Tag Archives: Acquisition

How Do You Improve a Business Model? Four Observations

Situation: A CEO is in conversation about combining with another company. One option is for the other company to absorb his company. What are the pros and cons of this option? Are there other options that will better serve both owners and employees? How do you improve a business model?

Advice from the CEOs:

  • The company has a great model today. The option under consideration looks like a double compromise – it alters both the company’s strengths and its fundamental business model.
    • The company’s strength is lean and mean – moving from a hourly/fee-based model with high utilization to a salary-based model, as the option on the table proposes, will change this. It also changes the dynamics of who will work for the company.
    • The magic of the current model is that it attracts top talent by offering them the best of two worlds: high individual billing rates with ready access to billable hours. Over the long term this has also made it very profitable.
  • Explore an alternative – how does the company transform its existing business model while retaining its strengths – lean, mean, low overhead – while transforming the model so that it builds “products,” perception, and recognition for the company?
  • A longer-term alternative is to look for a financial acquisition of the company. It has good net margins, good cash flow, and even spins out cash. This is valuable to a financial buyer.
  • What is the role of the CEO right now? Another CEO was asked “Do you have a job or a company? What happens if you leave? If the company dies, you have a job. But it may not be necessary to change much to become a company.”

[like]

How Do You Best Exploit a New Opportunity? Three Observations

Situation: A service company has developed the capacity to produce and sell a product. The CEO is considering two options for this new opportunity: create a separate entity for the new business or run the businesses in parallel under the current umbrella. How do you best exploit a new opportunity?

Advice from the CEOs:

  • Option 1: Create separate entity for the new business while the existing business continues in parallel.
    • How big is the potential win? The current company competes successfully for about 10% of the market. The new capability would allow the company to potentially compete for 100% of a larger market.
    • How different are the two opportunities? The current business requires specialized talent – it is a low volume, high margin business. The new opportunity is the reverse – high potential volume but lower margin. It is a more generic market with fewer specialized needs.
    • The separate entity option provides the most flexibility. The current model already functions well. A spin-off provides an additional option without losing what already exists.
    • Bring in another individual to develop and run the new entity. It’s a different game and requires a different focus. However, it will be a great opportunity for the right person.
    • The spin-off model will be more sustainable under separate management than under the current company.
  • Option 2: Operate both businesses under a single entity.
    • This option looks like a double compromise – it alters both the company’s current strengths and the fundamental business model.
  • A long-term alternative is to look for a financial acquisition for the current company. It produces good net margins, has good cash flow, a and spins off cash. This can be valuable to a financial buyer.

[like]

How Do You Generate Growth? Three Options

Situation: A company faces three options to generate growth. The CEO wants to pursue a path that keeps employees happy and rewards them for their efforts on behalf of the company. What are the trade-offs between the options and the potential impact on employees? How do you generate growth?

Advice from the CEOs:

  • There are three options to generate growth – continuing organic growth, accelerating growth through a merger, or by being acquired. These options are not mutually exclusive. The company may pursue more than one.
  • Organic growth can be accelerated by hiring an individual who’s focus will be company growth. The offer may include a minor equity position that is non-dilutive to current employee-owners, with vesting two or more years out.
    • It is important that top staff and key employees are comfortable with the person before finalizing any offer.
    • The message to current owners: “This person will drive this business with X expectations for results. The ownership position is contingent on delivery of anticipated results. Is this works as we anticipate, it is a win for all owners.”
    • Have a buy-back agreement as part of the employment contract should the individual leave. This should guarantee the company the right to repurchase any shares at an agreed price in the case of a separation.
  • The CEO has been approached by another company interested in a merger.
    • Is the value of this option increased or decreased by hiring the person described above?
    • Should the merger option still make sense, calculate a merger split that makes sense to current owners and see whether the merger partner will accept this. If not, find an excuse to drop or defer the merger discussion.
  • The CEO has also been approached by a potential acquirer. This could expand the market position of the combined companies, provide additional opportunity for current employees, and a cash payoff for current owners.
    • Talk to the other owners. Does this option meet personal financial and professional targets? What about personal needs to stay involved in business?
    • Once these discussions are completed, tell the potential acquirer what you want and need from the deal. They may agree!

[like]

How Do You Evaluate a New Revenue Model? Six Suggestions

Situation: A CEO is considering a new revenue model for his company. The existing model is profitable and stable, but not scalable. A new model, and perhaps additional locations may be needed to add scalability. How do you assess the risks of the model? What steps can be taken to reduce these risks. How to you evaluate a new revenue model?

Advice from the CEOs:

  • Project both the current and new models on a spreadsheet. What do profitability and return look like over time based on current trends?
  • Include assumptions about adding new customers within the model. Consider capacity constraints at the present location. Add start-up investment needed for the new model. Does overall profitability increase in the projections and will this adequately cover new customer acquisition costs?
  • Are performance standards for the current and new models different? Would it make sense to have different teams managing the models? What kind of experience will be required in the people who will build the new business? Account for personnel additions and start-up costs in the financial projections.
  • Critically evaluate the upfront financial exposure as new clients are signed up for the new model. Consider hybrid options which can be added to customer contracts. Examples include:
    • A variable flat fee model. Customers contracted under the new model will receive services up to X hours per month for the flat fee, with hours over this billed separately.
    • How do current time and materials rates compare with industry averages? If they are high, it is not necessary to quote existing rates to new model customers. Create a new rate schedule just for new model customers. Taking a lower rate under the flat fee model will not cover all costs and profit; however, it will at least partially cover utilization exposure and a higher rate for additional hours can make up the difference.
    • During the ramp up period of a new operating unit, client choice is critical. If, based on observations and responses in client questionnaires, heavy early work is anticipated, charge an initial set-up fee. Alternatively, ask for a deposit of 3-4 months to cover set-up exposure. If either at the end of the service contract or after a burn-in period some or all these funds have not been used, the client is refunded the unused deposit. This can both cover early exposure and make it easier to sign new customers for the new unit.
    • Draft contracts under the new model to include one-time fees in the case of certain events – e.g., a server crashes in the first 9 months of the contract, or an unplanned move within the first X months of the contract. These resemble the exceptions written into standard insurance policies. They can be explained as necessary because standard contract pricing is competitive and does not anticipate these events within the first X months of the contract. Most companies will bet against this risk. Those who do not may know something about their situation that they are not revealing. In the latter case you will be alerted to potential exposure.
    • Consider a variable declining rate for the new model. The contract price is X for the first year, and, assuming there are no hiccups, will be reduced by some percent in following years. This resembles auto insurance discounts for long term policy holders with good driver records.
  • Adding hybrid options may make it easier to sign new clients while covering cost exposure. The view of the CEOs is that most clients will underestimate their IT labor needs and will bet against their true level of risk. Provided that the new model delivers the same service that supports the company’s reputation, once clients experience the company’s service, they will be hooked.
  • An additional benefit to hybrid options may be faster client acquisition ramps within new satellite units and faster attainment of positive ROI.

[like]

How Do You Make the Most of Changing Your BHAG? Eight Points

Situation: A company recently changed their BHAG (Big Hairy Audacious Goal) to focus on premium customer acquisition, but as a small-to-medium sized company has a 3-year focus instead of the typical 10-20 year focus of a larger company. They want to make this a company-wide effort. How do you make the most of changing your BHAG?

Advice from the CEOs:

  • First, it is measurable and specific – grow to 10 times your premium current customer base in 3 years. Your marketplace is changing quickly, so a shorter-term BHAG makes sense. Call it your 10/3 Program or 10/3 Challenge.
  • Is it too shallow? No – this is something that people can rally around. It represents significant company growth.
  • What happens when you achieve the goal? Celebrate in a big way, and then set the next BHAG.
  • How do you create excitement? Every time you hit a milestone, bring in pizza, or conduct a special event. Celebrate.
  • Success = Change. What does that next milestone mean for the company and your capabilities? This isn’t just about new clients, but also includes scaling your delivery systems and customer service. Rally your non-sales staff around these important tasks.
  • Create milestones not just around sales numbers but also around timelines. Tie incentives to achievement of BHAG milestones.
  • Conduct a company meeting to announce the BHAG, and announce progress in future company meetings.
    • Progress against milestones.
    • Share pipeline data to maintain excitement.
    • Develop scale-up programs and share progress of non-sales departments as they ramp up services.
  • Think about building a competition around the goal. As long as this fits your culture it can add excitement to achieving both milestones and the BHAG itself.

Note: The term ‘Big Hairy Audacious Goal’ was proposed by James Collins and Jerry Porras in their 1994 book entitled Built to Last: Successful Habits of Visionary Companies.

[like]

How Do You Integrate a New Team Into Your Culture? Six Ideas

Situation: A West Coast company has recently acquired an East Coast company. The two companies serve similar customers with different but complimentary services. The acquired team has a history and mode of operating. The CEO seeks advice on how much they should require the new team to operate as they do at the home office. How do you integrate a new team into your culture?

Advice from the CEOs:

  • Have patience. The transition and transfer of culture will take time. Your priority is for both offices to operate smoothly and profitably. Business practices differ by geography to suit their regional cultures. The remote office need not function just like the home office.
  • If you want a manager from your home office in the new office, take care who you select. Since you have history with the new company and office, select a manager who already has a good relationship with key senior managers in the new office. This will ease the transition, and will keep you updated on what is happening there.
  • Organize a dinner with your new manager and the senior managers in the new office. At dinner you will want to communicate your expectations and accelerate the transition.
  • Involve the senior managers from the new office in mentoring the new manager. This will give them an important role and will show respect for their knowledge and expertise.
  • Do all that you can to reinforce the link between the offices – in a constructive way.
  • Set benchmarks and plans of action, and manage to these.

[like]

How Do You Communicate Benefits Changes Following an Acquisition? Four Thoughts

Situation:  A company was recently acquired. The acquirer wants to merge benefit structures between the two entities. Both contribute a similar amount toward benefits; however the distribution of benefits between retirement and health plans, and other benefits varies considerably. How do you approach the staff to communicate changes in benefits following an acquisition?

Advice from the CEOs:

  • Ideally, you want to gather employee input on what benefits are important to them before the overall package is finalized. This will help you to negotiate in your employees’ interest.
  • Make sure that the acquiring entity is aware of state regulatory requirements that may force them to retain state-specific benefits.
  • National companies often employ a cafeteria benefit strategy that allows the employees to make choices among benefit options, and fund these choices either at a company-paid base level or allow employees to supplement their choices through pre- or post-tax payroll deductions. There are numerous providers who offer cafeteria plans.
  • What’s the best way to have a conversation with employees once the new benefit package has been finalized?
    • Emphasize that the company is offering and funding this benefit and specify the amount that the company is funding as a percent of salary.
    • Create a grid mapping the full program:
      • Amount of company contribution
      • Old Program and benefits
      • New Program and benefits
      • Changes in allocation and changes in the total value of benefits offered.
    • If you have access to industry or regional comparisons for like-sized companies, and those comparisons put your company in a favorable light, share these as part of the communications package.
    • If you know that a highly valued benefit is being reduced, consider a short-term subsidy to ease the shift.
    • Be sure that you are clear and concise in your communications of the new plan and changes to the employees. You may want to have an outside consultant on hand to cover specific questions.
    • Be sure that any decisions your employees must make in the new program are fully and clearly explained.

[like]

How Do You Target and Prospect Acquisition Candidates? Three Guidelines

Situation: A company wants to grow by acquiring companies in similar verticals that have different but complimentary offerings. The targets will most likely be boutique operations. How should they target and prospect candidates?

Advice from the CEOs:

  • Before you think about either targeting or prospecting an acquisition do your internal homework. Establish your strategic plan, including strategic capabilities that you want to develop. Look for synergies within your plan, and assure that any new capabilities complement these synergies.
    • Will current customers be interested in the new strategic capabilities, or will you have to build or buy access to new customer segments?
    • Determine the leveraging factors. How much incremental business can you expect to gain compared to current business? Look at both top and bottom line impact.
    • Do a build/buy analysis to determine whether the capability is more effectively built using your own resources or purchased.
  • Leverage both internal and external resources to develop a target list. Ask what current employees may be knowledgeable of potential candidates.
    • Use your industry network to identify and gather information about candidates.
    • Retain a firm to assist you in identifying candidates. They can approach candidates from a neutral position to assess interest in acquisition.
  • It is critical to negotiate a deal that retains key talent. Founders and key staff of the acquired company must see the combination as a means to facilitate and expand their own vision. In many successful acquisitions you will see the following traits.
    • The acquiring company did not change management, accounting methods, or operational procedures of the acquired company.
    • They acted as a bank to facilitate pursuit of the acquired company’s dreams and already successful strategies.
    • They took a “hands-off” approach with the acquired company and did not try to force cultural change.

Key Words: Acquisition, Candidate, Plan, Capability, Market, Customers, Leverage, Build-Buy Analysis, Target List, Talent, Retain, Culture, Compatible, Due Diligence

[like]

How Do You Land Your Next Big Customer? Six Suggestions

Situation: A small company wants to land one additional large account per quarter. They utilize an array of marketing activities but aren’t sure where to concentrate their efforts. From your experience, how do you identify and land your next big customer?

Advice from the CEOs:

  • Landing large accounts is more of a relationship game than a marketing game. Develop a list of targets. Determine who you want to approach as the key decision maker, and work your own network and those of friends to gain a personal introduction.
  • If you and your principal target customers have operations overseas try to develop relationships between your and their overseas managers. Social networks abroad can be more accessible than in the US.
  • If you plan to introduce a new product or service, ask current customers whether they know of anyone who might be interested. This can prompt their interest or get you a significant lead.
  • Once you identify potential targets, conduct third party surveys of their industries. These can yield valuable insights into your targets’ organization and needs and help you better position your offering.
  • If a target customer has multiple divisions, initiate a relationship with a single division first and then leverage this relationship to develop additional business across the company. A number of small companies have figured out how to do business with multiple divisions of a single large company.
  • Trade shows are underutilized by many companies. Schedule meetings with target contacts In advance of the show. Even a simple visit to their booth can lead to a significant meeting. If you have limited resources, simply register as an attendee and use the show to network with potential customers.

Key Words: SMB, Customer, Acquisition, Networking, Social, Relationship, Overseas, Operations, Survey, Trade Show

[like]

How Do You Communicate Benefits Changes After Being Acquired? Seven Suggestions

Situation: A company was recently acquired. The acquirer wants to merge benefit structures between the two entities. While company contributions are similar, distribution of benefits between retirement plans, health plans, and other benefits between the entities varies considerably. How do you approach the staff about the changes in a positive manner?

Advice from the CEOs:

  • Ideally, you want to survey employees on what is and is not important to them about their benefits before the package is finalized. This will help you negotiate on your employees’ behalf.
  • Ask the acquirer whether a “cafeteria” benefit program is feasible. This would allow your employees to make choices among benefit options, and to fund these choices either at a company-paid base level or to supplement their choices through payroll deductions.
  • Inform the acquiring company of your state’s regulatory policies on state-specific benefits.
  • Once the new benefit package is finalized, ask for assistance communicating the new package to your staff. Create a simple and concise grid for the program:
    • Amount of company contribution,
    • Old program and benefits,
    • New program and benefits,
    • Use the grid to demonstrate that while the allocation may be different, the company contribution remains the same and the total value of benefits offered is unchanged.
  • If you know that a highly valued benefit is being reduced, consider a short-term subsidy to ease the shift.
  • Be clear about decisions that your employees must make in the new program.
  • If you have access to industry or regional comparisons for like-sized companies, you may wish to share these.

Key Words: Acquisition, Benefit Structure, Change, Employee Input, Cafeteria Plan, Options, State Requirements, Short-term Subsidy, Comparison

[like]