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 finish 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?
21. You are owned by your customers.
Many midrange businesses depend on a single customer or a small (less than five) group of customers for the majority of their revenue. A lack of diversity in one's customer base hurts at valuation time. What if one of those customers fires you? Where would you be then? Along the same lines, some companies fail to manage their legacy products and never succeed at migrating their customers to new or next-generation products. The challenge is to balance diversity and focus with the objective to minimize your overexposure to one market.
22. You are still thinking small.
Recently, a company was considering the purchase of a second business that would double its size. The founder of the target company wanted to retire, and it was extremely important to him to find a home for his staff. The work of the two companies was compatible, and the target company's owner was ready to take the deal. The deal represented a big risk for the buyer, though, not just financially but also in terms of his thought process. Excellence and comfort are usually enemies, and the owner of the acquiring company had to expand his thinking to accommodate a new enterprise that was double the size of his former one. Making this leap is not easy, and postdeal integration doesn't always get done. Take a look at AOL and Time Warner, Chrysler and Mercedes, or going back further in time, General Motors and Ross Perot's Electronic Data Systems. After an acquisition, it shouldn't be just one plus one equals two. It ought to be one plus one equals three-or more. A study done by the audit and tax consulting firm KPMG in 2001 indicated that in 83 percent of the deals they examined, the postacquisition value of the acquiring company didn't rise at all, and value degradation sometimes occurred when two companies were put together. Mercer Consulting published another report in 2001 indicating that 50 percent of merger and acquisition deals actually reduced the combined value. On the other hand, a Manufacturers Alliance study in 1999 suggests that CEOs consider only 11 percent of the deals they've done to be failures. Business owners must have the courage to step up and make a strategic acquisition when appropriate, and they also need the skills to integrate the two companies after the deal has closed.
23. You're undercapitalized or overcapitalized.
For the most part, overcapitalization took place during the dotcom era. For example, a fiber company in Dallas had $50 million in venture money but never earned higher than $8 or $10 million in revenues and never made money. You should have seen its plush offices, though. This was in the era when companies routinely spent millions of dollars on image advertising during the Super Bowl and $500 a day on fresh fruit for their staffs. When the fiber company went out of business, it vacated some awfully nice offices. If you're a sports fan, you may remember PSINet. It was the hottest Internet service provider during the dot-com era and even purchased the naming rights for the NFL stadium in Baltimore. Despite growing like crazy and being very well capitalized, the company was never profitable. It was a popular stock with analysts because of its rapid revenue growth and aggressive expansion plans, but by 2000, after spending money like drunken sailors, PSINet began to struggle. The company lost more than $5 billion in 2000 despite having almost doubled its annual revenues to $995 million. By the middle of 2001 it had built a debt of $3.5 billion and called it quits. The opposite side of the coin is undercapitalization. It's "business school 101" to know that an undercapitalized company is doomed to fail. But it happens all the time. Midmarket companies can find all sorts of ways to capitalize growth. They can leverage traditional banking relationships and turn to asset-based lenders. They can also create new channels and get their partners to capitalize their growth. One fast-growing consulting firm paid its employees a month in arrears. This took great pressure off its cash flow and allowed the company to expand into new markets.
24. You have no ability to scale.
It's ironic-few people plan to fail, but even fewer plan to succeed. Companies have great ideas for success but they never ask, "What if this goes well? What infrastructure will we need? What about collateral for the sales force? What kind of credit line will we need?" Companies need to be able to scale processes, people, technology, the product or service they offer, and methods of delivery. They may have beautiful numbers in their proforma financial statements, but what happens when those numbers don't turn out to be accurate? In the 1950s, Leonard Wibberley wrote a novel called The Mouse That Roared, which later became a Peter Sellers movie. The premise is that a small country in Europe, the Grand Duchy of Fenwick, invaded the United States expecting to lose the war and receive generous foreign aid to rebuild. Unfortunately for Grand Fenwick, it won. Now what? How do you keep success from turning into catastrophe? 25. You fail to reinvent.
Tom Peters once said that we all have to "eat change for breakfast." The only constant in the business world is continuous change, and yet many companies try to live in the old world and play by the rules that might have been in effect a decade or more ago. This just doesn't work. Have you ever tried to impose a hierarchical corporate structure on employees who are part of the demographic group referred to as "millennials" or "generation Y"? It's not going to work. A generation ago, employee attitudes might have been "We're going to win one for the Gipper," and "We'll stay up all night, if that's what it takes to secure the victory." Today's workers say, "Forget that. I just want to win one for myself." Any company trying to survive under the old model is destined for disappointment and heartache. Another example of this sort of failure is when a non-techsavvy CEO says, "We don't need to be on Facebook or YouTube or MySpace. I don't even know anybody who goes on those places, aside from my kids." You know who goes on those places? Your customers do. Failing to keep abreast of changes that affect your business can set your company on the road to disaster. |
| Are You Working On the Business or In the Business? |
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Most midmarket CEOs spend too much time on the details, like the subtleties of new benefits package, instead of looking at the bigger questions of "Where are we now?" and "Where do we want to go?" They "stay in the noise."
Instead, CEOs should be asking themselves what drives value in their company. They need to ask themselves if they are working on the business or in the business. I believe the first time I came across this concept was in the "E-Myth" by Michael Gerber and most recently in an article by Jay Ebben in Inc Magazine.
If leaders spend most of their time in the business, they are part of the problem. They should be asking themselves what they would be doing differently if there were a stock exchange for midmarket privately held companies. Most entrepreneurs are good at operating businesses-they're good at what they do. They know they need to make money, to satisfy customers, and to keep their employees happy. But do they know whether there will be a future for their products and services? Are they targeting the right market segments? Can they repeat what they've done in the past but on a larger scale? Anyone with some financial savvy will be primarily interested in the trailing twelve months. But the future is the sizzle. To build long term business value, it's not enough to have your rear view mirror polished to a shine.
Are you working on the business or in the business? | |
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 |
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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Building Business Value: How to Command a Premium Price for Your Midsized Company
by Martin O'Neill (Third Bridge Press)
Hardcover 
List Price: $22.95
Our Price: $15.96 Buy Now
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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 Buy Now
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