Author Archives: Sandy

About Sandy

Publisher, Ceo2Ceos.com Adjunct Instructor, Southwestern Indian Polytechnic Institute

How Do You Market a Companion Application? Four Alternatives

Situation: A company is developing a companion application that simplifies the use a major company’s software. The CEO is considering how to show this application to the major company as well as at their user group conference. How do you market a companion application?

Advice from the CEOs:

  • This is an interesting situation. If the major company likes the companion application, the principal question is whether they will want to attach an additional license fee if the companion application is marketed through them. This presents three options:
    • Research other companies that have developed front end or access products for this company – what was their experience with the major company and did that company demand an additional license fee payment. If so, how did they handle this?
    • Be up-front with clients, and if an additional fee is required pass these through to the clients. It may be cheaper for clients to pay license fees through this route than to purchase and pay license fees for the major company product.
    • You may want to take a wait and see attitude while conducting your own research on the situation. See when and if the major company asks for a license fees, and if so, find out whether they are willing to negotiate.
  • Large companies are often focused on their own offering. Forget the idea that they will market another company’s companion application or front end. Instead focus on your own contacts within the industry and your client base and start talking to them about your application. Generate some experience and traction on your own.

What Is a Favorable Exit Strategy? Three Points

Situation: A CEO is contemplating retiring in the next two years. The company is profitable but is primarily dependent upon a single large client for whom the CEO is the primary contact. Compared to national averages the company’s profitability is very favorable. The CEO questions whether his valuation of the company is reasonable. What is a favorable exit strategy?

Advice from the CEOs:

  • The principal question from the group is whether the anticipated valuation on exit will yield the financial rewards that the CEO requires.
    • The buyer will discount the value of the current business because the CEO is too important to the business, and because they will not assume that there is ongoing value to the current business beyond 2-3 years.
    • The best option is to sell to a buyer who wants entry into the key client. They will have reasons beyond the value of the company to pay a premium for this access.
    • For planning purposes put the value at 2-3 years of the cash that the CEO takes out of the company, discounted to present value plus some premium for the entry that the buyer seeks. Look at the dollars that this will yield and decide whether this sum is a satisfactory payment.
  • Concerning the company’s relationship with the key client:
    • The company’s reliance on the key client is two-fold – they are the key customer, and they drive the market which yields a premium price for the company’s products.
    • Purchasers do not like to be dependent on a single supplier. Their purchasing department will always be looking for alternative sources.
    • During the exit window it is critical to develop new customer relationships to sustain the company’s growth and reduce reliance on the single key customer.
  • If the key client is #1, who is developing technologies that will compete with the key client?
    • What are their markets?
    • Where are they going?
    • How are they trying to exploit the chinks in key client’s armor?
    • What can the company do to secure a vendor relationship with the companies who may replace the key client?

Can Outside Board Members Help a Struggling Company? Four Thoughts

Situation: The CEO of a family-owned company has struggled to align family members with the business plan. When difficult decisions must be made, established personality patterns and family history hinder consensus on what should be done. The CEO seeks advice on whether the addition of one or more outside Board Members can help to build consensus. Can outside Board members help a struggling company?

Advice from the CEOs:

  • The CEO of another closely-held company brought in an outside Board member two years ago. This has added considerable focus to the Board discussions. The addition of a fresh and respected perspective has helped to clarify decisions and reduce conflicts among the founders.
  • First, have a conversation with the team. Give them the opportunity to straighten out things themselves. Present the addition of an outside Board member as an option. Get their support. This will make the addition of an outside Board member a company decision, rather than the CEO’s.
  • The experience of other companies is that compensation can range from free – a retiree who wants to help – to expensive. Arrangements and expense will depend on what the company leadership wants to achieve.
  • Investigate SCORE – a well-established source for outside board members for small and family businesses.

Do You Move or Negotiate a Lower Rent? Five Suggestions

Situation: A company has been looking at alternatives for expansion but would be willing to stay in their present site if the landlord is willing to lower their rent without requiring more time on the current lease. Another option would be to purchase a building and lease out extra space until they need to expand. The CEO seeks advice on how to move forward. Do you more or negotiate a lower rent?

Advice from the CEOs:

  • Much has to do with the current real estate market. If the market is slack, there are more options whether the decision is to move or renegotiate the rent with the current landlord. However, if demand for space is high then landlords and sellers have the upper hand. This is a classic demand-supply situation.
  • Investigate lease buy-out options if the decision is to move. Better yet, if the decision is to move ask the new landlord to pay off the old lease.
  • For the money required to move an operation of substantial size, why not buy? In this case, the decision is balancing the size of the down payment with the company’s current cash position.
  • If the decision is to buy, consider creating an LLC to purchase the property and fund the purchase through a Small Business Administration loan.
  • The Devil’s Advocate Perspective while you make the decision: don’t worry about the least until it runs out. Instead focus on making as much money as possible and prepare for a move closer to the end of the lease. Renegotiating a lease and looking for a building at this time can consume a lot of time.

How Do You Identify Key Managers? Three Suggestions

Situation: A software service company wants to expand operations. Their business model is to build clone offices that operate like the home office in new markets, much like a franchise operation. The founder CEO is struggling to identify key managers who can manage remote offices. How do you identify key managers?

Advice from the CEOs:

  • The key managers must be individuals who are business savvy, not talented engineers. The key managers must understand:
    • Management – with a proven management record;
    • Basic accounting;
    • Recruiting and hiring;
    • How to manage an office;
    • A bonus will be experience in a similar field, but this experience does not substitute for the above four critical requirements.
  • Looking at current employees, is there the bandwidth within the current team to help bootstrap new remote offices?
    • For example, is there a key senior manager who can become Director of Franchise Operations? In this role, the DFO will serve as a resource to the individuals opening new offices.
    • As this individual’s focus switches, an important question will be who replaces this individual in their current role?
  • It will be beneficial if the individuals who are chosen to lead new offices have at least some experience in sales. This will help to quickly build new customer bases for the remote sites. However, a new site manager must have balanced experience. While sales will be part of the responsibility these individuals must also be able to build and oversee the other critical functions necessary to build viable remote sites.

How Do You Strengthen Internal Incentives and Ownership? Four Points

Situation: A technology company has established a leadership position in their niche. Nevertheless, they struggle with individual performance and buy-in to company performance. The CEO asks whether increasing ownership through stock incentives in a non-public company is an effective incentive for employees. How do you strengthen internal incentives and ownership?

Advice from the CEOs:

  • In the past, employees voiced a strong predilection for share ownership as recompense for the personal risk and sweat that they have put into the company.
    • It may be advisable to revisit this, particularly given the increased risk that comes with share ownership as a result of regulatory changes of the last 10 years.
    • As a substitute for share ownership, they may be open to some proxy that will provide them with value and the opportunity to have their opinions heard in the case of a buy-out.
  • Another company looked at this closely at the time of formation. They decided that proper recognition for contribution did not equal ownership. Ownership also entails personal liability and risk, which many don’t realize and, once they understand the implications of owners’ liability, don’t want. As an alternative they adopted a liberal profit-sharing structure that has met with employee enthusiasm.
  • Think about this discussion in terms of incentives:
    • Short Term – Annual-type incentives
      • Make sure that incentives align with desired behaviors so that individuals’ contributions contribute to business plan objectives and the next step for the company.
    • Long Term – consider the trade-offs
      • Share Ownership
        • Broadly distributed share ownership not only complicates future flexibility but may also complicate a buy-out or merger opportunity. Consider the implications of a situation where most shares are in the hands of past rather than current employees.
        • Strategic Partners wishing to invest may be reticent to work with a company with broadly distributed ownership.
      • ESOPs, while frequently referenced, tend to eat their children. They have several complications:
        • They are governed by ERISA, so you cannot discriminate. All must be able to participate.
        • Ownership is prescribed – with a maximum of 10% per employee. Will a future CEO candidate be happy with 10% when the admin assistant gets 3%? In this way ESOPs can impair succession and recruitment plans.
        • Annual valuations can be expensive.
      • Phantom or Synthetic Equity Programs
        • A company can tailor these to meet changing objectives.
        • Valuations are cheap and valuation metrics are easy to monitor.
  • To work through the options, sit and talk with the employees, and listen. Ask what concerns them. Don’t try to come up with a solution until their concerns are understood. There is an array of options available.

What is Appropriate Compensation for a Founder CEO? Four Points

Situation: A founder CEO established her company with a significant personal loan, which is being repaid. To compensate herself for the original investment, she is considering several options including an employee stock option plan (ESOP) through which employees would be able to establish ownership of a certain percent of the company. What is appropriate compensation for a founder CEO?

Advice from the CEOs:

  • The critical question is: what is the CEO’s goal? The next question is – what options best serve to achieve goal?
    • If the goal is long-term goal is maintaining or increasing current income combined with long-term security – like a Trust Fund – seek the counsel of a financial advisor who can help model how the options under consideration will satisfy the goal.
    • This individual can also evaluate the tax advantages associated with various options.
  • Is there a clear exit strategy in place?
    • Every company needs a written exit strategy, as well as a plan to put this strategy into action.
    • The simple existence of a strategy and a plan does not preclude adjusting either the strategy or the plan as conditions or opportunities change.
  • There are two important corollary points:
    • Having a strategy and plan is the only way to build a structure of accountability within the company; and
    • Recalling a lesson from Jim Collins’s book, Good to Great, the successful companies selected a solid strategy and stuck with it; the less successful comparators continually changed strategy and never allowed momentum to build.
  • To assist establishing an exit strategy, seek the advice of one or two consultants. There are several highly qualified exit advisors that can be researched through current professional contacts or via the Internet.

How Do You Generate Growth? Three Options

Situation: A company faces three options to generate growth. The CEO wants to pursue a path that keeps employees happy and rewards them for their efforts on behalf of the company. What are the trade-offs between the options and the potential impact on employees? How do you generate growth?

Advice from the CEOs:

  • There are three options to generate growth – continuing organic growth, accelerating growth through a merger, or by being acquired. These options are not mutually exclusive. The company may pursue more than one.
  • Organic growth can be accelerated by hiring an individual who’s focus will be company growth. The offer may include a minor equity position that is non-dilutive to current employee-owners, with vesting two or more years out.
    • It is important that top staff and key employees are comfortable with the person before finalizing any offer.
    • The message to current owners: “This person will drive this business with X expectations for results. The ownership position is contingent on delivery of anticipated results. Is this works as we anticipate, it is a win for all owners.”
    • Have a buy-back agreement as part of the employment contract should the individual leave. This should guarantee the company the right to repurchase any shares at an agreed price in the case of a separation.
  • The CEO has been approached by another company interested in a merger.
    • Is the value of this option increased or decreased by hiring the person described above?
    • Should the merger option still make sense, calculate a merger split that makes sense to current owners and see whether the merger partner will accept this. If not, find an excuse to drop or defer the merger discussion.
  • The CEO has also been approached by a potential acquirer. This could expand the market position of the combined companies, provide additional opportunity for current employees, and a cash payoff for current owners.
    • Talk to the other owners. Does this option meet personal financial and professional targets? What about personal needs to stay involved in business?
    • Once these discussions are completed, tell the potential acquirer what you want and need from the deal. They may agree!

How Do You Give Back to the Community? Nine Suggestions

Situation: A company has done very well providing goods and services to the local community. In the process they have made good money for the owners and employees. Still, they are aware that they only serve a portion of the community in which they operate. How can they reach out and benefit members of the community who do not necessarily require their services? How do you give back to the community?

Advice from the CEOs:

  • When employees have children or children of friends who are selling fundraising items, like Girl Scout Cookies, make a large purchase. Give the cookies away as gifts to clients and key contacts.
  • Conduct educational sessions to help the community become more versed in and aware of the products or services in which you specialize. These won’t be sales or marketing presentations but rather information sessions with no sales pitch attached. Talks can be given at schools, community organizations, or other venues that seek speakers.
  • Create a gift-matching program for employees. Make a gift to your favorite charity and the company will match your gift.
    • Try a fun variation on gift-matching: “Make Joe Pay!” Make a gift to a charity, and Joe, the CEO, will match it 3 to 1!
  • One company has a policy that employees are not to pressure other employees into supporting their or their kids’ fundraising. Instead, the company steps in and does this.
  • Work with the Angel Tree Foundation. Set up a Christmas or Holiday Tree prior to the holidays. Employees or others pick cards, and then buy a gift for someone in need within in the community.
  • Support national charities, e.g., the Heart Foundation or Cancer Society.
  • Create a formula-based program whereby based on company profitability or some other metric the company creates a donation pool. Have customers vote on the charities to be supported from this fund.
  • Encourage management and employee involvement on Boards of community organizations. Create guidelines and allow them paid time off to participate.
  • Create a mentor program. Contact the local school system and ask about clubs or classes at local schools that the company can sponsor or mentor.

How Do You Brand a New Product? Seven Suggestions

Situation: An information services company wants to launch a new product in an existing market. Their current brands are well-recognized with excellent reputations. Should they tie the brand to the company name or current products? How do you brand a new product?

Advice from the CEOs:

  • Brand specifically for each product or market – just as consumer product companies brand the same product with unique names for each consumer or commercial market.
  • A brand name is not the company’s identity – Apple as a company has created separate brand identities for computers, iTunes, iPods and serves multiple markets.
  • Attend conventions and survey the target market and current providers. Network to meet people and ask questions about what is important to them and to their buying process.
  • Think about the marketing funnel. The first element is awareness.
    • What are the company and its current brands now known for?
    • Build a brand with value that leverages the reputation and expertise currently valued by customers.
  • Define the current and planned market segments and tie branding to them.
    • Who are they?
    • How do they do it?
    • How will the new product fit?
    • Look at ROI for each market and create a strategy for the optimum combination of speed and profitability of market entry.
  • Tying meaning to a name can be a mistake. When one CEO named her company and service around a specific capacity, she limited the way that it was perceived. She is now considering a complete rebranding to open new markets.
  • Hire expert consultants with experience in developing brands. While this is an investment at the outset, these individuals are better, cheaper, and faster than doing this yourself.
    • Monitor the consultants to assure that they are spending the company’s resources wisely and addressing the company’s needs.
    • Hire someone with a network to gather the data necessary to support the branding exercise, a project manager. Use more expensive resources to plan and manage the exercise, and less expensive resources to gather the data.