It's Time to Play Offense Some Lessons Learned from the 2008 2009 Recession

(from Issues for Growth Vol. 18, No.14)

Lessons Learned in the Downturn

ACG Denver Corporate Executive Series Breakfast - September 22, 2009
Panel participants included Anthony Carroll, CAO, Vicorp Restaurants (Village Inn and Bakers Square restaurants); J.D. Johnson, President, Norgren Americas; John Zimmerman, CFO, Tomkins plc.; The panel was moderated by David Mead, President of The Mead Consulting Group.

The panelists shared a great deal of information on specific initiatives to improve financial results during the recession, but there were several overriding strategies that each company employed:

1.) Move quickly and decisively
Identify issues in your business and markets and initiate changes quickly. Don’t get caught up in gathering and analyzing data, but rather make changes once trends start to appear. Those companies that react quickly in difficult situations (economy-driven or self-inflicted situations) are those that will have the best chance of emerging quickly and healthy.
Moving quickly means there may be mistakes made, but most can be recovered from as long they are not catastrophic mistakes. A business that is not making mistakes is one that is not moving quickly enough and will most likely be left behind.

2.) Communicate the situation to your employees
Provide your employees a real understanding of the situation and what the goal of the company needs to be in the recovery. Your employees are the most knowledgeable about the detail workings of your business, and they are your best resource in resolving problems.
One company solicited input from the employees on how to reduce payroll costs. The employees were briefed on the situation and asked for their recommendation on headcount reductions, reduced work weeks, or reduction in salary. The company ultimately had to use a couple of the options, but the employee base was appraised of the decision and appreciated the opportunity to be a part of the decision process.

3.) Short interval management
During difficult times it is necessary to have as transparent an organization as possible. The reporting of key metrics becomes critical and each had reporting stepped up drastically. Once company described the increase in their business as “reporting that was done yearly was now monthly, monthly reporting was now weekly, weekly reporting was daily, and daily reporting was many times each day.”

Focus your efforts on the important metrics of your business. It may not be possible to increase all reporting, but those that are drivers for your company need to be reviewed more frequently and by all management that can impact the results.

4.) Communicate to your key customers
Your key customers need to be a part of your communication strategy. The communication needs to be more than just a letter from the president. Your key customers deserve face to face meetings to learn of your progress and in times of economic difficulty how you can partner with them to create a stronger relationship.

5.) Initiate revenue enhancement programs
Even in a recession there are ways to increase revenue. Cost containment is a given, but not a cure-all in a poor economy. Companies that focus solely on cost reductions will lag their competitors and emerge from a recession a weaker company. The companies shared ways that they adopted to quickly shift resources away from divisions or departments serving lagging industries and markets to those that offered current opportunities or great potential.
All the companies on the panel discussed price increases and promotions. Each had their own way of increasing sales, based on their specific industry. Norgren Americas had a strategy of discussing price increases well in advance to condition their customers prior to the increase. Tomkins took advantage of the downturn to exit unprofitable businesses and focus their marketing and sales efforts on industries and businesses with growth potential. Tomkins also used commodity price increases to explain the rationale for pricing moves. Vicorp Restaurants refused to play in their industry’s love of discount coupons, citing the long-term negative effect of conditioning customers to shop based on coupons.

30 Ways to Increase Prices. J.D. Johnson of Norgren cited that he solicited from all corners of the company all of the ways that the company could employ to effect an increase in realized price. These included the traditional price increase, but also the nontraditional such as eliminating free freight, bundling, etc. The company then developed a mechanism for employees across the company to exchange and share that information.

6. Never waste the opportunity of a good downturn
Each of the companies took steps to trim unnecessary expenses, exit unprofitable product lines or markets, close problem manufacturing plants or stores, jettison underperforming employees, etc. In many cases, these were actions that were difficult to take during prosperous times, but the necessity of the downturn made these actions, if not more palatable, certainly more possible. The actions improved productivity, profitability, and health of the businesses and have positioned each of these companies for the future.

What is working for you? What is not working? Let us know your thoughts. Share your experiences.

Minority Recaps - A Great Option for Some Business Owners

(from Issues for Growth Vol. 18, No. 13)

Many company CEOs and CFOs today spend a good deal of time working the banking environment. Most are frustrated by the current tight credit situation. Many of our client companies are still performing at very good levels. Some are interested in taking advantage of acquisition opportunities, other growth plans with new products and new markets. Some are looking for the opportunity to hedge the risk and perhaps take a few chips off the table. Other have good performing companies, but have issues with their balance sheet.

I have been surprised at how few business owners, CEOs and CFOs are aware of MINORITY RECAPS as a potential means for growth capital, taking a few chips off the table, and possibly providing for balance sheet stabilization. In light of the current credit markets, a more challenging market for company sales, etc. we recommend consideration of minority reaps.

Minority recapitalizations (Minority Recaps) - Owners of mid-market and family-owned companies can sell less than 50 percent of their shares at minimal, or no, minority discount and still retain control.

Owners of mid-market and family-owned companies can sell less than 50 percent of their shares at minimal, or no, minority discount and still retain control; they can receive cash for their shares; they can use debt, as well as equity, to enhance returns; they can keep a significant equity tranche for a second exit – when market conditions might again be peaking; and they can pursue an aggressive and ongoing business plan designed to stimulate organic growth and financing acquisitions. In a challenging economic environment, this allows private company owners to lower risk by lowering the personal financial concentration they have in their business through diversification.

Common Myths

A common myth is that there is no capital available. The truth is that private equity firms have a tremendous amount of capital sitting on the sidelines waiting for the right opportunities.

Another common myth is that all private equity firms want control. While that may have been true ten years ago, in today’s environment, many PE firms are enthusiastic about teaming up with management to grow good companies with less than a controlling interest.

Minority recaps are not an appropriate alternative for everyone.

The company needs to have the following characteristics:

· Good operating performance (cash flow and revenue growth

· Strong management team

· Strategic Growth Plan (tangible opportunities for growth)

For those companies that meet these parameters, it might be just the ticket.

Second bite of the apple can be better and sweeter than the first.

For those companies that sell a minority stake with opportunities to grow, the results can be compelling. In many cases, partnering with the right private equity firm can provide growth that is many times higher than the company could have achieved without outside capital. When the company is ready to sell in an additional five years, perhaps, the owner can reap significantly higher returns.

Example: Five years ago a client of ours was doing $26 M in revenue with good margins and cash flow. The owner wanted to expand beyond the region into other markets with new products, but lacked the capital and financial expertise. We helped the company develop a strategic growth and execution plan and shored up some weaknesses to present the company in its best light. We assisted the company in finding experienced, knowledgeable resources to help. The company sold 35% interest to a private equity firm. The owner was able to take a few million of his ships off the table (his family was very happy that his exposure was lowered) and still had significant capital to expand. The private equity firm assisted with introductions, and recommended the addition of a terrific CFO and a strong VP of Operations. The company last year recorded over $130M in revenue. That second bite 65% share was worth a lot more than it was five years ago. The owner had this to say: “I had heard terrible things about private equity. But these guys really became our partners and helped us become a better company. Thanks to Mead Consulting for helping us get it done with the right team.”

Market Challenges.

The current market offers some interesting challenges. But some companies will be able to navigate these waters and put themselves in a lasting competitive position. Think about how your company could gain with the capital to acquire and grow during a period when everyone else is still in the bunker with their heads down. One caution – before embarking on this path, seek help from those professionals with experience working with mid-size companies in your position. If you would like more information on minority recaps please contact me.