 2009. The lead article in this issue is about catching the social media wave and includes the following articles:

• Catching the Social Media Wave - Facebook and twitter are all the rage now, but can they really be effective business tools?

• Has your company reached a strategic inflection point? – The key business fundamentals may be changing but the management challenges remain the same.
  

• Yogi Berra was right when he said... – What can companies in transition learn from Yogi?

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Invest During Hard Times

-         Craig Barrett, former Intel CEO

Owner/CEOs often find it difficult to invest during difficult economic times. And yet, it is the investments made now which will drive revenue growth when the current economic recession ends. The challenge is to reduce spending while preserving or increasing investment. What’s the difference?

Investments support or drive increases in revenues and profitability. Spending is the cash disbursed for everything else which does not meet the investment definition. Like politicians, spending sponsors will argue vociferously that their particular program / budget / personnel are necessary investments and are absolutely essential for the health and even the survival of the enterprise. It is simply not true.

Finding funds for investment requires reducing large amounts of spending. Most managers are tempted to start with the free coffee in the employees’ lounge and the travel budget. There is often not enough money here to make a difference. Instead, challenge programs, markets, product lines, customer concentrations, and significant research and development programs.

Can the particular program or activity make a difference in the trajectory of the business and if successful will it be big enough to matter? The chief decision maker must be brutal in choosing among all of the good ideas. Only the very best should be funded; everything else must be jettisoned. The future of your business depends on it.

Pricing Pitfalls

It takes a strong manager to consider raising prices in a period of declining consumer demand and falling profitability. And yet pricing is one of the most important tools available for improving margins, strengthening customer relationships, and trimming the business’ overall profile.

There are right ways and wrong ways to manage pricing. Per Sjofors, [1] a pricing consultant, recently offered his list of the Top 10 Pricing Mistakes Most Companies Make. [2] Here is an abbreviated version:

1. Basing prices on costs, not customers’ perception of value
2. Basing prices on the marketplace (whatever that is)
3. Trying to achieve the same margin across multiple product lines
4. Failing to segment customers
5. Holding prices for too long at the same level (too high or too low)
6. Compensating sales reps on revenue rather than profitability
7. Changing prices without considering competitor reactions
8. Failing to actively manage pricing practices
9. Failing to establish internal procedures to optimize prices
10. Spending too much time serving the least profitable customers

Improve your business’ prospects for prosperity by taking charge of the product or service pricing process.

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[1] Managing partner at Atenga Inc., a Newport Beach California, strategic pricing consulting company

[2] Financial Executive, May 2009, p 30.

Lingering on the mezzanine financing ledge

Most sources of business financing are in tight supply: bankers are skittish, the IPO and equity markets are almost non-existent, and even the mezzanine players are having trouble moving the money.

According to Bank of America Business Capital,

"Very few private equity firms will do a [mezzanine] and equity deal; they want senior lending," says Andy Steuerman, a senior managing director with Golub Capital. …the deal market has effectively stalled. Economic uncertainty, on top of the credit woes, has both buyers and sellers retreating to the sidelines until more clarity emerges. …the only deals being pursued are the transactions that are absolutely necessary for a company's survival.

Translation: it’s not yet safe to come out of the financing storm shelter. Companies must continue to rely on their own wits for preserving cash and funding their businesses. As the recession drags on, customer profitability and working capital management remain key pillars of financial stability.

Do you know where your people are?

For parents, worrying about the health and welfare of their children is a lifelong obsession. Reaching adulthood is merely the end of one phase in the relationship and the beginning of another more complicated one.

Employee relationships work the same way. Hiring talented new associates is often the easy part. Holding on to them and facilitating their productive engagement in the organization is a lot tougher.

Consider some of the lessons of parenting:

• Your employees are your partners not your serfs – your relationships with employees will generally be more effective if you meet them as equals. Your roles may vary based on experience and responsibility, but you are all on the same team.

• Your employees have ideas, too, and they are not the same as yours – we could all benefit from a lot more listening and a lot less talking. Besides, they own the future; we are mired in the past.

• The world is different now, but the stories are the same – I am already hearing the “oh Dad” when I commence what my children refer to as a “when I was a child” story. The challenge is to engage both children and employees through time-tested stories about integrity and excellence but cast those stories in terms that are more relevant to their lives and jobs.

Would you buy a nice house or investment property and then let it fall into disrepair? Your people are far more valuable than any investment property.

Are you focusing on what’s strategic?

Owner/CEOs frequently struggle with resource allocations, especially among tactical operating initiatives and potential game changing strategic moves. And strategic investing can be especially difficult in the current economic environment.

A proper prioritization might look like the following:

1. First, ensure current tactical performance and organizational sustainability,
2. Then, determine what’s strategic for longer-term success, and
3. Finally, hire key talent to support new strategic investments

Apple is a great example. It’s iPhone and iPod products are riding high, and now the company appears to be hiring to bring key parts of its chip design process in house as a way of protecting its proprietary strategies while differentiating its capabilities from competitors.

Another company is stretching out the introduction of a new generation of products to better match current market demand while shielding some of its newer technologies from pre-mature competitive challenges.

Working out what’s strategic and then committing sufficient resources is critical for every company’s long-term sustainability.

Looking for financing? Community banks have money to lend.

Business owner/CEOs frequently ask about new or alternative sources of financing, especially in the credit crunch of the last year. Community banks can be great sources of funding, but you have to meet them on their terms.

An experienced intermediary can also be helpful. Here’s some recent information from Fantini & Gorga:

"New England alone has over 200 banks with over $500 million in assets. Collectively they’re well capitalized. Many are lending actively in the $1,000,000 - $25,000,000 range.

"But although their focus is local, it can be hard to get the best loan terms from these community banks.  They move in and out of the market. They have very particular – and frequently changing - loan criteria. Often these banks need a participant, or even a small syndicate of banks, to reach the needed loan amount. Terms and pricing vary widely.

"Check out our most recent Out of the Ordinary  to get a composite picture of what this critically important, but highly fragmented source of financing is doing."

Fantini & Gorga can be reached at the following address: *

Fantini & Gorga
265 Franklin Street
Boston , MA 02110
(617) 951-2600
(617) 951-9944 (Fax)

www.fantinigorga.com

* I am familiar with Fantini & Gorga's work, but othersie have no affiliation or arrangement with the firm.

What's your agenda?

Do your professional advisers understand your agenda? Have they even asked you about it?

As the new general manager of a two hundred million dollar company, I had a clear agenda – ensure the company’s economic survival and position it for sustainable future growth. Every decision I made was focused on those two strategic objectives.

Consultants and other professional advisers who could help me advance my agenda were welcome partners in the struggle. Those merely attempting to sell me something were vendors to be squeezed for the best possible deal if not simply shown the door.

To be effective, an adviser must be able to:

• Put themselves in your shoes, to appreciate the pressures and concerns you face
• Draw out your most pressing issues through thoughtful and creative questions
• Help you shape your agenda through supportive, but intellectually honest discourse
• Deliver bold, forceful advice consistent with your mutual understanding of the challenges you face

Effective, empathic advisers are few and far between. Keep looking until you find one, and then don’t turn loose.

The power of militant simplicity

Igor Shindel introduced me to the concept of militant simplicity. Some years ago, I hired Igor to lead the development of a next generation B2B e-commerce web site for PC Connection. The challenge was to build a fast, robust web site on time and under budget.

Militant simplicity became the mantra. Keep the site fast, clean, simple (what would now be called the Google model) by providing the 20% of desired functionality that would drive business value and ignoring the rest. Everyone seeks simplicity until the requests start coming in. Can we do this? What about that? Soon the team is mired down by the 80% of stuff that will never matter.

That’s where the militant part comes in. Once the project strategy, core objectives and critical functionality had been thoroughly defined and vetted by both business and technical teams, the team became militant in resisting scope creep. They made a list of all the ideas coming in and promised people the new ideas would be considered for the next release (maybe). Having their idea on the list seemed to keep people happy even if you never worked on it. Strange …

The free dating web site, Plenty of Fish, is a great example of a business built on militant simplicity. Founder and owner Markus Frind is currently taking millions of dollars to the bank while retaining 100% ownership. His secrets?

• A “dead-simple,” web site that practically runs itself on eight servers while serving up 1.6 billion web pages per month
• A free service attracting millions of users and supported by ads (often from competitors)
• Avoiding any improvements to the site that do not support fast, efficient matching
• Fixing problems quickly and simply instead of throwing resources at them

How much more effective and efficient could your business be if you adopted militant simplicity as a guiding principle?

Countering the decline in sales closing rates

Jill Konrath (Selling to Big Companies) recently reported, “It now takes 4.5 prospects to get a sale – up from 3.0 prospects just a short time ago.” That’s a closing rate decline of over 30% - an alarming, though not surprising, decline given the current economic environment.

The causes are many – longer sales cycles, fewer customers buying, more pressure on pricing, too many me-too products, not to mention management paralysis all around.

Countering the decline in closing rates requires that companies and their sales organizations focus on all the metrics in the sales cycle:

• Increasing the numbers of prospects – most sales forces are working with too few prospects to begin with. Shift more marketing resources to targeted lead generation.

• Accelerating prospect qualification – too many prospects in your pipeline are “china eggs” – they will never hatch. Sales executives can improve sales force effectiveness by rigorously scrubbing the pipeline to eliminate or downgrade poor prospects.

• Creating compelling offers – customers who routinely purchased your products in the past now require a compelling reason to turn loose of their cash. Product positioning is critical here. If your product is not a must have, it will be left by the wayside.

• Improving the overall customer value proposition – most customers today are pressing for pricing discounts, but it’s not always about the price. They are often seeking improvement in the overall value transfer from you to them. What problems can you solve for them that create more value for your customers than cost to you?

• Getting to a yes today – the sales process must drive a sense of urgency; everyone has quarterly sales targets to meet. The solution is to work backwards up the sales funnel and address the problems in the earlier stages of the sales process.

If you are generating a large flow of high-quality prospects that need your products and you rely on conservative conversion metrics, there will be plenty of qualified buyers to close each quarter.

Sales and marketing alignment

Brian Carroll over at B2B Lead Generation Blog recently wrote a post that ties in directly with our recent posts on this subject - Sales and marketing alignment: tips for getting it right with lead generation.

"According to the 2008 Miller Heiman Sales Best Practices Study, only 37% of respondents agreed that their sales and marketing organizations are aligned in what their customers want and need. I discussed this disconnect with Bill Golder in the February issue of Sales & Marketing Management. You can check out the interview online: Chronicles of a Sales Leader: The Lack of Sales and Marketing Alignment in Organizations Today."

Read Brian's article ...

Get some smart people to challenge you!

Business owner/CEOs can get so wrapped up in our own plans and worldviews that we miss our full potential, or worse we can be heading for a ditch without realizing it! Physicists call it a closed feedback loop. In lay terms, if we only talk to ourselves, we will only hear our own voices.

One of the essential roles of a board of directors or board of advisors is to challenge and vet the ideas and plans proposed by management. The end result should be that good plans are strengthened and poor plans are discarded or significantly re-worked.

My best investor relations meetings were the ones with the toughest analysts who asked the most difficult questions. They were experts at ferreting out the weak spots in our story, in effect telling us the areas we needed to work on going forward.

Customers and clients are often the best sources of real world feedback. Don’t fight them; embrace them. Your future may depend on it.

Balancing Marketing and Sales

Many companies are suffering from a significant imbalance between their marketing and sales efforts – skimpy marketing budgets with lots of expensive sales reps.

Business owner/CEOs justify this mix because it’s often hard to measure marketing results while a sales rep is either producing or he’s not. Such a tight bottom line orientation can be short sighted, especially when the sales reps’ production begins to decline and a remedy is not obvious.

There is a better way. The best marketing programs are ones that generate qualified leads for the sales organization to pursue. Here is an example.

A technology reseller uses product-based, solution-oriented seminars to develop interest among its customers and prospects.

1. The company produces monthly seminars in partnership with its vendor partners who supply the technical specialists to lead the seminars.
2. Email invitation lists are compiled from existing customers, prospect lists, and vendor mailing lists.
3. Marketing staff follows up to ensure that each seminar has at least 25 participants.
4. Sales reps are assigned to each attending company to build relationships, gather feedback, and follow up as appropriate.
5. The company tracks and measures the deal flow and sales results for every company attending each seminar.

Marketing activities are an integral part of the sales process. They should support and be linked to specific sales objectives.

The Facebook Business (Advertising) Model

Fascinating interview with Sheryl Sandberg, Facebook COO, in Business Week:

“We believe advertising needs to blend into the experience. … What we have are ads that act like our site.

“So, for example, on Valentine's Day, Honda gave a virtual gift, which was a little heart that said—I forget the exact language, but "Your heart is full, so your tank should be, too." It was a little Honda-branded gift. They paid for 750,000 of them to be given. So 750,000 people gave this heart to 750,000 other people. Then what that generated on the site was talk about Honda, talk about their cars, excitement about some of the things they're launching, and then more than 200 million impressions. So [those ads] didn't look like the huge ads you're used to seeing on other sites, but what they looked like were [Facebook’s] news-feed stories. So the advertising experience itself is very integrated into the Facebook experience.”

Read the interview …

Facebook is a classic example of jumping ahead to an entirely different variation on a business model. The model is still advertising but a very different kind of advertising – no banners, no search based text ads; call them “experience ads.”

The Question – how will advertisers measure impact? Banner and pay-per-click ads have become popular partly because real sales results could be tracked back to specific ads.

Sales versus marketing

Many business owners and managers confuse sales and marketing. They question the need for marketing programs or worse, they complain when they spend money on marketing and sales do not increase.

Marketing is like air cover in a military operation. It softens up the enemy and prepares the way for the ground forces, but only boots on the ground (the sales force) can secure new territory.

Marketing can:

• Identify, research and analyze potential markets
• Educate those markets about your company’s products and services
• Generate leads for the sales force

But the sales force must:

• Qualify those leads
• Close the business and
• Service the customers

Marketing does not and cannot replace sales. Done properly, marketing can improve the efficiency and extend the effectiveness of your sales organization.

The Business Model Merry-go-round

Your business model is the process by which you create value for your customers and entice them to pay you for it so that you can do it again tomorrow. It’s not a business unless it has customers or clients who pay you now or will pay you in the future.

The business models of many companies and industries are in a death spiral because of the convergence of three great forces:

• Internet-driven disintermediation
• Credit-squeezed recession
• Schumpeter’s creative destruction

Some examples are all too familiar:

• Recorded music, newspapers, magazines – How do you compete with free?
• Leveraged investment banking – borrowing short to invest long
• Auto manufacturing – they can always be made cheaper somewhere else

Even lawyers are starting to offer packaged services as well as performance-based fees and fixed prices.

What‘s an owner/CEO to do?

1. Recognize that no business model is safe in periods of great turmoil
2. Become routinely paranoid about what may be lurking around the corner
3. Invest in innovation of products, services, processes, pricing – everything

Your future depends on it.

20 Ways to Cut Costs

Business owner/CEOs all struggle during turbulent economic times with the dilemma: revenue is falling and profits are disappearing; do I focus on stabilizing/growing revenue or do I cut costs to minimize the profit erosion?

The truth is you have to do both!

ZweigWhite, consultants and advisors to architectural and engineering service firms, is offering a DVD program 20 Ways to Cut Costs: Cut wasteful spending and improve profitability.

While their list is specific to professional services firms, it’s a great place for any business to start:

• Unbillable principal-level staff
• Sacred cow administrative assistants and secretaries
• Unused office space or overly expensive office space
• Outside professional services
• Insurance
• Lights, heat and more
• Company vehicles
• Excess luxuries
• Employee benefits
• Unnecessary overtime
• Principal salaries and perks
• Non-billable travel
• Dumb, dead, or too small branch offices
• Unnecessary meetings
• Recruiting expenses
• Family members on the payroll
• Training for the sake of training
• Library and subscriptions
• Professional society dues and meetings
• "Don’t be left out" marketing expenses

Costs come in two varieties:

1. Investments that support current revenues or generate new revenues, and
2. Other spending, which is the profit leaking out of your business

Click here to order the program.

Applying ‘The Only Three Questions That Count’

I have been reading Ken Fisher’s The Only Three Questions That Count: Investing by Knowing What Others Don’t. Ken’s focus and business is managing stock portfolios at Fisher Investments but his questions and methods can also be applied to running a business.

Here are Ken’s three questions:

Question 1 - What do you believe that is actually false?

This one really set me back because it can be applied to everything you do. Life, investing and business are filled with myths. You think you know what your customers want, but have you asked them? You think you know what your competitors are up to, but have you gone into the market to see? You suspect that some of your employees are not happy working for you, but have you tried to find out why?

Question 2 - What can you fathom that others find unfathomable?

This is classic specialist, niche marketing for business owner/CEOs. How can you own a particular market segment? What products or services could address an unmet need? Or meet that need better, quicker, or cheaper? What knowledge, organizational, facility, design or production investments need to be made to position your company uniquely in that market?

Question 3 - What the heck is my brain doing to blindside me now?

This question could be summed up as “we see what we expect to see and we are simply blind to what we do not expect to see.” Each of us have pre-conceived notions or screens that filter the information we receive from our environment. Problems arise when the information we expect to see is incorrect or irrelevant to our situation, or worse, the information we filter out (are blind to) is warning us of impending disaster!

Business success is partly about the ability to challenge and vet what we see and hear. We might do well to start by challenging ourselves first.

Business Valuations - Here today, gone tomorrow

One of the greatest difficulties selling business owner/CEOs are struggling with these days is the rapid decline in prices which business buyers are willing to pay. The reasons are part financing, part business expectations in a recession, part negative trends in the business, and part the dramatic downward macro re-set in business valuation multiples in the markets at large.

As we have often said, "business valuation is in the eye of the beholder," and today's beholders are likely wearing dark glasses.

Part of the solution to this mis-match between would-be buyers and sellers is a better understanding of the bases for business valuations. Here is a helpful slide deck from Hayes Knight, accountants.

Business Valuations

View more presentations from Pedzel.

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Readers may also find our presentation Business Valuation and Exit Strategies: Planning for the End Game helpful.

To have a great idea, have a lot of them.

 -         Thomas A. Edison

Ideas are like opportunities – they exist where you find them. The secret is being open to ideas as they come your way. Receiving and recognizing ideas is like panning for gold. The ideas already exist and like a great river, they flow constantly through the background of your mind. [1]

Panning for ideas requires effort much like the gold prospector standing bent over in the river with a sieve. Standing on the riverbank or idly gazing across the water will bring you few nuggets. You must engage.

How does one pan for ideas? Here is one approach: [2]

1. Recognize that panning for ideas requires conscious effort
2. Ideas usually come in response to our struggle to solve a problem
3. Relaxed, solitary concentration on the problem at hand shuts out competing noise and allows the river of ideas to flow
4. Jot down your thoughts on a piece of paper
5. Just let the ideas flow - don’t try to evaluate them yet

When the stream stops, review your list for the nuggets.

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[1] Many people believe that the subconscious mind is the doorway to infinite intelligence – the store of all knowledge that exists in the universe.

[2] "Elmer R. Gates (1859-1923), who held dozens of patents, made his living 'sitting for ideas.'  His tools were a quiet room, a pen, blank paper, and his mind." - Lee Humphries

Complexity is the enemy of progress

March 31^st – and we are deep into the tax (terror) season for many small business owners. Any business operating as a limited liability company, partnership, or sole proprietorship must file its tax returns by April 15^th. Only 15 days to go…

Most people do not mind paying their fair share; it’s the complexity of the process that drives them crazy. Even though the majority of business owners hire a tax professional to actually prepare the returns, someone in the business still has to compile the information, answer the questions, and dig out that missing piece of paper required to support some deduction.

Every hour of someone’s time spent complying with some inane government regulation is one less hour that’s available to design a new product, make a sale, or satisfy a new customer. Contrary to the views of the local weatherman, daylight savings time does not add any time to your day!

My greatest fear about the impending Obama revolution is not increasing tax rates; it’s the dulling of entrepreneurial juices and the sapping of animal spirits which results when the heavy hand of government blocks the sun.

Here are a few thoughts for owner/CEOs attempting to escape from bureaucratic entrapment:

1. Focus on those business tasks that only you can do
2. Delegate, delegate, delegate
3. Hire specialized staff support if necessary
4. Simply stop doing anything that will not make a difference in your business three years from now
5. Finally, vote for politicians who understand that government regulations are the kudzu vines of an entrepreneur’s life!

Are you tracking your free cash-flow margins?

Every business owner/CEO is watching his/her profit margins closely these days. But are you also keeping a close eye on your company’s free cash flow and cash flow margins?

Free cash flow is the discretionary cash that’s left over after paying all operating expenses, required debt payments, and capital expenditures. It’s the money that can be used for dividends, acquisitions, or for stock buybacks if your company is publicly traded. Cash flow margin is free cash flow divided by revenue.

Free cash flow must also take into account changes in working capital required to support the business. A recent study at Georgia Tech reports that while cash flow margins in several major industries were holding steady in recent months, the study’s authors predict that free cash flows for many industries could sink by 50% over the next year. What is happening here?

Two things:

• First, when revenue growth slows or begins to decline, cash flow actually increases because working capital is being released from operations (receivables decline through a combination of continuing collections and slower sales). Managers often see this as a positive – it may be in the short term but it bodes ill for the longer term because the business is liquidating itself.

• Second, as revenues continue to decline, cash flow quickly turns negative because few managers are able to reduce expenses as quickly as their revenue declines. And the speed of this change in direction can be breath taking. Free cash flow can literally be positive with a cushion one month and turn negative, falling off a cliff the next month.

While tracking your company’s free cash flow is vital, it is not a substitute for carefully scrutinizing and modeling changes in every component of your company’s finances on a continuous real-time basis. And while doing so may be painful and time consuming, the alternative is likely worse.

Maximizing the sale value of your business

Many owner/CEOs have recently despaired about their ability to sell their businesses at acceptable prices under current market conditions. If buyers are interested, it’s often only at depressed prices.

We are always on the lookout for new tips for addressing this challenge. Mark Cadbury recently offered his 10 Ways to Maximize the Sale of Your Business. Here is Mark’s list:

1. Ensure Customer Diversity
2. Develop Management and staff
3. Systematize the business wherever possible
4. Focus on Recurring Revenue
5. Develop Proprietary Products/Technology that cannot be copied easily
6. Engage a Team of outside professionals
7. Broaden Product Diversity
8. Develop and maintain Key Performance Indicators (KPIs)
9. Prepare a Written Growth Plan
10. Invest in a quality accounting system

This list is good advice for any business owner regardless of whether you are currently looking to sell your business.

Read Mark’s article and commentary.

Get what you want from the people who have it.

Sometimes we struggle to accomplish our goals in life because we are trying too hard to do it by ourselves. Few people achieve great things solely through their own efforts. Most successful people build on or rely on the work of others who came before.

While not exactly “out of the mouths of babes,” listen to the wisdom of Ezra – Internet entrepreneur, age 22 – talk about what he learned from building a profitable online business in less than two years:

“The piece of knowledge that really changed my life is that you get what you want from people who have it. So figure out what you want, find someone who has it, and learn it from them.”

1. Figure out what you want or need.
2. Find someone who has it.
3. Learn it from them.

How hard can that be?

Marc Andreessen on Innovation

Innovation is alive and well!

In a recent appearance on PBS' Charlie Rose, Marc Andreessen, Netscape co-founder and Internet pioneer, talks about the waves of technological innovation washing through today's world and what we might expect in the future. Enjoy the show!

Inspiring Innovation

"Competition breeds innovation."

–        Samir Shah, iPhone software developer

Inspiring productive innovation is a challenge for any owner or manager.

• First are the vested interests who never heard a new idea they liked.
• They are followed closely by the NIH crowd (not invented here) – we didn’t think of it so it can’t be any good.
• Finally, bringing up the rear is the yes but gang – “yes, that’s a good idea, but...[it will cost too much / we’ve tried that before / we can’t do it / we don’t have time and do our regular jobs / we would need to hire a consultant to do that / etc.]”

Inspiring and fostering productive innovation requires:

• Challenging people to produce their best work. Competitions, games and prizes are a great way to start. They get people’s juices flowing; they create excitement; and more importantly they provide psychic rewards (recognition, etc). Beating a competing company to a new idea, product, or service works even better.

• Incubating new ideas outside of the work mainstream. Skunk works are the classic example of sequestering a new product development team away from the company’s main business. Small, separate work teams can provide similar benefits in evaluating and developing new ideas as long as the team is independent and protected from the pressures of the vested interests, NIH crowd, and the yes but gang.

• Owner/senior management sponsorship and support. One of senior management’s most important roles is the allocation of the firm’s available capital. Only the best ideas should be funded which pre-supposes that the best ideas have in fact been identified and properly vetted.

Long-term success requires continuous world-class innovation. Anything less usually produces one-trick ponies and also-rans. Which would you like to be?

Counting calories

Anyone who has ever attempted to lose weight hates counting calories. And yet the quantity, type and frequency of caloric intake largely govern whether a dieter will reach his/her goal.

Businesses must also count their calories. Spending cash is the business equivalent of calories. Like foods, there are several types of calories:

• Muscle building calories from proteins – strategic investments in products, services, and processes

• High-energy carbohydrates – operating expenses that support effective production, sales and marketing, and customer service

• Empty calories like alcohol – spending on perks and overhead items that do not contribute to the business’ success and which would never be missed by customers

What kind of calories are you feeding your business?

Striving for Excellence

College basketball fans are in full war hoop this month as the March Madness of the NCAA Men’s Basketball Tournament dominates the sports airwaves.

Everyone has their favorite pick (even the Fan-in-Chief), but the tournament winner will be driven not by fan support but by the team which marshals the highest level of consistent excellence.

Excellence is about being the best, about never settling for a second-rate performance, about bouncing back from adversity, about always staying focused on the goal, about unrelenting discipline, stamina, and drive.

Excellence is the ultimate hallmark of business success as well. Your business can only become or remain successful if your customers, partners, and employees consistently choose you over your competitors.

Are you committed to excellence in everything you do? Or are you waiting to be knocked off by the competition?

Sizing up the scenarios

The recession and financial crisis are playing havoc with many businesses. Credit is tight, sales are down, and employees are nervous. But wishing things were different won't make them better.

It's time for some serious scenario analysis. [1] Radical changes may be required for your business to survive but making the wrong changes may also accelerate its decline.

Here are a few thoughts to consider as you develop your analysis:

• Draft a range of scenarios – conservative and extreme. The current economic environment is so volatile that extreme measures (liquidation or sale) may be necessary. Don’t get caught short by excluding unpleasant cases.

• Vet your assumptions with key colleagues and outside advisors. Outsiders often recognize the signs of a rapidly deteriorating environment before management does, and a group will generally think more comprehensively than one or two individuals.

• Model the consequences including rigorous financial analyses. How low can sales go before you: Violate your loan covenants? Run out of cash?

• Prioritize your options – renegotiating bank lines of credit, salary reductions, layoffs, store closings, or other actions should be planned and prioritized. What do you do if this happens? Where is the next firebreak? [2]
  

• Be prepared to shift to the next option quickly if your first choice isn't working. Just as firefighters dealing with a brush fire fall back when the wind turns against them, you need to be prepared to change directions quickly if market conditions shift or worsen.

Waiting to plan will only make things worse.

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[1] “Scenario analysis is a process of analyzing possible future events by considering alternative possible outcomes (scenarios). The analysis is designed to allow improved decision-making by allowing consideration of outcomes and their implications.” Continue reading at http://en.wikipedia.org/wiki/Scenario_analysis

[2] A firebreak is a gap in vegetation or other combustible material that acts as a barrier to slow or stop the progress of a bushfire or wildfire.

Communicating knowledge is power

- Chris Witt [1]

What good is having a lot of knowledge if you can’t communicate it effectively to others?

Sitting through PowerPoint presentations is often painful. On two occasions this past week, presenters spent much of their time reading their slides – not particularly enlightening nor building my confidence that the presenters knew their subject matter very well. In both cases, however, I knew the presenters to be bright, educated and knowledgeable about their subjects – you just couldn’t tell it from their presentations!

On a third occasion, I asked the presenter to skip the slides and talk to me about the subject at hand which resulted in a much more productive interaction. (As a senior executive, I often required presenters to send me their slides in advance. At the meeting, I would then skip the presentation in favor of a discussion about the matter at hand.)

PowerPoint has its (limited) place:

• Conveying specific, controlled information such as in investor presentations
• Documenting matters covered
• Providing handouts for participants to take away

But only you can communicate the passion and knowledge that you bring to a subject. Don’t let the PowerPoint slides get in your way!

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[1] Chris Witt’s new book is Real Leaders Don't Do PowerPoint: How to Sell Yourself and Your Ideas

Delving into the details

You’ve probably heard the old adage: the devil is in the details. Concepts are fine and necessary, but concepts must be translated into actionable plans that can then be delegated and executed or nothing good will happen.

The most recent Treasury plan to address the financial crisis is a good example. The Obama administration hyped Treasury Secretary Geithner’s recent speech only to have him deliver more conceptual mumbo jumbo with no concrete or actionable details. The stock market tanked again.

Understanding the details of the business in my prior life as a chief operating officer was critical to successfully:

• Supervising and supporting subordinates,
• Spotting and resolving problems quickly, and
• Communicating effectively with the owners, the board, and Wall Street.

Dig deep lest you miss the debris and the diamonds just beneath the surface.

Cultivating confidence

Confidence is the currency of business. Customers trust suppliers to deliver, and suppliers expect companies to pay their bills on time. Lenders and depositors trust borrowers and banks to return their funds at the agreed time and in the agreed manner.

The recent meltdown in credit and other financial markets clearly demonstrates the consequences of lost confidence.

For business owner/CEOs cultivating confidence requires:

• Maintenance of a sound (conservative) financial posture
• Conducting your business activities consistent with promises made
• Frequent, honest communication with all stakeholders
• Addressing problems quickly and clearly
• Always having a backup plan

Trust (confidence) is based on a series of positive transactions over time. Confidence lost is not easily re-gained.

Is your pricing under pressure?

With revenues falling away like an avalanche, many businesses are facing intense pricing pressures or simply dropping their prices willingly to keep current accounts.

Strategic pricing is a better way. Strategic pricing involves clearly understanding:

• The market dynamics affecting your products such as the degree of commoditization and degree of pricing transparency,
• The availability of add on value-added services,
• Customer segmentation pricing opportunities,
• Individual customer willingness to pay, and
• Negotiation tactics.

Left to their own devices, sales reps often:

• Price based on gut feel,
• Fail to use available data, or
• Use price to solve customer service problems

The goal of strategic pricing is the development of a rational, structured approach to pricing decisions which is based on analysis and research and orchestrated through pricing guidance, tools, process and management oversight.

Poor pricing process is money left on the table.

Do you have what it takes?

Many owner/CEOs and corporate managers are starting to look for acquisition bargains in the downdraft of the recession and stock market decline. While bargains likely will be found, many challenges await the unwary acquirer as well.

Are you ready to do a deal and do you have what it takes?

Some of the best advice I have seen on this topic in some time recently came from Chinese Vice Premier Wang Qishan in an exchange with a Chinese businessman seeking government support for overseas acquisitions:

“Do you have a handle on your own management capabilities? Have you analyzed the cultural differences of the two sides? Do you understand the relationship between unionized labor and management in that place? If the other side’s engineers resign, are you really going to send people … overseas, and make the whole company speak [your language]? If you don’t know yourself and know your opponent, then this kind of confidence scares me.” [1]

Here’s the punch line - Know your own company; develop a clear understanding of the target and the terrain; and then, and only then, think about going shopping. In my experience, the educational cost is far higher when you buy first and learn later.

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[1] Will China Buy the World? WSJ Deal Journal, 310/09

Risk can be managed

Owner/CEOs and other executives are increasingly focusing on risk management as the economic recession and financial market turmoil roll on. Experience is the key.

Dave Hitz offers a humorous, yet deadly serious, definition of experience in his new book, How to Castrate a Bull:

“Ranch work can be risky. Before working on a cattle ranch in California’s high desert, I could never have imagined performing rudimentary surgery on a touchy region of an enormous, angry beast; now I’ve done hundreds. Risk can be managed.”

There is no substitute for experience when managing a crisis. If you do not have the requisite experience, get outside help. If you do have experience on the subject, the advice is the same – get outside help. If you were facing surgery personally, you would want the most experienced surgeon available. Your business should be no different.

New Financing Help for Small Businesses

The credit freeze continues to squeeze the finances of most businesses especially small and mid-sized companies who have fewer financing alternatives than large companies.

The recently passed economic stimulus bill [1] contains financing good news and bad news for small business owners.

The good news – the bill authorizes an additional $660 million for programs to aid small businesses:

• $375 million for temporary fee reductions or eliminations on SBA loans and increased SBA guaranteed shares, up to 90 percent for certain loans
• $255 million for a new loan program to help small businesses meet existing debt payments
• $30 million for expanding SBA’s Micro loan program, enough to finance up to $50 million in new lending and $24 million in technical assistance grants to micro lenders

The bad news - $660 million is less than 1% of the total spending and tax reductions authorized under the bill for a segment of the economy which employs more than half of the nation’s workers.

Still, any help is welcome in a storm. Ask your banker or other financial advisors about SBA programs that might benefit your company, or go to www.sba.gov.

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[1] The American Recovery and Reinvestment Act of 2009

Watching for the bad debt danger signs

Bad debt losses on customer accounts can be one of the biggest financial drains for any company. Anticipation and prevention of losses is far less costly than making the losses up with new sales. Here is a list of Ten Signs Your Customer Is Tanking from cfo.com.

1. Changing Payment Patterns
2. Shifty Buying Habits
3. Constant Nitpicking or Higher Demands
4. Shrinking Cash Flow
5. Large Accruals
6. Tight Lips
7. High DSO (Days Sales Outstanding)
8. Managerial Shuffling
9. Persistent Rumors
10. Tax Liens

Read the full article here.

“Sooner or later, those who win are those who think they can.”

- Paul Tournier

Today’s Quote from Paul Tournier, the Swiss physician and author, speaks volumes about the power of belief and how essential belief is to one’s success and happiness. Most of the really important things in this life begin in our own heads.

If we begin the day expecting a good day, most likely it will be a good day even when unexpected things happen. We cannot control many things that happen to us; we can only control how we respond, and that response will generally be driven by the attitude and frame of mind that we bring to the encounter.

Winning works the same way. We will seldom win anything of significance in business or other competitive activity if we don’t expect to win. And we will not expect to win unless we believe that we can win.

Put simply, belief is the driver. Belief gets the juices flowing – the adrenaline pumping. Belief causes us to take the actions and make the effort necessary to win. Belief keeps us going in the face of delays, setbacks and other adversity. Belief makes all things possible.

Belief is the ultimate competitive advantage.

Time to Call the SWOT Team

As the credit crunch and recession drag on, owner/CEOs need to dig deeper into their operations to maintain the best possible position. Completing a SWOT analysis is a good place to start.

What’s a SWOT analysis? A SWOT analysis assesses an organization along four dimensions:

• Strengths – these are the factors or characteristics that set your company apart in the marketplace, that enable you to win and maintain customer relationships.

• Weaknesses – these are the areas where you are vulnerable to competitors and the loss of customers.

• Opportunities – every company has market opportunities which are not currently being exploited for a variety of reasons – they are not visible, the company lacks the necessary talent or resources, or management has not focused on them.

• Threats – threats come in many shapes and sizes – new competitors, emerging technologies, shifting markets.

High performing companies

• Emphasize and lead with their strengths while
• Working to limit the impact of their weaknesses;
• Invest in their opportunities while
• Monitoring potential threats frequently.

Here is a sample SWOT analysis.

Learn more about using SWOT analyses as a basis for reviewing and revising your business plans.

Playing nice with the money people

The etiquette of dealing with investors, venture capitalists, and lenders has taken on greater importance these days with many owner/CEOs seeking financing to keep their businesses humming or floating. We have commented on banker relationships in several recent posts.

Here is a list of the Top Ten Ways The Best Entrepreneurs Interact With VCs from Mark Davis:

1. Only contact VCs that invest in your type of company (e.g., sector, stage, etc.)
2. Be honest about your intentions
3. Be patient with VCs
4. Actively share information
5. Do not take rejection personally
6. Do not harass VCs (they’re people too)
7. Focus on the success of the company; check your ego at the door
8. Be open to feedback and new ideas
9. Do not sully the reputation of a VC simply because you did not like their decision
10. Build relationships with VCs

Mark follows his list with some insightful comments about each tip.

Read Mark’s advice.

Are you struggling with your IT systems?

Now is the time for Comfort IT (Information Technology)

"Whenever crisis strikes and people enter uncertain and frightening times they close up like a clam.  They do not take on new risks like new cars or houses, instead they find comfort in life’s little pleasures.  Macaroni-and-cheese, tomato soup, and meatloaf seem to sooth the troubled mind and are the perfect accompaniment to the theater of financial meltdown.  IT has it’s equivalent of comfort foods..."

Continue reading at Edgewater Technology . . .