Tag Archives: Option

How Do You Construct a Deal to Expand? Three Areas of Focus

Situation: A CEO has an opportunity to combine with another business to expand their market geographically. A lead to work with the current owner to manage the transition has been identified. A second option is to bring in a new manager from the outside to manage the transition and the expanded business. How do you construct a deal to expand?

Advice from the CEOs:

  • Basics that are needed prior to initiating negotiations:
    • Define what the seller wants – both financially from the sale and in terms of ongoing involvement in and support of the business.
      • Without a lengthy transition period, the value of the business is not significant. The value is in the current owner’s relationships – both with clients and his team. It is critical to retain both.
    • The other big question is what the seller wants personally.
      • Is it legacy? Is it the opportunity to transfer knowledge?
      • The seller knows the CEO’s company and approached them about a sale. Play on this.
    • Are there potential complications to the deal?
      • Do any non-compete clauses exist with other companies?
      • Do other agreements exist that impact the value of the acquisition?
  • What other aspects of the deal does the group recommend?
    • Within the new organization, put the current owner under the recommended lead. This gives the lead more prestige and demonstrates trust. It also raises the bar for the lead.
    • A bonus is that the current owner and the lead get along. This will facilitate the current owner’s mentoring of the lead – like the child that he wishes would have taken over the business.
    • The current owner is a savvy businessperson, and the existing relationship between the seller and the lead will facilitate his ability to pass this knowledge on to the lead.
    • The current owner’s key assets are his connections and knowledge of the business. This will include subtle aspects to the business of which only the current owner is aware.
  • The option to bring in an outside office manager potentially complicates the situation.
    • Bringing in an outside office manager to manage both the lead and the current owner is the worst case – the most likely to blow up.
    • This arrangement puts the current owner two reports away from the CEO.
    • With an additional person involved, the personal dynamics become more complex. Keep it simple.

How Do You Shift Culture as the Company Grows? 12 Challenges & Countermeasures

Situation: A company has grown through its expertise consulting for other companies. For its next growth step the CEO and Board want to shift to a project basis. This entails several changes, from compensation to organization and focus. How do you shift culture as the company grows?

Advice from the CEOs:

  • Risks & Challenges
    • Biggest risk – dissatisfied employees who see less billable income per hour and may not see the “more hours” part of the picture.
    • The biggest personnel challenge will be those who have been with the company for many years, and who will see the most change – maybe not to their specific practices if they can bring in business, but on the project side.
    • Communication is a critical challenge, and also the best way to avoid landmines. Put a velvet glove on the presentation of the opportunity: “This is good news – we know that the low hanging fruit is now mostly gone, and that the remaining fruit is higher; to counter this we now have more options.” Carefully prepare communications to both management and consultant team members.
    • Another potential landmine – the impact on the company’s reputation if it blows up after a year. Set appropriate expectations – the company is introducing a new program rather than a wholesale rebranding.
  • Countermeasures to Mitigate the Risks
    • Maintain a structural option that preserves the old model for those who can bring in new projects and who prefer this model. For them, the new model is just an option that can help tide them over if there are gaps between the projects that they bring in.
    • Present the project option as new opportunity. Give more senior and experienced consultants priority in choosing whether to participate or not in new project work.
    • Plan and create the ability to assess the old consultancy model vs. the new project model. This will be especially important when individuals are spending part of their time in each area.
    • Create a set of metrics for each business – the consulting and project businesses – to measure whether they are on track. Identify and monitor the drivers for each business.
    • Keep the title Consultant on consultants’ business cards – Consultant, Sr. Consultant, etc. Allow them to continue to take pride in their role.
    • Move to the new model through a planned phase-in but retain the option to adjust the speed of transition between the old and new models. This will allow sensitivity to changes in the environment.
    • Don’t consider an immediate and complete rebranding – think in terms of introducing a new product under the company’s well-known brand. Plan a gradual transition of business to the new model. Introduce the new product as a new offering. As it picks up steam, gradually move brand identification and promise to the new model.
    • For the new project model, create incentives for project performance. Show team members that while the hourly rate may be less, if they perform as a team they will share the upside through project bonuses.

How Do You Fuel Early Stage Growth? Five Suggestions

Situation: An early stage company has assembled an impressive team and has a solid service offering. The immediate challenge is bringing in clients to fuel growth. The team has the capacity but needs some creative ideas on where they should focus their efforts. How do you fuel early stage growth?

Advice from the CEOs:

  • Fully utilize the team’s talents. Team members with established expertise can offer clinics featuring the company’s service offering at local colleges, business organizations and other venues to target audiences. Think about business organizations with members who would benefit from the company’s services. Also reach out to venture capitalists and the entrepreneurial market.
  • Develop a strong value proposition:
    • Go-to Organization
    • Eyeballs on the market
    • Links to highly qualified resources
    • Demonstrated expertise in your space
    • Claims tied to the top priorities of target clients
  • For start-up and entrepreneur client targets:
    • Offer a packaged set of services for a fixed fee. Be open to creative payment options to fit the financial needs of entrepreneurs.
    • Start developing a full suite of services. Start by assessing the need and developing a target list of early clients. VC portfolio companies can be a great target.
  • Build a good web-based communications interface for client use. Think of what is needed to create an attractive menu and let this drive service development.
  • Develop a separate brand for ancillary services that will complement the current offering, but which is outside of the current offering. Look at markets which would benefit from the service, including medical and nursing providers.

How Do You Evaluate Business Opportunities? Five Guidelines

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?

How Much Should Management Own Post-Financing? Five Points

Situation: A company anticipates closing a Round 3 financing this year. The CEO has an idea of the range of management team ownership that is likely at this round. He seeks advice from others with experience. What can the team do to assure that their ownership is at the upper end of the range? How much should management own post-financing?

Advice from the CEOs:

  • The numbers change depending upon both company valuation and the funding environment. Currently, Silicon Valley venture capital firms are becoming more cautious and risk averse. This is because many companies that have received financing over the last 2-3 years have underperformed. Many have yet to even produce and release a product. In this environment, the chances for maintaining a larger share of ownership for management are not as good as in headier times.
  • Seek two outside counsel to generate two independent opinions on a fair management option pool, and to assist in negotiations. These will likely be boutique firms.
  • Approach the situation as an executive option pool objective. Determine what needs to be in place to attract new executives, as well as to replace existing executives should they leave or be unable to serve.
  • When discussing this with your board and investors, phrase the challenge in win-win terms. The objective is to lock-in key personnel and assure that key positions will be filled to meet company objectives. This is the best way to assure future financial success.
  • Key members of the executive team may want to seek independent advice, apart from the company or executive team.

Is It Time To Change Horses? Four Suggestions

Situation: A company has a business relationship with another firm. The relationship involves co-development of technology as well as marketing and other support. Portions of the relationship have worked, however, the other firm has not kept its part of the bargain in terms of marketing and support promised. What is the best way to approach the other firm to resolve this situation? Is it time to change horses?

Advice from the CEOs:

  • Have you have clearly communicated to the firm both what you are pleased with about the relationship as well as your level of dissatisfaction regarding lack of marketing and other support promise? To whom has this been communicated? Are you sure that your message has gone all of the way to the top?
  • Do a SWOT (strengths, weaknesses, opportunities, threats) analysis on the current arrangement and alternatives available to you to support your trade-off analysis before taking action.
  • Present a marketing option that will address the situation and ask whether the firm will support it as previously agreed.
    • If they say yes, have a contract ready for them to sign.
    • Negotiate other key items at same time.
    • Be sure to involve all parties on your side in the preparation, including the individual(s) who made the introductions that led to the relationship. Additional heads can bring more insight into the options that the firm and relationship offers. Bring the key parties involved to the negotiation, and be sure to prep them in advance.
  • Business relationships should be based on clearly stated deliverables and timelines. If deliverables are missed then it is time to make a business decision – either repair the situation or part ways.

What Will Happen to HSA Accounts Under the Affordable Care Act?

Situation:  To maintain expense control as the Affordable Care Act is implemented, a company is looking at HSA options to replace their past insurance coverage. What do you think is the future of HSA policies and accounts as the ACA is implemented?

Advice from the CEOs:

  • HSA Accounts are expected to survive implementation of the ACA, at least for now, and may even thrive (Forbes Magazine analysis, 3/27/13).
  • The HSA Model combines a relatively inexpensive high deductible health insurance policy (minimum deductibles in 2013 at least $1,250 for individual and $2,500 for family coverage) with an HSA Account. Employer or employee contributions go into the account pre-tax. Most insurers offer a high deductible policy and many companies have adopted this option because it helps to control the growth in health care costs.
  • Annual HSA contributions are limited to the amount of the deductible, currently up to $3,250 for individual and $6,450 for family coverage, though these amounts are increased by $1,000 of the employee is 55 or older. Contributions are held in a bank account and can be withdrawn by the employee to cover most out of pocket health expenses. This is under an honor system, subject to possible audit by the IRS.
  • The key component that differentiates HSA Accounts from older health reserve accounts is that if the funds deposited annually are all not used to pay for health costs, the employee gets to keep the excess funds in the account. If the employee builds up excess funds in HSA Account, these can be transferred into an IRA. Check with your HSA bank for rules as to transfer of IRA funds back into the HSA Account if needed to cover out of pocket health care costs.
  • The down-side of the HSA Account is that if the employee encounters a significant health cost, above the amount in their HSA Account, they will have to cover this out of pocket. However, they have the option to reimburse themselves from future HSA contributions as these accrue.
  • If you are considering this for your company, it is advisable to hire a consultant to help you tailor the plan to the specific needs of your company.