Monday, April 12, 2021

Seven traits of Colorado success stories: Why some companies grow and others get stuck

[Editor's Note: Over the past 13 years, we have met with the CEOs or owners of over 350 private Colorado companies. These companies range from new technologies, products and services in such diverse fields as education, technology, construction, trucking, logistics, medical devices, outsourced services, among others. Some of these companies are growing - some quite rapidly; others are stagnant or stuck. Some of the traits successful companies have in common - may surprise you. - DPM]

Some companies are growing - some quite rapidly; others are stagnant or stuck. Why are there such differences? Certainly companies that depend on some industries such as home-building or construction were severely impacted by the economic downturn. However, blaming stagnancy solely on economic malaise is an oversimplification. The recession - and subsequent "selective recovery" has highlighted the differences between the good, well-managed companies from those others whose fortunes rise and fall with the economy. We have found that industry, size, and the overall economy are not necessarily the determinants of company success.
Companies that have become "Colorado success stories" share certain traits. While this is not intended to be an all-encompassing list, this list is intended to provoke some thought about what breeds success.

1. Lifestyle or Equity Value.
How many of you have ever been involved with a company where the owner was conflicted about current compensation or cash flow vs. investment for the future?
Be clear with what type of company you want to be. A lifestyle company can allow the owner to call his/her own shots and to move at his/her own pace. It is run for the cash flow and lifestyle benefits of the owner(s). In an equity value company, the owner strives to build real assets with a scalable, tangible value that can be bought and sold. This leader is willing to sacrifice some short-term gains in order to invest in growing the market value of the business. These "equity value" owners focus more on building value as seen by potential buyers: sustained improvements in revenue/EBITDA, and a strong management team that can operate and grow the business without the owner's constant involvement.
There is no right or wrong answer to the lifestyle vs. equity value question, but owners must be clear in the distinction. Straddling both lifestyle and equity value camps is sure to generate both lower current cash (compensation for the owners) as well as lower growth and value potential (lower equity value).
See the article we have published before Which do you have - a Lifestyle Business or an Equity Value business? which delineates some of the characteristics of Lifestyle vs. Equity Value companies. Lifestyle companies tend to have a short-term focus; they tend to run at the owner's pace or comfort level. Investment in the business may be secondary to a passion of the owner, such funding the as sponsorship of a team, or sport, or the arts. While these companies may have some elements of other management styles, in the end, there is a centralized nature to decision-making and authority. Likewise, since there may be limited empowerment or upward mobility for managers, high performers are not attracted to Lifestyle companies, or do not remain.

2. Empower employees.
Companies can't grow beyond a certain point if all of the real decision-making stays in the hands of the owner or a small group of managers. Growth companies look to empower employees to make decisions. They also develop a culture that allows employees to make mistakes and a mechanism so that they can learn and grow from the mistakes. 

3. Hire for the next level. Then develop them!
Companies that want to grow understand that they need talent that can manage at the next level. Successful companies hire people who can grow 1-2 levels higher in the organization so that the talent pool is constantly being strengthened. These companies also understand that paying more for top talent more than pays for itself. 

4. Develop flexible strategies you can execute well.
Traditional approaches to planning and execution assume away uncertainties and set a fixed plan in place for a year or more. Successful companies are developing multiple possible views of the future, developing a plan and actions, then revisiting the plan every 8-12 weeks to adjust to changes in the market or the competitive landscape. Otterbox (now Otter Products), the designer and marketer of protective cases for smartphones and other devices, grew dramatically from $15M revenue in 2008 well over a Billion in revenue with a flexible approach that re-evaluates all strategic operating plans every 6-8 weeks for possible adjustment. Other companies are utilizing scenario planning to develop and "rehearse" their responses to different possible future states in order to maximize their competitive position. See our article "Why every company should be doing scenario planning" and the 5-part series on Scenario Planning.

5. Develop an adaptable organization.
Successful companies focus on creating a culture of adaptability. They develop an organization, and leadership that can react quickly and make necessary course corrections in response to market opportunities.  
 
6. Focus on a superior customer experience.
Some clients calls it developing "emotionally-connected" clients; Others call it "under-promising and over-delivering". These companies focus on wowing the customer and build systems and hire and reward people who want to delight the customer with every interaction. Engagement of customers is key.
7. Play offense instead of defense. 
If you do anything long enough it becomes a habit; then it becomes part of your culture. Similar to the last downturn, duting the pandemic many companies have created defensive cultures with cost-cutting and deferring or eliminating new projects and new products. "NO" has become the operating word for "stuck" companies. Successful companies look for opportunities to develop and test new business models, new products and new projects. They see the market as ripe with opportunities to grow and innovate. "HOW" is their operating mantra.

Conclusion: Examine your company. Do you live the traits of successful companies? As we asked in our last eLetter: "Have you Decided to Go!"

Let us know your thoughts. Email me or post your comments.
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Sunday, April 11, 2021

Deciding to Go

[Editor's Note: The decision to become an extraordinary company is not coincidence or happenstance. Rather it is a conscious choice. Shouldn't you be great at what you do? Shouldn't you decide to become the company your customers can't live without? Some companies have remained defensive, chastened by the shock of the early pandemic months. I thought this article that I first published several years ago was appropriate for these times. -dpm]

Author and speaker Joe Calloway opens many of his presentations with a story from the movie Apollo 13: "The movie opens with a gathering of astronauts to watch Neal Armstrong who is about to become the first human being to walk on the moon. As we hear Armstrong's immortal words, 'One small step for man; one giant leap for mankind,' the mood becomes quiet, even reverential. ...Shortly after the broadcast, the party breaks up and everyone goes their separate ways, Jim Lovell, who is played by Tom Hanks, is alone with his wife, Marilyn in their backyard. Looking up at the moon, Lovell says, 'From now on, we live in a world where man has walked on the moon. It's not a miracle. We just decided to go."

Calloway makes the point that the first step that great companies make is the deliberate decision to pursue greatness. Many organizations talk about change. Sometimes companies will orchestrate management retreats, spending two or three days at some resort developing great ideas in a sea of flip chart paper and white boards. Six months later, everyone wonders, "What happened to those great ideas we had."

Strategic Planning without a "Decision to GO" is a waste of time

Decide to go... or go home. Strategic planning without a "decision to go" is a waste of time. You might think it peculiar that a company like ours would make such a statement. After all, The Mead Consulting Group helps companies develop and execute strategy. But, after more than 35 years helping companies, we have learned that it is the commitment to ACTION that determines success. "Deciding to go" is the biggest differentiator among companies.

What many people don't know (or likely are too young to remember) is that when President John F. Kennedy made the statement in May 1961 that the U.S. would put a man on the moon by the end of the decade, it was simply not another political speech. He rallied support in all sectors of government and the country. He helped us all see that this was a major commitment that was worthy of our time, resources, and commitment. He helped us "decide to go." You might say that President Kennedy created what Jim Collins ("Good to Great") calls a BHAG - a Big Hairy Audacious Goal. 

Processes Institutionalize commitment

Motivating the populace was just the start. We needed processes and plans to achieve such a feat. After all, at the time of Kennedy's statement, the U.S. space program had not even managed to orbit the earth. To speak of going to the moon struck some as an impossible task. It would have been an impossible task if significant changes were not put in place. NASA and the other key organizations worked together to put organizations, plans, people, and processes in place.

Research shows that not a day went by that at President Kennedy did not inquire about some facet of this commitment - notes to the Vice President about funding from Congress, encouraging commitment to math and science education, speeches to keep the issue in front of the American people - making us all feel proud to play a part in this journey. 

Along the way, it became OUR goal. It was the processes and daily commitment of many people - at all levels - that made it work. Kennedy was alive for only the first 1000 days of the journey. During that time he helped us make this BHAG ours. Then we took it the rest of the way.

Become the best at what you do

Organizations define themselves - set their own limits. Leadership helps paint the picture for greatness. It is too easy for small and mid-size companies to say that "we're only a small company" or "we sell undifferentiated, unglamorous products." With that attitude, why bother getting out of bed in the morning. A mentor of mine once told me, "There are no boring jobs, only boring people." What he meant was that people need to be inspired. If you have an undifferentiated product or service, whose fault is that? Do something to transform the customer experience. 

Develop a big goal. Then go make it happen. The successful companies are focused on the daily details to accomplish that big goal. Everyone wants to be part of something great.

Become the best at what you do - whatever it is. Make the Decision to Go!

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 The Mead Consulting Group has been helping clients develop and execute Strategic Growth & Execution plans for many years. Check out our website for descriptions of some client success stories. 

 If you would like to discuss how we might help your company begin the process of adding value and moving your company to the next level of performance, please contact us for a free consultation.

Saturday, February 27, 2021

Prepare your company to be bought

[Editor's Note: Many business owners fail to prepare their businesses for a sale either because they believe that a potential sale is far off in the future or because they are focused on current issues and do not consider preparation to be a priority. We would submit that companies need to be "prepared to be bought." Sometimes lucrative offers come unexpectedly for companies that are well-positioned. We typically recommend that a company engage an experienced investment banker to assist them in a sale - often even if they have received an offer - in order to generate a competitive environment.
Some business owners who have tried to "time the market" at some point off in the future have found that unpredictable events such as the Covid-19 pandemic, 2007-2012 recession, credit and stock market crunches, tech bust(s), 9/11, industry issues, etc. can derail their ability to sell at maximum value. We recommend to our clients to work each year to make certain that their companies are currently desirable to buyers. - DPM]
 
How best to position your company to be attractive to buyers:

1.   Demonstrate Strong Financial Performance
a. Historical Financials
*   Consistent revenue growth (at least upward trend)
*   Recurring revenue is a plus
*   Strong operating margins
*   Increasing profitability
*   Importance of last twelve months

b. Operating Cash Flow
*   Focus on hitting projected revenue and earnings numbers
*   Review net profitability of customers and products

2.   Maintain "clean" financials
a. Audited or "auditable" Financial Statements
*   Have your financial statements audited with a reputable firm to add    credibility
*   Use GAAP accounting. If not, identify how practices differ from GAAP
*   Understand cash vs. accrual accounting - timing differences can be material

b. Income Statement Adjustments and "Add-backs"
*   Buyers are skeptical of earnings that rely on substantial add-backs (one-time, non-recurring charges, private company expenses, etc.)

3.   Diversify your customer & supplier base
*   Diversification signifies a healthy business and reduces risk
*   Buyers will pay less for companies dominated by one or two customers
*   Examine what % of sales your top 10 customers represent?
*   How stable are your top suppliers? How stable are their terms?
*   Do you have multiple suppliers for critical components/services?
*   What % of total purchases does your top supplier represent? Top-5 combined?
*   What % of the company's sales are related to a few key employees?

4.   Develop a Strategic Growth Plan
*   Maintain a clear strategy and be able to demonstrate your history of execution
*   Be able to articulate specific future growth opportunities
*   Position your company to take advantage of them
Remember: A buyer needs to see a potential Return on Investment

5.   Build a capable Management Team
* Invest in training and key strategic hires, if needed
*  Motivate management to add value to the company through a potential sale
* Focus on building a deep management team that can thrive without your continued leadership

6.   Eliminate potential "Gotchas"(these are items that could result in significant discounts to value)
*   Maintain legal documentation (licenses, regulatory filings, contracts, intellectual property, incorporation, etc.)
*   Clear title to all assets
*   Document processes and procedures
*   Resolve legal disputes, environmental issues, etc.

7.   Build a team of Qualified Advisors
*   Minimize distractions from running your business effectively
*  Get advice from professionals who have "done it before" and 
who have expertise in areas you do not 
*   Beware of advisors that outstep their areas of expertise

Are you and your company ready if a buyer appeared on the radar?
Most business owners who have executed a successful sale of their business will tell you the most important thing is: BE PREPARED.
 
Selling a business is very different than operating a business. As a business owner you know your industry, your product or service, your customers and your markets. Most business owners will only sell a business once in their lifetimes - and it can be by far the most important financial transaction of their lifetime.
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The Mead Consulting Group has helped over 60 clients prepare for successful sales transactions ranging from $15M to $350M in transaction value. We help companies increase the value of their businesses leading up to a transaction, minimize the things that cause potential buyers to discount the price, prepare to best position the company, and assist the owners in building a transaction team.
 
What successful business owners say about us:
 ...We could not have completed the sale of our business without the advice and guidance of The Mead Consulting Group. Their experience was critical in helping us prepare, and endure, the transaction process to a successful outcome. ...Charles M, President, Healthcare IT Company
 
A successful process is draining and stressful. The Mead Consulting Group brought the experience and expertise necessary to help our team focus on the critical issues and not get caught up in the multitude of items that can derail a transaction. Why reinvent the wheel? We chose to take advantage of individuals who could help us understand the nuances, negotiate effectively, and close the deal. ... Ken W, CEO, Behavioral Healthcare

...We missed the opportunity to sell our family business during the last upcycle. Mead Consulting helped us grow revenue and EBITDA to record levels and guided us through the selection of a transaction team. Dave Mead and his group provided great counsel throughout the sales process, removing obstacles and firmly encouraging us to a great deal with a strategic buyer that mirrored our family business values. ...Dan M, President, Building Products Company

...I do not know why anyone would attempt to sell their business without Mead Consulting. Since they have owned and sold their own businesses, they understand the challenges of continuing to run the business while trying to sell it. Their experience kept us focused on the right things and they helped keep our transaction team well-aligned during the process. They truly act as the advocate for the CEO and owner, helping to make sure that it was the best deal for the owner. ...Ron T, CEO, Software Business
   
 Let us your your thoughts. Call me on (303)660-8135 or Email me
               

Thursday, February 11, 2021

Nine reasons why 2021 could be a great time to sell your lower middle market company.

 

What is a lower middle market company?

Lower middle market is defined nationally as transactions between $10M and $250M in enterprise value.

When is a good time to sell?

CEOs and business owners routinely ask the question, When is the best time for me to sell? Is now a good time or should I wait? Truthfully, many of the folks that address that question (investment bankers, private equity professionals, financing sources) have a vested interest in having companies go to market. So, business owners can be skeptical when reading optimistic projections. 

The Mead Consulting Group has advised business owners for years that there are a number of factors to consider when evaluating if it is a good time to sell a business. The most important is to make sure your company is prepared, and to not wait for the "absolute best time" to sell, but to sell when the market is good. There are lots of examples of companies that have regretted not going to market in 2006-2007 because they thought the market for their company would be better in 2009 or 2010, or got caught in the early “Covid squeeze” when the stock market plummeted in March 2020.

 There are a number of factors that suggest that 2021 could be a terrific time for some lower middle market company owners to sell.

1. Company results have rebounded or stabilized. Many lower middle market companies have rebounded or at least stabilized from the early Covid downturn. Even if revenue growth in some sectors is still very moderate, many companies have done an excellent job of managing expenses and increasing cash flow. Demand in many industries has rebounded nicely.

2.  Valuations are high. With stock market at record levels, the prices (multiples of EBIDA) being paid for good companies are at high levels.

3. Potential Tax Changes. With changes in Washington, there may be an appetite for raising taxes to offset the cost of the Pandemic, and the economic stimulus packages.

4Interest rates are still historically low. This is important since the buyer of your business need to borrow for the transaction.

5.  Private equity firms have plenty of dry powder and fewer distractions from older investments. Private equity firms have raised record amounts of investment capital. With lots of capital to invest, they need to put that capital to work by buying companies. At this time of year, they can focus most of their attention on looking for new opportunities.

6. Private Equity has an increased focus on lower middle market transactions. There are many new private equity firms and family offices that specifically focus on the lower middle market.

7. Strategic buyers have lots of cash. Strategic buyers have been accumulating cash in record amounts.

8.  Strategic buyers need to find new ways to grow. Sources of organic (internal) revenue growth have been difficult for many strategics. They are under pressure to acquire companies that add new products, new customers, new geographies, and new capabilities.

9. There are still more buyers than sellers in the market. The number of baby boomer business owners who are reaching retirement age is increasing daily. In 2021 baby boomers range in age from 57-75 years old. There comes a time when these business owners need to sell and there may well be a glut of businesses on the market. Surprisingly, this has not happened yet.

 Are you and your company ready to go to market?

Most business owners who have executed a successful sale of their business will tell you the most important thing is: BE PREPARED.

 Selling a business is very different than operating a business. As a business owner you know your industry, your product or service, your customers and your markets. Most business owners will only sell a business once in their lifetimes - and it can be by far the most important financial transaction of their lifetime.

 If you would like to perform an assessment of your company's readiness to maximize value in a sales or recapitalization transactioncontact me today.

Thursday, January 28, 2021

Traits for Happiness - Seven Gifts from people with the happiest lives

                                                             Traits for Happiness

Seven Gifts from people with the happiest lives

This list is from Hugh Hewitt's book, "The Happiest Life". As we move into the new year, I thought this list was very appropriate, especially given the trying year in 2020. It was compiled from interviews of people across all ages, ethnic groups, and circumstances. I hope you find it inspiring as we enter this new year. . If you haven't read Hewitt's book, it's a quick read and well worth your time.  - dpm] 

Encouragement

Enthusiasm

Empathy

Energy

Good Humor

Graciousness

Gratitude 

Best wishes for a happy, healthy, and prosperous new year! 

  

(Excerpt from "The Happiest Life" by Hugh Hewitt)