Situation: A company has built a solid core business and wants to expand its product portfolio by adding new business. Core functions can serve both existing and new business, reducing overhead on individual businesses. What pitfalls must the company avoid? How do you balance core and new businesses?
Advice from the CEOs:
New business activity cannot impact core business. The core business is the company’s bread and butter. It is important to make this clear to both employees and clients and to structure the handling of new business opportunities accordingly.
From a staffing standpoint, new business opportunities cannot impact marketing, service and operations staff supporting the core business. New business development activity and operations cannot result in a pull from their focus on the core business. This separation may be facilitated by placing the staff supporting new business in separate facilities, or in an area separate from the staff supporting core business.
In the case of support functions that will serve both existing and new business, recruit and hire staff to support the new business to assure that both existing and new business receive proper support.
Hire a new person, one with experience and contacts, to develop the new business opportunities. Look for a sales person who can bring in significant new business. This will pay for the individual quickly.
How does leadership communicate these changes to staff?
Meet with key managers to identify potential concerns. These may include impact on company culture and client focus. Use the responses gathered to develop a communication plan to allay employee concerns.
As new business opportunities are added, it will be necessary to bring in new, experienced personnel. Previously, the company brought in experienced personnel to build the current business. Be open and up-front about this and explain that as the company grows there will be new opportunities for existing employees.
The company’s objective is to improve the quality of the organization and to raise the boat for all. Current owners and managers will automatically benefit from the efforts of new people to expand the business.
Building new business opportunities as separate businesses diversifies the company and reduces the risk of overdependence on existing clients and key vendor relationships. This enhances the job security of current employees.
Situation: A company is purchasing another company to expand its product offering. The CEO is concerned that the employees need to stay focused through the closing date. He is also concerned about retaining key employees both of his company and the company that he is buying. How do you prepare for an acquisition?
Advice from the CEOs:
Until the deal closes, don’t change anything about your current direction.
As you negotiate and move to close, be mindful of competitive bids.
This will help to keep the deal in place.
It may also open the option to put together the deal and then seek competitive bids to fund the deal through private equity groups.
Get three second opinions – learn what could go wrong with this deal so that you can plan and anticipate.
To assure that you retain key staff take the following steps:
Hire consultants: HR, financial, see what they recommend.
Offer key employers favorably priced options for a combined minority position in the company. This offers them an upside and will be an effective retention package.
What else can be done to retain key employees.
Let them know how this acquisition will position the company as the Dream Team company in your space.
Explain how this acquisition gets the company closer to a true exit strategy which will be financially beneficial to them.
If you can assure key employees that they will not experience any change in their job, title, responsibilities or compensation, retention may not be an issue.
Situation: A company has built a very successful single site business, and wants to expand geographically. They are investigating where it makes sense to duplicate operations in new sites and where it makes sense to consolidate operations. The company’s secret sauce is in their system and procedures. How do you plan for business expansion?
Advice from the CEOs:
Look at the shared services piece and the cost/benefit tradeoffs. What services are best centralized, and what are the critical on-site services that you want duplicate in remote sites?
Other companies use remote offices for field personnel, but centralize all shared services. Centralized shared services include invoicing and collections, financial reporting, telemarketing, anything dealing with trade names and print or trade-marked collateral, and an array of other services which would be too expensive for individual sites to duplicate, or where leaving things to the individual sites might result in inconsistency of service and erosion of the brand.
How do you replicate key talent? Consider whether key talent can be retained in the shared services side of the business, not the cloneable service delivery sites. Typical franchise operations have people who are difficult to replace or replicate so most do not try to include these roles in the service delivery operations.
You will need to provide for a sales role in your remote offices as business development will be critical to early success of new sites.
In the transition from “successful small” to “successful large” most businesses find that the medium stage is the most difficult. Issues to consider include:
Does your direction match your expertise – do you have support of individuals knowledgeable about franchising?
What are the margin differentials within the business? Do you want to clone the high or low-margin areas of the business? Develop profitability models for your central and remote sites, and assure that the sites will have sufficient profitability to assure their short-term success. This will make it easier to proliferate the remote sites.
Situation: A company has been approached by an international firm with an existing West Coast presence that is interested in expanding its US operations. A Letter of Intent is in place but will expire in weeks. The LOI is of interest because the company has cash flow challenges. The CEO seeks advice on whether and how to proceed with a sale or merger, or whether to continue as an independent entity. Do you merge, sell or keep the company?
Advice from the CEOs:
This is a personal decision. Do you want to be your own boss or to become an employee? It really is a question of what you want.
If you are burned out, there are advantages to having a boss, at least in the short term. However, 2 to 3 years out you may tire of this.
While cash may be tight, you can address this with other measures.
Can you save money by reducing office staff (hours or people) short-term until your cash flow improves?
Talk to private investors – offer up to 9% interest on a note. The company is a going concern and therefore likely to be able to pay off the note. You may be able to negotiate a note at a favorable rate.
Negotiate a 5 year note, with interest only payments for the first 3 years; sweeten the deal with an offer that if you get new business worth $X during the period of the note, you pay them Y% of upside.
You have revenue-producing business and receivables. Factor your receivables to raise the cash that you need. Adjust your prices to cover the cost of the factoring discount.
If you have the margins, or can increase prices to produce the margin, offer discounts for early payment of accounts receivable.
If you decide to sell, avoid a contract that takes away your flexibility to maximize your future payouts.
Can you be confident that the buying firm will survive until your payouts are completed?
Situation: A Company has a key customer that wants to upgrade the Company’s status as an approved supplier. This comes with a catch – the customer demands that the Company reduce the amount of its total revenue represented by its business with the customer. The customer doesn’t want the Company to be overly dependent upon them or their business. One option that the Company may explore is purchasing another business. When does it make sense to buy a company?
Advice from the CEOs:
The Company may be working under a false premise.
If the Company is truly a critical supplier, the customer is not likely to go away just because they don’t like a single ratio on how the Company runs its business.
The risk that the Company takes on buying another business is that this distracts the Company and ends up jeopardizing current business both from thus customer and others.
It makes more sense to explore acquiring another company if the Company’s broader goal is to become more diversified, or if new business commitments are forthcoming from this or other current customers.
What about this strategy makes sense?
Provided that the purchase of another company makes strategic sense, it may be feasible to finance the purchase of that company through a leveraged buy-out.
Be sure to build an earn-out with incentives contingent upon the seller staying on and helping to maximize long-term value of business.
As an alternative to buying another business, it may be possible to build a new lower cost/price version of the Company’s current product or service and build a new customer base for the lower cost version. This is how automobile companies use the same or similar frames, engines and many of the same components to create different cars for different markets.
Situation: A small technology company has a handful of major customers. They are very good at what they do and want to expand and diversify their customer base. The challenge is that they don’t have the funds for large-scale marketing. As an additional twist, for now they prefer to stay under the radar of their largest competitors. How do you build market awareness on a small budget?
Advice from the CEOs:
Start with the basics. Define your market niche and build from there. Create a beachhead in this niche and generate strong testimonials from your current customers. Segue to tradeshows and broader marketing opportunities as you build marketing strength.
You already have several marquis clients. Look for opportunities in other divisions within these client companies. The work that you have done for existing divisions makes you credible.
Network with your current clients to develop other opportunities. They won’t want to help their competitors; however, if you can improve what they receive from their other vendors they may provide introductions for you.
As a small company, focus on a single market where you have strength and credibility. You don’t want to spread yourselves too thin.
Find a good customer and solve their problem well. Create an evangelist who will tell others about you.
Look for speaker opportunities at high visibility events within your market niche.
Consider webinars, these are inexpensive and if you promote them to decisions makers in your target niche you can quickly build credibility.
Situation: A company wants to expand its markets and customer base. Currently their business is dominated by a single customer. What best practices have you developed for identifying new customers and markets?
The key to getting new customers is to devote dedicated time to this task.
If your company is populated by engineer or software specialists, consider hiring a sales professional – a commission based hunter sales person who has experience landing big accounts in markets similar to yours. You may pay this person a good percentage of sales for brining in this business, but gaining the additional business can be worth it.
Much depends upon your relationship with your large customer. When a single client has rights over or ownership of the technology of the company but is not pursuing broader markets that the company is interested in, is it feasible to negotiate rights to pursue this business?
The larger client will pursue their own interests, not those of the smaller vendor. Perhaps a win-win deal can be worked out, but it may be difficult – particularly if the larger client is concerned that use of the technology in other markets could affect its interests in their primary markets.
Be very careful in this situation. The easiest tactic for the larger company to defend itself from a perceived threat is to sue and simply bury the smaller vendor through legal expenses. While the smaller company may be legally within its rights, deep pockets can beat shallow pockets through attrition.
In the case that the larger client simply continues to buy all capacity of the smaller company, an alternative is to raise rates, or perhaps to just say no.
Consider recreating the opportunity – create your own adjunct proprietary product with your own software or design talent and expand your horizons with this product.
Be aware, the large client can still sue if there is any appearance that your proprietary product impinges on their product rights. As in the case above, the larger company has the resources to bury the smaller company in legal expenses regardless of who is legally correct.