As an investment banker in London 23 years ago I wish I knew The Portfolio Partnership (TPP)! I would have said to many clients – you’re not ready for sale. You’re not ready for prime time. You need to scale to the next level to ensure that you and your fellow shareholders will crystalize a reasonable reward for your life’s work. I’d have said, look up the team at TPP and invest in operational excellence that will drive your value over the next 2 years. At that point if you want to sell let’s talk because an exit will most likely be an attractive option for you.
The point being that so many companies come to market not ready for the sales process. The work I did in London selling businesses for a premium valuation (the ones that were ready) and failing to sell others, as well as numerous buy-side programs taught me the characteristics that buyers and investors cherish. These are classic issues that are relevant across sectors and across time. It inspired me to create the Saleability Test for entrepreneurs to give them visibility of value drivers that if addressed will deliver the strategic option of selling out even if you don’t. These drivers, if executed well, will drive the scaling of your business, to produce a stronger and safer company and a fun place to work. Sound good?
So over the last 23 years, here are the top 10 challenges that I’ve observed that cause value leakage and make you unattractive. Alongside them are some operational actions you could take to address them.
Website sounds like everyone else and/or your SEO rankings are nowhere: Revisit your positioning statement (that’s the boilerplate paragraph on your press releases). Does it define your unique positioning that you want to dominate and a credible reason supporting that superpower. Here is one I worked on earlier – MRSI Systems (a part of Mycronic Group) is the leading manufacturer of fully automated, high-speed, high-precision and flexible eutectic and epoxy die bonding systems. With 35+ years of industry experience and our worldwide local technical support team, we provide the most effective systems and assembly solutions for all packaging levels including chip-on-wafer (CoW), chip-on-carrier (CoC), PCB, and gold-box packaging. Drive your storytelling to support that positioning. Think about how you can reinforce that messaging in everything you do. As for SEO rankings the key here is quality and relevancy to your market. Ensure keywords are embedded in relevant content that is referenced by other people. Blogs, white papers, LinkedIn articles, presentations, books, video transcripts. Does your website make it easy for people to interact with you?
No one has heard of you in the industry. Industry peers don’t see you as a competitor. Journalists have no relationship with you: Buyers and investors want to see endorsements and recognition that you are a player in your sector. Gartner and analysts should be citing your products and services if your sector is covered (or the equivalent analyst for your sector). Being invisible is not safe. It undermines lead generation. It undermines the credibility of your solution. It takes a relentless commitment to generate content. Build an editorial calendar and synchronize with the editorial calendar of the major trade publications in your sector. Amplify your advertising budget by negotiating well placed articles alongside your advert.
I have no knowledge of my competitor’s margins: We call that flying blind. There is a surprising amount of public domain information on the web. Investing in a deep market mapping exercise will reveal the positioning, pricing, products, margins, market share and customer base of your major competitors. We are not saying copy the opposition but being aware allows for better decision making. I hate to use it again but AI will transform mapping exercises (blog coming soon).
Your revenue and profits are flat with little growth: The reality is that every business is either declining or growing. Get control of the levers of sales and profit growth and build key performance measures that demonstrate success. In practice we find most management teams don’t invest the time to develop sales processes that focus on a diagnostic sales approach to selling. Based on Jeff Thull’s excellent Diagnostic Selling model, we help build a complete sales process into businesses (primeresource.com). We find that
sales growth should never be a problem if you truly understand your customers. Launch profit initiatives on the back of your relaunched sales strategy. What could you do to improve margins? Look at product/service profitability. Understand breakeven points and how your costs are growing. Are non-core businesses holding you back? Are you addressing a skills gap that’s holding you back? Do you understand your competitive value proposition and how you can win? How could you change the sales process to play to your strengths?
Your top 3 customers account for 60% of your business: There are various flavors of this. One customer represents 25% of your business etc. I brought one of the largest independent IT contractors to market with great margins, positioning, sales team BUT AMEX represented 40% of their business at the time. My worst nightmare came to fruition during due diligence. AMEX fired the client for let’s say political reasons and a change of strategy. The buyer of my client walked away. Happy ending ensued as the client drove revenue aggressively over the next 18 months, with no one customer accounting for 5% of the business. We sold it 2 years after the first failure for an EBITDA multiple of 18.
Forecasts are never achieved: If you ever start a sales side mandate or an investment raise of capital, your ability to deliver on promised Profit & Loss and Cash Flow forecasts becomes unreasonably important. It talks to the credibility of management. It demonstrates the visibility of earnings or lack of visibility. No one wants to buy a problem. Getting better at forecasts requires constantly executing them and then working out what went wrong. What assumptions are constantly off? Practice makes perfect especially if post-mortems are done to understand their credibility.
The business is dependent on the owner: If you are the CEO and owner and you took a 3 month sabbatical, what would happen? Would customers miss you? Would the sales pipeline dry up? Would the business fall apart? Dependency can kill value. Dependency on a few key people, products or sectors. Look, if you are in the semiconductor market there are probably a few sectors you need to rely on like Infrastructure, Telecoms, or Aerospace. But dependency on one person can seriously reduce the value of a business, certainly in a private company setting. It’s always surprising how large a private company can scale relying on one charismatic leader but its not healthy. Build a quality management team of talented, supportive professionals around you not by throwing money at the problem but by selling a dream. Use that charisma that worked on clients to find people that carry you to the next level and create a safer environment.
The business is dependent on legacy products: Clearly in the world of technology the case studies abound of leaders missing the bend in the road. Big headlines like Nokia spotting the analog to digital transformation better than Motorola are well known. Bill Gates has admitted to not recognizing the significance of the internet. But in the Middle Market (Revenue $10m to $1 billion) it’s vital to keep revisiting the relevance of your product and service to the market. From the recent past we were able to support the transition of a high-tech product manufacturing business dependant on products built and engineered in the 90s to the launch of new products in 2017 that dominated the revenue line the next year ahead of a sale to a public company.
We’ve never really formalized staff development but we talk a good game: It’s tough finding a system that’s affordable to develop staff as you scale your business. Is it worth it? Won’t they just leave anyway? Well they will certainly leave if you don’t invest in them! Here is a little idea that worked for me in a $15m software business I was running (turning around) to create staff engagement. The book Mavericks at Work published in 2006 covered dozens of great innovative ideas and made a huge impression on me. Specifically one idea caught my imagination – the creation of Pixar University. Pixar was acquired by Walt Disney Company in Jan 2006 for $7.4 Bn. I became fascinated with the concept of creating a University inside much smaller companies. In Pixar’s case Randy Nelson was identified as the key person to drive the University. Pixar’s CEO Ed Catmull handed him an 8 page memo that highlighted the concept. The author of the memo – Walt Disney himself had penned it in 1935 which had created Disney Art School which acted as the catalyst for Disney animation. It was that concept that inspired me between 2007 and 2010 to implement the University Concept in two software businesses. How I did it is captured here.
We run basic financial management packs here that are available about 10 days after the month end: That will be a problem if you ever launch a sales process. What get’s measured gets done. Build a management information pack that a public company would be proud of and publish it with an insightful narrative no later than 7 days after the month end. Identify the key performance indicators that drive profits and cash and relentlessly measure them, assign them to top managers to control and reward performance improvements. KPIs can and should include lead generation stats, pipeline quality, product quality metrics, customer service levels, inventory turns, AR days, AP days, IT support tickets, warranty claims, cash generation %, GM%, EBITDA %. Use trailing 12 graphs. Track order book, backlogs, over time. Today’s poor performance started a long time ago perhaps years if your sales cycle is long.
Let me know if these were helpful. Ian@TPPBoston.com
TPP scales companies through operational excellence and through acquisitions. Think of us as hands-on Operating Partners. It’s fractional corporate development management through the lens of an operator.