Author Archives: Sandy

About Sandy

Publisher, Ceo2Ceos.com Adjunct Instructor, Southwestern Indian Polytechnic Institute

What is the Role and Value of an M&A Consultant? Four Points

Situation: The owners wish to sell a company. One option is an M&A consultant to assist with the sale. The CEO wants to know about others’ experience. What is the role and value of an M&A consultant?

Advice from the CEOs:

  • The first step is to assess the strengths and weaknesses of a consultant to determine their value.
    • The cost of an M&A consultant is inexpensive relative to the value of the business.
    • Accounting rules and M&A practices of public companies do not always apply to private companies. Valuation is affected by variations in profits year-by-year, so consultants typically use 3 to 5 year historical results for comparison against industry standards.
    • Technology companies may have a different value than service-oriented businesses, particularly if significant IP is involved. Look at the creativity of potential consultants’ solutions.
  • Consultant alternatives:
    • Business brokers, accountants, and valuation specialists can all offer valuations.
    • Investment Bankers who charge an upfront fee may be more strategically oriented. Typically, the more strategic the valuation exercise, the more dollars involved.
  • Be cautious in choosing a consultant.
    • Many business owners spend a lot of time and money with accountants and lawyers when they could save by working with a business broker paid on a commission basis.
    • Business brokers are skilled at getting business sold – however the deal is not necessarily in the best interest of the owner. Brokers are paid by commission and so may not have the best interests of the owner at heart.
  • What should you look for in a consultant?
    • Maximization of sale value with a minimal tax exposure.
    • A consultant who will help the owner figure out what they want from their business and exit – who will help to establish owners’ exit objective, a key to a successful exit.
    • A consultant who will help choose the right team of advisors.

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How Do You Fund Growth Strategically? Five Approaches

Situation: A CEO is looking at a significant investment in capital equipment. Being considered are not just the cost of the investment, but the opportunity cost of not making the investment and the impact that this will have on the business. An additional consideration is the business mix of the company and whether to shift focus from low volume/high margin to low margin/high volume products. What tools have others used to assess these trade-offs? How do you fund growth strategically?

Advice from the CEOs:

  • Review the company’s approach to contracts. It may be desirable to revise the approach in light of the new objective. The switch from low volume/high margin to low margin/high volume products impacts not only production but also marketing, sales, finance and accounting.
  • Price some early new contracts below market to finance the additional equipment expenditures, as well as to test market response to the new offering. This will help to identify additional adjustments that are needed for the new approach and offering to succeed.
  • Structure the financing options for equipment purchases creatively, for example by allowing for participation by customers and investors.
  • Watch changes in working capital at all times and keep it under control. Working capital is a commitment of resources just as is buying equipment or facilities.
  • Consider all resource commitments as investments, regardless of the way the accountants deal with them as in expensing vs. capitalizing these investments on the balance sheet. For example, a marketing program is an investment even though it will show up as an operating expense. Make sure that this can be justified in terms of future cash flows expected.

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How Do You Best Use Cash Flow Statements? Five Points

Situation: A CEO is familiar with and regularly uses income statements and balance sheets in financial discussions and planning. However, cash flow statements present more challenges, particularly when comparing cash flow over time. A second question is whether cash flow statements are more important to C versus S corporations. How do you best use cash flow statements?

Advice from the CEOs:

  • Most companies use the P&L and Balance Sheet to “stay on top” of the business on a short-term basis. However, these statements do not provide detailed insight into where cash is coming from and where it goes.
  • The cash flow statement represents a tracking tool to highlight trends and make projections about important changes in financial flows. All three financial statements are used to plan and monitor performance against the company’s financial targets. However, the cash flow statement is the most meaningful of the three, regardless of business size.
  • If 1/3 of a company’s expenditures is fixed cost how does this impact planning?
    • Carefully watch changes in volume over time and the impact on cash flow before deciding to expand.
    • When deciding whether to commit new resources it may be wiser to allow finances to be stretched for a while or even to turn down some marginal business opportunities before committing to a new layer of expenses.
  • The cash flow statement is not really affected by the corporate structure, since its three areas of focus – operations, investment, and financing – are common to all three.
  • Business is getting more complex. It really pays to understand the key elements that drive the business, and their impact on cash.

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Should You View a Competitor’s Illegally Published Code on the Internet? Four Points

Situation: A CEO recently learned that the proprietary code for both his company’s and his principal competitor’s products have been published on an international web site. He is conflicted about whether he should look at his competitor’s code, knowing that this would potentially be illegal in the US. Lawyers have offered conflicting and vague advice. Should you view a competitor’s illegally published code on the Internet?

Advice from the CEOs:

  • Consider the status of IP protection outside the United States.
    • In some countries there do not appear to be clear legal guidelines. One of these countries is likely where this situation originated. The country in question either lacks rules governing IP or the ability to enforce rules that exist.
    • The frustrating thing is that the playing field is not level between US and non-US companies. US companies are held to a high ethical standard by US law, whereas competitors in other countries that are not held to the same standard are free to review the illegal source code and learn from it as they can.
  • How complicated and expensive would it be to change the code? If this is feasible and not prohibitively expensive this may be the best option. Updated code can be provided to users through a software update.
  • Any company has to assess their own ethics as they craft a response to this situation. Make sure that the solution is consistent with the company’s ethical standards.
  • Could this have been an act of economic terrorism and/or theft?
    • If so, it is possible that the U.S. Justice Department could step in if one can make a case for national or economic security (unfair trade) based on violation of software copyright laws.
    • An action like this would, at a minimum, discourage similar future events. It could also help reduce the likelihood that competitors would try to profit from this situation at the company’s expense.

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How Do You Obtain Competitive Intelligence Ethically? Six Points

Situation: A CEO is concerned that many of the ways that her company might gain competitive intelligence could compromise the ethics and values that she has worked to instill in the company. What legal and ethical methods have others used to gain competitive intelligence? How do you obtain competitive intelligence ethically?

Advice from the CEOs:

  • It’s critical not to use methods that compromise the company’s legal position. Using spies or spy devices fit into the category of both illegal and unwise methods to obtain intelligence.
  • Do not misrepresent the company, or have employees misrepresent themselves to competitors in order to obtain competitive information.
  • Do not talk about prices directly with your competitors. This compromises both companies legally.
  • Here’s a test: If an action is being considered to gain competitive intelligence, would the company be willing to put up a banner in the office for all employees to see, telling them about this? If not, don’t do it. If questionable activities are employed, it’s likely that they will find out no matter what is done to hide these activities.
  • Here are primary sources for gathering competitive intelligence ethically:
    • Customers;
    • Competitors’ customer service and engineering departments, possibly through 3rd parties;
    • Editors of trade journals;
    • Former employees of competitors;
    • Trade Associations; and
    • Trade shows and conferences.
  • In addition, these are good secondary sources:
    • Google and other search engines – whatever appears through these is publicly available;
    • D&B Hoovers;
    • Web sites;
    • Reverse engineering – without using information obtained unethically;
    • 10Ks and Annual Reports available on the SEC web site.

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How Do You Encourage Employees to Take Full Responsibility for their Jobs? Five Points

Situation: A CEO is discouraged because employees are neither taking initiative nor holding themselves accountable for results. They see potential problems, but don’t act to either prevent or resolve them. They continually bring situations to the CEO and expect the CEO to solve the problem or save the day.  What have others done to shift responsibility and accountability to staff? How do you encourage employees to take full responsibility for their jobs?

Advice from the CEOs:

  • There are two important questions to ask:
    • Is this a situation that includes a large number of employees or just a few? If it’s just a few then these situations can be handled individually. If more than a few then systemic changes may be necessary.
    • Are all employees clear on their responsibilities and what is expected of them? Is there written documentation on responsibilities associated with specific roles or individuals? Has this been communicated to individual employees during performance reviews?
  • It is essential that direction and individual responsibility be clearly stated and understood. Encourage dialogue once direction or instruction is given to test understanding. Important direction should be documented in writing.
  • Have clear core values been established that guide both the company and individual responsibility and decisions? Have these core values been publicized and posted in break  areas as well as work areas? Use the core values to assess employees’ work to reinforce emphasis.
  • Assure that employees are clearly empowered to make decisions. This is particularly  important if employees have been subjected to micromanagement in the past.
  • Ask for and encourage dialogue, both in one-on-one situations and in team and company meetings. Make employees part of the decision process so that they feel ownership over their responsibilities. Assure that excellent performance is recognized, rewarded and publicized.

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How Do You Institutionalize Double-Digit Growth? Six Suggestions

Situation: A company is enjoying 10% organic growth per year and wants to sustain this growth rate. They enjoy a favorable position as a technology leader. Their principal strategy is to continually advance the technology. The chief obstacle to ongoing technological superiority is getting the right people to populate their brain trust. How do you institutionalize double-digit growth?

Advice from the CEOs:

  • Look for domestic office locations that have the right talent but a lower cost of living. Florida presents attractive cost of living with low employee turnover.
  • Can the company compartmentalize?
    • Set up a remote location, run by a trusted individual, and do portions of the work there.
  • Be aware that teamwork within the company becomes a challenge with remote locations.
    • A communications strategy – for example videoconferencing – can help to engender teamwork across distance.
    • The pandemic made videoconferencing a far more viable alternative than it was prior to the pandemic.
  • If the company’s infrastructure is highly bureaucratic or the cost of quality high, can adjustments be made that will relieve some of the cost pressures?
    • Creating “Hot Teams” is a method to developing new, innovative solutions.
    • Can the company’s technology be leveraged to improve productivity – for example, using modeling and simulation to reduce prototyping costs?
  • Can the company employ knowledge management?
    • Gather lessons learned from past and recently completed projects.
    • Share good or best practices.
    • Make sure that new efforts do not start from scratch.
  • Consider outsourcing to universities, with proper contracts.

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How Do You Guide a Company Through a Sale? Five Thoughts

Situation: A company was built on capital equipment complemented by annuity sales of supplies used by the equipment. The company is moving toward automation of technology and offshore production of OEM equipment. An OEM partner will take on the equipment side of the business and the company will focus on automated supply solutions with sales direct to the end customer. The OEM partner has approached the company with a purchase offer. How do you guide a company through a sale?

Advice from the CEOs:

  • It is important to determine the value proposition, both from the company’s standpoint and the standpoint of the OEM buyer. The company’s objective will be to optimize the intersection of these two views of the value proposition — to its benefit.
  • Look at current employees and the technology and determine what to do to preserve their positions and interests. This will become part of the negotiation, but it is essential to have a clear idea of how this meshes with the CEO’s personal priorities.
  • Look to outside experts for advice on exit and succession planning.
  • Determine the CEO’s vision and path of involvement up to the sale. This involvement is negotiable, but should remain consistent with the CEO’s vision during the negotiation.
  • What is the company’s patent position, and the value of the patents in terms of future revenue? IP produces a future revenue stream. Consider the valuation to be in the range of 4 years of IP value.

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How Do You Generate Buy-in as You Change the Business Model? Six Points

Situation: A company is changing its business model from fee for service, driven by individual contributors, to a contracted project model with teams delivering service. The driver for the new model is to deliver full solutions to meet client needs. The CEO is struggling to obtain buy-in to the new model from all stakeholders – employees, managers and shareholders. How do you generate buy-in as you change the business model?

Advice from the CEOs:

  • The objective is to obtain agreement on vision and direction as the company adapts over a 3-5 year horizon.
    • Benefits include: product vs. service sales, a growing annuity revenue base, increased stability for the company and improved career paths for all members of the team.
    • Risks include: massive change, fear accompanying any change, too rapid growth, and the changes to company culture that will accompany this
  • Acknowledge and celebrate what the company and team have done well and the success that this has generated. In addition, share the lessons learned from experience to date, as well as the new opportunities that these lessons have created and the reasons to change to take advantage of these opportunities.
  • Create an exciting vision that expresses the new opportunities. Consider an off-site “WOW” event to announce your vision.
    • Focus on what’s in it for them as stakeholders. Address how they can participate in the change.
    • Where are the opportunities? Do they include investment and ownership?
    • Focus on the next major steps and the doable objectives associated with each step.
  • The new direction will require a different type of manager – with skills and experience managing teams. This is a growth opportunity for all involved. Provide training to assist the transition.
  • Employee and manager skill sets (including the CEO’s) will need to adapt – identify what skills will be needed and how they can be found or developed.
  • The past culture has been highly entrepreneurial with little middle management. The new model may be different from the current model, but it can still be entrepreneurial in a different way.

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How Do You Increase Employee Engagement? Six Suggestions

Situation: A  CEO wants to increase employee engagement throughout her family-owned company.  Performance is frequently poor, employees sometimes treat each other badly, and employees rarely put out the extra effort that could make a difference. What have others done to turn around a poor company culture? How do you increase employee engagement?

Advice from the CEOs:

  • To add some energy, for example to the accounting department, bring in AccountTemps for 3 months to bring everything up to date. This will help to establish a new level of expectation within the company. AccountTemps can also produce templates that will make it easier to stay up to date in the future. This will send a message to employees that the company is willing to invest to create new standards.
  • For those who are managing underperforming areas, link their pay to performance.
  • Leverage promising young employees by giving them more responsibility in their departments. This may facilitate a shift of resources to areas of the business needing attention.
  • Have employees make customer phone calls – to current and former customers – with instructions to listen to what the customers have to say about the company’s product and services.
    • Collect and use this information to foster a customer-oriented mindset.
    • Encourage employees to take pride in the final value delivered (or not delivered) to the customer.
  • Consider a second “Founding of the Company.” An event that will wake everyone up and reinforce both the value that they represent for the company and the company represents for them.
  • To increase cohesion within the company, create an event to bring everyone together, and help them to see and value what employees share rather than what makes them different.
    • Ask employees to put up photos of themselves at age 4-6. Ask those with children to add pictures of their kids as well. Conduct a contest is to match the photo to the employee.
    • Use special events to build a team focus at work. Examples are a company picnic with a 3-legged race or a movie and pizza at 6:00pm.

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