Inorganic Growth: Strategy and Tactics

Last time, I outlined some basic overall strategies in order to identify some potential acquisition targets. This time I want to build on that and talk some about both short term and long term issues. For this, I want to use an example from my past.

As I have written in the past, AFC was looking to sell itself due to where it saw its market was going. In order to facilitate the sale, we needed to convert our customer base from 80% small carrier sales to 80% large carrier sales. One major step along the way was the purchase of the former Reltec Access Group in Dallas from Marconi.

Strategically the importance was that this team was the primary vendor to BellSouth. The company had other business but BellSouth dominated the revenue. AFC had not been able to crack into BellSouth and we saw this as a way of capturing the business. This is part of “buying a competitor” strategy. There was a challenge to convince BellSouth that they should stick with the platform, but that was something we were used to. In case it is not clear, the purchase would not be worth it.

Tactically we had to come up with an “Integration Plan”. This is the plan of how to eliminate overlaps and make the two companies one. In the long term, we would like BellSouth to change platforms so that we could converge and concentrate our focus. Of course, that was not going to work in the short term. Our plan was to treat the group as essentially a wholly owned subsidiary. AFC appointed an executive (Jeff Rosen) to be the lead on the integration, but beyond that it was really only the G&A functions (HR, Accounting, etc.) that had to be combined. We kept Sales, Marketing, and Engineering separate. That way BellSouth would have the entire team that they were used to working with intact.

Did this work? Well, it is hard to say. AFC was purchased less than 1 year after this transaction closed (partly because of the transaction). In the meantime, BellSouth continued on with the product and we were expanding the people that were involved with BellSouth (including myself).

The point of this post is that the Strategy drove the Tactics. I need to speak more on both topics. Whenever you are looking at an acquisition, you need to have clarity and alignment between both the short term and the long term aspects of the deal.

Have a great deal!

 

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!

 

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Inorganic Growth: What to Buy?

One of the challenges that owners have is that they are not sure how to look for companies that they might want to purchase.  I want to go over four types of companies to look at and the strategic rational for each.

The first and most obvious purchase is that of a competitor.  The goal here being to be able to expand the customer base by the direct absorption of the competitor’s customer base.  There should be significant overlap in function, so there would seem to be the best chance for synergy savings.  However, some attention to the demographics of the customers to ensure that the combined firm addresses an additive segment.

The second kind of acquisition is purchase of a company in an adjacent market.  This will create a broader product and service offering.  Many times buyers will prefer to do business with one firm instead of two.  This lowers friction in the transaction and can simplify the business arrangement.  This can be successful if the buyer for each different product or service is the same.

The third kind purchase is to purchase a vendor of the company.  This is a form of vertical integration where the goal is to get more of the profit from a transaction.  This makes the most sense if the vendor is used in a large portion of the sales of the buyer.  The caution here is that if the vendor company does not sell to the general market it will change the economics of the company.

The fourth kind of acquisition is the purchase of a sales channel for the company.  This is a different form of vertical integration where the purchaser is looking to lower the cost of sales for their product or service.  Additionally, there is the possibility of locking competitors out of these sales channels.  The issue will be whether the other sales relationships can be efficiently maintained.

All of these types of purchases can work and I have been involved with all of them in one way or another.  The biggest issue is the mix of the strategic rational with a plan to execute the new business post acquisition.  We will get to that over time.

Have a great day!
Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!

Inorganic Growth: Debt

Last time I posted before the Holidays, I started talking about Inorganic Growth or buying a business.  One of the things I pointed out was the use of an Small Business Administration (SBA) loan as part of the path forward.  As I have worked with many businesses, I find them increasingly adverse to debt.  They are proud that their balance sheets are clean of liabilities.  I think to myself about the lost opportunity.  I expect that many of you are surprised by that statement.

One of the things that has happened is that people misunderstand Business Debt from what I would preach them on Personal Debt.  These work differently financially.  I do not mean that you don’t owe principal plus interest.  I mean they accomplish different things.

Personal Debt accelerates the purchase of things that we want in our life.  We pay interest for the purpose of having them sooner than we might otherwise have them.  Most of the time we don’t need these things.  They are wants.  They add nothing to our financial situation.  There are exceptions.  Most of the time a Home Mortgage can be a very good financial decision.  This is not always true.  However, the majority of the time you will have spent considerably less than renting.

On the other side, Business Debt is used to grow a Business or that is the theory.  The term that we look at here is “Return on Invested Capital”.  You might be able to open a new location, purchase a more efficient machine, or hire a new Sales person.  In any case, you should have a Business Plan that shows that you make more money because of the money that you borrowed.

Let me give you an example.  I did some work with a Food Manufacturer that had Retail Sales.  They were looking to raise equity capital.  This was an established business and had a model that was working.  Their plan for the money was to pay off the debt that the company had and open 1 new Retail Location.  An alternate use of money would have been to open more locations.  Another choice would have been to break into the Grocery Market.  Yet another choice would have been to expand Online Sales.  All of these latter choices potentially made the company more money.

And that is the point.  Debt used properly in a Business should increase Cash Flow and Business Value.  That is completely different than Consumer Debt.  What would you do in your Business if you had enough money to do more?

Have a great day!

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!

An Initiative for Next Year?

As we come to the close of the year, I want to talk some about something you should consider for next year:  Inorganic Growth.  That’s right, buying a business to add to the one you have.  Most small business owners that I have met do not really think this is an option for them.  I have posted this Fall about buying a business instead of starting one and about using an SBA loan to fund your business.  In fact, if you look through my postings I think you will find ample ways of buying another Business.

The question is why buy instead of build?  Well, the answer is that you are not buying instead of building.  You are building and using buying as one mechanism.  This does not discount all types of ways of growing your business.  Buying one has a single advantage:  Time.  Imagine you run a $1M Revenue company and are growing at 10% per year.  It will take you about 7 years to become a $2M Revenue company.  But you might be able to buy a competitor Business and make that change overnight.

So, what is special about being bigger.  You will hear it called “Scale”.  What this means is that there are parts of two $1M business that are duplicated or asked to do multiple things.  When the two businesses come together you can eliminate the duplication (this is called “Synergy”).  People can focus on wearing fewer hats in a larger company so that they become more efficient at what they do.

This works in lots of ways.  Let’s suppose both companies had websites and that they used both Search Engine Optimization (SEO) and Search Engine Marketing (aka Pay Per Click or PPC) to drive traffic into the business.  By buying a competitor, you can eliminate one company that was competing in the Search and have better search results through SEO.  You also can allocate more money to the one company and have more PPC traffic as well.

There are challenges with this approach and we will cover them as well.  But you should consider Inorganic Growth as part of what you plan to do.

Have a great day!

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!

Annual Plans: Putting them to Work

When I last posted about Annual Plans we were talking about Key Performance Indicators (KPIs) and Key Results Indicators (KRIs).  I want to talk this week about making this plan a living document that works for you and your business.  Going through the exercise can help, but nowhere near as much as using it on an ongoing basis to judge your performance.

When we talk about the Indicators, we are talking about things to measure in your business.  The next step is to put these measurements in place with what is often called stop and go gauges.  In this case 2 levels are assigned to the performance of each metric.  There is a lower point between the Red (bad) and the Yellow (Danger).  The higher point is between Yellow (Danger) and Green (Good).  There are some binary metrics, but most of the time the 3 color levels are a more likely measurement.

So, let me use an simple example.  We are going to measure the number of Sales appointment per month and use a number of 90 a month as our Green Goal.  If we get 75 per month, we will call that gauge Yellow.  Anything below 75 is Red.  This is a typical KPI and might be found in many companies.  The next part is to match the KPI with the monthly revenue total.  Green in the Sales Call number should strongly correlate with Green in the Revenue KPI.  There might be some delay (depending upon your Sales Cycle), but that is the mission of this style of measurement.  Create a set of KPIs that generate the KRIs that you want in your business.  Then measure both and make sure that it happens.

There are a couple of problems to diagnose with this setup.  The first is whether your business can meet the KPIs that you have established.  If you can’t then there needs to be another plan – something different put in place.  If the KPIs do not lead to the KRIs that you want, then either you have the wrong KPIs, the levels are off, or the correlation is not as strong as thought.

All of these errors are likely to occur, especially the first time you use this strategy to build a business.  In many ways, it is similar to the first time you do anything.  You learn, adapt and grow.  Over time you will build excellent measures and predictors of performance.  And when you do, your business will move into a phase where you can grow in a controlled manner.

Have a great day!
Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!

Sonoma County: News and Notes

This week I get to my review of Enphase.  This is long delayed due to other business activities for me as well as the Thanksgiving Holiday.

The company reported $77M of revenue and a non-GaaP loss of $0.01 a share.  This is a significant gain over past quarters and was based around a nearly 3.5% gain in Gross Margin.  This has been a troubling metric for the company as it is still in the low 20% range.  The response of the stock has been almost explosively positive with today the stock being $2.90.  The stock was hovering below $1 a share not too long ago.

There are three things that I would like to say about this very positive result for the company.

First, I want readers to note the ongoing R&D spend that the company has.  This number is about 10% of Revenue.  Nowhere near the numbers that I decry in Calix’s results, but the company needs to continue to invest in cost reduction activity.  There is a balancing act in the R&D plan between reducing cost and opening markets.  As the CEO notes throughout the call, there is a 7-10% annual price reduction in the market.  R&D must keep lowering costs or Enphase will fall back below 20% Gross Margins.  At the same time, the company needs to expand Sales.  Right now the projection for Q4 is flat again.  Without Sales Growth, the company will need to manage itself very tightly.

Second, this was the first time we got to hear the new CEO (Badri Kothandaraman) on the call. I know that many will regard these results as his success.  The thing is that as he points out this result started when the IQ6 started shipping.  The plan to get to today was before his tenure as CEO.  Essentially, we now see the outcome of Paul Nahi’s plan.  The next couple of years will tell us all about Badri as a CEO.  In particular, he talked about caution on pricing.  This will limit upside Sales at least in the near term.  So, you will want to monitor the  control of Operating Expenses and Gross Margins over the next several quarters.

Finally, we will have a shifting competitive landscape over the next few quarters.  Beyond the Sunviva ruling, there will be competitive response to the products announced on the call for 2019.  Because Enphase is ASIC based, it takes a longer development cycle to build new products (you have to design and prove your silicon AND design and prove your circuit boards).  It also means that non-ASIC based solutions can be available with less time from the start of development.  There is also this notion of pushing into India and Africa.  I think India is a more likely place, as the Chinese have little to no influence there.  However, caution needs to be applied to Africa.  Many if not most countries in Africa are in bed with the Chinese.  It will be interesting if a company like Huawei, which is already huge in these markets becomes a factor.

Those notes aside, this was a very positive quarter.  Have a great day!
Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!

Annual Plans:  KRIs and KPIs

Last week, I posted about initiatives.  This week I want to talk about measurements.  There are two kinds of measurements used in Plans.

The first type of measurements are called Key Results Indicators (KRIs).  They measure the results of business activity.  An example of a KRI is Revenue.  Revenue is a result of Sales, which is a primary business activity of every for profit company.  It also is a very important number to the Income Statement and every company should be planning for and setting measurements for Revenue.  I know this seems very basic, but we need to include the impact of any Initiatives in these measurements.  When will the initiative become important?  Will I see benefit from the Initiative in this metric or other ones?

The second type of measurements are called Key Performance Indicators (KPIs).  These measure day to day work that should be driving results to some KRI.  An example of a KPI for Revenue might be the number of Sales Calls that are made.  If you want to drive higher Revenue, then one way to do it is to call on more prospects.  There should be some correlation between these numbers, but the Sales Calls will happen before the Revenue increase.  Depending on your Sales Cycle (the time between first contact and deal closing), you might have a good predictor of future Revenue.

And from that basic approach you can see the idea here.  KRIs are all about what happened in the past.  KPIs are all about what is going to happen in the future.  The goal of planning is to choose the right KPIs for your business and set the goals for them to meet or exceed your KRIs goals.  As you can imagine, this is an imperfect science and the first time you will likely get it wrong.  But it is the exercise of that connection in your business from your activity to your outcome that is important.

Let me give you an example of a not KPI from my past and how it related to a KRI.  When we bought the former Reltec group in Dallas, their Product Manager showed us a chart.  This chart showed housing starts in some specific geographies to revenue from the company.  He could show a connection between the Revenue the group got with the housing starts from 6 months earlier.  The good news is that this connection was easy to track.  The problem was that the group had no control over it.  And that is what we want out of KPIs.  A level of control by our own actions.  So while this was a valuable tool, it was not a KPI in a business process way.

A better example would be a cost reduction plan that I worked on at AFC.  We stack ranked the products by volume and then took the top 10 to evaluate what could be cut out of the design or out of the manufacturing.  We set a dollar amount that we needed to save through this process and measured it quarterly.  Each group that had responsibility with the top 10 had a goal to deliver on.  That allowed us to track at a lower level how each team was doing.

So, that is a little about measurements and how they can be created to drive business results.

Have a great day!

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!