The Exit Window: Are You Ready?

Much has been written about the unprecedented amount of capital, otherwise known as “Dry Powder”, currently under management by Private Equity firms. These firms are feverishly looking for the right deals to invest their ammunition. Over the past few years we’ve watched EBITDA floors drop and multiples rise as the window for these PE firms to invest their managed capital narrows.

A few years ago my firm was asked to conduct a break-out session on Exit Strategy for the “fastest growing companies in America” at the Inc. Magazine National Convention. We assembled a panel of Private Equity experts as well as a former owners of a company who had recently completed a successful exit.

I was a bit surprised when the doors opened and over 250 company owners poured into our small room, filling every seat and most of the aisles. We made a short presentation then offered an open mic for questions. In our post-session debrief, we made two observations from our panel’s interaction with the company owners:

  1. Exit Strategy is top of mind for many company owners – industry neutral
  2. Company owners need help to prepare their company for a successful exit

My partner, Doug Tatum, makes an interesting observation about the primary motivation in the capital market…

Are you considering an acquisition for your company in the future? If so, is your company “Exit Ready”? Do you know how to reduce a PE firm’s perceived risk on your company so that you can eliminate due diligence barriers and take advantage of those unprecedented multiples?

You’re wrapping up Q4 2014 and preparing for launch into Q1 2015. What better time to get your partners in the same room and discuss these essential operational questions that cover the risk factors most Private Equity firms want to eliminate in their portfolio companies:

  • Is our Leadership Team strategically aligned?
  • Is our Leadership Team accountable to performance?
  • Can our Leadership Team state the same, clear Value Proposition?
  • Does our CEO delegate responsibility effectively?
  • Does our company have the right executives, with the right experience, in the right positions?
  • Does our Leadership Team prioritize, allocate resources, and execute effectively?
  • Does our company utilize an effective and accurate Economic Model that enables us to forecast performance effectively?
  • Can our company identify it’s greatest risk and do we manage that risk effectively?
  • Does our company have adequate capital to fund growth going forward?

One of our local entrepreneurs, Peter McAlindon, Ph.D. founded a successful tech business in the gaming industry. A few years ago he presented a report to his Private Equity firm that answered the “risk” questions about his company. Here’s a quote from Dr. McAlindon that he offers to fellow entrepreneurs…

“The Private Equity firm said that they had never seen anything like The Benchmark Button report, and that it reduced their perceived risk of my company. I received the money I needed.”

If you want to sell your company now or in the future, and want to prepare the most profitable exit, then contact me for a complimentary Benchmark Button report (benchmark-button.com) for your company. Get Exit Ready so you can grab your share of the Dry Powder.

Brent Sapp, CEO Inc. Navigator, brent@incnav.com.

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He Learned from the Best – His Own Clients

henry-rischitelli-newerHenry Rischitelli says he learned business from the best – his own clients.  Rischitelli’s company, Next Marketing, targets the Fortune 1000.  His clients include GM, AF, Metro VCS, Community Coffee, and Mircrosoft among others.  He also learned from his father, an entrepreneur who made big money in the 70s but lost it it when interest rates skyrocketed.  Henry watched his dad struggle, and, as a result committed to avoid debt and watch margins.  He was savvy enough to inhibit his company’s growth so that Next Marketing could grow in the recession.

Henry chose his team carefully. “I’ve got to have people around me who are smarter than I am. I’m loyal to them and they’re loyal to me back.”  But he also believes that a company’s culture must transition from loyalty to performance in order to scale.

Henry’s home run is to double Next Marketing’s revenues in the next few years.  To do that he’ll continue to watch his clients in action. “It’s been great to see them at work,” he states. “They’re dynamic individuals who are successful for a reason. You’ve got to stay up with them and ahead of them to negotiate with them.”  It sounds like Henry is smart enough to walk in the right footsteps.

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5 Questions Every AD(H)D CEO Should Ask

Whenever I speak to a group of CEOs I always ask, “How many of us in this room are at least ADD?”  Inevitably almost every hand goes up, and I see nothing but smiles.   I think of 2nd stage CEO/Founders when I read this cartoon:

It’s almost like a badge of honor with this group.  They look at Elon Musk or Richard Branson as kindred spirits who used their eccentricities to break through the concrete wall of second stage growth. I’ve worked with over 500 of these outstanding individuals over the past 2 years and almost all share the same condition.  Of course they’re driven to distraction; they’re intelligent, innovative, and impetuous risk takers.  They lead companies that are too big to be small and too small to be big, and most want to scale their business. As you might guess, the most dangerous threat to them and their companies is not competition. It’s the tyranny of the urgent.  They spin too many plates and lose focus on their venture’s value proposition. They stop doing what they do best and get sidetracked from executing on top priorities.  Even in the midst of the maelstrom, they often get bored.  I recently asked my friend Bill Wydra, President of Ash/Tec Manufacturing, to identify his greatest fear as an entrepreneur.  Without hesitation he responded, “Boredom.” Unfortunately, over 90% of these CEOs and Founders lose their investment in the adolescent stage of growth that we call No Man’s Land because of CEO blind spots like micro-management, boredom and team misalignment.  Listen to my partner, Doug Tatum, briefly describe some of the symptoms of No Man’s Land.

How Do the Top 10% of Companies Succeed? from The Benchmark Button on Vimeo.

ADHD

Sound familiar? Because entrepreneurs are constantly in “SQUIRREL!” mode, here are six questions every AD(H)D CEO of a fast-growth company should ask and answer before entering No Man’s Land:

1.  Do I delegate all non-critical customer decisions? The tendency, of course, is for CEOs to get hands-on in almost everything during startup. But if the CEO fails to delegate then he/she gets buried in the details and can’t experience #2.

2. Am I positioned to do what I do best? Years ago every professional batter knew what pitcher Nolan Ryan, the all-time strikeout leader, would throw when he took the mound.  For almost 20 years Ryan hurled a 100 mph heater that, as all-pro Reggie Jackson once stated, “…seemed to disappear on the way to the plate.” Every CEO has a fastball. When I recently asked Bryan, the CEO of one of the fastest growing technology companies to identify what he did best he replied, “I’m great at raising capital.”  What would happen if Bryan was so buried in business operations that he didn’t have time to perfect and throw his fastball?  His company would grow itself out of existence.  A CEO must be freed up to do what she/he does best in order to survive No Man’s Land.

3.  Have I got the right people in the right leadership positions? This is a tough one, but not because the CEO doesn’t know the answer.  A fast-growth company moving through adolescence almost always has to endure strategic hires and fires.  The friends that came on in start-up, usually for a title rather than a salary often don’t have the talent or experience to scale the business.   The answer to this question is often excruciating, but the decision is essential to the company’s future.

4.  Can my leadership team clearly articulate and agree on the Value Proposition? Over 85% of growing companies don’t have a concise, cohesive statement that communicates their unique competitive advantage.  That means that most CEOs and their leadership teams are almost always out of sync on why a customer buys their product.  This impact of team misalignment on the value proposition permeates through the entire organization, ultimately resulting in poor resource allocation and low ROI.

5.  Does my leadership team spend more time planning than executing? Company leadership will flail like a beached pompano if team alignment and accountability on the top 3-5 company priorities does not become a routine.  The company must, at some point, transition from a culture of loyalty to performance.  Over 80% of CEOs believe they lead a performance-based culture, but their teams believe otherwise.  On the other hand, we’ve seen that a focused team that rows in the same direction and executes on the right things can increase performance by at least 20%.

The Pattern You see the pattern.  A company can get stuck in No Man’s Land if the head honcho doesn’t ask and answer these 5 questions in time.  But, if the leadership team assumes responsibility for all non critical decisions, and if the team gets in sync on the priorities to execute; then the CEO can throw her/his fastball and scale the company like every other successful AD(H)D Economy Hero. Just ask Richard Branson; that is if you can get his attention.

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The Power of the Right Priorities

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Step #4 in the Strategy Sprint to create a sustainable Execution Habit: Choose the Right Priorities, Action Points, and Metrics

EH 3 90

Priorities

Start by asking this question:

“What are the 2-3 things in the next 90 days that will cause a 50% increase to accomplish our PRIMARY Goal?”

Here are a few examples of actionable priorities:

  • Capture Phase VI ASCD Contract
  • Sell 30 Terminals in Q3
  • Increase Margins on Current Product Line
  • Secure $3 Million in Additional Cash
  • Create an Accurate Financial Forecasting Model
  • Hire the New COO

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Strategy can be simple. Teams focus when they are responsible for a handful of priorities with actionable points and deadlines. Priorities should include those 2-3 (up to 5) actionable tasks that best contribute to the team accomplishing this year’s PRIMARY goal.  More than 5 priorities result in no priorities.  Normally the priorities last for at least 90 days.  They don’t often change, unless something unexpected happens with the company; for example, a market change or an unexpected opportunity.  The priorities must apply directly to the PRIMARY Goal, not another objective.

Action Points

Start by asking this question:

“What are the 3-5 next-step action points for this priority?”

Action Point Examples:

  • Publish the Merlot eBook by next Tuesday, March 7, owned by Mick Thompson
  • Secure presentation with ACME by March 14, owned by Tom Sorenson
  • Create plan to reduce costs on NewCo product line by March 7, owned by Susan Smith
  • Close SimCo deal by March 17, owned by Pam Worthington
  • Secure 5 interviews with qualified candidates for CFO position by March 18, owned by Nick Flagler

The time frame for action points usually spans between 1 week to 1 month; the shorter the better.  Action points serve as the “to do” list for each priority.  Identify an “Owner” for each action point from the inner circle, and specify a date the action point will be completed.  Action points can change from meeting to meeting depending on the changing dynamics in the company week to week.  The action points allow for strategic flexibility and maneuverability.  As soon as an action point is accomplished, archive it and replace it with the “next step”; or delete and replace the action point if it is no longer relevant.

Metrics

Start by asking this question:

“What are the 3-8 non-financial, operating metrics (KPIs) that will best represent performance on the priorities to  accomplish the PRIMARY Goal.”

Examples:

  • Number of Platinum Memberships
  • RMA Return Days
  • Number of Systems Delivered
  • Number Leads for Widget Product Line
  • Percentage of Inventory Accuracy

Non-financial operating metrics are primarily based on your team’s behavior; within their influence to move the needle.  These numbers, percentages, etc, will provide a clear benchmark of the company’s progress on your priorities and action points.

You’ve come a long way in a short period of time to develop your Execution Habit and get the right things done if you completed  (links) Step 1, Step 2, Step 3, and Step 4 of your Strategy Sprint.  Now it’s time to talk the importance of keeping score in my next post.

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The Leadership Team Must Keep Score in Order for the Business to Win

Step #5 in the Strategy Sprint to create a sustainable Execution Habit: Adopt a Strategy Scoreboard and Schedule a Meeting Rhythm

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In recent posts I’ve described the neccessity for CEOs and leadership teams of emerging growth companies to pull themselves away from the urgent long enough to create a sustainable Execution Habit; a habit that includes a radically objective analysis of the business, team alignment, and effective prioritization.  My company has worked with over 600 emerging growth companies in the past few years. We’ve seen that without an Execution Habit, a simple but powerful routine that equips the CEO and inner circle to accomplish the PRIMARY Goal for this year, the company will stall in the enevitable, unavoidable chasm of second stage growth called No Man’s Land.  Less than 10% of the 600,000 companies in this category survive this adolescent stage of business when they reach it.  An Execution Habit greatly increases the probability that a CEO and team can break through No Man’s Land granite wall and scale their business.

Nothing drives the energy and enthusiasm for execution more than winning.  The team needs a simple, but comprehensive scoreboard for weekly strategy meetings so that they know whether they are winning or losing.  A scoreboard is essential to a sustainable Execution Habit because it compels team action and accountability on a regular basis.  Your Scoreboard should be a one page document, like the Inc. Navigator Strategy Scoreboard, that you can easily update and edit.  It should document team alignment on the priorities and actions before you enter your weekly meetings.

Your Scoreboard should include the following categories:

  • The PRIMARY Goal for this year
  • The top 3-5 priorities that will accomplish the PRIMARY Goal
  • The top 3-5 next-step action points for each priority; including an owner for that action point and an anticipated completion date
  • The top 3-8 non-financial operating metrics to track performance on the priorities
  • A list of inner circle team members so you can choose who will assume responsibility for each action point on the priorities
  • The option to invite inner circle team members to vote on the priorities and actions when needed.  Voting identifies team misalignment on strategy and provides the catalyst to make changes and get in sync.

The team should vote on the priorities with these questions:

  • Is this at top 5 priority?
  • Is this clear enough to guide action?
  • Are we doing the right things and achieving the right results?

The team should vote on each action point with this question:

  • Are we doing the right things to achieve the right results?

Voting results are valuable for:

  • The initial Strategy Scoreboard retreat (see below) discussion
  • A re-calibration or affirmation of the team’s perspective after several priorities have been changed, or multiple action points have been added
  • A monthly ritual as part of the meeting strategy meeting rhythm

EH Meeting Rhythm

A one-day Strategy Scoreboard retreat will give your team the opportunity to discuss and agree on the PRIMARY Goal, priorities, action points and metrics.  This one-day session will probably be the most valuable day you will ever spend as a leadership team.  You will have strategic discussions in this meeting that you’ve never had before.  At the end of the day your Scoreboard will be set up and you will be ready for your subsequent weekly meetings.

Schedule a Meeting Rhythm

The inner circle team should establish a weekly rhythm to review performance, report on company or market changes, and update the Scoreboard as needed.  These review sessions should not take more than 30 minutes after the first few meetings.  If your team is not accustomed to meeting, a weekly ritual will be a change in behaviour but remember you’re making the effort to develop a sustainable Execution Habit that will produce huge ROI for your efforts.

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His Company Thrives While the Industry Falls 50%

Frank LiwallHow does a company stay in the Inc. 500/5000 six consecutive years straight and win four of Music’s major awards, including a Grammy – while the industry drops in value by 50%?  Ask Frank Liwall, CEO of The Royalty Network . Frank is a former auditor who decided to switch hats and use his experience with numbers to educate song-writers.

My audits exposed me to numerous injustices within the music industry; I found a underserved niche market to help songwriters understand the alternatives available to them in Music Publishing.

Frank says that the bio of Tommy James’s, former lead singer of the Shondells, helped him understand a musician’s need for his business.

His (Tommy) story typified all the reasons for starting The Royalty Network.  He signed contracts without knowing what he gave away.  It affirmed that I want to take care of my clients so they can sleep well at night.  We spend the time necessary to educate and inform artists so they can make the right decisions.

With a thriving business that includes clients like Beyonce, Frank says he’s fortunate to have someone he greatly respects to keep him grounded.

My wife Kathy affirms the principles I believe in.  She keeps me grounded to keep family a priority while I work in a relentless and fast paced industry.

Frank’s company grows while record stores continue to close.  He does it by keeping his team in sync to execute on a handful of the right priorities.  He also infuses passion into his planning.

We want to make a difference in the career of thousands of songwriters.  We’re all about career building, not career ending. We care greatly about adding value to our clients’ careers.

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20% CAGR for 12 Straight Years

Brad HeathIt takes a brilliant entrepreneur to helm a company that generates 20% CAGR for 12 years, 5 of which placed them in the Inc. 5000. Brad Heath, CEO/Founder of VirTex Assembly Services,  is one of the few starters who successfully capitalizes on an idea before a market says they want it. “I saw a under addressed market, and followed the ‘if you build it, they will come’ business plan. We started as an outsourcing company with two strategic suppliers, and within six months were 40% of the one company’s business. I structured a owner financed purchase of that company that had been losing money for 3 1/2 years. We were profitable the first quarter.”

Brad also shows his brilliance through his ability to maintain life balance.  In the midst of generating hundreds of jobs, domestic and in Mexico, he still finds time for his most important priorities.  “I have been able to be involved in my children’s activities and have achieved a level of work life balance that would never have been possible in corporate America.”

Successful entrepreneurs persevere through the potholes, and Brad is no exception.  Like the majority of fast growth companies, 2009 hit VirTex like a rogue wave.  “We experienced a near complete erosion of our customer demand. To survive, we had to lay off 25% of our work force and cut remaining salaries by 20%. This hurt our employees who didn’t deserve to lose jobs. It felt like a huge failure to me. But we’ve come back stronger and doubled the size of our work force since then.

Economy Heroes like Brad keep the economy going because they keep at it with tenacity, creativity, and a willingness to take risk; and, as in Brad’s case, a family focus to boot.  Is there such a thing as a “Renaissance Entrepreneur”?

Economy Heroes 60 Day Strategy Sprint

For Entrepreneurs: Stagnation is a Higher Risk Than Failure

Neil GloggerNeil Gloger makes a living by finding homes for plastic heading to the landfill.  He helms InterGroup International, an Ohio-based recycler of post-industrial plastics.   Neil got into the recycling business because he wanted to make an impact on society.  He’s done that while growing his company from $239k in year one to $14.9mm in 2011.  He’s succeeded despite significant setbacks that included the crash in 2008 and another unexpected tragedy. “We had a fire in2007 that destroyed most of our inventory and an entire building. But we survived and thrived.”  Neil eventually re-hired every employee that he lost in the fire and downturn.  “Hiring everyone back was the best thing that’s happened since we started the company.” Neil is committed to press ahead despite circumstances.  He cited one of our founding fathers as a hero who lived the example of perseverance, “Benjamin Franklin  was one of the earliest entrepreneurs.  He persevered from working for a drunk printer to one of the most influential people in our history. He taught that most people are limited by their own mind.”   Neil identified his own fear of getting stuck.  “We must continue to move forward. Stagnation is a higher risk than failure.  You only get disease from standing water, not running water.  We’ve got to adapt and grow.” Neil believes entrepreneurs build society and he intends to affirm that axiom.  “We’re heading to $150 to $200 million, hopefully through an acquisition spree that will put us at the forefront of industry consolidation on recycling.”  Neil, like the example of his early American hero, will avoid stagnation and mental limitations so that his company adapts and remains in “running water.” Economy Heroes ebook CTA

Quit Counting and Start Tracking Importance

Counting in a business is easy and addictive.  Some companies just can’t find enough things to measure.  It’s like watching someone paint their body with random tattoos; where do they stop? Look at this dashboard of an online business management program:

In their fascinating book, Scorecasting, Jon Wertheim and Tobias Moskowitz describe the danger of reckless counting.  They reference the blocked shots by NBA centers as an example.  In 2008 Dwight Howard, center for the Orlando Magic, blocked 232 shots in the regular season.  That same year Tim Duncan, the San Antonio Spurs big man, blocked 149 shots.  Howard easily won the NBA Defensive Player of the Year and was assigned the nom de guerre of Superman.  Moskowitz and Wertheim drilled deeper on the “value” of those blocked shots, i.e. the resulting points that each block generated for the team.  While Howard’s blocks generated .53 points per game; Duncan produced 1.12 points per block.

That triggers a question: Why do we—and the NBA—count blocks rather than value blocks? The short answer: Counting is easy; measuring value is hard. We see this all the time in many facets of life and business. People count quantities (easy) rather than measure importance (hard) and as a result sometimes make faulty decisions…Business, like Sports, is filled with rankings based on simple numbers that don’t always correspond to value.  

Moskowitz and Wertheim,  Sportscasting

So how do you measure importance?  How do you choose the right things to value, so that your team makes good decisions and gets the right things done? How do you shrink your dashboard in size from the one above to this:

Here are 6 steps to track importance:

  1. Get radically objective about the business
  2. Set a clear direction by focusing on a handful of priorities
  3. Track the things that best portray performance on priorities
  4. Align the team through routine communication
  5. Keep score to hold each other accountable
  6. Adapt and learn quickly

So quit counting and start tracking importance. Get the team focused on the right things; and make sure you know the value of  a “blocked shot” before you tattoo it on your dashboard.

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7 Lessons This Starter Learned from the Governor

Steve Parker Jr., Founder and Managing Partner of Level Wing, credits his friend and mentor, current Florida governor Rick Scott, with placing him in high level responsibility early in his career. “Rick let me work in a lot of roles right out of college. It was when the internet was just starting to scale.”  Parker describes lessons he learned and applied from Scott’s example in his blog post, 7 Lessons Learned from the Governor of Florida.

Steve is community minded and value driven. He learned from his mentor that “…when you are given, you have a responsibility to give back.”  So while Parker enjoys his role as a “Big Fish” in Charleston, S.C., he does so for the right reasons.  “Last year we gave an average of $2000 per employee plus work time to non-profits in and around Charleston.  We started a popular breast cancer forum, and participate in charities as much as we can.”   You’d expect this type of behavior from a guy who’s favorite book a few years back was “Start Something that Matters”, written by the founder of TOMs Shoes.

Although Levelwing, a digital marketing solutions provider, collects accolades like baseball cards including the Inc 500 List, SC Fastest Growing Companies, Ernst & Young Entrepreneur of the Year Award, Charleston Fastest Growing Companies, SPARK!, and the Addy Awards; the partners intend to take Levelwing to the next level.  “We want to become the thought leaders of data intelligence for media and advertising. We want to pull raw data from queries and help our clients to understand the value of data for marketing to help them with their operations and objectives.  We want to extract information they’ve never seen before.”

Maybe the governor’s 7 lessons contributed to Steve Parker’s success; but it’s clear his balance of business and mission will keep Levelwing on the path of doing well in addition to doing good.

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