Preparing to Sell Your Company

This month’s article is a collaboration with Eric Duffee, Director and Co-Chair Mergers & Acquisition Practice at Kegler Brown Ritter + Hill. Each month, Eric looks at a different piece of The Anatomy of a Deal – a series of easy-to-digest articles that break down complicated aspects of business transactions – helping you better understand terms + processes that can shape the direction of your business.

This month we look we explore the 8 steps you need to take to prepare your business to be sold.

8 Steps to Prepare to Sell Your Company

If you ever watch Shark Tank on TV, you might get the impression that selling all or part of your company is as simple as walking into a room with lots of rich people, answering a few questions, and then cashing your check.
 
Of course, deals don’t really get done this way. But many new and established business owners don’t have a clear picture of what really goes into selling all or part of a company.
 
Most well-executed sales are the culmination of many months – or years – of preparation. With that in mind, here are some relatively simple steps you can take now to prepare your company for a successful future sale:

1. Operate the business with an eye toward a potential transaction.

It’s important to set up an organizational structure that is flexible enough to permit future investment and/or a sale. Even after tax reform, a limited liability company is usually – though not always – the right vehicle, as it can be adapted for several different situations. Also, thoughtful use of subsidiaries to limit risk and segregate assets from the outset may improve the risk profile for future buyers. More broadly, careful attention to the organizational formalities sends a positive message to potential buyers about the meticulous care the owners have taken toward the business.
 
Also, contracts with third parties should be structured to permit transition of those contracts to a potential buyer without the third party’s prior consent. Otherwise, those third parties may pose a risk to your deal. At best, they may be non-responsive when you need their consent to the deal. At worst, they may withhold consent entirely, or use their newfound leverage to renegotiate their deal.
 
The time to start planning is now. More on this below.

2. Think like a buyer.

Generally speaking, buyers evaluate potential targets and assign valuations based on (1) their assessment of risk, and (2) their level of confidence in the ability to grow the business after the closing. As such, buyers are constantly thinking about risk factors that might prevent them from assuming the full value of your business, and then taking it to the next level. For example, if your software development company has a single developer who is the only person who really knows your product’s code, a buyer will be rightly concerned about business continuity if the developer quits or uses his or her power to extract a pound of flesh from a new owner to which he or she has no loyalty.
 
Similarly, targets that have a very high level of customer concentration may also present major risks to the buyer. While simply expanding your customer base is easier said than done, steps can still be taken to lock down the relationship with those major customers, including long-term contracts – if you can do so while still securing favorable terms.
 
Finally, every company has warts. The key is addressing and dealing with those warts head on. Waiting and hoping the buyer doesn’t find them is a losing strategy. A proactive strategy that identifies these issues and adopts a plan for addressing them will build major trust and confidence with a buyer. This is most effectively done by someone who is not the buyer, but who is also not attached to the business emotionally – an objective third party you can trust.

3. Lock down your assets.

On Shark Tank, the sharks almost always ask “What’s proprietary about this?” Every business has something to protect, and buyers will want confidence that the target company has taken appropriate steps to protect its intellectual property assets; in most cases, that’s what they’re buying.

Most people think about patents and copyrights when they think about protecting their intellectual property assets, but brand protection (in the form of trademark protection) and trade secret protection (in the form of confidentiality agreements) are equally important. An “IP audit” with a qualified intellectual property attorney is a good way to get an understanding about what can be protected, and the related costs and benefits.

In addition, many technology companies are shocked to learn that paying a contractor to do development work isn’t enough to give the company ownership over what the contractor develops. A written work-for-hire/assignment agreement is legally required to ensure that the company owns this asset. You really want to get these agreements signed at the outset. We’ve had many experiences where we’ve had to track down a developer on the eve of closing. Assuming we’re successful in tracking the developer down in the first place – no small feat given that developers can work from anywhere in the world – these developers sometimes catch on that they have additional clout to demand more money.

While additional steps to protect intellectual property may be necessary for some businesses, putting in place a simple work-for-hire agreement with any employee or contractor involved in development and a basic confidentiality agreement with anyone who may have access to your confidential information will save you a lot of hassle – and potentially dollars – later on, and the cost is not as much as you might think.

4. Manage your people.

Most sellers correctly want to keep the potential sale confidential for as long as possible. Loose lips sink ships – and sometimes deals. However, it’s almost impossible to keep the transaction confidential from everyone involved in the business. The seller will likely need information and assistance from a handful of key employees. In addition, the buyer will usually want to talk to several key employees – both to learn what they know and potentially to offer them post-closing employment.

In these cases, a robust confidentiality agreement, often coupled with a “stay bonus” or “change of control bonus” or other incentive, will be critically important. You want these key employees to be focused and incentivized to get the deal done rather than worrying about their own future employment. These are delicate conversations, but an appropriate incentive structure will make those conversations easier and help facilitate a successful deal.

Also, think about whether to require non-competition agreements from any of your key employees. Non-competition agreements with key employees will give a potential buyer comfort that key employees – like the sales representative who has the primary relationship with your largest customer – won’t simply walk out after the sale…and take your customers with them.

5. Know your value – and how to improve it.

We’ve touched on the value of your business a couple of times, and of course like any seller, you are probably very interested in what the value of your business is. Entire courses are taught on this subject, and while no two business appraisers are likely to arrive at the same exact estimate of your business’s value, they do all work to understand the same drivers of business value: cashflow, the market and risk.

Cashflow is the stream of cash produced by your business each period. Buyers prefer companies that produce predictable, growing streams of cash. The market is the industry you serve. Buyers offer premiums for certain industries, software for example. Risk is a measurement of how likely the predictable, growing stream of cash will NOT be predictable or will NOT grow.

Owners should concentrate business performance improvement efforts on making cashflow, or profit, grow steadily and predictably. Owners should also eliminate risks that might interrupt that steady growth pattern. Owners often look to sales first, and while increasing sales is certainly a laudable goal, it is more effective to work on growing sales margins because profits drive business value more directly than revenue. In fact, a company that reduces revenue, but increases profit dollars, is worth more than a business with larger revenue and the same profit dollars.

We often get the question from clients: “when should I start preparing the business for sale?” If you’ve watched Shark Tankyou’ve certainly seen the poor inventor who walks into that room unprepared. They invariably learn a lot, but don’t you wish they had figured everything out in advance? Selling your business in the real world is no different – the buyer is looking for a reliable, growing stream of cash produced by your business.

Start building that track record of a reliable, growing stream of cash right now.

6. Get your financial house in order.

The buyer and the bank financing the buyer will want to see the track record of the business. They think differently than the owner does. Once you own an asset, research shows, you no longer look at it the same way. You become emotionally attached. However, a buyer is objective and risk averse, so they look with skeptical eyes, comparing the business to a bond that would yield the same stream of cash.

You will be asked for historical financial records, and 3-5 years of audited financial statements is not an unusual request. During due diligence, firms with poor financial records require more time – and much more expense – to build financial statements the buyer and their bank will accept. This process can be frustrating due to the increased expense of historical audits (which are more expensive than a regular audit), and the reduced initial estimates of the business’s value that may result from their findings.

A proactive firm that has a thorough financial review or audit completed annually avoids surprises during due diligence. As a side benefit, good solid financial statements and a scorecard are an excellent foundation for performance improvement efforts to increase the business value discussed above.

7. Build your team.

Time for the self-serving plug: it is very important that the seller assemble a team of experienced financial, accounting, tax, legal, strategy and other specialist partners (e.g., security, insurance, environmental, etc.) who understand these deals. An experienced team will educate you on market trends and ways to help ensure that the deal gets done – on the terms you want. A good deal team will produce value that exceeds the cost, in terms of take-home price, risk mitigation, and perhaps most importantly, deal certainty.

8. Focus on the letter of intent.

The letter of intent is a key document for both parties, but is extremely important for sellers. As such, it’s never a good idea to sign a “back-of-the-napkin” letter of intent. So what should go in the letter of intent? Stay tuned or email me to discuss.

Impact of a Younger, Less Experienced Workforce

Many of our clients are experiencing a change in their business environment that is new to their experience base. An unreliability in the workforce. For a very long time, the US work force has been very stable. People came into the workforce and worked for most of their career at a single or perhaps two or even three companies and then retired. And in the meantime, they were reliable, stable, healthy and due to their long track record with the business, they retained much of the institutional knowledge required for stable, orderly transition from one work force generation to the next.

However, fundamental changes have occurred in the workforce since the beginning of the new millennium:

  • The incoming, low experienced workforce is less qualified to begin work;
  • The most experienced 20% of the workforce, the Baby Boomer generation is retiring and reducing their working hours;
  • Automation has been reducing the number of people we need to run the business;
  • Health issues are more prevalent, and absenteeism is higher than ever; and
  • The least experienced 20% of the workforce is suffering from attention management and distraction challenges.

The implications of these factors affecting business from the outside are far reaching:

  • More training and oversight of new employees is required. And the experienced employees we used to rely on are not there because they are retiring and we’ve already automated them away.
  • As the most experienced 20% leaves, much of our institution knowledge (all of it in fact that wasn’t captured and recorded) is walking out the door or simply dying with them.
  • While on the one hand, automation has enabled us to grow businesses without adding (as many) people, it also has created an unexpected vulnerability. Each team member is now more valuable and more impactful than they were in the past. This has resulted in each one becoming more difficult to replace productively.
  • Opioid use, diabetes and obesity as well as other modern ailments are more prevalent and cost us more downtime. 
  • The distractibility and loss of focus of the newest segments of the workforce, and frankly the entire workforce, are reducing the productivity of the time that is actually worked.

As if the list wasn’t long enough, when these factors play off one-another and an experienced team member retires leaving a less productive younger team with no memory of how things are supposed to work, it’s no wonder nothing gets done!
 
This is why many of our clients, who haven’t done any process documentation or process improvement work in years are suddenly finding they need process documentation and work aids.  The old hands cannot be relied upon to train the new ones and the new ones may not be around long enough to get proficient leaning by experience. Process documentation and training can bridge the gaps cause by demographic changes in the modern workforce we all have to work with. 
 
We would be glad to sit down with you and talk about how our clients are ensuring that their business system support their team members rather than relying on their team members to support the business system.

An Assault on Wealth

Is your wealth under attack… from you? I recently read an excerpt from The Perfect Square: A History of Rittenhouse Square by Nancy M. Heinzen. Rittenhouse Square was home to high concentration of very wealthy in the mid to late 19th century. It describes a shift in the relationship between the wealthy and their money.

In the beginning, wealth in this country behaved largely as wealth in the Old World. As more people became wealthy, and they became wealthy fast, they took on trappings of wealth quickly as well.

 "The jeweler J. E. Caldwell, who catered to Philadelphia society, told his friends that after the Civil War there was such extraordinary demand for jewels that it was hard for him to keep up with orders. To his great surprise, he found he no longer knew most of his customers, since many of them were buying their first diamonds.”

The new wealthy were spending their new wealth rapidly without the benefit of the generations of experience that the old rich had. This trend was documented in The Theory of the Leisure Class by Thorstein Veblen. Briefly the newly wealthy began using their wealth and spending itself as a badge of their status and position in society.

If you look around at business owners today it can be seen that many are still adorning themselves with trappings of wealth. This diversion of wealth from investments and productive capital allocation sap earnings and future wealth growth. For example, a $68,000 difference in base price will upgrade your vehicle from a Honda Accord to a BMW 7 Series. That gets you 10 more speakers, one more air bag and a 1.1 second faster 0-60 time for the 11-year life of the car. The same $68,000 of capital is worth $143,000 over that same period if invested at 7%, the average, inflation adjusted return of the S&P 500. That same principle, if left invested is worth over half a million dollars after 30 years.  …or you can have 10 more speakers, one airbag and 1.1 more seconds.

Perhaps a more mindful approach to spending, investing and the trappings of wealth would be a profitable undertaking. Here’s the link to the excerpt article on Delanceyplace.com.

Via Negativa

When building a business, add something to it, right?  Wrong.  When improving a business, the secret is to reduce or remove something.  When a business is simplified, disturbances and issues stand in stark contrast to serene order. 

Complexity is a profitable business’ enemy.  Every time an order or customer is added, it increases the complexity of the business.  So periodically complexity must be reversed out of the business and it must be simplified.  We have seen our clients, owners of small and medium businesses, punching way above their weight in terms of earnings by reducing complexity and using simplicity as a force multiplier.

By reducing complexity, the leadership team is freed to focus on the critical few things the business needs for profitable growth.  Removing less profitable activity, products and customers from the business eliminates unproductive costs while improving focus.  By eliminating those costs, margin is increased.  That margin can be banked in the form of additional earnings, it can be reinvested in the business to further improve earnings or it can be set aside for a rainy day to shockproof the business.

Via Negativa roughly translates to; “through subtraction”.  Assess business results to-date through the lens of via negative and ask; “what can be removed from the business to improve its performance?”  Things to investigate:

  1. Customers that are costing to much to serve;
  2. Product or service lines that cost too much to be profitable;
  3. Sales talent that isn’t covering its costs in margin generated;
  4. Supply, material or service costs that reduce business earnings; or
  5. Staff or other cost levels that are out of line with industry norms for a business of this size.

Trends… It’s A Lot About Labor Right Now

Based on what our clients are experiencing, you are probably aware of the tight labor market.  With 4.1% unemployment, some of our clients struggle finding talent.  Entry level talent, supervisors/project managers and even CFOs are difficult to find.  Here are some ideas that our clients are using to capture and retain talent.

There are tricks that are working for some of our clients.  Looking to non-traditional sources of labor in some markets is a logical choice.  We are hearing positive reports about looking into transitional labor candidates for entry level labor type positions.  In this context, transitional means transitioning from jail or prison back into normal life.  We know organizations on both the supply and demand side of this new trend and there is a lot to recommend it for entry level positions particularly in low or no skill required positions.  If you are on the demand side, meaning you are seeking labor, you should connect with a known entity on the supply (transition) side to help you do this.  As you can imagine the rewards are excellent but not without need for care and attention to the details of execution.  If you are interested in this approach contact Alvis House locally.

Another interesting source is the unemployed.  While this may seem obvious on the surface, most hiring processes pass over the unemployed as a matter of course.  In this market, it might be wise to review the process and relax that filter.  The unemployed have traditionally been considered too risky to bet on.  But, again with careful attention to detail and specifics, this pool can also be tapped.  In fact, we know a firm that specializes in finding work for unemployed candidates locally.

An interesting pool to tap into, that you may not have yet, is experienced executives.  It’s counter-intuitive, with the economy growing the way it is.  But many experienced and frankly highly qualified executives are on or near being on the market.  Acquisitions are a clear driver of this but acquisitions alone are not adequate to account for the trend that we are seeing.  We maintain a list of excellent CFO/COO candidates that we watch, and we know a few that would be approachable at this time.  …and for those of you seeking a President (or integrator in Traction terms) these would be excellent candidates.

Taking Stock

It's time to get off the speeding train and take a moment to take stock.  We are fond of saying that “Traction is a good business book” AND that “Traction is NOT the last best business book that will be written.”  One of the things that Traction got right is the need for weekly, monthly and quarterly check points on progress toward strategic business goals.  Traction calls these “rocks” after Stephen Covey’s concept from the book First Things First.  Big rocks are important things you put into the jar first.  Then you fill in around them with small rocks and sand to fill the jar.  If you start with the small stuff first, the big rocks won’t fit in because the small stuff will fill the jar if allowed.

So here, at the end of the second quarter, it is time to see how the business is doing on accomplishing big rocks.  Big rocks are strategic ideas, changes or projects that, if completed, will move the business forward and help it grow profitably.  The challenge of course is that customers and vendors and employees and regulators and others will fill our time with things that are not big rocks that do NOT drive profitable growth but interfere with it.

When planning for 2018 at the end of 2017, what big rocks were put in the plan?  How much progress should be made by now?  …and how is that working for the business?  Are the earnings ½ of the way to the new target level?  Are the people hired that needed to be hired?  Are the new lines of business up and running?  What were those rocks and are they on track?  If not, now is the time to change course and do what can be done to bring them home in 2018.  Begin with the financials and work out from there.  If you are not using a performance scorecard for all the major focal points in the plan and the business, begin there and develop one.  If you don’t have a plan for 2018, lay one in for the balance of the year.  And give some thought to removing something from the business (see Via Negativa in a future post).

No Bad Weather, Only Bad Clothing

There is a Norwegian adage; “There is no bad weather, only bad clothing.”  I was reminded of this adage this morning as I was out in the rain, in my North Face Drizzle, taking photos of rain hitting the surface of a pond in our neighborhood.

Of course, this principle applies to business as well.  Change is a constant in the world and business is no exception.  We all experience it daily.  Sometimes the change appears to be a tailwind boosting us along.  Sometimes we perceive it as a headwind slowing progress or impeding profits. 

As we perceive change as negative, it can be very useful, strategic in fact, to ask ourselves; “How can I use the wind that I have?” Sailors must do this if the wind is a headwind.  They tack back and forth to get where they want to go, even though the wind might be blowing in exactly the wrong direction.  Progress may not be as quick, but the wind is free and it will get you home no matter where shore is.

Assessing and managing business performance

Assessing and managing business performance has two dimensions to it.  The first is managing day to day performance.  This involves making performance visible and then discussing the difference between desired performance and actual performance.  The second dimension of performance management is related to managing the development and progress of initiatives.  This aspect combines traditional project management discipline with performance management.  A key element of both of these approaches is breaking a process into parts, assess each part and then decide whether it performs acceptably or that it needs improvement.  In short, chop, inspect and decide.  This process, combined with scorecards and effective monthly and quarterly leadership meetings can provide major and minor course corrections needed to bring initiatives home.  If you are interested in exploring this further, join us on March 16th and we’ll talk about how to determine what should be next for your business.  You can register here.

Driving business value starts with strategic decisions not initiatives

Driving Business Value starts with strategic decisions.  Determine a three-year breakthrough goal that goes beyond incremental improvement in the current business.  Stretch BEYOND what you are capable of doing today.  Demand growth that isn’t possible today.  A common mistake is starting with initiatives, allowing functional leaders to pick initiatives to take on hoping that they will combine to advance strategy.  In fact, the strategy should dictate what initiatives need to be undertaken.  This can be difficult.  It can lead to the feeling that there are winners and losers among departments.  Some get to take on initiatives they want to advance and some will play a supporting role, improving their performance in more incremental ways while the organization focuses on strategic capabilities.  If you are interested in exploring this topic, join us on March 16th and we’ll talk about how to determine what should be next for your business.  You can register here.

Lane on… Knowledge Workers As Loopers

As I write this, Ed Sheeran is performing “I Love the Shape of You” live, looping his chorus and singing the melody over top of his own live instrumental tracks at the Grammys.  Pretty amazing.  And something that knowledge workers can learn from.

Those of you that know me, know that I was raised by wolves.  My first real job had me reporting to software engineers (the wolves).  But the best kind of wolves that included a Stanford educated software engineer with experience at Bell Corp. where so many amazing things were discovered and invented; including data networking, the transistor, cellular telephones, the laser and solar cells.   

I learned many important engineering principles from this team.  Many of these engineering principles apply to knowledge work in general.  Sheeran’s work demonstrates one of those principles; reusability.  The software principle is to create software modules that are general purpose in nature, tested and of high quality that can be used again and again without further investment of engineering time.  Sheeran is so amazing because he does this on-the-fly, live while he is performing. 

Many knowledge workers can learn from Sheeran’s performance.  Most of us don’t have to perform live without the opportunity to review and revise our work as we go along.  Fortunately, we can record our work and revise it to use it in the future.  By creating a toolkit of reusable knowledge objects and adding new work to it as we complete it, we can build a set of templates and sample deliverables that can reduce the time required to complete a project, analysis, report or presentation.  This is a strong practice that reduces time required to accomplish a result and improves the quality of the deliverable produced.  By saving work examples that have been fully vetted, reviewed and proofed, and then generalizing them for multiple uses, we can have a great starting point for new work allowing us to essentially stand on our own shoulders as we start a new effort.

Lane On… Vendors are employees too

If you think vendors are a source of value to be exploited you need to reassess this position. Your vendors and suppliers are almost indistinguishable from employees.  How are vendors like an employee?

You, as an executive, are responsible for what your vendors do, and as appealing as it sounds, you can’t delegate that responsibility to a vendor or someone outside the organization.  The performance of the vendor directly affects the performance of the company.  If they under-perform, it affects the value of the business, which should be reason enough, but like-as-not, it will affect your performance as well if you are responsible for the area in which they perform.  So while we can delegate activities to vendors, we cannot delegate responsibility… just like with employees.

Vendors have life cycles just like employees have career paths.  They need to be on-boarded, developed and perhaps dismissed.  Each of these milestones comes with costs.  It takes time to properly on-board a new vendor, it takes time to develop them and teach them about your organization; how it operates and their role in company processes.  …and it takes time to transition them out of the company if they fail to work out.  Vendor turnover, just like employee turnover, increases the costs associated with vendor life cycle management.  It is valuable to develop vendors... just like employees. 

It is worth noting, however, that unlike employees, vendors don’t retire.  A well-managed vendor can be a resource forever unlike an employee.

Vendors understand the difference between value generated for you and value generated for them.  Just as an employee might slack off if you poorly organize or manage work, a vendor might do this too.  For this reason, If you assign something to a vendor; you had better organize it first or you will be giving them too much of the value associated with that activity.  So if you are outsourcing a process to a vendor, you should take the time to optimize that process before you do.  Otherwise the vendor will take over the process, optimize it and pocket the savings themselves.  Vendors can be motivated by easy money... just like employees.

Vendors are not interchangeable.  They are highly unique with wide variances in experience and culture that make a difference to the company.  Just like you wouldn’t hire an employee based solely upon their current salary and the degree they earned, you cannot hire a vendor based upon their price and the widget they make.  You need to determine how they fit with the culture of the company and how intangibles will affect their performance and the performance of the organization... just like employees.

So now you’re wondering, why would I ever use a vendor?  Why not just in-source everything? Because of scale and core competencies.  Vendors can often gain economies of scale because they focus on a small number of processes and this brings unit costs down.  A company must decide what it’s core competencies are.  Everything else, it can consider purchasing from a vendor.  In the sixties, companies wrote their own software for example.  There were very few software packages for sale, and they were nothing like what we use today.  So companies had no choice but to write their own software.  This was expensive and error prone.  As a result, an entire industry developed around engineering and selling software packages .  This saves most companies from having to be software developers and vastly reduces the cost of computer software.  Unlike an employee, a vendor can aggregate work across companies and thus reduce the cost of that work through economies of scale.

So, what impact does this have on the company and you as an executive?  You need to consider your vendors as resources and just like human resources; you should manage their ‘career’ path and life cycle.  Forward looking companies are measuring vendor experience just like they measure employee experience.  It’s an opportunity to get direct feedback about how the company affects its vendors and in turn how that affects company performance. Developing your vendors is every bit as valuable as developing employees.

Redbank Quarterly Business Review

As the quarter comes to a close I thought I would share some of what we've been reading about the economy.  The name of this update post is borrowed from the meetings we hold with some of our clients to review progress and adjust course on a quarterly basis.

The Outlook

The economy in general continues to pick up steam.  February marked a full year of 200,000 new jobs gained per month.  It’s safe to say that not everyone is restored to their pre-recession positions.  There are still many that are employed at levels below where they were in 2007.  It’s also safe to say that things have generally picked up for the majority.  Recent declines in the price per barrel of oil make that industry and the ones serving it a notable exception.  The decline has had a marked downward impact on selling prices and on the appetite for fracking development which appears to have all but stopped.  Wells continue to be operated, but development is paused.  This is likely to remain the case until growth absorbs the capacity in this industry.  Fracking and other new sources increased the capacity of the industry which eventually led to price declines.  As a result, the Saudis, in particular, decided to maintain production levels and constant barrel output in order to put pressure on the newer sources including fracking but also the BRIC (Brazil, Russia, India and China) countries.  The alternative would have been to cede share permanently which was viewed as the greater of two evils.    This, coupled with a slower growth percentage rate for the Chinese economy, whose growth had been driving higher demand for oil, will put tremendous pressure on the BRICs and to a lesser extent the fracking industry.

American consumers of oil are experiencing a low oil dividend right now which surpasses that experienced in other regions due to the fact that oil is traded in dollars and the dollar is strong right now. 

The oil raw materials value chain industries, particularly petroleum, chemicals, metals, steel pipe, transportation, and containers, are already affected by this slowdown in development activity.  Other industries will see improvements in raw materials and transportation costs.  It remains to be seen if the cold currently being experienced by the petroleum industry will be caught by the rest of the economy offsetting the boon related to reduced fuel prices.  To put this in perspective, the petroleum extraction and development sector at $320 billion is less than two percent of the U.S. economy.  Its value chain, the people and businesses that supply it, is in turn, a fraction of that number.  Those alone are not enough to significantly slow the economy. 

Other sectors, including banking and construction appear to be experiencing welcomed expansions.  Banks are currently “gushing cash” according to one recent headline.  With unemployment expected to be at or below 5.5%, and disposable income expected to rise 3.8% this year, consumers are able to finance homes and expanded credit card debt.  However the appetite for debt still appears staid relative to 2007 levels.  The ability to maintain these debts is improved due to the higher employment levels which also mean good news for the collections industry.  More employed debtors means more collectible debts.  Banks will also be aided by expected hikes in interest rates (10 year T’s +.5%) and increased business spending (+5%).

In the construction sector, new housing starts are predicted to hit 770,000 up more than 100,000 from 2014.  Home remodelers, designers and home improvement suppliers should see a 3.5% expansion or more across the country with pockets outstripping this.  In the commercial sector, construction of commercial and health care facilities is expected to rise this year as well.

Manufacturing and distribution seem to be riding the demand wave.  They are expected to grow slightly behind the 5% rate for the rest of the economy.  Automotive will lag behind, but it will feel like a pick-up.  They will see a rise to 16.8 million units sold, up 2% from 16.4 in 2014.  This continued increase should help ease some of the downward pressure put on metals by the oil & gas pull back.

Inflation at 1.8% can be expected to about double last year’s rate.  That sounds terrible, but the resulting 1.8% could be considered healthy for the economy.  Some economists say a little inflation is needed in order to avoid the very devastating deflation.  In a deflation, consumers get used to waiting for prices to fall which leads to an ever slowing economy and a destructive self-reinforcing cycle.

What can upset this apple cart?  Shocks that can effect this otherwise rosy picture include war in Europe, which would be one approach Putin could take to overcome his domestic crises, a 9/11 scale terror attack or a Katrina scale natural disaster.  Our economy right now is pretty resilient.  Even the Boston Marathon attack, a grave tragedy, did not phase the national economy.

At this time our advice to clients is to look to profitable growth... make sure that new business you add is also accretive and adds EBITDA.  Also, don't forget customer retention as a growth strategy.  Your customers will likely be growing this year and you can simply grow with them, if you retain them.  A customer defection fights growth and must be replaced BEFORE growth can occur.  We are also working with several clients on resiliency planning which goes beyond sustainability and looks to shock-proofing the business.  Asking; "What can go wrong and how can we protect ourselves from such events?"

Lane on … Values; Not Just for the Soft

I admit it, I used to think that shared values exercises were just so much kumbaya.  But, the longer my career , the more I understand them to be critical to any organization’s success. I think the reason so many of us undervalue them is that we've been fortunate enough to work in organizations that worked well and there was a strong sense of shared values.  When you have them, it’s hard to imagine what it’s like without them.

But I've seen enough situations where they were missing to have lost any doubt.  As a consultant, I benefited from situations where my competitors had fumbled the shared culture/values.  In one particular instance, the client was frustrated with our competitor, the incumbent in the account, and put phase two of what would have been their project up for bid.  We capitalized on the opening and picked up a major automotive account as a result.

Just recently, a client experienced the defection of a key executive to a competitor.  It’s not going to work out very well for the defector or the competitor.  The timing was messy and caused some disruption.  After the departure it was clear that the rest of the leadership team knew that he didn't fit in.  It's likely that the organization has been suffering for some time with the wrong player in the right seat.  We’re putting a set of shared values in place now to aid in hiring (and firing) decisions.  I think if these had been in place last year, there’s a very real possibility that this transition could have happened earlier and in a more controlled fashion.  Certainly it would have been better for the organization as they could have controlled the timing.  But it could even have gone well for the defector, he would have had the chance to determine his own direction.

Lane on… The Cannon

Those of you who have been to my office will know that I have seven feet of shelf space dedicated to business books.  None of the books are dogs.  Dogs don’t get saved, they get donated.  But among the keepers, some are timeless core books and some are either too narrow to be used often, or so technically deep that they will expire at some point and be superseded.  Technical books become obsolete fastest because our understanding is expanding so rapidly.  I thought it might be interesting to decide what goes into the Lane Cannon (and thereby what is left out).

Some rules, before I begin. 

1.     No author should dominate.  Nobody knows everything you need to know.  Period.  

2.     Categories include: strategy, execution and innovation.  More about that at the end, but suffice it to say, this is the cannon and there can be other lists.

3.     No more than four books across three categories.  I know if you’re actually going to read these, it can’t be the 100 most important books written on business.

So here are my thoughts on the best business books to date.  Obviously, this will change as new volumes come out, but the cannon will be far more stable than the rest of the books on my shelf.  Please feel free to debate me on these:

True Strategy

Good to Great, Jim Collins – Jim’s three legged strategic framework introduced key concepts such as the hedgehog, the flywheel, first who … then what, confronting the brutal facts and Level 5 Leadership into the business lexicon.  We marry this with balanced scorecard concepts to create our Focused Scorecard Strategic Framework.

 Winning, Jack Welch – This is worth getting for the GE five slide strategic framework he lays out in the chapter on strategy.  Can you describe your business in 5 slides?

Gaining and Sustaining Competitive Advantage, Jay Barney – Jay’s approach to boiling down strategic decisions using four dimensions, value, rarity, imitability, and organization (VRIO) is very pragmatic and useful in determining next actions.

Control Your Own Destiny, Or Someone Else Will, Tichy and Sherman – The title pretty much says it all.  What isn’t said is that the authors wrote this based on their observations of GE.  How many businesses are you aware of that are counting on a particular set of, often narrow, circumstances for survival?  We saw many of them disappear during the Great Recession.

Strategy Execution

The Balanced Scorecard, Kaplan and Norton – An excellent treatise on how to marry strategy to financial AND statistical performance indicators in four dimensions: financial, customer, process and innovation.  We marry this with G2G concepts to create our Focused Scorecard Strategic Framework. … and Profit Priorities from Activity Base Costing, Cooper and Kaplan – this is not a book.  It’s an 8 page article which is why I’m lumping it with The Balanced Scorecard.  It hits profitable growth squarely on the head and explains a very simple concept that most of you are not doing.  It also outlines the 20-225 rule for those of you who have been involved in our recent dialog on profitable growth.

Execution, Bossidy and Charan – As the title says, this book is about delivering on the great strategy you’ve put together in your off-site session.

Traction, Wickman – New to the list this year, this 2011 book just recently came to my attention from two different sources, and for good reason.  It’s an excellent treatise, almost cookbook, particularly if you combine it with some of Wickman’s other titles, on how to operate a privately held business.  If you know WHAT to do, this book will tell you how to get it done.  It does miss the external financial perspective which is critical so be sure to read the Outsiders with this one.

The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success, Thorndike – What makes a CEO attractive to Warren Buffet, Blowing away the market and your peers regardless of the market conditions.  These eight guys, sadly they’re all men, make Jack Welch look like a junior executive!  Critical is the perspective; cold financial analytics and warm people relationships.

Moneyball, Michael Lewis – Without talent, there is no execution.  BUT, how much do we really know about the aspects of talent that really drive performance?  In the context of baseball, Lewis challenges our preconceived biases that blind us to the truth, shows how to get fact based and go beyond gut feel and what happens when you do; Oakland, with a fraction of the budget of the Yankees creates a win record which is essentially the same, right up to the playoffs.

Innovation

Winning at New Products, Robert Cooper – An excellent breakout of the Phase-Gate process, why it works and some how-to information as well.

The Game Changer, Lafley and Charan – A look inside P&G’s Searchlight program and what makes it great.  I realize this makes two with Charan’s name.  I just chalk that up to skill on his part for finding people with important things to say.

The Art of Innovation, Tom Kelley – a look at how one of the most powerful product design and innovation houses anywhere and how they operate.  Reading about how things work inside Ideo is fascinating in and of itself.  But there are actionable ideas throughout the book.

I know.  Now you’re asking; “where are the pricing, selling and customer satisfaction books?”  The ones I like in these areas all fall into the technical/narrow focus category.  They are on the shelf, just not the cannon.  More on that list in another post.  Also for another post are the sort of personal ones about time, bureaucracy, communications and management at the level of the leader.

Lane on… CEO Performance

It’s a tough question; “What makes a good CEO?”  Here’s an article from the Harvard Business Review about CEO performance.  They rank the 100 top performing CEOs.  Their criteria include total shareholder return, and market capitalization.  They also used a ranking provided by the Reputation Institute to measure intangibles.

Redbank’s perspective on this is that of the owner of the business.  We look at what makes a firm stronger and a better investment for its owners so we look at enterprise value.  Things like the intangibles that HBR looked at are necessary and prerequisites to driving value.  There’s a lot required to be successful and it isn’t easy.  But the ultimate measure is the value and strength of the firm.

If you’re interested in this subject, you might want to read The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success by William Thorndike.  It’s a much tougher standard to meet.  If you can meet Thorndike’s standard, you can be proud of what you accomplish and secure in the knowledge that you build business value in a sustainable way.  If you are a CEO, you know you create value.  If you are an owner, you know that your investment will grow in value and security.

Lane on … Finding Insight

Facing a new challenge? Wondering where the answer will come from?  Click here for some ideas for where to look for insight from Harvard Business Review.  I think this article is a good source for idea generation/discovery.  I was a little surprised that they didn’t include a couple of my favorite sources; nature and solitude.  I find that spending some time alone, without interruptions my mind will draw conclusions and come to realizations that I can’t seem to arrive at if I keep my mind pressed on a challenge.  I also find that backpacking in the woods or kayaking will stimulate new ways of thinking.

Lane on… The Evolution of Business

My oldest daughter and I recently went diving and hiking in the Galapagos islands, long a bucket list destination of mine.  In Puerto Ayora, the principle town and jumping off point for adventures, they sell a tee shirt that says:

It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change  – Charles Darwin

While the correct attribution of this quote is Clarence Darrow, not Charles Darwin, it can still teach us a great deal about business.  Any business that survives must be prepared to weather changes and shocks.  We’ve had quite a few of these in recent years: materials price increases, the downturn, the cash crisis, and maybe downsizing.  And now this year is no exception with the Japanese earthquake and resulting Tsunami, the impact of which is just beginning to be tallied. 

And this is not just a recent phenomenon; the history of the Dow Jones Industrial Average (DJIA) shows a series of economic and other shocks throughout its 127 year history.  Every few years there is a significant shock. 

Much like organisms in nature, the firms that do well in any particular time are the firms that are best adapted to the external environment around them.  Most firms understand this and have efforts underway to improve the performance of their business.  Best in class firms, however, take this to another level.  They focus their improvement efforts on their abilities to change.

This requires a commitment that is sometimes hard to make.  If we are already pressed for resources to take on the improvement initiatives we have underway, how can we allocate resources to make change happen all the time.  But it is this commitment to maintaining a change agency within the organization that sets apart those who merely survive and those who thrive.

There are several advantages to embracing change as a discipline as opposed to something that must be avoided or controlled:

  • Change friendly firms have an almost perpetual first mover advantage since they are usually first to anticipate a change and respond effectively;

  • The discipline of becoming good at change makes those other improvement initiatives faster and therefore more profitable, since benefits accrue earlier; and

  • Morale is better; planning and acting to create change is invigorating and engenders hope and brighter expectations for the future.

If you look at the very small percentage of firms that deliver a track record of profitable growth you will find all of them have designated change teams to recognize coming needs for change and to plan and deliver the firm’s response to that change.

This encore post was originally posted in April 2011

Lane on… When to Sell Your Next Deal

A customer calls to ask you to participate in a competitive bid in order to retain their business.  This is a frustrating situation.  You’ve been serving this customer, successfully, you thought.  But now they are asking you to “sharpen your pencil”, “provide them with any new ideas you have”, “share with them your methods and approaches”, and “explain your cost and profit structure.”

How do you respond to this?  Do you drop your price?  Do you explain the value you’ve already been adding?  All this seems a day late and a dollar short.  You’re already off-balance and in reaction mode.

The time to sell this deal was before now.  By measuring customer satisfaction and linking it to account service and account management (sales).  Then acting on that information and doing more of what your customers love.  Measuring and responding to customer satisfaction qualitative and quantitative information can prevent the urge to bid out contracts by keeping satisfaction levels high.  And in the event of a customer decision to bid, it provides metrics and information that can be used in the proposal to allow for pinpoint pricing decisions and to provide evidence of value delivered to the customer.

The answer to the question; “When do you sell your next deal?” is to sell it before you need to while you are servicing your customer and using their feedback and direction in improving your product and services.