Exit Planning in the 2012 Deal Market: Value Added Commitment

   “It’s not whether you get knocked down … it’s whether you get up”

  Vince Lombardi on Commitment

We know it’s been a rough and tough market to get deals done:  

• Values are down
• Buyers are interested, but worried
• Deal terms and conditions are different in today’s “new normal”
•  Financing remains uncertain, though improving

Yet, deals are getting done.  In the past 12-months, we’ve successfully settled 3 transactions (not bragging, just letting you know we’re persistent and active!). 

A recent survey (*) of the middle market “deal makers (i.e., buyers)” regarding their 2012 plans had some interesting findings:  

• 86% planned to complete 0-3 deals
• 79% planned to complete the same or more deals compared to 2011
• 51% reported that bank lending remains “tight’; 49% felt opportunities were improving
• 76% felt that the biggest challenge of getting a deal done was the purchase price (i.e., too pricey) and economic uncertainty
• The “hot markets” are technology, financial services and healthcare that combined represent 55% of the buyers interest
• 51% expect to finance their deals with a combination of cash, equity (stock of the buyer) and debt (bank, seller)

In our experience: the deal market is improving -- call it bubbling, but not yet boiling.  

So in a tough market, what’s the plan?  What are you going to do to add value to your company?  We’re all adjusting to the “new normal” as it is now called. To be honest, in our role as exit planning advisors, there is no magic plan; there are no new tricks.  It’s about remembering and emphasizing the good habits you had in the beginning that, over time, might be forgotten or overlooked.  Here is your opportunity to restart your business with a goal to increase the business value and prepare for your “exit”.  It’s basic business 101:

• Define your “brand”: narrow the market if needed, expand if there is an opportunity.  Revisit, reset, repeat as needed
• Diversify your customer base: right or wrong, buyers are “squeamish” when a handful of customers represent a large part of the business,
•  Customer contracts – are they “assignable”? Is that in writing?
•  Profit margins – “run your business” to improve (not minimize) profit margins.  The “profit is good enough” attitude needs to go away.  Even if you’re in a commoditized industry, you don’t have to be the cheapest in town (note:  revisit #1 above -- brand does matter)
• Recurring revenue/cash flow – if you have an opportunity to convert from single billing to repetitive monthly cash flow, consider making the change (e.g., HVAC contractors who have both preventive maintenance contracts vs. time and material). Buyers like balanced, recurring revenue streams even when it’s the same dollars
• Refresh, recharge the marketing look.  You’ve heard the expression you only get one time to make your first impression … website, tweets, social media advertising.  It’s predicted that by the end of 2012, 60% of the Fortune 500 companies will actively engage customers via Facebook marketing efforts.  Where are you?  What’s it look like?
• Management team – we get it. You’re the decision maker about everything.  Loosen the reins a little.  Your key people are most likely staying with the new owner.  Give them the flexibility and authority to make decisions you‘ve been making.  Remember, you’re creating value for your company and key people are just that … valuable!
• Management compensation plans, incentive plan:  Critical to buyers, and to your successful exit, is the ability to retain key management.  Take a fresh look at various incentive plans you could use now to retain the key staff in the event of a change in ownership.
• Debt – credit lines and other forms of debt.  Do you use them just because they are convenient?  Or is the debt really needed to provide working capital? If not needed, make it go away. 

There you go. We hope we triggered some “Aha” moments for some.  We spend a lot of time with owners and their advisors helping them plan for a successful exit. As always, if we can help you, just give a call.     

           

 by Ed Davis, Partner

 

* The Deal magazine and Merrill DataSite

Year to Date Commercial Construction Contracts are Down

Commercial Construction contracts for future work through May 31, 2011 are down about 10% from this time in 2010 per McGraw Hill Construction.  More info http://tiny.cc/pzgb5. 

Lending Update in 2011

By John Gibson, Partner

We are hearing that banks say they have money and want to lend it but they can't find enough qualified borrowers. At the same time, borrowers who are looking for loans say their banks are just paying lip service, looking for a way to turn them down.

Who is right? In a way, both are.

Uncertainty and fear have produced cautious bankers. 2011 is a little better than 2010 and much better than 2009. Banks are tip-towing back in, but they are fearful. They are afraid for many reasons. Fear of the unknown. Fear of loss. Fear of federal and state regulators glaring over their shoulders and writing down loans. Even Fear of losing their jobs.

What can you do to improve your chances in this environment?

It's back to basics. Start with the 3 C's; Character, Credit, and Collateral. It takes all three legs for the stool to stand. You have one first impression to win over the banker. Don't give them an excuse to turn you down. You must have a complete loan package. If you don't it will be set aside and you lose critical momentum. Point out the positives and explain the negatives. Answer before asked. All loan proposals have negatives. Letting them know that you aware of yours, not trying to hide them and what you are doing to correct them scores big character points with the lender.

In short, be prepared, stay positive but realistic and don't forget the three C's.

What's Really Going On Poll

Welcome to our 1st Semi-Annual Harvest Associates ‘What’s Really Going On” survey.

There is a lot in the news recently about all the incentives and programs designed to benefit small business owners. So, like Ed Koch, the famous mayor of New York who always wanted to know “how am I doing”… we thought we would take an informal poll to see what was really going on.

Our goal is real simple…get serious, honest, unbiased input from those who are in the “hot seat”. We wanted the comments to be meaningful so we contacted people in different businesses and different markets. By the way, we aren’t concerned about political correctness and putting lipstick on anything. We just want to know “how are you doing?”

The question we asked was: What is the biggest challenge you and / or your clients have been dealing with this past year? What have you done to solve it?

We were going to do a list of the Top-10 items but really the responses really came down to four items.

Problem 1: Cash flow is very tight.

Problem 2: Making New Sales is Difficult

Problem 3: Planning and Strategy is very tricky right now.

The solutions we are hearing can be summarized as, manage cash, prospect and sell like big dogs, cautiously keep your eyes out for opportunity.

Details and representative comments follow.

Problem and Solution 1: Cash flow is very tight. There is no easy answer. The solution has been to carefully manage cash flow by focusing on payables, receivables, and reducing all non-essential expenses and costs.

Representative Comments:

Larry Ely, Professional Graphics Printing Co, Sales Manager
“…the biggest challenge will be controlling labor costs, managing cash flow and growing the business back to previous sales volume in a down market. The solutions are managing overtime costs, hawking our accounts receivable and working on creative marketing”

Michael Fisher, SITE Resources, Principal
“…our accounts receivable is a problem we haven’t solved but we’re doing a better job with timely billing and follow up…competition is causing us to lower fees and in some cases we just decide not to chase certain clients for work. We WILL NOT play the low-ball game and then go back to clients for extra billing. In some cases we have had to limit the scope of work we can do for a given fee. Lack of funding has always been a problem but much more so today. Clients just don’t have the available funds to pay for their “wish list”. More often, we are providing supplemental services in the middle of a job just to get the job done even though we don’t get paid for them”


Shiela Cox, Performance Horizons
“...The biggest challenge I’ve seen is maintaining profits in the face of declining revenues due to reduced demand for products/services coupled with downward price pressure.”

The best solution I’ve seen is:
**careful analysis of profitability by product, service, channel, and customer
**limiting or eliminating low profitable activities
**expanding or creating high profitable activities



Problem 2: Making new sales is difficult. Solutions include increasing marketing (although not always to success), providing extra services, and looking carefully at product mix and value of offerings.

Representative Comments:

Kay Rosburg, Dever Designs, VP
“…the biggest challenge has been the loss of clients and projects that were put on hold and replacing the work. No question, revenue stability is our challenge. Our solution…have not come up with one yet! Have spent WAAAY more on marketing in 2009 but didn’t get the results I hoped for. The reduced revenue has forced us to delay the capital expenditures and our salaries have been substantially reduced…across the board”

Dean D’Camera, D’Camera Group, Principal
“…we have spent the year transforming our approach and our process. ..we are bringing greater measurable value to our clients designed to manage total cost of risk for the mid-to-large size commercial insurance clients. A recent insurance study (RIMS) indicated that the total cost of risk insurance premiums represent 59% of the total cost. Our focus now is to work with clients to address 100% of the risk. We actually have trademarked our process."

Paula Worthing, PLDA Interiors, LEED, AP, Principal
“…the biggest challenge is too maintain our income…the economy is having a huge effect on our client’s ability to get the funds and lease procurements which of course filter down to us. We are trying to meet the challenge with a forward focus and creative marketing. We also are doing things to strength our in-house capabilities. Still, we need some luck!!

Carol Coughlin, President, Bottom Line Growth Strategies
“…Projecting revenue has been especially difficult for companies that have consulting projects. It’s hard to tell whether the ups and downs are cyclical or a pattern related to the overall economy. The past year was definitely unlike prior periods. For 2010, revenue projection will continue to be a big challenge. Some companies have hired business development people but are finding they don’t work for intangible service income like IT projects.”


Problem 3: Planning and Strategy is very tricky right now. While volumes have been written about this the response we heard in our words is, deal with it, do your best, and look for opportunities.

Representative Comments:

Jeff Whipple CPA, Mattos Pro Finishes, VP Finance
“…In two words the hardest thing we are dealing with is Risk Assessment - is it a time to be cautious or a time to be a risk taker to position yourself for the future? How do you sit down and really strategize the business especially when it comes down to longer term investments such as marketing programs or expansion?

We think that you have to be as consistent as you can be. If you were aggressive you still have to be somewhat aggressive; you can't do an about face and become ultra cautious since that would confuse both the market place and the employees.”


Michael Mercurio, Esq, Chair, Business and Real Estate, Offit Kurman
“…For my business (and for my clients), the biggest challenge is convincing clients that the world is not ending. This market place, though challenging, is replete with opportunities for business that are willing to take calculated risks….... grab market share, eliminate competitors, add effective product offerings, increase client loyalty as well as bootstrap into other opportunities. The best solution is for owners to listen to fellow entrepreneurial business owners who can provide real life wisdom as to what works….”

In summary - we are hearing loud and clear right now that it is important to manage cash, prospect and sell like big dogs, and to keep your eyes out for opportunity.

Watch for our mid-year poll in June. We are projecting a better market and perhaps even concerns about hiring again (we are optimists you know!). If you would like to participate, don’t wait for us to call…please contact us. We are small business junkies and would love to talk with you.

Thanks to those who responded to our 1st poll. Thanks a million.

http://www.harvestbusiness.com/

Risks of a Rapid Revenue Growth Strategy

I attended a fabulous presentation recently by Manny Skevofilax of Portal Finance http://www.portalfinancegroup.com/ titled, “Navigating the Risks of a Rapid Revenue Growth Strategy”.

His takeaways were:

Review your strategic plan on a monthly basis to ensure that you are achieving your goals. All goals must have a timeline and responsible party.

Be willing to make changes to your business model and plan. Track results. It is riskier to stay the same than to implement intelligent change. Continuously and forever improve.

Whenever possible use variable costs instead of fixed costs. This will allow your costs to drop rapidly if your revenues unexpectedly drop.

Make sure you have a rear view mirror, a dash board, and a windshield. The rear view mirror is your bookkeeper telling you the past. Your dashboard is your Controller telling you what is happening today. Your windshield is a CFO helping you look into the future.

Another great thought…

A company growing at 5-10% is like driving down a city road at 15 mile per hour. You have time to look around and adjust.

A company growing at 25-100% per year is like driving down that same city road at 100 miles per hour. You don’t have any time to look at anything. Make sure you have the right team and the right plan to go 100 miles per hour.

Two Laborers - A Short Story

A story:

Many years ago two hard working guys took jobs as laborers digging ditches. The first laborer worked hard 10 hours a day but never lifted his head up and looked around. 40 years later he was still a laborer.

Whereas the other guy also worked 10 hours a day but after a year or two he asked for and received training to learn how to lay brick. After working as a mason for 5 years he figured out how to oversee other men for the owner and became a foreman. Finally, he took a big chance and started his own masonry company.

Did he really work harder than his associate who 40 years later was still digging ditches 10 hours a day?


Now more than ever you need to both work hard and work smart. Make sure you have a way to grind out the work but also be keeping your head up, looking for opportunities. They are out there waiting for you (or your competitor).