Tag Archives: Return

How Do you Evaluate a New Opportunity? Five Views

Situation: A CEO has been approached about new opportunity. The company has been through some hard times, and the opportunity offers access to quick cash which would remedy the company’s debt exposure. A downside is that the deal would erode the company’s brand exposure because it would operate under another brand. How do you evaluate a new opportunity?

Advice from the CEOs:

  • Carefully evaluate how this opportunity will impact current operations.
    • What percent of time and effort will the opportunity require? Will it compromise the company’s current operations?
    • The appeal is access to quick cash. However, if the bottom line isn’t sufficient to meet the company’s needs, walk away.
    • Given that the project would be under another brand, why not spend the time and resources growing the company’s brand?
  • Is there anything that could make the opportunity more appealing?
    • See if the other company is open to offering a piece of the business after a period of commitment.
    • Management control. Assure that the company’s principals would have the autonomy to make it work.
    • The ability to keep the company’s name visible and prominently cited in all joint projects.
  • Look at this opportunity the same way that the company evaluates other opportunities.
    • Opportunity to build brand presence.
    • Assure that the proposed project meets the company’s current rates of return, or if not at least the current dollar return per project.
  • Is this a way to get into larger projects more quickly with reduced risk? If so, negotiate this into the deal.
  • Bottom line:
    • The company is emerging from hard times nicely.
    • The company is building a strong brand and reputation in its target geography.
    • Stay the course and trust in the company’s abilities.
    • Take on projects from this new opportunity only if they help build the company’s brand and reputation with less risk than is currently carried.
    • There is no reason to entertain this opportunity if it reduces the company’s brand equity and/or carries the same or more risk than the company’s current project mix.

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How Do You Optimize the Business Model? Four Suggestions

Situation: A company works on a project basis, and the CEO is concerned that the return per project is too low. She is looking for ways to boost the return per project without substantially increasing project risk. How do you optimize the business model?

Advice from the CEOs:

  • What are the risks and potential upsides surrounding the projects?
    • The principal risk is long-term liability, connected with residual liability following project completion.
    • This risk can be mitigated by purchasing a wrap policy; however, this can cut into the profit generated by the project.
    • It is possible to build scale more quickly with larger projects. The percentage return may be lower, but the dollars can be higher.
  • What are the principal components of the company’s time risk?
    • Higher cost of money and greater exposure to fluctuations in prices and interest rates over the project period.
    • This risk can be mitigated using financial derivatives particularly over longer-term projects.
  • How broad is the company’s geographical scope?
    • Currently customers are within a 30-mile radius of the company’s office primarily because company personnel are frequently at the client’s site.
    • This area will broaden as the company’s reputation becomes known.
    • Consider the creation of branch offices to extend the breadth of the company’s service area.
  • What are the key variables that the company faces completing projects?
    • Payment is not received under current contracts until a project is completed.
    • This can be mitigated by creating milestones with payments due at the completion of each milestone.
    • It may be worthwhile sacrificing a level of project profit in return for more frequent payments to boost the company’s cash flow.

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How Do You Finance Site Expansion? Three Recommendations

Situation: A company wants to expand to new sites. It’s business model relies on high levels of customer service, with high customer retention and efficiency. The challenge is that the model is low margin, because only a few employees are billable. How do you finance site expansion?

Advice from the CEOs:

  • To evaluate profitability and start-up time create a low-cost prototype site to test the model and collect data.
    • Develop a template with a high likelihood of survival over the first 6-12 months when investment will outweigh income.
    • Consider a SWAT resource team to accelerate early success for new sites.
  • Key areas of focus:
    • Understand the value of the business. For example, is it:
      • Improving client operational efficiency?
      • Building the team?
      • Response time to client needs?
    • From experience define the most important variables for success:
      • What is front office, what is back office?
      • How important are the dynamics between key people? Is it better to hire key people as the number of sites expands or grow them internally.
      • Determine what is being sold, with a reasonable prospect of return – methodology or services?
  • Consider a franchise model. The model must show a reasonable return to the prospective owner, including the cost of franchise purchase and start-up costs.
    • As franchisor, it is important to know what this model looks like to a prospective franchisee; however, take care not to create a representation to which would be bind the franchisor as a promise.
    • A successful franchise should have a branded presence.
    • Offer potential franchisees a guarantee: if after one year the net costs to establish and maintain the site are below a certain level, the franchisor will credit the difference between their estimate and the actual net costs in Year 2.
    • MacDonald’s does not allow franchisees to choose store locations. Similarly, the franchisor can choose locations, determine the availability of key talent, select anchor clients, and develop a reasonable estimate of the value of a new franchise before selling it. This increase the value for the franchise sale and creates a more predictable ROI for new franchisees.

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How Do You Optimize a Financing Pitch? Seven Suggestions

Situation: A company is drafting a pitch for their next round of funding. They want to reach both current and a new set of investors and highlight the improvements that they’ve made since their last round of funding. How do you optimize a financing pitch?

Advice from the CEOs:

  • Work on a quick demo of the site. This is critical for a software company. The site must clearly and quickly show what differentiates you.
  • When you sit down with potential investors, start your pitch with a catchy statement, e.g., “We’ve all heard about ‘pay it forwards’. I want to talk to you about ‘Job-It Forward’.”
  • Start the presentation with an overview and a simple illustrative explanation so that the audience instantly gets what you are doing. For example, “we’re about generating social capital and here’s an example of how we do this.”
  • Be careful not to drown your audience in detail. Limit yourself to 3 bullets per page. Use graphics rather than words as much as possible. Most people can only absorb a limited amount of verbal information, but they remember pictures.
  • If you’ve already started talking to potential investors, what are your results? What feedback have you received to date? Analyze this and adjust your presentation and pitch accordingly.
  • Can you show a potential funder ROI? For example, if you give us $X, we will generate $Y in terms of return. You want to demonstrate IMPACT! Those who will support you want to see the advantage of investing in you vs. other options available to them.
  • Include a slide showing sources and uses of money spent to date. Show how you will use the money that you wish to raise.

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How Does a B2B Company Learn B2C? Three Lessons

Interview with Ross Johnston, CEO, DiskCorp

Situation: A well-established B2B company is starting to work with B2C retailers. It is finding that both the internal and external perspectives of B2C companies are very different. How does a B2B company work differently with B2C companies?

Advice from Ross Johnston:

  • In the OEM market, manufacturers control all warranty obligations, have tightly controlled procedures for handling and tracking returned goods and are very focused on product quality and operational efficiency.
  • Leading B2C retailers have a very different perspective. Their focus is on the customer: on encouraging great customer experience and repeat customer visits. Products are sold to big box retailers without warranty, and the retailers provide their own warranty programs. This results in far more returns than for OEMs. Further, product is returned for a wide variety of reasons from failure to work as advertised to the customer simply changing their mind. There is also a wide range in how returned products are handled – from throwing them in the dumpster to returning undamaged items to stock, and few records are kept.
  • Our challenge is to help retailer and big box customers design, develop and implement recycling and cost recovery systems in our market. This means both developing procedures for the retailers and new channels to cost recovery markets.
    • First, they need processes to triage returned goods into broad categories: new or near new goods condition for resale; goods which require refurbishing or recycling; and goods for environmentally appropriate disposal.
    • Second, we have created a software tracking solution – a reverse logistics program – to track returned goods from receipt to their eventual disposition with full end-to-end P&L analysis. This can yield up to a 45% gross margin on returned goods which is shared with the retailer.
    • We develop additional processes that vary by retailer to help them handle the flow of returned goods.
    • We want to provide the retailer with an end-to-end operational platform that turns a cost center into a profit center and reduces long-term liability exposure that accompanies landfill disposal.

You can contact Ross Johnston at [email protected]

Key Words: B2B, B2C, OEM, Warranty, Procedures, Focus, Product, Customer, Return, Refurbish, Disposal, Process, Tracking

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How Do You Fire a Founder? Three Suggestions

Situation: A founder of a company also heads business development. This person had no prior experience in business development, and no other skills to offer the business. Over the last two years he has generated only a fraction of his salary in new or additional business. The CEO has concluded that it is time to hire a business development professional; however, the Board is reluctant to act. What are the steps that you would take to let a founder go?

Advice from the CEOs:

  • Because the individual in question is an owner, the situation is delicate. Staff relationships are involved as well as morale. Therefore, it is essential that you create a convincing case for replacing the individual and show that this is the best for the business. Don’t rush the process. However, once you’ve built a solid case for what needs to be done, act expeditiously.
  • Start by evaluating and documenting what the individual is doing to develop new business.
    • Count customer connects per day. Set a baseline expectation and measure against this.
    • Look at the pipeline. Historically what does your new business funnel look like – contacts, presentations, evaluations, closes. How does this individual’s pipeline stack up?
    • What are his business advancement and close ratios? How do these compare with industry standards?
  • For the individual: Demonstrate that his performance is penalizing his own return as an owner. Create a spreadsheet that shows:
    • The current situation, and his return as a shareholder from current results, versus
    • Hiring two effective business development people, and how this could change his return.
    • Show the individual a graceful way out – one that works for him.
  • For the Board: if the current direction is negative, create a model that shows your current direction and the break even implications. Present this analysis to the Board to show that the company needs a change.

Key Words: Business Development, Founder, Principal, Experience, Performance, Replace, Document, Pipeline, Return, Model, Trend

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