Acquisition of New Portfolio Companies
Business Growth Strategy
Tax Planning for C & S Corp Conversions re. New Dividend Tax Law
Strategic Sourcing & Supply Chain Improvements
Acquisition Strategy, Targeting & Integration
Intellectual Property Licensing & Strategic Alliances
Non-Dilutive Growth Capital
Improving the Amount or Cost of Senior Debt
Marketing & Sales Best Practices
Value Driver Analysis for Business Profitability Improvement
Interim Management Services
 

Acquisition of New Portfolio Companies

Buyout funds and private equity funds often contact us in an attempt to find companies that they can acquire. They are often surprised to learn that we rarely represent companies that are seeking to be acquired by buyout or private equity funds. However, since our practice is differentiated by the combination of growth advisory and investment banking services that we provide, we provide buy-side services to many medium sized companies, which are seeking to grow through acquisitions. While many funds believe that buy-side activities are something they should control internally, we can often interest funds in the benefits of outsourcing such activities to Source. For more information on our acquisitions services, See "Acquisitions Strategy, Targeting & Integration" below, or click here.
 

Business Growth Strategy

We define growth strategy as "the guidance for making directional decisions that influence a company's long term performance." The future viability and value of a business depend both upon immediate results and longer-term, value-building initiatives. Today's rapidly changing and aggressively competitive business environment requires larger privately owned companies to devise successful strategies that anticipate market trends, customer needs and competitor actions. Source can help identify or evaluate key matters that are critical to your strategic decision-making. Clients will often use our growth consulting services to supplement their internal growth strategy resources. Our senior professional staff members can assist with evaluating market positioning, product differentiation, technological innovations, product pricing elasticity, employee commitment, and the expectations of customers or shareholders. We can also provide assistance with regard to the impact of macro-economic trends, such as the stability of currencies or interest rates, the impact of government regulations, capital market liquidity, and international sourcing and trade. To request more information on our Business Growth Strategy services click here.
 

Tax Planning for C & S Corp Conversions re. New Dividend Tax Law

Most privately owned businesses with revenue in excess of $50MM are either C or S Corps. Most privately owned businesses are also controlled by five or fewer shareholders. As such, they are treated as "controlled corporations" under the corporate income tax laws. One significant limitation for controlled corporations under the tax code has historically related to limitations on the periodic redemption of shares by corporations, which are taxed as dividends rather than being treated as a capital gain. These tax rules have for decades limited the planning flexibility for inter-generational transfers of businesses, or even for an owner to liquidate an ownership interest in a corporation over a number of years. Until recently, the tax rate on dividends has been much higher than the tax rate on capital gains. This changed in 2003, when the tax rate on dividends was reduced to 15%, which is the same as the current capital gain tax rate. The lower tax rates on dividends expire after 2008. Therefore, many privately-owned businesses, which wish to take a longer-term view to their tax planning options, are either: (i) completing partial share redemptions or conveyances now while the 15% rate applies, or (ii) considering the restructuring of their corporations into limited liability companies. Limited liability companies can elect to be taxed as partnerships, which (like S Corps) permit flow-through taxation. However, the partnership tax rules often provide greater planning flexibility for closely held companies. For example, a limited liability company can have different classes of shares unlike an S Corp. Partial redemptions of a limited liability company interest are also taxed at capital gain rates. Some advisors are currently concerned that the lower tax rate on dividends might expire after 2008 or be discontinued prior to then. By currently converting to a limited liability company, this tax risk can be avoided. The conversion of corporations to limited liability companies will often, however, trigger a tax on any "liquidating gains" from the corporation. The good news at present is that: (1) the lower 15% tax rate would apply and (ii) given the difficult economy for the past couple years valuations may be lower at this time. When taking all of this into consideration, many owners of closely held businesses are ridding themselves of corporate structures for their businesses. This facts presents an opportunity for buyout and private equity funds, since many businesses will need to attract third-party capital to fund the tax costs associated with converting from a corporation into a limited liability company. For more information on this tax planning idea click here.
 

Strategic Sourcing & Supply Chain Improvements

Many privately owned manufacturing and distribution businesses have been under increased pricing pressure from their customers in recent years. This has required them to re-examine the competitiveness of their purchasing and supply base. The current conditions take root in the leveraged buyout and re-engineering days of the late 1980s and early 1990s. That was a difficult time for many procurement organizations, which were parts of larger public companies or leveraged companies. In such companies, the focus on getting close to the customer, short-term financial results, and overhead reduction resulted in a de-emphasis on and even a gutting of procurement departments in a misguided effort to be "lean and mean." One forlorn procurement manager once put it, "We went way beyond 'lean and mean,' all we got was skinny and teed off!" As companies saved money on the reduced cost of the purchasing department, it became more difficult to effectively manage the cost of purchases themselves, which can be up to 80% of the entire cost base of the business.

Still reeling from these initiatives, understaffed and overworked purchasing organizations picked up on a new buzzword in the 1990s-"partnering." The promise was to identify a few strategic suppliers, get close to them, commit to long-term relationships, and your business performance will skyrocket. Often, they maintained their long-standing relationships incumbent suppliers, which were frequently family-owned, middle market companies.

By the late 1990s, global competitors from Mexico, China, India, and Eastern Europe put enormous pressure on U.S. and Western European businesses. The suppliers from these regions are very competitive. Often they can deliver comparable quality at 30% to 50% lower-cost. This has required many purchasing organizations to revisit their "partnerships." The margins of many medium-sized companies have been squeezed in the process. But lack of information, trust, and the prospect of extended supply lines has prevented many companies from fully exploiting this historic global business opportunity, which means that pricing pressure may increase going forward.

A challenge faced today by many privately owned companies is that their larger customers are focused on seeking additional purchasing improvements. This, in turn, is forcing many family-owned businesses to re-examine their own procurement processes. Recent experience shows that companies who apply best practice procurement processes, e-sourcing technologies, and global sourcing strategies are consistently saving 15% to over 50% on purchases of both production materials and indirect purchases. Moreover, these results can have even more impact when purchasing focuses its efforts in the product design phase where new products can now be launched at dramatically lower cost. This can generate increased market share and earlier breakeven on products thereby making procurement a driver of company growth.

The focus on global procurement and supply chain improvements is requiring most, larger family-owned businesses to rethink their competitive positioning. Source's growth advisory team has considerable experience in working with clients on both the buy and sell sides of supply chain issues. For more information on how Source's supply chain and procurement services can increase the profitability of your business click here.
 

Acquisition Strategy, Targeting & Integration

A study, completed by the Association for Corporate Growth several years ago, confirmed that the business acquisitions (i.e. external growth) are one of the three principal growth drivers for the majority of companies with revenue above $100MM. However, supporting an effective external growth plan for each portfolio company can be burdensome for some buyout funds and private equity funds. Pursuing acquisitions can be distracting to current management team members who need to focus on current operations. Adding new staff to pursue acquisitions can increase fixed overhead and, also, place time and resource demands on companies. Often existing credit agreements must be amended to permit acquisitions. Finally, there are many other competitors and well-capitalized buyout and private equity funds that are also aggressively seeking acquisitions; frequently bidding-up prices in the process. When you then read the statistics that suggest that 55% of all middle-market acquisitions fail to deliver value for the acquiring companies, you can begin to wonder whether the cost of the pursuit is worthwhile. While buy-side acquisition initiatives are never guaranteed to produce results, Source can efficiently provide outsourced business development services for our buyout fund and private equity fund clients that: (i) minimize fixed cost, resource drain and distraction and (ii) while positioning the business to be a prepared acquirer. Our skilled senior professional staff members, databases that facilitate acquisition targeting, knowledge of the capital markets to obtain acquisition capital and years of transaction experience can provide cost-effective acquisition guidance for privately owned companies. For more information on how Source's acquisition services can aid the growth of your buyout fund or private equity fund click here.
 

Intellectual Property Licensing & Strategic Alliances

Intellectual property is a key ingredient for value creation in medium sized businesses. Intellectual property helps distinguish a company from its competitors. Distinguishing your portfolio companies from their competitors can be a key ingredient in the overall returns you will be able to provide your investors. The challenge for most medium sized companies owned by buyout funds and private equity funds is how to develop or acquire intellectual property. Competitive pressures and lack of surplus capital often limit the effort that a smaller business can place on research and development, or engineering or testing. Further, in many instances, the most talented scientists or engineers are employed by much larger businesses and are unwilling to take the career risk associated with joining a smaller company. It is also quite difficult for smaller companies to support the business development efforts that would be required to seek external intellectual property owned by others and to acquire it directly or through licensing transactions. Therefore, the vast majority of medium-sized businesses are limited in being able to distinguish themselves through world-class intellectual property. This fact relegates businesses to rely solely on internal R&D, which can be more costly and time consuming, or to tough-it-out on price, rely upon updates to old product lines or to seek growth merely through business acquisitions. All of these can be limiting or risky strategies. Source has perfected an approach to cost efficiently evaluate whether intellectual property might be available for licensing from Fortune 1000 companies. Such companies are often eager to find smaller businesses that can commercialize their intellectual property for various purposes. Licensing intellectual property can be the most significant value-creating activity for many medium-sized businesses. For more information on how Source can help integrate this concept of intellectual property licensing into the Growth Strategy for your portfolio companies click here.
 

Non-Dilutive Growth Capital

Often business growth strategies require capital investments beyond the contribution of free cashflow. Supplemental funding is required to realize business objectives. Most banks prefer to limit credit to not exceed certain percentages of domestic account receivables, finished goods inventory and fixed assets, or to further limit credit based upon conservative formulas relating to a company's historic earnings. Funding requirements may, therefore, exceed bank credit parameters. Some buyout funds or private equity funds, which own interests in privately owned businesses, therefore, struggle to obtain needed capital on a non-dilutive basis. That is where Source's experienced guidance can add-value. We know that there are as many as 24 different funding options for many privately owned businesses. We have thoroughly researched these capital market segments and have identified those funding sources, which will provide growth-capital to privately-owned companies without requiring ownership in the business. Our business financial advisory, corporate finance and investment banking services can assist you in assessing, structuring and obtaining the capital funding required to support the growth of your business. Our focus is driven to help reduce your weighted average cost of capital while also providing capital adequacy to support your company's growth and operating requirements. To request more information about our Company Capitalization services for companies with revenue between click here.
 

Improving the Amount or Cost of Senior Debt

As privately owned businesses grow to become larger companies often they wish to maintain relations with their existing bankers. This is admirable, and candidly something we endorse, since often their existing bankers have supported the companies through some difficult times along the way. Conceptually if you read the advertisements of most banks, which emphasize relationships with their customers, this would also seem to be your banker's objective. However, in reality, without periodically gauging the credit terms provided by their banks versus what might be available in the senior debt markets for companies of similar size, in similar industries and geographic regions, many businesses are not receiving adequate credit support from their existing senior debt providers or the pricing of the senior debt being provided is above market. Some skeptics suggest that this is simply the way that banks operate: minimize credit exposure and maximize account profitability. However, we disagree. In our opinion, whenever a medium-sized, privately-owned businesses is not served properly by its existing bank, it is usually for one of the following reasons: (i) their senior credit needs exceed their current bank's regulatory lending limits and their current bank does not have an active loan syndicate department, (ii) bank mergers and consolidations cause changes in bank lending policies, (iii) senior bank officers are often displaced during mergers, (iv) federal or state bank regulators will often force banks to limit their credit exposure in certain industries or geographic regions, (v) the credit needs of the business have evolved (e.g. foreign manufacturing operations), (vi) other forms of senior credit are needed (e.g. 10 year term loan for acquisitions or plant expansion, or lease for single purpose specialized equipment), which would be better provided by non-bank senior lenders (e.g. an insurance company or mutual fund), (vii) stiffer federal bank regulatory guidelines limit the amount of credit support a federally insured bank can provide and the credit requirements would be better served by a non-regulated senior lender, (viii) banks sometimes have internal conflicts between what the calling officers want to provide a customer and what the loan underwriters are willing to support, which often requires a company to provide its loan officers with third-party confirmation of what another lending institution might be willing to provide, and (ix) there are other reasons, as well. For more information on how you might be able to increase the amount of senior debt that would be available to your portfolio companies, or to learn how to reduce the cost of your senior debt click here.
 

Marketing & Sales Best Practices

Most better performing companies include both internal and external growth objectives in their strategic plans. Internal, also referred to as organic, growth is typically the least capital intense route to increasing the size and value of a business. It is also less risky than acquisitions. However, when you isolate the financial performance of many companies, their internal or "organic" growth is often anemic. Only those companies that are performing the marketing and sales functions at a "best practice" level of performance can demonstrate solid results in the area of internal growth. Internal growth is also typically the most capital efficient and poses far less financial risk for shareholders than does acquisitions. However, due to weak internal growth, many management teams and their capital supporters rush towards external growth options, which are typically acquisitions, not realizing that their internal sales results could be dramatically improved. After all, it is estimated that roughly 55% of all completed acquisitions fail to provide anticipated financial results. Therefore, an increasing number of businesses, which are owned by buyout capital or private equity funds, are examining whether improvements can be realized through embracing marketing and sales best practices.

The objective of marketing is to identify a qualified lead or opportunity. There are a number of processes used to do so. Some of the most familiar include:

• Advertising (TV, radio, billboards, magazines, etc.)
• Trade shows
• Referral management
• Internet search optimization
• Branding activities

The objective of sales is to pursue and close the sale, given a lead/opportunity by marketing. Salespeople are most effective when the following factors are optimized:

1. Knowledge: The salespeople know their products and services so well they can act as a true business consultant helping prospects solve real business problems.
2. Aptitude: The salespeople have a talent for sales that is in the DNA. This talent can be easily ascertained by testing.
3. Skills: The salespeople have mastered the Top Ten Skills of the Super Salespeople. These skills are not in the DNA, they must be learned.
4. Motivation: The salespeople are motivated to sell. Motivation can be partially ascertained with testing, but must be verified in interviews.
5. Process: The salespeople are working in companies that have best practice marketing processes to support them.

Source people can offer the following assistance in helping our client's businesses transition to marketing and sales best practices with the following four offerings:

• Step One: Conduct an assessment of the sales and marketing processes and provide recommendations on transitioning to "best practice."
• Step Two: Assess the aptitude and motivation of all current and future salespeople.
• Step Three: Train salespeople on the top ten skills used by the country's very best salespeople.
• Step Four: Conduct and facilitate a Strategic Marketing Planning offsite for company executives and salespeople. The output of the offsite is a roadmap for growing the company.

Value Driver Analysis for Business Profitability Improvement

The financial results reported by companies have been likened to the score on the board during a football game. They indicate whether you are winning or losing. However, the score does not necessarily provide insight into the state of play on the field. Similarly, analyzing the performance of a company based solely upon a review of its financial results does not provide the critical insight needed to gauge a company's value driver strengths or weaknesses. The key Value Drivers in businesses are Marketing, People, Process and Information. Strengths or weaknesses in each of these critical areas ultimately will affect the financial results of a company. Is it possible to evaluate the Value Driver Strength of an organization to determine in advance how strong or weak its financial results might be? And, in fact, to enable the owners to improve the performance of a company before poor financial results are reported? From years of working with medium-sized businesses, Source has been able to examine the Value Driver performance of hundreds of companies and, by doing so, has developed a proprietary Value Driver Survey that can be used by clients to materially improve the future profitability and financial results of a medium-sized company. The Value Driver Survey will: (i) identify the value drivers that can have the most immediate impact on improving the value and profitability of your business, (ii) isolate the discrepancies among internal views held by owners or key managers, which might be hindering the effective implementation of business plans or otherwise causing progress to lag, and (iii) provide a highly accurate comparison of a company's Value Driver ranking relative to other companies. For additional information on our proprietary Value Driver Survey, please click here.
 

Interim Management Services

Buyout funds and private equity funds can find themselves thrust-into challenging business matters. The sudden death or disability of a key executive or principal owner, who has also been serving as the CEO or President of a closely held company, can represent significant risk relative to value-erosion. In many closely held businesses, there are weak succession management plans. Source's experienced team of senior professionals includes a number who have successfully operated companies. We have often provided interim management services for closely held companies. We can provide such services until a management successor has been recruited or until a business is sold. For more information on our Interim Management Services click here.