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#4 Critical Functions (pt. 2)
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Your Ultimate Acquisition Matrix
Using an Acquisition Rating Matrix to Save Time and Arguments
I am going to pass on a valuable secret acquisition weapon to you! While you don’t see me issuing press releases and publicly announcing who is buying who, I’ve been involved in scores of confidential buy/sell transactions over the past two decades. I love matching family companies with other family companies and making great culture fits where everyone makes money and is happy!
What I came to realize was that too many owners were wasting needless hours contemplating, studying and even structuring and massaging acquisitions that simply were not good fits. Their desk was being cluttered by every Tom, Dick or Harry broker sending out multiple solicitations, so all of sudden growing owners were faced with scores of opportunities. The families would spend hours talking about deals, going around in circles. I knew I needed to do something to get them clear and unstuck.
I’ve been a believer in rating matrixes, using them in credit and project prioritization for years. So my solution to get them unstuck was to help each family create a rating matrix to filter acquisitions. Since each company’s sweet spot and strategy is different, and strategy is fine-tuned and even redirected over time, each matrix is customized to exactly match what the company truly needs to catapult to the next level. And best of all, you don’t need me to do it! Here’s how…
First, in general, the components of the matrix should include preference in geography, sectors/specialties, size, business core values/culture fit, physical assets (with specifics), technology, and people assets (with specifics). You can add or subtract, making the matrix fit your exact needs.
The act of purposefully creating the matrix as a family team allows for meaningful dialogue and unveiling of differing views and preferences. The team approach gets those differences out on the table where they can be dealt with effectively and consensus and agreement built. It’s far better for these discussions to happen in a board room building the matrix prior to any emotional pressure of an eminent acquisition while everyone still has cool heads!
For example, I was working with a family where suddenly a mixed wholesale and retail opportunity had presented itself through a broker. This family had sold off some retail years before so was totally out of that sector. While half the family loved the idea of a retail presence, the other half was not thrilled with going back into a situation with so many employees again. This raised healthy discussion over the family’s objectives and different ways their volume and profit potentials could be achieved.
As the family gains clarity, I’m a stickler for including some sort of Return on Assets (ROA) component. Any acquisition should incrementally add to ROA and not dilute. I’m not opposed to buying distressed situations, but the forecast must show the end result increases the overall ROA on the combined operation. If the acquisition lowers the ROA, the acquisition will effectively lower the overall value of the family’s holdings, making their pre-acquisition assets LESS valuable than before the purchase. Obviously, this defeats the objective of creating family wealth!
It’s a good idea once the family has created the matrix to have trusted outside eyes review it before putting it into active use. This can be your outside CPA, a trusted banker, myself, or other professional you trust.
In the case I mentioned with the retail discussion, the broker had taken super aggressive license with add-backs. In fact, as we reviewed the package, an expert on my team said he would be embarrassed to present a package with add-backs listed by the broker. So, as we reviewed the retail assets for the family, the true cash flow was far less than what had been represented. (By the way, we never do that in a Meridian package. We believe in being forthright since most of the people we sell to remain our clients over the years.)
I mention this situation with the crazy aggressive add-backs because you must be really careful with how you rate opportunities if using a “doctored up” solicitation package as your basis. But at least using your matrix, you’ll have a preliminary score. Your matrix score may later be lowered (or sometimes increased) during your due diligence process. The important point is your matrix allows each opportunity to be scored and compared objectively, so your decision making will come from an empirical data system, not just emotion and gut feel.
With the matrix in place, and your 1-5 rating system, each opportunity should be scored by at least two people (CEO and CFO are typical). If only one person scores, you miss the valuable dialogue. Some families have a 2-3 member team do initial scoring, and then based on a minimum threshold, involve more family owners only if a potential acquisition meets the minimum threshold score. This two-tier system has proved useful and helpful to families.
I often get questions about weighting the criteria. I like using a weighting system for your criteria based on your family preferences. Again, use the team to create your weighting factors so that everyone is “bought in” to the methodology because they created it. That stops most arguments before they begin (not that any family has squabbles – LOL!)
If you have questions about creating your own Acquisition Matrix, please feel free to call me at 817-594-0546. In the meantime, hoping you make this your best year ever
Blueprint for Mega Growth Success
There is an insatiable thirst in family businesses for size. For decades, small family companies dominated markets, providing outstanding service to local customers with a high degree of intimacy and relationship. But now, industry media is filled with merger announcements. My own company is helping many of these companies buy, sell and merge. Some previously small family companies are morphing into regional and national powerhouses. Will they succeed? What can be learned about mega growth success and failure from other businesses?
In groundbreaking research just released, David Thomson, a former technology executive and management consultant provided the blueprint for mega growth success by studying what it takes to go from small company start-up to billion-dollar company. He created the blueprint through intense number crunching analysis of 7,454 American companies that went public after 1980. The findings have profound implications for any family company bent on mega growth success.
Out of 7,454 companies studies by Thomson, 25% went out of business, and only a mere 387 (5%) of them reached the billion-dollar revenue mark. Remarkably, those same 5% accounted for 50% of the job count for the entire group. These are the blueprint companies. And for the few that rise to the top, success has its rewards. Stock in these high growth companies outpaced the S&P 500 six-fold in just a five-year period. So what does it take? Through careful study, Thomson identified seven drivers of mega growth success.
1. Create and Sustain a Breakthrough Value Proposition. In an industry where fuel is fuel, how do you create breakthrough success? That’s what Starbucks executives grappled with where we all know that coffee is not just coffee. High growth companies sell emotional benefits, not just products. Take for example blueprint company The Cheesecake Factory. In 1978, CEO and Founder David Overton was simply looking for an outlet for his parent’s struggling cheesecake bakery when he opened his first restaurant. The company went public in 1992 with $52 million in sales and racked up $1.1 billion in sales at 111 restaurants in 30 states thirteen years later. How? With larger-than-life portions and gaudy theatrical flair, all of this achieved with little or no advertising. Action Item: Knowing that high growth takes a breakthrough value proposition, I personally challenge you to think through your company’s uniqueness in an industry where sameness and standardization rule. Know exactly how you will stand out from the rest of the industry.
2. Exploit a High Growth Market. Huge growth companies exist in virtually every industry. And frankly, the gasoline industry is already such a huge marketplace that few in our business should have any concern over ability to reach a billion in sales. Ameritrade is an interesting example of a company seeing and grabbing a huge market. Although they officially entered the discount brokerage market in 1975, it was visioning the potential online market that became key to expansion in 1995, allowing the company to go public in 1997 on revenues of $73.8 million. After recovering from the dot.com implosion, the company earned $340 million on $1 billion in sales eight years later, something they would not have achieved without expanding what they “saw” as their marketplace. Action item: Determine how far your geographic reach needs to go. Define the growth trends in your target market. Start by concretely knowing the total market for your product mix, something easily available through good demographic firms like IMST (www.imstcorp.com). Challenge yourself to examine and reset your definition of your marketplace.
3. Focus Relentlessly on Cash Flow. Successful high growth companies know the difference between growing sales revenue, growing profit, and growing cash flow. Of the three, cash flow takes center stage. Blueprint companies are characterized by funding growth through operations, not through huge capital investment at start-up (other than biotech and telecommunications that require large upfront capital). Most of the blueprint companies were founded on a shoestring, just the opposite of so many money-infused start-ups that flare and burn into extinguishment. Will our industry have some that flare and burn? My guess is we will not be immune.
Already the wall street types who believe in a sequence of get a pile of press, get a pile of money, then get a pile of customers, are knocking on family doors. Blueprint companies actually succeed in reverse order – they start with customers, sales that create internal cash flow and then finally go to the press with their success. Real live customers finance operations until the company gets to the IPO (Initial Public Offering) size. Even after the IPO, they relentlessly pursue positive operational cash flow. Action item: Invest in top-quality, industry-specific cash flow education.
4. Leverage Big Brother Alliances. Blueprint companies attract great customers with high profiles and reputations that open doors to new markets. Think the little fish landing the whale. For instance, blueprint software company Cerner was just a small hospital management software company until Mayo Clinic took a huge risk with this relatively small little known, but technologically advanced company. Mayo realized it needed an integrated technology solution in their booming industry with shrinking insurance reimbursements and skyrocketing costs. Their choice was to spend $16 million with a relatively obscure vendor. The risk paid off. After five years of start-up, Mayo is realizing between $3 and $7 million annually in savings and having instantaneous access to all their medical data. The relationship with Mayo then made it easy for Cerner to land other customers. Action Item: Determine the “whale” in your marketplace that has the potential to push you to be a better supplier and open doors to new customers.
5. Pack Your Board With Industry Experts. In family business, few companies have boards that go beyond family members and a few trusted professionals or friends. Blueprint companies, however, do not pack their boards with insiders who simply want to keep on eye on the cash. Instead, they choose successful CEOs from outside industries plus industry experts who offer deep experience, help bring in business and give shrewd business advice. Action Item: If you do not have an outside advisory board, and you are serious about growth, act now. Develop a list of potential high power board members, then stock your board with the best. They will drive you to achieve more than you knew even possible. That’s value.
6. Use Blue-Chip Customers to Gain Credibility. Closer to our industry is the blueprint company Headwaters, an alternative energy provider that was struggling to sell its patented synthetic coal technology to electric companies until latching itself to Dow Chemical. In 1999, Headwaters had lost $28.4 million on revenues of only $6.7 million, but with the Dow relationship, increased its net cash on operations to $151 million on revenues of $1.1 billion six years later. Action Item: Within your marketplace, identify potential blue-chip customers, create an action plan for landing them as a customer, then launch a campaign to leverage that relationship.
7. Build an Inside-Outside Leadership Team. At blueprint companies, Thomson consistently saw two-person leadership teams. One leader was great with “outsiders” including customers, bankers, vendors and even media — think high-charisma and charm. The other half of the leadership team was the “inside” person — an expert in operational efficiency and cash flow. They watched the books like a hawk. Action Item: As CEO, honestly assess whether you are the inside or outside person. Acknowledge that you can’t be all things to all people, much less be in two places at the same time. If you don’t have a counterpart, promote or hire one now.
In summary, growth doesn’t guarantee success. If your plan is for mega growth, use these seven mega success attributes as foundational truth. Through honest assessment and action, allow them to keep you from being part of the 95% that either miss the mark or can’t sustain their success; allow them to catapult you into the top 5%. Perhaps years from now, it will be your company that future MBAs will study in their business schools for greater insight on the exact formula for business success!