Sunday, August 28, 2011

So you are thinking of selling to Private Equity!

Private Equity
Congratulations. You have built an impressive business and have decided that in order to accelerate growth you would like an investment in capital from a sophisticated investor such as a Private Equity firm. Alternatively you may be looking to sell the whole business to a PE firm.

Below are a number of suggestions that may assist in the execution of your strategy.

Before I go on, a big thanks to the anonymous, but experienced Private Equity blogger of www.carriedinterest.com who put much of the list together.
  1. Work out why you are selling and let that drive the structure. People often sell businesses with a focus only on the money and then later look back with regret after six months playing golf. It may be that a partial exit is better for you than a sale would be.

  2. Hire advisers who buy and sell businesses for a living.  Yes, they'll charge a lot more than Fred who does your tax return, or the neighbourhood lawyer who sold your house, but it will be money well spent.  

  3. Dividend out all excess cash well before the sale process begins. Smart buyers will always go after the cash sitting in your business.

  4. Try to resolve outstanding or pending litigation. It may even be worth taking a financial hit to remove litigation which could scare off potential buyers or result in a tough warranty/indemnity/escrow regime.

  5. Address leadership succession issues well before the sale process begins. No smart investor wants to buy a business from a retiring founder. (See my previous post on this topic).

  6. If your inventory controls are loose, complete a professionally supervised stock take. Your goal is to build buyer confidence, and that means avoiding surprises.

  7. Make an effort to collect overdue debtors. It's unlikely that the buyer will pay for accounts receivable which are dated (depending on your industry, this typically means 90+ days).

  8. Sell obsolete or slow moving inventory, as well as any surplus assets. Again, the buyer probably won't give you value for these, so try and monetise them before you start marketing your business.

  9. Remove those embarrassing “personal" assets from the balance sheet. Come on, you know what I'm talking about. Your daughter's computer, the boat you never used for customer sales events, the car you ex-wife drives . . . time to clean it all up.

  10. Ensure that property leases are arms-length. Buying a company where the seller is also the landlord is an uncomfortable, but common, situation. If your company's buildings are sitting in the family trust, at least put in place a proper lease on typical market terms.

  11. Run a competitive sale process.  Getting an offer from several buyers will not only almost always drive up the sale price, but it may also give you a range of different transaction structures to consider.  

  12. Get your books in order. Ideally you should have three years of audited accounts ready to show the buyers.

  13. Get your premises in order. Sounds very obvious, but do not want to give a terrible firm impression due to dirty workshops, offices with 20 year old lighting and carpets, no signage on buildings, etc. As part of this, consider whether your OH&S practices would stand up to outside scrutiny. 

  14. Assume that potential buyers will want to read your board minutes from the past 12 months . . . write them accordingly.

  15. Make sure that employment contracts are in place for all important members of the management team.

  16. Ensure that the accounts are in order - both statutory and management accounts. It is worth making an investment in a decent accounting firm to ensure that the accounts are in as good condition as they can be before buyers pitch up. If can be very embarrassing for a seller to find that their earnings are much lower than they had thought because there is a stock write-off, an uncollectable debt, or whatever hiding in the books.

Wednesday, August 24, 2011

Who inspires you?


As consumers, we are constantly bombarded with CEO autobiographies that laud the given CEO’s accomplishments in the business sector.

I am happy to admit I have read my fair share of these books however whilst the stories were interesting, I can honestly say that I am rarely inspired by the CEOs themselves.

I am not too sure why this is. Perhaps having worked with so many individuals I am accutely aware that there are highly skilled people who do not become CEO because of luck, timing, internal politics etc. Likewise I have seen less skilled people become CEO because of luck, timing, internal politics etc.

When I reflect on who inspires me it is not people in the business sector. For me Nelson Mandela and Mohandas Gandhi are inspirational.

Nelson Mandela: The key attribute that I find inspiring about Nelson Mandela is that after been imprisoned for most of his adult life he still practiced forgiveness of his oppressors and the betterment of the whole of society. I wonder if I was in the same position would I be as forgiving?

Mohandas Gandhi: In a world where violence is (and was) prevalent, Mohandas Gandhi changed the entire political regime through peaceful methods. If you reflect on the bravery shown to stand up to an armed force with nothing but the will not to fight back, is for me, an astounding feat.

When I look back at all the materials from my MBA and the business literature available, I find it interesting that attributes that corporates should aspire to i.e. treating employees with fairness and equality, as well as demonstrating bravery in decision making (not simply following the herd because a new best seller says so) seem to be missing in action. I have a plethora of materials on Strategy, Financials, Marketing etc however very little on the skills of people whose accomplishments will be told in the pages of history. And yet it was these skills that helped execute a change strategy on a scale very few people will ever know.

So who inspires you and why?

Saturday, August 20, 2011

Could you build a windmill?

This is the inspirational story of William Kamkwamba on building a windmill. William demonstrates the fantastic example of how the ingenuity of one person can have a positive and profound effect on their surrounding community.

The video below is from TED June 2007. There is also a book titled The Boy Who Harnessed the Wind that is a highly recommended read.

If you want further information see:
a) William's website - http://williamkamkwamba.typepad.com/
b) Wikipedia article - http://en.wikipedia.org/wiki/William_Kamkwamba
c) TED page - http://www.ted.com/speakers/william_kamkwamba.html

Enjoy the video.



Monday, August 15, 2011

The US debt ... now imagine it was a business Turnaround.

There have been countless articles written about the current state of the US debt.... so here's another one. Except I thought I would put my "business hat" on and look at it from a Turnaround perspective. 

Before I go on, please note:
  1. I have absolutely no interest in taking a political stance. I am merely putting a business lens on the situation.
  2. I am obviously simplifying the scenario and solution, considerably, for the purposes of the article.

So let’s set up the scenario.

We have a company that is over geared (too much debt) and making a loss (deficit) as its expenses are significantly greater than its revenue. Unable to continue its current operations through its existing cashflow, the company has recently gone to the bank in order to increase its Line Of Credit (debt ceiling). However this was seen as not solving the company’s problems and hence the bank is reluctant to agree to the company’s request. Given the current state of the business it is unsurprising that the bank would like to increase the interest rates of its lending to the company as it believes the current situation is riskier than the past (AAA to AA+ rating downgrade).

Assignment:  The bank has asked for a review of the situation in order to bring the company back to profitability as quick as possible and ensure the existing debt is paid down.

So here we have a typical case of a company in distress and the requirement is to implement a Turnaround program. 

Question 1: Can we increase revenue? When undertaking a Turnaround assignment one of the first questions that needs to be asked is “Can we increase prices and not lose volume?”. Whilst price elasticity is always a consideration it never ceases to amaze me how  companies do not increase prices for fear of losing business however when they are forced to raise prices due to their financial distress they are able to get the price increases through and remain at similar volumes. This will not be the case for all businesses but the rule applies – in a Turnaround if you can increase prices whilst maintaining similar volumes (i.e. increase revenue), THEN DO IT!

Question 2: Can we reduce costs? From a P&L perspective, reducing costs is relatively easy when you are only looking at lines on a spreadsheet. However the reality is cost reductions usually involve impacts to people i.e. not merely numbers on a spreadsheet and hence the decision making process often becomes emotive and clouded. Additionally sacred cows tend to rear their expensive heads during cost reduction programs. However the reality is that when a business is in a turnaround phase ALL costs need to be reduced. It’s not easy and it hurts emotionally but when the business is at stake it is better to make the cuts than end up in a situation where bankruptcy is declared. So a similar rule (see Question 1) applies – in a Turnaround if you can reduce costs whilst ensuring the business operations continue, THEN DO IT!

To summarise: If the US was a business any CEO recruited to Turnaround the financials would try to increase revenue and reduce costs.... both at the same time. Sacred cows would be thrown out the door and the clear objective of bringing the company back to profitability would be ingrained in the change management program across all levels of the organisation. The increase in the Line Of Credit would not be required as the company would be able to manage itself in its given cashflows. Finally, as the debt is paid back, the interest rate that the bank lends at is reduced as the risk associated with the company is reduced.

Again I appreciate the fact that I have over simplified the situation and like so many out others out there I sure I may be deemed as just an armchair expert but to quote George Burns, “Too bad that all the people who really know how to run the country are busy driving taxi cabs and cutting hair.

Tuesday, August 2, 2011

Listen..... and build your network.

I recently had a phone hook-up with Jacob Esparza at tech start-up Huklup [hook-loop]. Jacob had contacted me after reading an article of mine - http://www.executionandstrategy.com/2011/04/my-no-1-networking-lesson.html. We had a great conversation about building a network and becoming a connector which brings me to this week’s article.

Networking is something that is easier to talk about than to do.  As I stated in my previous article my key networking rule is very simple -  when you meet someone, don't think about what the person can do for you but think about what you can  do for them personally.  I always stress to anyone who asks my advice on networking to remember that the more you give the more you will get back. 

I have heard a number of times various contacts talk about “time wasters” after being connected for the first time.  Please note that the comment about the “time wasters” has nothing to do with the person's background, experience, credentials etc. It was because they approached the meeting in the wrong way. It turns out these “time wasters” engage in a one way talk fest. 

Remember the saying “you are born with 2 ears and 1 mouth”. This applies to building your network.