Situation: The CEO of a software company has been presented with two opportunities by a large customer – international expansion to support their sales and creation of a data warehouse facility. The company has the option of pursuing either or both. The customer is not offering up-front cash to support either opportunity. Should they pursue either or both? How do you choose between opportunities?
Advice from the CEOs:
Keep pursuing both opportunities and establish a series of decision points which will yield either a Go or No-Go decision on each. The big question is to determine how either will support company growth.
The customer is interested in both opportunities so ask them for assistance such as: removing barriers, client referrals, or some form of cash or investment.
For either opportunity to succeed requires a high level of internal buy-in and support from the customer.
If the company can afford to be aggressive now, this is a great time to move.
Look carefully at the ROI on each opportunity under different scenarios.
Do background work with potential clients to validate each market opportunity.
Specifically to International Expansion
Buy-in from the customer’s head of international sales is essential – without this it will be difficult to establish a solid relationship with the international sales team. Lack of this support will be a No-Go sign.
Can the customer provide office space, access to their infrastructure, administrative support, assistance in gaining necessary licenses to do business, etc. during start-up?
Could this venture be undertaken through a joint venture with an established international company? This would save start-up costs and allow validation of the opportunity before risking the company’s investment.
Execution will require a large-scale effort – both time and money. Include both in the Go/No-Go calculation.
Specifically to the Data Warehouse Facility
A competitor’s right of first refusal on this business is a barrier. However, the opportunity may be viewed as too small for the competitor. Is it possible to buy rights from this competitor?
Ask the customer to transition their customers to your company and its product.
Situation: The CEO of a service company needs to expand its market base due to concerns that a significant service and referrals partner may decide to stop working with them. A break-up would have significant impact on salaries, effort and focus. The company’s priority is to expand client growth to minimize the impact of a break-up. How do you expand your market base?
Advice from the CEOs:
To expand or build a market requires a champion. Someone like the company’s founder who has the passion and contacts to build new business.
Second, incentives must be established to reward success bringing in new clients. These incentives must have teeth – no success, no incentive. No safety valves.
Third, create a plan to support the new business development – including marketing, event attendance, etc.
Initially, be selective and target just a few highly desirable new clients to test and refine the client attraction model before expanding to the broader potential client audience.
Build a set of case studies of services and results for new clients.
Track and prove out the profitability and workability of this model.
How should the effort to expand the market base be constructed?
Start with preparation. Research the current prospect list to assure that they are good prospects. Also look at the current company culture – do the company’s strengths align with what is needed to attract and serve new clients?
If the research shows that a significant number of prospects are different from current clients, think of this as a new channel. Create a different business unit to specialize in serving these clients. Hire a team to focus exclusively on the new client group, with proper incentives tied to achievement with these prospects.
Another company had a similar choice. They created a program to increase their market base and went after it with full focus. It took five years to accomplish vs. the two years that they had planned. Nevertheless, the results have been worth the effort and expense. If the company believes in the model, invest in it.
Situation: The CEO of a specialty component company wants to standardize documentation of company procedures covering sales, production and ISO documentation. This will take time and effort, and employees are concerned about accountability for poor results. How do you incentivize employees to document SOPs?
Advice from the CEOs:
Are employees are being asked for accountability without being empowered or rewarded for performance? Currently, there is nothing about employee performance that is directly tied to:
Dollars in raise, or
Share of the bonus pool.
Everything is determined at the CEO’s discretion.
Why would anyone want more accountability if they feel that they have little control over their jobs or future at the company?
To increase accountability and drive, employees must be given control over the factors tied to retention, pay and bonuses.
To create an effective system for employees to document standardized SOPs they need:
Incentives that are under their control to achieve the objective – creating standardized SOPs.
Objectives that are achievable with clearly stated rewards for performance.
Performance evaluations tied to clearly stated objectives, discussed with and agreed to by each employee, which drive raises, bonuses and rewards.
The messaging about these changes must be delivered with energy and passion. Employees must feel excited by this opportunity.
Understand that this may cost 10-15% in increased overhead but will boost the value of the company way beyond the cost.
Employees need to know the vision for the company and must be empowered to achieve the results to fulfill this vision.
The why behind the desire for standardized SOPs is just as important as the incentives created to achieve them.
The why must be clear, simple, and must be understood by the employees for everything to work.
To further motivate the team, involve them in designing the incentive program.
Ask what they want. Maybe it’s something as simple as a fun day with the team.
If they aren’t asked, the danger is that they will not respond to the incentive offered. Money is not the only, and in many cases is not the most effective incentive.
Situation: The CEO of a successful small software company is snowed under by day to day tasks. She wants to focus more of her time on business and infrastructure development. However, the company’s departments are not strong enough to run without her supervision. How do you free up more of your time?
Advice from the CEOs:
The first priority is to develop infrastructure that will allow the CEO to focus on strategic development.
To build this the company needs the right people to do the work.
Look at the daily task list and develop or hire new managers to oversee day-to-day non-strategic functions.
For example, offload payroll and back-end accounting to a bookkeeper.
Look at the gaps between where the company is now and where you, as CEO, want to be in terms of your time and responsibilities:
In addition to a bookkeeper, hire an experienced executive assistant – to keep you focused as CEO.
The company is growing rapidly. It is time to hire a human resources manager.
The company’s cash flow projection for the coming year indicates a substantial surplus.
Use this surplus to hire infrastructure.
In front of key clients, keep the impression that you are available to them; however, this is primarily for client relations. The CEO doesn’t have to do all the work demanded by clients.
Use the lawyer / rainmaker model. The rainmaker maintains key client relationships; however, the rainmaker has staff do 90% of the work.
The 7 States of Enterprise Growth Model indicates that the company is now in what’s called a Wind Tunnel. The critical activities in a Wind Tunnel are:
Letting go of methodologies that no longer work and acquiring new methods that do work, and
Situation: The CEO of a service company continually finds the company short of cash. They have just hired a new accountant, but it will take time for this individual to understand the financial situation and to generate recommendations to improve cash flow. How do you keep a company afloat short-term?
Advice from the CEOs:
Point #1: This isn’t just a question of controlling costs; the company needs to build the infrastructure to succeed.
If there isn’t someone on the team in a position of authority, who the CEO can trust completely, hire this person. The CEO can’t control all risks.
While the company has shrunk over the last two years, it is still a substantial company and needs professional management. To grow effectively, professionals are required in key leadership positions. If necessary, hire experienced outside talent
Look for teachable moments as challenges arrive. The CEO, instead of solving a problem, should work with employees and mentor them through discovering and implementing solutions.
How to communicate this to current staff?
Put the story together. Be able to make a clear statement to them, including the current situation and future possibilities for which the company must prepare.
Generate charts and metrics to support key points.
Use senior staff as the mouthpieces to present the story to the rest of the organization. Once they are onboard, have them help craft the message. Don’t underestimate the CEO’s authority. This is business, not a popularity contest.
Let others make mistakes – it is part of the learning process – no matter how critical the situation.
Point #2 – Return to the company’s roots.
The faster everyone accepts that a focused approach is the only way to survive, the faster the company will turn around. Reestablishing company presence in key markets with a new model that speaks to their desires makes a lot of sense.
Be very clear as to what flat-rate service pricing covers. Include this in the signed customer agreement. Don’t allow costs to creep up or it will kill the profitability of flat rate jobs.
Create an infrastructure nimble enough to adapt as market conditions change. Identify what really works and focus on this.
Situation: The CEO of a small technical company is in the process of handing off responsibilities to a new President who lives in another state. The CEO and President have known each other for a long time and have a strong relationship. The CEO will hand off several key responsibilities immediately, while retaining financial and HR because of the President’s location. How do you transition to new management?
Advice from the CEOs:
Most of the current hand-off plan concerns non-technical areas. The next logical area to delegate is Customer Support.
Establish a trigger process for new requests for support that keeps key parties informed and meets customer needs on a timely basis.
Think about bumping up Customer Support to a more proactive Customer Relations function. This is important during economic downturns when trade show attendance is low.
Next in line are Installation and Installation Planning, since the new President will already have Installation Support.
Think about Technical Support. This could be combined with Customer Support and makes sense because many customer support questions come through technical support.
Beef up the financial function to support future growth. Growth brings new complexities into the picture. Consider handing this off to a part time professional who can provide regular updates of the company’s financials. A professional can also look at the structure of the books and suggest changes that will provide more insight into company operations, opportunities for savings, and sources of funding to support planned growth.
Situation: The CEO of a family business faces his most difficult conversation. One brother, who makes more than anyone else, is not living up to his responsibilities. A long-term key employee currently handles most of this brother’s responsibilities at a modest salary. The CEO is intimidated by this task. How do you prepare for a difficult conversation?
Advice from the CEOs:
Call a meeting of the three brothers and the key employee. Propose putting all four into a pool. The key employee is treated like a brother. Ask: what is a fair way to split the pie and to build incentives so that each makes what their father, who built the company, made? Make it clear that all four members of the team want the same earning potential and that one team member is not more equal than the others.
Prepare and script this meeting ahead of time.
Don’t allow the under-performing brother to play the others off against each other.
Know what must be said if this brother says he will leave.
The CEO must stick with the message. If the underperformer doesn’t like the message, he is not indispensable. A replacement could be hired for far less than he is currently being paid.
What are the key points for the conversation?
Turn the question around – the brothers all joined a company model that no longer works – the three brothers, combined, make less than their father made.
Ask the underperformer – what are the proper incentives? What is fair? Is it fair that for years, he has made more than anyone else?
It’s time for each member of the team to work together to figure out how to make what their father made in this business.
The brothers have supported the underperforming brother for years. Any old debts that were owed have been paid.
Ask the underperforming brother for his voice in how to expand the company and make it more profitable.
This is a new game. If all members pull together everybody wins.
A company is looking at options to fund growth. These include selling a stake
in the company, bank financing, organic growth. or partnering with another
company. There are trade-offs to each option. How do you fund business growth?
Advice from the CEOs:
There is a question that should be answered before talking about funding: what is the vision for the business?
Think about building the business that the founders want to run. What size company feels comfortable from an operational perspective? What does it look like?
Does the company have the right people and infrastructure to support planned growth? Are current direct reports capable of taking on additional projects and monitoring both current facilities and additional sites?
As the company grows, can the bottom line be increased as fast as the top line?
Commit the 5-year plan to paper. Before deciding how the company will grow, determine the vision, the growth rate to support that vision, the organization required, and the strategic plan to get there.
The funding decision is an investment decision. What’s the return for a multi-million-dollar investment? What incremental revenue and earnings will it produce?
Estimate how much revenue the investment will generate in 5 years. At the current gross margin, what is the incremental gross margin per year.
Given this estimate, what is the projected EBITDA? Does the annual EBITDA represent a reasonable rate of return on the investment?
The investment ROI must be known – both from the company’s perspective and for any lender or partner who invests in the planned expansion.
How high do the company’s relationships extend in key client companies? Do client upper management realize how critical the company is to them?
If the answer is not high enough, develop these relationships. This could open new funding opportunities.
For example, if the CEO knows the right people at a key customer, let them know that the company may want to build a facility near them. The customer may be interested in partnering with the company to finance the facility.
A multi-million-dollar joint venture plant investment is a modest investment to a large customer if it gains them a strategic advantage.
A young company is in the process of hiring new employees. Good customer
service, including excellent communication skills and empathy are the most
important qualifications. Good follow-up skills are more important than
educational background. How do you train new employees?
from the CEOs:
Training new employees may be putting the cart before the horse. The first task is to solidify the company’s business model. The next task is to determine what roles and positions fill that model. Only then can the company determine how best to train employees.
Build an organizational chart for a $1 million company.
Who will the company serve?
What are the positions and roles?
This is future that the company will be building and determines how to select and train people to fill the positions.
Suggested Reading: The eMyth Revisited by Michael Gerber – a guide to envisioning the future of the company and how to build it.
A word of caution. As CEO, you don’t want to be training people like yourself. This is both difficult and risky. You may be training future competition.
As an alternative, think of a series of distinct roles or functions that make up the business, then select and train different individuals to handle each role. It’s difficult to find people who can do it all. It’s much easier to find people who can bring in new clients, establish and nurture relationships with partners, network to develop a referral base, or counsel new clients on alternative solutions to fit their needs.
Organizing this way means training and creating experts in segments of the business, but nobody knows the full business the way that the CEO does.
Each position within the company will need individualized objectives and performance evaluation criteria. What are the key metrics for each position? This helps to build efficiency.
Think about both one-time and recurring income models. This may call for different employees or at least a different sales activity to build each business segment.
A company has been approached by a larger company that is interested in
purchasing it. The purchaser wants to fill a niche that they don’t currently serve,
but which is important to their growth. The CEO is concerned about what will happen
to employees following sale of the company. How do you respond to a purchase
from the CEOs:
Questions for Preliminary Stage Research:
What valuation is the tipping point for an attractive offer by the buyer?
Determine the nature of the purchaser’s interest in the company and how it fits into their broader strategic picture. If their plan will dramatically change the market the company’s current market value may go down later relative to doing a deal with them today.
If the acquirer has a history of buying other companies, look at who they’ve recently bought, what they paid, and what kind of impact they had on the staff and culture of the companies purchased.
Check out the purchaser’s P/E ratio. If it is in the range the company’s desired multiple on EBITDA, a good deal is possible.
Temper the company’s response and approach to get the most from this experience.
Currently, assumptions about the acquirer make the offer appear unappealing. Ask questions to validate or challenge these assumptions.
Be open-minded so that the purchaser reveals more about themselves and the market than they would if they sensed a lack of interest in an acquisition.
How does the company protect itself during the inquiry and due diligence process?
Keep staff numbers and individuals, and customer lists close to the chest.
Have an LOI and ask for a breakaway clause before sharing significant information.
Breakaway clause: if the two companies get into discussions and the potential acquirer decides to abandon the discussions, it will cost them $1M.
The potential acquirer may not agree to this, but it demonstrates that the company is serious both about the discussions and about preserving the confidentiality of its business information.
More Advanced Stage Questions and Research:
This looks like a strategic interest. If so:
Get assistance from an investment banker.
Look at what other alternatives may be available to the acquirer to assess the company’s potential value.
Any offer other than a high-multiple strategic valuation and offer should not be of interest to the company.
What restrictions will the acquirer put on the company?
For example, if there is an earn-out value, will they give the company the freedom to operate to maximize this value?
Be careful with employee communications and how employees are informed of an outside interest. This can be difficult during due diligence.
If the founder remains with the company post-sale this could help lock in the value of the exit and assure the employees’ future.
Make the most of this opportunity.
Are there ways that the company can become better and smarter working with the acquirer?
Is there a relationship short of acquisition than would benefit the company like a collaboration or partnership?
Can a relationship short of sale enhance the company’s market presence and help the company to achieve national status more quickly?