The Building Business Value newsletter has one purpose⎯to assist midmarket business leaders in their never-ending quest to build better companies. Whether you are the CEO of your own company, a senior manager of a business unit, or a leader in a company that serves those in the midmarket, you will find something in each newsletter to help you serve your stakeholders. Each month we will cover a variety of topics, all focused on leading in the midmarket.
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Five More Mistakes to Avoid Making If You Want to Build Superpremium Value
Five Crazy Things CEOs Do
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We continue our list of the craziest things CEOs do and the negative impact these things can have on building value. As a quick review, most companies sell at subpar or par value, meaning that their ultimate price tag is somewhere between three to five times EBITDA (earnings before interest, taxes, depreciation, and amortization). Poorly run companies sell for a smaller multiple, while companies that are run about as well as their average competitors might go for four or five times their net earnings. But just as superpremium ice creams command a higher price in the marketplace, some companies sell for a superpremium of nine to ten times EBITDA. It's like the difference between generic ice cream and Häagen-Dazs.
So the questions are these: Why do some companies command that superpremium price while others don't? And if you are a C-level executive of a $10 million to $100 million enterprise, what do you need to be doing right now to prepare your business for an exit at a superpremium price?
And just as important, what do you need to stop doing?
Here are five more mistakes businesses make that practically ensure subpar valuations when the founders or the C-level executives are ready to exit. Keep in mind, building business value should be the main goal of every leadership team and is not just associated with an exit strategy. So, since building value is your number-one priority, how many of these issues apply to your business?
11. You are mishandling the communications of the corporate
strategy.
You've got a new mission and direction as a result of your most recent off-site meeting. Great! Now how are you going to get the word out to your one thousand employees? Are you getting posters designed to illustrate your new mission, vision, or purpose? Are you stuffing paycheck envelopes with a document listing the five new goals of the organization? Most midmarket companies don't take these actions. If they establish a vision, the CEO fails to share it with others.
Other times, a CEO does try to get the word out but does so in a way that the Reverend Bill Hybels of Willow Creek Community Church calls the "Mt. Sinai approach" because Moses came down from Mt. Sinai with the two tablets denoting the Ten Commandments and demanded that they be followed. That top-down approach might have worked for Moses, but it doesn't work in today's business climate.
Consider this from my upbringing on a farm. Cow paths make sense to cows. From a human perspective, the particular route cows choose for themselves may make no sense. But those routes make enormous sense to the cows themselves. People within organizations often operate in much the same way. They get work done by going to certain other people in the organization, regardless of what the organizational chart might mandate. If you try to impose a new structure from above without getting appropriate buy-in, you'll end up with two organizations-the one on paper and the real one. Executives in midrange companies often don't take the time to excite, coach, cajole, and mentor their stakeholders and their employees with regard to new structures, new directions, or new visions. They fail to do so at their peril.
12. Hey, we're making money!
Often managers focus solely on operational effectiveness instead of thinking about the future. The most effective middle-market leadership teams develop two paths for strategy. One path represents the present, and that's operational effectiveness. The other path represents the future-value creation. Losing sight of the future and focusing only on making an operation more effective now can leave a company vulnerable to major shifts in the marketplace. If your idea of long-range planning covers only the next ninety days, then this might be an issue in your organization.
13. You are not an S corporation.
If you're formed as an S corporation, you'll have options when it comes time for your exit. C corporations and limited liability company (LLC) formations may be the right formation for your company, but my preference is still Subchapter S. If a publicly traded company (Public) buys a private company (Private), Public can write off everything that isn't cash as goodwill. Both organizations can make what the IRS calls a 338(h) (10) election. This is a fancy term you may want to study because it could save you big bucks. In essence, the election allows Private to treat the sale of its stock as a sale of assets, paying tax only on the asset gain. Public, therefore, gets a stepped-up basis in the assets of Private at a no-tax cost of the purchase and can roll part of that tax break into the premium purchase price it can pay for Private if it chooses. Make sure your legal and accounting teams walk you through this because the benefits and burdens of a Section 338 may seriously affect the economics of a deal and may change your tax situation. The bottom line is that being structured as a Subchapter S gives you flexibility in structuring the best stock, asset, cash, or 338(h)(10) option for your company.
14. You only ask for money when you need it.
A company is only as strong as its banking relationships. A great banking relationship increases value by giving a company the flexibility to use cash when it most needs it. The worst time to ask for money, of course, is when you need it. You should sit down with your bankers monthly to tell them how great you're doing. You probably learned somewhere along the line that it is never a good idea to surprise your boss. Bankers are similar-they don't like surprises either. If they feel they understand the rhythm of your business, bankers are enticed to come to you with better deals, increase your credit line, and give you banking covenants you can work with.
15. Blood is thicker than water, but not necessarily what the com-
pany needs.
A family business can often be an opportunity to find employment for otherwise unemployable relatives. Managers of such companies tend to promote individuals they like or to whom they are related instead of finding individuals who are truly suited for the job being fillled. This is not a good way to run a company. In his book The Five Temptations of a CEO, Patrick Lencioni says that when CEOs abdicate the responsibility of hiring, they ultimately lose track of their team. Family members in the company place a huge burden on everyone involved and make it nearly impossible to execute good business decisions. Sometimes those relatives need to be taken out of those jobs to create a team that acts like a group of qualified professionals.
I'll have five more mistakes to avoid in next month's newsletter.
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Seminar for Business Owners
PREPARING YOUR COMPANY FOR ACQUISITION IN A BEAR MARKET
May 21, 2009
Sponsored by:
The Bloom Group, LLC
The McLean Group
George Mason University, Mason Enterprise Center
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Using Advisory Board Sources of Wisdom and New Business
In the April 2009 issue of Fortune Small Business, Justin Martin wrote a great article on how advisory boards can give you firm a leg up. Well-led midmarket companies leverage their resources, including their boards of directors and boards of advisors. They use these business-savvy individuals as sources of wisdom and as sources of new business.
Similarly, John McBeth, a serial entrepreneur and CEO of Next Century, has a passion for what he calls a "worthy purpose." He keeps himself accountable by leaning on a top-notch board of advisors who aren't afraid to set him straight.
 Typical Midmarket Behavior
In contrast to this, too many small and midmarket companies tend toward boards of directors that consist of friends and family. Perhaps Uncle Joe loaned the company $100,000 ten years ago, so he still wants to run the show. But friends and family who may have been able to pony up necessary start-up funds back in the day are not capable of providing the outside accountability that experienced business leaders offer. Many middle-market companies struggle with governance. Entrepreneurs and C-level executives need someone to challenge them and offer the guidance and direction necessary for growth. Uncle Joe may have great fishing stories to share at the board meetings, but he cannot mentor the leadership team when tough, challenging business decisions must be made.
Beware of "Good Intentions"
There are other ways to fail to take maximum advantage of your board of directors. A company might have board members with personal agendas that lack transparency. Or a board member might try to buy the company outside the stated strategy of the executive team and the other members of the board. Leaders might isolate and disregard board members whose points of view differ from their own. That's why board diversity is extremely useful. Boards not only provide insight, advice, and support to the CEO, their members should have strong industry and financial backgrounds to add real value to CEO decisions. Board members not aligned with the direction of the company are harmful; those with axes to grind or agendas to meet must be culled. Outside directors give business leaders the opportunity to close the books every quarter, position their companies for the future, talk about plans and leadership development, and generally guide the company with the help of other experienced leaders.
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As a business operator, I have been in a position to lead a company during troubled times. Concerns over the direction of the company, sleepless nights worrying about debt and cash flow, high anxiety over closing a deal or a transaction⎯the challenges seem endless. But I've also experienced the highs of leadership⎯the real joy of meeting client needs, the fulfillment of shaping a team, and the satisfaction of watching a vision become reality. As tough as it can be, there is really nothing quite like being a leader in the midmarket.
It is my sincere desire that this newsletter will support leaders in the midmarket as they navigate their way to building stronger, more valuable companies. I welcome your comments.
Sincerely,
Marty
Martin O'Neill
Corsum Consulting, LLC |
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Marty O'Neill
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Marty O'Neill founded Corsum Consulting, which focuses on one goal: helping companies build business value. He is a frequent speaker and consultant on leadership, corporate culture and building business value and is the author of Building Business Value (Third Bridge Press) and the co-author of Act Like an Owner (Wiley). As a business operator, Marty started and sold a company, positioned another for an LBO, and helped a third sell for a significant premium. Marty lives on the Magothy River in Maryland with his wife and three children.
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Act Like an Owner Owner: Building an Ownership Culture
by Martin O'Neill (Wiley)
Hardcover
List Price:
$39.95
Our Price:
$24.53
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Building Business Value: How to Command a Premium Price for Your Midsized Company
by Martin O'Neill (Third Bridge Press)
Hardcover
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$22.95
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$15.96
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