Situation: A company is planning for growth and is considering several business opportunities. None are fully baked, but broadly speaking the CEO is interested in a list of pros and cons that will help her team to evaluate the opportunities before them. What questions should the management team be asking? How do you evaluate business opportunities?
Advice from the CEOs:
Which of the opportunities do you find exciting? Which opportunities ignite your passion? Which opportunities would be exciting to pursue on a daily basis? Use this to create your first cut.
When you meet with your team, prompt discussion by asking: why do you come to work each day? What drives you now?
Now look at each of the opportunities that you are considering. Which opportunities best reflect your answers?
Rank the opportunities in terms of probability of success. For each, do a SWOT analysis – how does each address your current strengths, weaknesses, opportunities and threats? How could each make the company stronger or address potential threats that you foresee?
Which opportunity provides the best segue to your long-term strategic opportunities over the next 2-3 or 3-5 years?
On a personal basis, how important is power and authority to you? What about the personal and work time that is available to you? What is your role, as CEO, in each opportunity? For each opportunity, does this role reflect your personal priorities? Finally, what is your ideal opportunity, in personal terms?
Once you have evaluated all of your opportunities – including your personal ideal opportunity – perform a weighted scoring of the opportunities to test your assumptions. Among the opportunities available, which is closest in score to your ideal opportunity?
Situation: A plumbing company wants to broaden their market and is intrigued by building maintenance agreement models. They have looked at one franchise offering that would cost $120K in purchase and monthly fees the first year. The up-front investment per new customer would be $10-50K with no guarantee of closing a maintenance contract with the customer. What are the pros and cons of maintenance agreement models
Advice from the CEOs:
Don’t look at just one company’s maintenance agreement model. Investigate companies that provide similar services.
Ask the company who their principal competitors are, and what companies have similar or differing models.
Investigate each of the competitors. One of them may be more appealing for a company your size.
If the company is unwilling to share this information, be VERY careful.
You should be able to talk to the franchisees since you would not be competing in their territories. Tell them you are evaluating the company and its model and want to learn about their experience. Ask about training, processes and procedures, and any upside or downside that the current franchisees have experienced.
As you evaluate this and other offerings, calculate worst case scenario in terms of risk and expense. Is this something that you can afford? If not, the model doesn’t look good.
Can you write in exclusions to your maintenance agreements to limit your liability for large ticket items?
Analyze the potential of your market. Conservatively estimate the number of clients that you could generate, and what you would earn. Do a cash flow analysis of your upfront expenses, risks and revenue.
Watch for red flags in the agreement models. For example, in one model the vendor is responsible for the maintenance of a building; however, they can’t require any tenant to use their services. This means that they would effectively be guaranteeing the work of other companies, or the impact of this work on the building’s services, with no control over the quality of the other companies’ work. This could expose them to significant potential losses.
Key Words: Maintenance Agreement, Franchise, Investment, Pros, Cons, Red Flag, Due Diligence, Worst Case, Scenario, Market Potential
Situation: A company has an opportunity to form a marketing partnership with another firm. The primary potential benefit to the company from this partnership is gaining access to new customers. On the other hand, partnerships may bring complications. What is your experience with marketing partnerships, both positive and negative?
Advice from the CEOs:
Marketing partnerships can certainly work, provided that both parties see benefit to the relationship, and both are committed to make it work.
Be sure to clearly define boundaries with the partner.
If either company can perform a particular service, whose customers are who’s?
Is there alignment throughout the partner’s organization regarding the partnership? Or are their conflicting priorities within different branches of that organization? Test the waters ahead of time and assess how these will potentially impact the partnership.
There are potential pitfalls:
What is the in-house/outsource attitude of the partner? If there are strong voices for in-house production or service provision, these will not be supportive of the partnership.
Watch the quality of the partnership over time.
Successful partnerships are based as much on friendly cordial relations as on business priorities. Are your business cultures and ethics compatible?
Who is the champion for the partnership on the other side? What will happen if the champion leaves? Is there a back up champion?
Build an exit strategy into the partnership that will allow you to leave gracefully and mitigate financial or good will consequences if the partnership sours.
Situation: A company is considering a merger. The other firm competes with customers who account for 25% of the company’s current revenue. How do you maximize the value of this merger to the company while mitigating the negative impact on current business?
Advice from the CEOs:
The maximum risk from the combination is loss of 25% of current revenue. The merger makes sense if you believe you will gain upside which more than counters this risk.
Both companies have brand equity. Maintain both brands and to continue to promote them. Maintaining both brands will buy you time to replace business which is potentially at risk.
Talk to customers and get their perceptions of the pros and cons of the potential combination. Ask about any concerns that they may have. Understanding the pros, cons and concerns will help you to mitigate negative fall-out.
Legally, in a 50/50 split, the Chairman will call the shots. You will have little recourse to counter the Chairman if he decides to fire you. This individual has built his company through previous mergers. Visit and break bread with those who were principals of these companies at the time they were merged or acquired. This will tell you a great deal about the individual with whom you entrusting your future. You will also learn what the others did during their mergers to help plan your own moves.
Give yourself a back door or Golden Parachute after six months if the merger does not go as you anticipate.