Tag Archives: Line

What Is Your Exit Strategy? Three Options and Approaches

Situation: Every CEO needs an exit strategy, if only for the good of the business because the future is uncertain. In this case, the Founder CEO wants to reduce her involvement in the business over the next 3-5 years. Her company has an offering that addresses domestic and international concerns about global warming. The CEO seeks help evaluating options. What is your exit strategy?

Advice from the CEOs:

  • The CEO sees several strategic options. Which option is more likely to yield results in a timeline that fits a 3-5 year exit strategy – a major international push, a partnering strategy, or leveraging current business to gain additional sales and market share by tweaking the current product line?
  • International Strategy.
    • The company needs international partners, not just a sales presence. This will require substantial time and upfront commitment from the CEO, not just a salesperson.
    • Where and who are the predominant businesses in the international markets under consideration?
    • Can an international strategy be executed and produce fruit in time to complement the exit strategy?
  • Partnering.
    • Partner with a hardware company to increase visibility and usage.
    • Partner with some of the top prospects for an exit strategy.
  • Focusing on the Product Line.
    • Employ customer shadowing to better understand how customers currently use the software and what challenges they encounter or opportunities they see – involve marketing, and R&D, not just the sales team.
    • Reposition the current offering to take advantage of opportunities.
    • Simplify installation and implementation.
    • Look at the product development strategy. Can revenue be bumped or upgraded from renewal customers? Are there options for “deluxe” versions with a premium price for upgrades, that become the following year’s standard upgrades?
  • Gather the company’s team and work through the scenarios for these options. Once this is done, prioritize them based of timeliness and potential impact on the bottom line and company valuation.
  • Also look at the Board structure – are there gaps in regulatory or sales and marketing expertise. What about adding someone who has connections to a key customer base?

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How Are Your Relations with Your Bank? Seven Points

Situation: A CEO’s company is short of cash to make a scheduled payment against a line of credit. They have been notified that if the payment isn’t made, the bank will transfer cash from the company’s checking account to satisfy the payment. This would compromise their ability to meet payroll and pay vendors. How are your relations with your bank?

Advice from the CEOs:

  • What the company needs is time, so that they can pay down the line of credit from cash flow. It is best to compartmentalize any discomfort with this situation. Remember that any bank action generally takes time.
  • Advice from the company’s lawyer is that if they stop making deposits, the bank will notice and react negatively. Given that the current interest rate on the line is low, a negative reaction from the bank could lead to an increase in the rate.
  • The company has a bargaining chip. The bank does not want to show the company’s line as delinquent. If they admit that a delinquency exists, it puts them in a bad place.
  • Develop a contingency plan to guard against the company’s biggest risk – inability to make payroll. Assure that this can be covered.
  • Use checks paid by customers to move a portion of company assets to another bank.
  • Secure a new line of credit with another bank to cover credit needs, including salary coverage if the current bank acts adversely.
  • Assure that any conversations with the bank are documented in letters to the company’s contact at the bank.

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How Do You Fund Business Growth? Four Observations

Situation: A company is looking at options to fund growth. These include selling a stake in the company, bank financing, organic growth. or partnering with another company. There are trade-offs to each option. How do you fund business growth?

Advice from the CEOs:

  • There is a question that should be answered before talking about funding: what is the vision for the business?
    • Think about building the business that the founders want to run. What size company feels comfortable from an operational perspective? What does it look like?
    • Does the company have the right people and infrastructure to support planned growth? Are current direct reports capable of taking on additional projects and monitoring both current facilities and additional sites?
    • As the company grows, can the bottom line be increased as fast as the top line?
  • Commit the 5-year plan to paper. Before deciding how the company will grow, determine the vision, the growth rate to support that vision, the organization required, and the strategic plan to get there.
  • The funding decision is an investment decision. What’s the return for a multi-million-dollar investment?  What incremental revenue and earnings will it produce?
    • Estimate how much revenue the investment will generate in 5 years. At the current gross margin, what is the incremental gross margin per year.
    • Given this estimate, what is the projected EBITDA? Does the annual EBITDA represent a reasonable rate of return on the investment?
    • The investment ROI must be known – both from the company’s perspective and for any lender or partner who invests in the planned expansion.
  • How high do the company’s relationships extend in key client companies? Do client upper management realize how critical the company is to them?
    • If the answer is not high enough, develop these relationships. This could open new funding opportunities.
    • For example, if the CEO knows the right people at a key customer, let them know that the company may want to build a facility near them. The customer may be interested in partnering with the company to finance the facility.
    • A multi-million-dollar joint venture plant investment is a modest investment to a large customer if it gains them a strategic advantage.

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How Do You Evaluate an Acquisition Opportunity? Four Issues

Situation: A company is considering purchasing a line from another company to complement its existing product line. They would split commissions with the current owner, and gain an additional employee with knowledge of the products to be acquired. The purchase would add to the company’s offering, as well as rights to additional products. The CEO sees this as a low risk move. How do you evaluate an acquisition opportunity?

Advice from the CEOs:

  • In evaluating a commission split opportunity, will the commissions that you would receive exceed the cost of both the additional employee which you will add, plus the support that it will require to maintain the new business? Do the new commissions cover the anticipated costs, plus a reasonable profit?
  • Have you vetted the numbers to demonstrate that this purchase provides a suitable return on investment vs. other potential investments that you could make? Is the marginal revenue that you will receive greater than the marginal cost that you will bear? Is the ROI of the new line greater than your cost of capital? If not, what can you do to improve the return?
  • Looking at your current operations, do you have your existing shop in order? Have you calculated the metrics that will allow you to understand, where you’ve been, where you are, and which provide a clear vision of where you want to go? If not, the question is whether you are ready to take on another line.
  • The bottom line question is – how do you know that this acquisition is the best use of your funds?

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How Do You Generate Scalable Manufacturing? Four Suggestions

Situation: A company has built a strong prototype line capable of handling projected volume for the near-term as they scale up production. Their long-term plan is a fabless model through manufacturing partners. They have solid IP counsel and protection. What are the most critical elements of scale-up? How do you generate scalable manufacturing?

Advice from the CEOs:

  • The answer will depend on the product strategy, if the near-term focus is on quick tactical wins.
  • The most critical elements of the scale-up will be:
    • The planned speed of the scale-up. A tactical approach, which will make limited demands on production near-term supports a prudent scale-up plan.
    • Having the right business development talent to generate quick wins with smaller volume opportunities to feed the scale-up.
    • When you are ready for larger volume – and your scale-up capacity can support this – hire an experienced sales professional who is known in the industry and who can bring you some relatively quick higher volume contracts.
  • Que near-term contracts according to the sales cycle.
    • Design cycle – build awareness of your capacity among significant market players and focus on quick turn-around to respond to their demand.
    • Qualification cycle will be longer, perhaps 6 months. As your brand awareness builds push for qualification orders which will be larger, but still within near-term capacity.
  • Focus business development efforts on building strong awareness across your target companies. Some companies tend to limit early knowledge of vendor capabilities between their divisions until they have confidence in the vendor’s ability to deliver. Optimize customer awareness by:
    • Cultivating business partners who can facilitate a high-level approach within your target customer companies.
    • Start creating a small forum of industry savvy individuals who can become your champions. Leverage this forum to spread your message and bring you opportunities.

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