Situation: A CEO has been approached about a potential acquisition of his company. The offer was a surprise, and the team within the company is split on whether they are interested in a sale. They are currently very happy with what they do. How do you prepare for a potential acquisition?
Advice from the CEOs:
How does a company best position itself in advance of discussions?
Rebrand the company to boost the value proposition. Make what the company does best the focus of its value proposition. Position the company as the “experts” in this area.
Look at a series of possible scenarios that could develop and determine who on the team can best contribute each scenario. This will help to evaluate the implications of each scenario and to rank them in terms of favorability on the company’s terms. It will also help to quickly exclude certain scenarios if they come up during discussions with acquirers.
What research should the company conduct on the acquirer?
Do a deep dive into the potential acquirer. Research is simplified if the acquirer is public. Go online and look at their SEC and public filings. Look at their revenue trend as well as their profitability or losses.
What is the acquirer’s history of acquisitions? Interview people from companies that they have purchased.
Don’t pitch anything to the acquirer until you understand what they want to buy – this is critical so that the company positions itself well.
What is the best approach to take once the conversation starts?
Quick first step – send the company’s financials to the acquirer with a 3-year projection. Ask them, based on this, for a price range that they would consider for the company. If the range is outside of expectations, the conversation is over.
Determine whether this looks like a strategic vs. a financial buy. A strategic buy yields a higher price.
Cut a deal structure with a bonus tied to success post acquisition. This means a reasonable upfront payment with big payments for future success. This creates golden handcuffs to motivate the company’s staff to stay post-acquisition.
There should be multiple options on table – addressing both financial considerations and the future of team.
Situation: A CEO has been the principal source of financing for her company. She is looking for Round #1 financing of $800K to $1 million to take the company through the next two years, followed by an additional two rounds of financing to take the company to profitability. What are the best options to obtain financing?
Advice from the CEOs:
Given the company’s size, it’s too risky to put all eggs in one basket. Also, it is difficult to simultaneously pursue all options. List and rank all financing options, and limit efforts to the top 3-5 options, forgetting the rest for now. The company is more likely to be successful with a limited number of targets.
The big question is which avenues to pursue? Current preferences are:
Sell what the company can sell now – focus on collaborators and bootstrap the company as much as possible.
Angel funding, if the company can find the right angel.
Avoid venture capital unless there are no other options.
Given these, where does the company have live contacts? What conversations can be pursued to a successful conclusion in the next 1-2 months?
For the Angel option, the company’s model is easy to explain and has appeal. Which potential Angels could be approached in the next 1-2 months?
An option is to bring an Angel in slowly – creative input, perhaps a Board seat.
Once the Angel is on-board, put together a list of your funding priorities and a list of 4-5 top prospects in a Board discussion. Ask this individual’s advice and assistance contacting some of the prospects. He may ask at that meeting or later why he hasn’t been asked.
For the first $1million – consider an SBA loan.
Under new guidelines, the application fee has been reduced.
Approval cycle – 30 days or less.
The trade-off between bootstrap and Angel funding and SBA is personal risk. Look at this as a fallback option.
VC funding is very time consuming. Also, VCs prefer that their clients are somewhat desperate, so that they will receive a larger piece of the company for their money.
Situation: A company is preparing for end of year reviews. They use several performance measures to evaluation employee performance, including 360 Reviews. The challenge is that both managers and peers tend to rate everyone at the highest levels – even though everyone knows that this is not valid. How do you get managers to honestly rate their teams?
Advice from the CEOs:
This is a common problem for companies. The central issue is that managers want to get on well with their teams, and may fear that giving someone a less than stellar review will impact individual and team performance. You have to change both the perspective and the methodology.
Start with the basics. Performance reviews are about communication and documentation.
Expectations should be based on an up-to-date Job Description for the position.
Job Descriptions should address skills, expertise and behavior. Clarity and specificity are essential.
They should anticipate growth, and include standards of performance to measure growth.
To prepare for a review meeting, the manager rates the employee against the standards specified in the Job Description, as well as any objectives established in past reviews. The employee self-rates against the same measures.
Following the review meeting, the manager must document the discussion and objectives for the next period set during the meeting. The employee reviews and signs this document.
For managers, a key performance measure is quality and substance of reviews.
Besides individual reviews, have your managers rank their people 1 to X along several metrics:
Reliability on the job
High or low maintenance
Use zero based thinking: Knowing what I do now, would I hire this employee for their current position?
Align the review process with the company’s goals.
Do a total ranking among company employees. Tell managers that those ranking last place(s) must be upgraded. The CEO approves the final ranking.
Situation: Two key managers of a company are too busy with day-to-day activities to focus their planned 40% of time on growth. The company has hired personnel to relieve some pressure on them, and a new ASP (Application Service Provider) is improving customer out-reach. How can the CEO take pressure off these managers so that they have time to grow the business? How do you focus managers on growth?
Advice from the CEOs:
Small companies grow through their early stages with everyone wearing many hats and doing everything. The company is now larger than this and it has to stop. Managers need to focus their responsibilities where you need them to focus and stop doing less important tasks.
Have you gone over key responsibilities and expectations for the two managers? Do they have clear objectives and deliverables? If not, focus on this.
Brainstorm with them how they could free-up time to focus on growth.
Do this in a meeting. Your plan is 10% growth. Ask for their ideas on how to grow the business, and develop a plan to put their ideas into action. What help or resources do they need to meet this plan?
Three heads better than one to ask core questions – let them come up with the answers.
Design processes to address needs and responsibilities.
Rank implementation of options in terms of impact to the company and financial results.
Given the ranking, implement programs sequentially – most relevant and easiest first.
Taking orders by phone is clerical. This should not be a manager’s prime focus.
Have a clerical person answer the phone, and train them over time.
Limit the manager’s direct involvement in phone orders to critical situations.
Situation: In a contracted service company, activity gets very busy at predictable intervals due to contract renewals. During these busy periods, either positive or negative surprises can make it difficult to handle the work load. What techniques have you developed to make sure that you find time to do all the right things?
Advice from the CEOs:
Look at your renewal process and break it down. There may be some aspects of the process that require top staff attention and other aspects that are routine and can be handled without special training. For the latter tasks, cookbook the details so that you can use either your own or outside staff to complete them. This will start to open up more options.
You may want to stagger your renewal periods so that all of the renewals do not happen at the same time. If this is not possible, rank your current customers in terms of revenue volume and profitability. This enables you to shift focus from less profitable customers during crunch times.
As crunch periods are both periodic and predictable, bring in extra staff on a temporary or contractor basis during these times to help manage the load. You may even be able to work with a staffing agency to plan adding of additional personnel to help handle the load during crunch times.
In the current economy there are a number of highly talented individuals – retirees, spouses who work part time, individuals who are underemployed – who want or need to work but do not necessarily have to or want to work full time. During your slower periods offer training on your products and software to a group of people like this so that during the crunch times they can come in to assist the load.
Situation: A company’s primary objectives are to hone their business model and establish their first satellite office as a model for future expansion. An opportunity has arisen from a trusted source that could rapidly expand both business and opening of satellite offices by providing service to a single national client. How do you evaluate the tradeoffs between these options?
Advice from the CEOs:
What is the impact of this new option on client diversity? One of Porter’s fundamentals of strategy is to not have too much of your business dependent on any one customer.
What is the impact of this opportunity on your personnel, time and resources?
Are there areas in which this opportunity will save time and resources, for example by consolidating some back-office functions like billing and accounting?
If this opportunity will take an inordinate amount of time and focus, consider starting a new entity to take advantage of this opportunity.
Use a decision-making grid to evaluate the new opportunity versus your present strategy:
Identify the most important factors of both your current strategy and the new opportunity.
Weight the importance of each factor as a percent of with the total adding up to 100%.
Rank each opportunity against each factor.
Multiply the factor ranking times the weight for each ranking.
Sum the weighted rankings.
See whether the summed rankings support of contradict your gut feeling, and further analyze depending on the result.
Once you have identified the risks in this proposition, determine contract provisions that will reduce risks to acceptable levels. If the potential client is unwilling to yield enough of these points in the contracting stage to acceptably mitigate your risks, then walk away from the deal.
Don’t risk your entire company for one opportunity. Financial rewards are only a scorecard.