Money is Only Money

Last week I discussed the general parameters of the private equity market for small and midsized businesses. A rational look at the number of “funds” active in the market, measured against the number of legitimate candidates for investment or acquisition, paints a clear view of why so many small companies are receiving calls from interested investors. There simply aren’t enough profitable, growing companies to buy.

I put “funds” in quotes because not all Private Equity Groups are funds. There is a big difference between “We have money” and “We can get money.” Your first questions to any purported acquirer should be about the source and condition of their funds.

Some will say they have investors ready to fund. Walk away. You don’t have the time or energy to let your company be used as a beauty contestant for someone who is little more than a broker.

Others will say they have “dry powder.” That’s the PEG term for an actual bank account in which their investors have deposited real money. “Dry powder” is the amount they have available to invest. Ideally it should be sufficient to purchase your business for cash. although that might not be how things eventually wind up.

Rolls of 100 billsFor many of my clients who are approached, the next questions disqualify most of the remaining prospects. The conversation goes something like this:

Q:  What related acquisitions in our industry are currently in your portfolio?

A: We have over $400 million dollars to invest

Q: What is your strategy for our industry, and why do you find it attractive?

A: We have over $400 million dollars to invest

That’s an oversimplification, but not by much. Money is only money, and merely having it is no guarantee of success. You should remember that the average PEG has promised a target level of return to its investors, and most have a deadline for investing the money. If they fail to do so, the money reverts to its original owners, usually less the PEG’s costs of operations. That (not surprisingly) greatly diminishes the PEGs chance of raising more from those folks next time around. If that deadline is approaching, some funds get much looser about how and where they find deals.

Let’s say you find a fund that is already focused in your industry and has a strong plan for growing their investment. That is usually either by adding more companies like yours, or by using their relationships to generate a lot of new revenue. Whether you should give up control (and you are always giving up control) of the business depends largely on your personal objectives.

  • Family Financial Security: You want to take enough money off the table to eliminate the risks your family has lived with since you started the business. You still enjoy working, but would like to have more of a safety net.
  • Executive Expertise: As hard as it may be to admit, you’ve taken the company as far as you can. It has a lot of upside potential, but you know that you aren’t the one to take it there.
  • Capital Investment: You’ve identified substantial opportunity if you had the equipment or network to pursue it, and the investors agree with you.
  • Two bites: As I described last week, you see the investment partner as bringing the ability to make the minority share you retain worth more than the majority you are selling now.
  • Exit Strategy: Your new partners understand and agree on a time frame and method to let you move on to the next stage of your life.

I recently had a client who was offered a substantial 8-figure sum for his company. He is well under 40 years old. He decided that the company was (and the investors agreed) positioned for a period of very rapid growth, and he would rather make that run as a sole owner. Those members of his peer board who were over 50 years old strongly advised that he take the money and start another business if he had that much appetite for risk.

Age and attitude govern what is or isn’t a good deal. First you have to know what you want, but even then professional investors can’t read your mind. Unless you tell them what your objectives are (and you will have to eventually), they can only talk about their investment, and money is only money.

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Does Investment Capital Make Sense for Your Business?

In the business acquisition world, deals where a seller keeps some equity for a future round of merger or acquisition activity is generally known as getting a “second bite of the apple.” Private Equity Groups (PEG), of which some 5,000 currently operate in the US, specialize in these two-stage deals. Generally, the motivation for a business owner is to secure part of his or her equity value now, and keep some skin in the game for a bigger payoff later.

apple with bitesOn the face of it, these deals can offer the best of both worlds. An owner can monetize a substantial portion of ownership, alleviating the risk to family security that often accompanies an entrepreneur’s concentration of wealth in the company. With the capital and connections of professional investors bringing new opportunities, the company grows bigger and faster, making the ownership percentage kept by the founder worth more in a few years than the whole business was at the time of the original deal.

What is there not to like? You reduce the risk of a major downturn in your business by securing part of your investment now, and keep an ownership interest in a big upside. An infusion of new capital allows the company to expand, and you enjoy additional connections to markets and strategic partners.

In an ideal transaction, that’s exactly what happens. In the real world, however, there are some issues surrounding supply and demand.

First, a Private Equity investor needs some scale to leverage, That is commonly pegged at a minimum of $1 million in pretax cash flow (or profits, for some analysts). Statistics on the number of privately held companies that generate that level of profitability vary widely, but most estimates put it between 15,000 and 20,000 companies in the $10 million to $100 million revenue bracket. Among the 28 million privately held businesses in the US, that is about one half of a percent.

Chasing these, even assuming they were all for sale (which is far from the case), are the aforementioned 5,000 funds. Even if each did one transaction a year, we would run out of candidate companies in pretty short order.

The reality of the private equity marketplace is a little more muddled. According to Doug Tatum of Newport Board Group, the last few years of private equity activity has been about two-thirds add-on transactions. That is, smaller companies being acquired to grow a core acquisition in the original target range.

On the other end of the pipeline are the issues of acquisition strategy and “dry powder” in the PEG. Some have funds available from investors, the uncommitted portion of which (dry powder) are available for investment. Others merely claim to know where to find money if a good deal comes along.

Similarly, acquisition strategies range those targeted on a single industry, to those with seemingly no strategy at all. In between are funds that claim a suspiciously broad range of expertise (One claims “specializing in health care, manufacturing and high technology.”) and those who claim no expertise. (“We will consider any company with $XX in annual cash flow.”) It’s usually not clear how those investors will provide the contacts and expertise to help a business grow to a whole new level.

Let’s assume you’ve been approached by an equity group that knows your industry, has  a track record of success, and can show real investment money in the bank. Aside from price, what other considerations should impact your decision whether or not to talk seriously? I’ll go into that next week. Readers are welcome to post their ideas and opinions.

I have just published a new eBook, “24 Tips for More Effective Meetings.” It is available for FREE with your subscription. If you are already a subscriber, just reenter your email address in the small sign up form above and to the right. You will be automatically redirected to a page where you can download it. Thanks for subscribing!

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Regulation: Between a Rock and a Hard Place

True story: A fortune 500 company implements a new wellness plan for employees. It’s designed by consultants who use the Affordable Care Act (Obamacare) as a template. Workers are incentivized to get regular exercise, quit smoking and lose weight; with contest prizes and discounts from their health insurance premiums rewarding successful efforts.

crushing rockThe U.S. Equal Employment Opportunity Commission promptly files suit against the company for discriminating against obese employees and others with unhealthy lifestyles. The EEOC says that their mandate to punish discrimination isn’t subject to a law that promotes something different.

True story: An employee for a small business that provides contract workers to backfill positions in the Federal Government sues her employer for fostering an atmosphere of sexual harassment. A Federal worker in her department took her mobile phone from her desk and used it to make explicit photographs. According to the law, the employer must either a) move the woman to another position, or b) discipline the offending photographer. Unfortunately, there is no other position besides the one she is contracted for, and the selfie-star works for the Feds, and so can’t be touched without the due process of the civil service system.

The employer is left with a choice between paying the employee not to work, or leaving her in place and defending against a claim he had nothing to do with and can’t fix.

True story: An employee who is on a “final” performance improvement plan (PIP) with termination the stated result of non-performance, informs the Human Resources Manager that she has been diagnosed with depression. She does not request any accommodation under the Americans With Disabilities Act, but says she “Just wanted her to know.” In compliance with HIPAA (which mandates up to a $50,000 fine for a first offense of  sharing employee medical information), the HR manager maintains complete confidentiality.

Ten days later the PIP is reviewed, the employee is found to have not made the necessary changes, and she is terminated. She sues the employer, claiming that the real reason for termination was her medical condition.

Despite the testimony under oath by both the HR Manager (that she didn’t share the information, since it is prohibited by law), and the company executives (that they were not informed), the EEOC judged the company guilty due to “temporal proximity.” That is, the incidents of the reporting and the termination occurred closely enough together that, regardless of prior documentation, everyone else is assumed to be lying.

The Washington Post calls it “The Fourth Branch of Government”; agencies that have been given lawmaking power by Congress, and which now account for over 80% of the rules businesses have to abide by. These laws (or regulations) are implemented without vote or accountability. In 2007, for example, Congress passed 138 laws (and that’s before they were gridlocked) and Federal Agencies finalized 2,926 new regulations.

In 1960 there were about a dozen agencies , like the Securities and Exchange Commission, that had rule-making power. Today, there are over 140 Federal agencies empowered by Congress to make new regulations and enforce them. We’ve come to accept that the EPA, OSHA, HHS, EEOC, DOL and scores of others can create new laws and penalize employers who violate them, even when the “violation” is to comply with a different agency’s rules.

Some regulation to protect public safety and promote ethical dealings in the workplace is clearly necessary. Empowering a million bureaucrats to determine this country’s legal system without accountability isn’t.

I have just published a new eBook, “24 Tips for More Effective Meetings.” It is available for FREE with your subscription. If you are already a subscriber, just reenter your email address in the small sign up form above and to the right. You will be automatically redirected to a page where you can download it. Thanks for subscribing!

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Posted in Business Perspectives, Entrepreneurship, John's Opinions, Managing Employees, Politics and Regulation, Strategy and Planning | Tagged , , , , , , , , , , , , , | 1 Comment

One Response to Regulation: Between a Rock and a Hard Place

  1. Frank Benzoni P.E. Retired says:

    John

    Welcome back – and as usual another great article – batting 1000

    Frank

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“Everyone has Gotten So Rude!”

Not too long ago, I was leading a group of business owners in a discussion. These were not my peer board members, but rather owners at a breakfast, none of whom I’d met before. To start the conversation, I asked each to describe the biggest business challenge he or she faced today.

One older fellow came back sharply. “Rudeness!” He said. “Business people no longer have any manners.”

I immediately thought of several versions of this problem. Folks who communicate abruptly via email or text. The near extinction of friendly conversation just to “get to know” customers and vendors. A growing tendency to negotiate via revised Word documents or purchase orders emailed back and forth instead of discussing differences. I didn’t know if these were the man’s issue though, and so asked him to clarify.

“For my entire career,” he said “I’ve prospected successfully for new customers by dropping in on companies unannounced. I’d just walk into a business, give my card to the receptionist, and ask for 15 minutes of the CEOs time. Once he saw what I had to offer (insurance), he’d often ask me to follow up with a proposal.”

“Now, when I ask for the CEO the receptionist usually asks if I have an appointment. When I say ‘no,’ she refuses to contact the CEO. Even if I get her to call him and ask, he won’t come out and see me. I’ve gone to the trouble of coming to his place of business to meet him, and he won’t even do me the courtesy of listening to what I have to say.”

business greetingI was aghast. Surely he couldn’t be serious? “No soliciting” has become so ubiquitous that most of us don’t even bother putting signs on the door anymore…it’s just assumed. I certainly don’t meet with walk-in salespeople, especially now as they seem mostly to be guys selling something off a truck. Who has an expectation of a CEO welcoming an unscheduled sales visit?

As I considered his issue, however, I realized that most forms of cold calling get the same response. Do you answer emails that offer a free analysis of your web traffic? Do you return telephone messages from companies that have buyers ready to purchase businesses just like yours? Do you RSVP for a presentation at the local steak joint on how to make your retirement savings grow faster? Probably not.

We don’t worry about rejecting various forms of mass solicitation because they aren’t personal, and we don’t expect the sender to take our lack of response personally. An actual, traditional sales cold call is personal, and the salesman is relying on your reluctance to offer a “personal” insult to gain face time. Rejection of the daily flood of sales contacts has become so automatic, however, that we no longer consider any rebuffs to be either personal or rude.

Cold calling has been replaced by warm calling, a contact backed up by a referral, Linked In connection, or shared common interest. As we increasingly categorize, catalog, limit and prioritize our relationships, those outside the circle have less chance of getting through, even if they show up in our lobby.

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6 Responses to “Everyone has Gotten So Rude!”

  1. Phyllis Pickard says:

    It is true that we don’t see cold call sales people, but we do try to treat them courteously.

  2. Mike Havel says:

    Interesting and so true. The World has changed! When I started in sales in 1979, I use to park my car in an industrial area, and walk the block making cold calls. I do not believe that would work in today’s world.

    Just like a lot of us grew up with an open chain link fence or no fence at all. We all knew our neighbors.

    Today most fences are tall wooded structures that are not open to your neighbors to see in, and a lot of us never see or know our neighbors.

    I agree that most of my calls today are “warm calls”. Either the customer found us on the web and ask to see us, or I connect with a referral or follow up from a show.

    However I do miss the FUN of making cold calls. Use to learn a lot about an area and meet new and interesting people.

    Mike
    .

  3. Jim Edholm says:

    I began selling in 1964. From day #1 – based on the sales book used at my Monsanto sales training course, “How I Raised Myself from Failure to Success in Sales” by Frank Bettger – I always worked by appointment out of respect for the other person’s time. I felt that just “dropping by” suggested that the CEO or Purchasing Agent had little to do besides entertain me.

    That said, when I would call for appointments, I usually got a somewhat friendly reception and an appointment.

    In 1975 I changed to selling estate planning/financial planning just like your subject in your opening story. We called on business owners – valuable, illiquid assets like a business need cash, i.e. insurance, to pay estate taxes at death. WHen I made that switch, also moving to New England from the Midwest at the time, I found an ENTIRELY different atmosphere – hostile, suspicious, defensive, closed off.

    Since then it’s only gotten worse. Coward that I am, I now employ a telemarketer to “sell” initial telephone consultations. Easier appointment to get, somewhat less productive than face-to-face.

  4. Mike Wright says:

    As pointed out, the Internet has changed so much. It used to be that sales calls were an important source of information. Now we are constantly bombarded with information, and the challenge is on filtering most of it out. Which comes across as abrupt or rude. We have been trained the we can search for what we need when we need it. Knowing exactly what we are looking for has become the challenge.

  5. Jeff Ostroff says:

    Our distribution business requires cold calling. We get no where with phone calls and little with emails, so we go to the prospects. In food service this has not become entirely unexpected. We apologize for interrupting, introduce ourselves, leave a card, ask for a card and a future appointment. Rarely are we treated poorly and the results are still worthwhile.

    • John F. Dini says:

      I agree, Jeff. The restaurant industry – perhaps due to the more hectic nature of mealtime rush and lulls combined with the “hospitality” aspect of greeting everyone as a potential customer, is one of those where cold calling is still effective and expected.

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Ode to a Hunter

I’m sure you would all be disappointed if I didn’t return with some sort of business allegory related to my absence. Of course, I hate to disappoint…

My book Hunting in a Farmer’s World focuses on the challenges of being a “Hunter” personality in a business environment that promotes focus on the “Farmer” tasks of management and process. When I present on Hunting and Farming around the country, however, I take a broader approach, not only recognizing the Hunters who are stifled by farming constraints, but also the Farmers who, regardless of the safety that lies in systems and processes, are called upon from time to time to make fast decisions, to go out on a limb, because people are depending on them and failure is not an option.

Dr.HernandezTimothy Hernandez MD, is an Internal Medicine Specialist, and my primary physician. I like having him as my “managing” health care professional. He is a Farmer; meticulous, systematic, and conservative. He pays attention to the details, and carefully tracks the smallest of changes from visit to visit.

On Tuesday, March 3rd, Dr. Hernandez worked me into his office schedule based on my wife’s description of my serious illness. I had been sick since Saturday, and the antibiotics prescribed by a weekend clinic were having no effect. In fact, I was growing noticeably worse.

Dr. Hernandez gave me a careful examination, showing surprising interest in what I thought were unimportant symptoms (earaches, eye sensitivity.) After some diagnostic manipulation, he called in his Nurse Practitioner. He repeated some of the manipulations, and had her do them as well. Although they agreed that my illness was serious, and probably required hospitalization, they couldn’t identify a primary diagnosis to justify an admission authorization.

Then Dr. Hernandez did something that, even in my deteriorating state, I recognized as dramatically out of character. Here’s a rough paraphrase of his directions to his Nurse Practitioner.

“I don’t think we have the time to go through an admission authorization process, so this is what we are going to do. I want you to listen carefully, because if anyone calls and I am unavailable for any reason, you are responsible for seeing the plan through.”

“You will put Mr. Dini in a wheel chair and walk him over to the hospital. When you get there, you will walk him through Emergency check-in without stopping, and tell them it is with my authorization and that we will do any paperwork later. By the time you get there I will have spoken to the physician in charge and told him what we need. You will get Mr. Dini into an ER room and get IVs started immediately.”

“Because he will be in the ER, Mr. Dini’s diagnostics can be all ordered stat. We will hold and treat him in the ER until a bed opens in the Intensive Care Unit and he can be moved there. Now go.”

In the next two hours my Septic Shock worsened dramatically, and I flirted with system failure for the next three days until my liver and kidney functions were stabilized enough to begin effective diagnostics. I spent 5 days in ICU and 5 more in telemetry before we got the upper hand, but without Dr. Hernandez’ decision to take immediate action, cut through the red tape, shortcut accepted process and recruit the cooperation of others, I would not be writing this. He is a Farmer, but his Hunter instincts and linear focus when failure wasn’t an option were exceptional.

There are clichés that we use and overuse in business. One we throw around when someone comes through with crucial information, or helps us achieve a goal, or makes us look good when we thought we wouldn’t. In all my career, however, I have never had the opportunity to use that cliché in its literal sense. I’m pleased and proud to be able to do so now.

Thanks Tim. You saved my life.

 

 

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Posted in Entrepreneurship, John's Opinions, Leadership | Tagged , , , , , | 10 Comments

10 Responses to Ode to a Hunter

  1. Ed Kleinman says:

    John,
    I very happy to hear of your brilliantly orchestrated recovery.
    Your remarks about the latent “hunter” in the many diligent, systems driven “farming” executives out there that consistently read your blog will be most welcome. Glad to have you back in the saddle.

  2. Oswald Viva says:

    John:
    I am so glad that you defeated the illness. Having just gone through a scary episode myself I know the impact it can have in you and your family. My wishes for a complete recovery.

  3. John,

    I was alarmed to hear of your medical issue, and I’m so happy that you are on the road to recovery. As usual, you have nailed several essential truths about business and life – I don’t know where we’d all be without you.

    Keep getting better!

    Steve

  4. Carol says:

    John
    Thank God for someone willing to go “outside of the box!”

    Take care.
    Carol

  5. Rusty says:

    John,

    I’m glad to hear you are on the road to recovery.. I think your story points out another aspect of being a hunter – even hunters need someone to watch out for them. Hunters can oftentimes have a “hero” mentality. I noticed that Leila was the one who made the call to the doctor to get you worked in…probably against your protests that it wasn’t necessary.

    Good to see you back in the saddle.

    Rusty…

  6. Gerald Stowers says:

    Hey bud, only you..on your death bed…could come up with such a good story about your illness. Glad you are still with us, you had us worried.

    Looking forward to our next Gerald-Rita.

  7. Dr bernie Schayes says:

    Glad you have recovered John-you have a great doctor

  8. Bob Dodge says:

    John,
    We are all blessed that you are still with us.

  9. Lindsay Allen says:

    John, so glad you are on the road to recovery. Like you I had a similar episode in 2008. And like you, my wife (a true Farmer) made me go to the emergency room. Turned out, I had a staff infection. My body functions were beginning to break down (kidneys, liver). The Kidney specialist that saw me said I probably would have died that night had I not gone to the ER that morning. I’m so glad that Farmers sometime know what’s best, even though us Hunters sometimes think we can take on anything. Best of luck with the rest of your recovery.

    Take care!

    LA>

  10. Mike Wheeler says:

    Happy to hear you are now doing well!

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