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If you would be interested in learning more about
the types of services we most often provide to family-owned businesses
depending upon their revenue size and ownership type, please click
on the appropriate category below:
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a. Revenue from $10MM-to-$25MM
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Business Growth Strategy
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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 long-term,
value-building growth. Today's rapidly changing and aggressively
competitive business environment requires your company 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. We then propose straightforward ideas based
upon your company's needs. Often smaller companies recognize
market opportunity, but seem to be "stuck" at a
certain level of revenue. We refer to these companies as Stage
1 businesses. In fact, the majority of closely held companies
would be categorized as Stage 1 Businesses. Often a missing
component in their strategy is how to take their businesses
through the Stage 2 processes and organizational changes that
will enable them during Stage 3 to achieve significantly greater
share of market. To request more information on our Business
Growth Strategy services for companies with revenue between
$10MM-to-$25MM click
here.
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Marketing & Sales Best Practices
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The surest, least capital intensive way to grow
smaller family-owned businesses is through what is typically
referred to as internal or organic growth. However, the vast
majority of most family-owned businesses are not performing
the marketing and sales functions at a "best practice"
level.
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 leads and
close the sale, given a lead/opportunity by marketing. Salespeople
are most effective when the following factors are optimized:
- Knowledge: The salespeople know their products
and services so well they can act as a true business consultant
helping prospects solve real business problems.
- Aptitude: The salespeople have a talent
for sales that is in the DNA. This talent can be easily
ascertained by testing.
- Skills: The salespeople have mastered the
Top Ten Skills of the Super Salespeople. These skills are
not in the DNA, they must be learned.
- Motivation: The salespeople are motivated
to sell. Motivation can be partially ascertained with testing,
but must be verified in interviews.
- Process: The salespeople are working in
companies that have best practice marketing processes to
support them.
Source's professional staff can offer family-owned
businesses the following assistance in helping our client's
companies 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.
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Accessing Growth Capital
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Often smaller businesses are under-capitalized
and, therefore, their growth options seem to be stifled by
lack of adequate funding. 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. Many owners of smaller businesses are unaware
that there are as many as 24 different funding options for
many businesses. Business owners are, also, often reluctant
to consider anything other than bank debt because they are
under the misconception that other forms of capital would
require them to give up control of their businesses, or that
other forms of capital are too costly. Source's 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 for company's
growth and operating requirements. To request more information
about our Company Capitalization services for companies with
revenue between $10MM-to-$25MM click
here.
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Developing Stronger Management Teams
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As a business owner, the value of your company,
its profitability and survival are all highly dependent upon
the strength and performance of your core management team.
Typically in family-owned businesses there are both family
and non-family members who are part of the management team.
As a principal owner of a family-owned business, you are likely
one of the key management team members. As such, there is
already owner-bias among your key management team. These factors
are often the principal management development challenge faced
by smaller family-owned businesses. The managers in a strong,
effective management team understand and are committed to
the owner's vision for the business. They manage to satisfy
the needs and wants of your customers. They manage to sustain
a high level of morale and productivity among your employees.
They make the best use of the resources you provide them.
They coordinate the operating elements of your business. In
short, everything a strong management team does should be
geared toward building the value of your company. However,
developing a strong management team in a family-owned business
is a challenge. It is sometimes harder to recruit or retain
strong management candidates to a smaller, family owned company.
Non-family management candidates are often concerned that
the owners will have a bias in favor of family members when
it comes time for salary and bonus reviews or internal promotions.
Also, most smart managers soon realize that the family members
who work in the business will ultimately be dependent upon
the company to support their lifestyles. The perception can
develop that a small family-owned company will be at a growth
disadvantage because of the financial demands placed on it
by the owners. Our experience with hundreds of family-owned
companies has shown there are several key steps in any effort
to create a more effective management team. The very first,
perhaps surprisingly, doesn't even concern your managers,
but concerns you, the business owner. Do you have a clear
vision and strategy for your business? For more information
on this subject click
here.
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Improve Business Planning & Forecasting
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The vast majority of smaller businesses demonstrate
weakness relative to translating their future business plans
into actionable steps and forecasted financial milestones.
Traditional budgeting generally falls short in projecting
future performance. The budgeting process itself in most organizations
does not isolate management's annual contribution to value
growth creation for the owners. Furthermore, most smaller
businesses have also not analyzed the key metrics, which drive
value creation in their businesses, and are, therefore, unable
to established value-based pay systems for their key managers.
Value-based pay systems are often a critical link for improving
future business performance. Source has considerable experience
assisting with management team development, leadership mentoring
and development, and business succession management planning.
These are essential parts of good Business Governance and
are ultimately linked to improving the results of business
planning and forecasting. For more information on this subject
click here.
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Intellectual Property Licensing & Strategic
Alliances
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Intellectual property (often defined as referred
to as know-how) is a key ingredient for value creation in
many family-owned businesses. Intellectual property helps
distinguish a company from its competitors. Distinguishing
your business from competitors is a key ingredient in your
overall value proposition to your customers, which ultimately
determines how profitable and long-lived your business will
be. The challenge for many smaller companies 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 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, whether core or non-core to
the larger business. 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 your
Growth Strategy click
here.
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Value Driver Analysis for Business Profitability
Improvement
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The financial results reported by companies
have been likened to the score on the board during ball 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 a business are Marketing, People, Process and Information.
Strengths or weaknesses in each of these critical areas ultimately
will effect 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? 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. By doing so, Source 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 implementation
of business plans, and (iii) provide a highly accurate comparison
of a company's Value Driver ranking relative to other companies.
This enables owners to quickly gauge whether their business
will likely survive and prosper for another 8 years or longer.
For additional information on our proprietary Value Driver
Survey, please click
here.
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b. Revenue from $25MM-to-$50MM
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Business Growth Strategy
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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 growth. Today's rapidly changing and aggressively
competitive business environment requires your company 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. We then propose straightforward ideas based
upon your company's needs. Often smaller companies recognize
market opportunity, but seem to be "stuck" at a
certain level of revenue. We refer to these companies as Stage
1 businesses. In fact, the majority of closely held companies
would be categorized as Stage 1 Businesses. Often a missing
component in their strategy is how to take their businesses
through the Stage 2 processes and organizational changes that
will enable them during Stage 3 to achieve significantly greater
share of market. To request more information on our Business
Growth Strategy services for companies with revenue between
$25MM-to-$50MM click
here.
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Marketing & Sales Best Practices
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The three most assured ways of growing a family-owned
business that has revenue in the $25MM-to-$50MM range are
to: (i) sell more of your products or services to current
customers, (ii) attract new customers and (iii) find new products
or services that will interest current and new customers.
These methods of growth are typically referred to as internal
or organic growth. However, despite efforts to improve growth
through such methods, many medium-sized, family owned companies
continually fall-short of the sales growth expectations, which
are included in their annual budgets. The reason for this
is that their marketing and sales functions are not executed
at a "best practice" level of performance.
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:
- Knowledge: The salespeople know their products
and services so well they can act as a true business consultant
helping prospects solve real business problems.
- Aptitude: The salespeople have a talent
for sales that is in the DNA. This talent can be easily
ascertained by testing.
- Skills: The salespeople have mastered the
Top Ten Skills of the Super Salespeople. These skills are
not in the DNA, they must be learned.
- Motivation: The salespeople are motivated
to sell. Motivation can be partially ascertained with testing,
but must be verified in interviews.
- 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.
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Accessing Growth Capital
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Often smaller businesses are under-capitalized
and, therefore, their growth options seem to be stifled by
lack of adequate funding. Most banks prefer to limit credit
to not exceed certain percentages of domestic accounts receivable,
finished goods inventory and fixed assets, or they further
limit credit based upon conservative formulas relating to
a companies historic earnings. Many owners of smaller businesses
are unaware that there are as many as 24 different funding
options for many businesses. Business owners are, also, often
reluctant to consider anything other than bank debt because
they are under the misconception that other forms of capital
would require them to give up control of their businesses,
or that other forms of capital are too costly. Source's 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 a company's growth and operating requirements.
To request more information about our Company Capitalization
services for companies with revenue between $25MM to-$50MM
click here.
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Improving the Amount or Cost of Senior Debt
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As smaller family-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,
most businesses are not receiving adequate credit support
from their existing senior debt providers or their cost is
above market. Most businesses do not periodically gauge the
credit terms provided by their banks versus market comparable
terms. 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, most
medium-sized, family-owned businesses are not served properly
by their existing banks. This is typically for one of the
following reasons: (i) bank mergers and consolidations cause
changes in bank lending policies, (ii) senior bank officers
are often displaced during mergers, (iii) federal or state
bank regulators will often force banks to limit their credit
exposure in certain industries or geographic regions, (iv)
the credit needs of the business have evolved (e.g. foreign
manufacturing operations), (v) 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), (vi) 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, (vii)
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 (viii) 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 company, or to learn
how to reduce the cost of your senior debt click
here.
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Improve Business Planning & Forecasting
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The vast majority of smaller businesses demonstrate
weakness relative to translating their future business plans
into actionable steps and forecasted financial milestones.
Traditional budgeting generally falls short in projecting
future performance. The budgeting process itself in most organizations
does not isolate management's annual contribution to value
growth creation for the owners. Furthermore, most smaller
businesses have also not analyzed the key metrics, which drive
value creation in their businesses, and are, therefore, unable
to established value-based pay systems for their key managers.
Value-based pay systems are often a critical link for improving
future business performance. Source has considerable experience
assisting with management team development, leadership mentoring
and development, and business succession management planning.
These are essential parts of good Business Governance. For
more information on how Source can help improve your business
planning and forecasting click
here.
|
|
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Intellectual Property Licensing & Strategic
Alliances
|
| |
Intellectual property (often defined as referred
to as know-how) is a key ingredient for value creation in
medium-sized businesses. Intellectual property helps distinguish
a company from its competitors. Distinguishing your business
from competitors is a key ingredient in your overall value
proposition to your customers, which ultimately determines
how profitable and long-lived your business will be. The challenge
for most medium-sized companies 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 business are
limited in being able to distinguish themselves through world
class intellectual property. This fact relegates businesses
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, whether core or non-core to
the larger business. 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 your
Growth Strategy click
here.
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Small Acquisitions & Strategic Alliances
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A study, completed by the Association for Corporate
Growth several years ago, confirmed that the majority of medium-sized
businesses in the revenue range between $25MM-to-$50MM excluded
business acquisitions and strategic alliances from their core
growth strategies. Companies in this size range tended to
depend upon increased sales (i.e. Internal growth) to drive
growth. However, companies above $100MM in revenue used acquisition
as one of their primary growth drivers. There are many reasons
that smaller companies exclude acquisitions and strategic
alliances: (i) smaller companies often do not dedicate full
time staff to acquisitions (i.e. external growth) as do larger
companies, (ii) the owners of smaller companies often have
little or no experience in completing acquisitions, (iii)
smaller companies are often not adequately capitalized to
fund acquisitions and (iv) many owners of smaller companies
have heard horror stories associated with failed acquisitions
(e.g. the estimates that 55% of all small company acquisitions
fail to add value for owners or actually destroy value for
owners). Nonetheless, when you analyze the Growth Strategy
alternatives for many medium-sized companies, it becomes clear
that internal growth alone will limit value-growth for the
owners. Source can efficiently provide outsourced business
development services for clients. Our skilled staff professionals,
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 smaller companies. For more information on how
Source's acquisition services can aid the growth of medium-sized
businesses click here.
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Value Driver Analysis for Business Profitability
Improvement
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The financial results reported by companies
have been likened to the score on the board at the end of
the football game. They indicate whether you have won or lost,
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 effect 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.
By doing so, we have 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 implementation of business plans
or otherwise hindering progress, and (iii) provide a highly
accurate comparison of a company's Value Driver ranking relative
to other companies, which enables owners to quickly gauge
whether their business will likely survive and prosper for
another 8 years or longer. For additional information on our
proprietary value Driver Survey, please click
here.
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Value Creation Based Management Compensation
Formulas
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As a family business owner, the value of your
company, its profitability and survival are all highly dependent
upon the strength and performance of your core management
team. Typically in family owned businesses there are both
family and non-family members who are part of the management
team. As a principal owner of a family owned business, you
are likely to be one of the key management team members. As
such, there is already owner-bias among your key management
team. This factor is often the principal, management team
development challenge faced by smaller family-owned businesses.
The managers in a strong, effective management team understand
and are committed to the owners vision for the business. They
manage to satisfy the needs and wants of your customers. They
manage to sustain a high level of morale and productivity
among your employees. They make the best use of the resources
you provide them. They coordinate the operating elements of
your business. In short, everything a strong management team
does should be geared toward building the value of your company.
However, developing a strong management team in a family-owned
business is a challenge. It is sometimes harder to recruit
or retain strong management candidates to work in a family-owned
company. Non-family management candidates are also often concerned
that the owners will have a bias in favor of family members
when it comes time for salary and bonus reviews or internal
promotions. Also, most smart managers soon realize that the
family members who work in the business will ultimately be
dependent upon the company to support their lifestyles. The
perception can develop that a small family owned company would
be at a growth disadvantage because of the financial demands
placed on it by the owners. Our experience with hundreds of
family-owned companies has shown there are several key steps
in any effort to create a more effective management team.
One secret for success is evaluating whether your key manager
compensation formulas are linked to business metrics that
will translate into value creation for the shareholders. Such
value-based compensation systems create a win-win environment
for both family and non-family managers. For more information
on this subject click
here.
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Strategic Sourcing & Supply Chain Improvements
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Many family-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 family-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.
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Family Business Governance
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We believe that effective Family Business Governance
is a process by which the controlling owners of a business
create an atmosphere for nurturing quality input to maximize
the effective utilization of a company's entire resource base.
Effective Business Governance is especially important in family-owned
businesses because such companies typically lack a diverse
group of shareholders and, therefore, they receive more limited
input. Effective Business Governance involves assembling a
trusted governance team, which typically includes controlling
shareholders, capable outside members of a board of directors
or business advisory board who consistently demonstrate over-time
a commitment to providing frank input on matters relating
to the success of the company, and certain key members of
the company's management team. Such a trusted governance team
then participates in the periodic evaluation of the effectiveness
of a company's strategy and its management teams' success
in implementing the strategy, as well as the quality of the
company's overall operating results. Business Governance also
involves periodic evaluation of business reinvestment risks
or opportunities, succession management and contingency plans,
owner wealth transfer plans and exit strategies. Most family-owned
businesses that have created effective Business Governance
atmospheres also generate annual value growth progress reports.
These isolate management's annual contribution to value growth
creation for the owners. For more information on how to improve
the effectiveness of Business Governance for your family-owned
company click
here.
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Business Succession Management
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A recently completed survey of the owners of
medium-sized businesses concluded that most such companies
have weak business succession management plans. Furthermore,
at present over 65% of all family-owned and other privately
held medium-sized companies are controlled by persons over
58 years of age. Finally, the average tenure of a president
in a family-owned business is 22 years (as opposed to less
than 5 years among public companies) and, the survey reported,
the typical medium-sized family business expects to have to
find a replacement for its president within the next five
years. This is no easy task for a number of reasons. First,
given the long tenure of most presidents, most of them know
intuitively how to run their companies to make business decisions.
Little is documented regarding their business strategies,
operating tactics or know-how. Next, the key management teams
typically have personality styles, which are highly compatible
with the long-term president. Incompatible personality styles
do not survive long-term in most family-owned businesses.
For more information on Family-Business Succession Management
click here.
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Owner Exit Plans & Inter-Generational
Business Transfers
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Most owners of family-businesses have not designed
effective exit plans or inter-generational business transfer
plans. Certainly with regard to the owner's exit the subject
of business succession management arises. That subject is
covered above. Another hurdle is that the lifestyle requirements
for most family-business owners financially exceed what their
company's retirement plans have been funded to support. Therefore,
as part of their withdrawal from the company, their retirement
will have to be supplemented, whether in the form of unfunded
deferred compensation or through refinancing the company to
support the redemption of the owner/president's shares. Such
unfunded obligations can be burdensome on companies, which
also need to reinvest to remain competitive in the future.
Many family-owned companies also delay the implementation
of inter generational business transfers, which can create
additional future financial burdens due to transfer taxes.
For example, if a company is currently refocusing its strategy
and funding to support a period of increased growth, and concurrently
no effort is made to transfer (e.g. Into a family business
trust) some of the business ownership, then successful execution
of the business plan will accelerate the growth in share value
that is part of an older-generation owner's taxable estate.
It is for a combination of these reasons that relatively few
first generation family-owned businesses are successfully
transferred to the second generation. For more information
on how to successfully plan for the exit of an owner or the
inter-generational transfer of a business interests click
here.
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c. Revenue from $50MM-to-$150MM
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Business Growth Strategy
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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 family-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
aptitude and 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 impact
of demographics or the stability of currencies or interest
rates), the impact of capital market liquidity trends, or
international sourcing and trade. To request more information
on our Business Growth Strategy services for companies with
revenue between $50MM-to-$150MM click
here.
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Tax Planning for C & S Corp Conversions
re. New Dividend Tax Law
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Most family-owned businesses with revenue between
$50MM-to $150MM are either C or S Corps. Most family-owned
businesses are also owned by five or fewer controlling 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 family-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. This can
facilitate inter-generational transfer planning or even provide
a mechanism for management incentive shares under which gains
will be taxed as capital gains (unlike corporate stock options,
which are restricted only to C Corps and that are most often
taxed as ordinary income). Periodic partial redemptions of
a limited liability company's shares 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: (i)
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 family businesses are ridding
themselves of corporate structures for their businesses. There
has never been a better time to do this. For more information
on this tax planning idea click
here.
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Strategic Sourcing & Supply Chain Improvements
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Many family-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 family-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.
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Acquisition Strategy, Targeting & Financing
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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 can
be burdensome. 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 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 clients that: (i) minimize fixed cost, resource drain
and distraction while (ii) 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 family-owned companies. For more
information on how Source's acquisition services can aid the
growth of your business click
here.
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Intellectual Property Licensing & Strategic
Alliances
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Intellectual property (often defined as referred
to as know-how) is a key ingredient for value creation in
medium-sized businesses. Intellectual property helps distinguish
a company from its competitors. Distinguishing your business
from competitors is a key ingredient in your overall value
proposition to your customers, which ultimately determines
how profitable and long-lived your business will be. The challenge
for most medium-sized companies 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 are typically
required to seek intellectual property owned by others and
to acquire it directly or through licensing transactions.
Therefore, the vast majority of medium-sized businesses are
limited by not being distinguished through world-class intellectual
property. This fact relegates businesses 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
the concept of intellectual property licensing into your Growth
Strategy click
here.
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Accessing Non-Dilutive Growth Capital
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Often business growth strategies require capital
investments beyond what can be funded by free cashflow. Supplemental
funding is required to realize business objectives. Most banks
prefer to limit credit to not exceed certain percentages of
domestic accounts receivable, 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.
Owners of a family business are generally reluctant to seek
capital from funding sources that will seek an ownership interest
in the business for two primary reasons: (i) capital providers
to family-owned businesses generally attempt to undervalue
their investments, which increases dilution and attendant
capital cost, and (ii) the governance of a family-owned business
can be sufficiently demanding relative to constituent interests
without complicating matters by including a new owner in the
capital structure. Many owners of family businesses, therefore,
struggle to obtain needed capital but 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 family-owned businesses. We have thoroughly researched
these capital market segments and have identified those funding
sources, which will provide growth-capital to family-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 without having to give away ownership. To request
more information about our Company Capitalization services
for companies with revenue between $50MM-to-$150MM click
here.
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Improving the Amount or Cost of Senior Debt
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As family-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, most 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, family-owned businesses is not served
properly by its existing bank, it is typically for one of
the following reasons: (i) the company's senior credit needs
exceed its current bank's regulatory lending limits and its
current bank does not have an active loan syndicate department,
but their bank does not want to lose its customer relationship,
(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)
beyond its current bank's geographic reach, (vi) other forms
of senior credit are needed (e.g. 10 year term loan for acquisitions
or plant expansion, or lease financing for single purpose
specialized equipment), which would be better provided by
non-bank senior lenders (e.g. an insurance company or mutual
fund), but its bank is unaware of the third-party financing
options that are available or the banker does not recommend
other alternatives for fear of losing the customer relationship,
(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 in order to obtain credit commitments
from their bank's underwriters 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 company, or to learn how to reduce the cost of your
senior debt click
here.
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Family Business Governance
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We believe that effective Family Business Governance
is a process by which the controlling owners of a business
create an atmosphere for nurturing quality input to maximize
the effective utilization of a company's entire resource base.
Effective Business Governance is especially important in family-owned
businesses because such companies typically lack a diverse
group of shareholders and, therefore, they receive more limited
external input. Furthermore, as company's grow or transfer
from founders to second or third generation owners, there
are often fewer family members that are either interested
in being involved with, or who are capable of managing, the
business. The greater the number of heirs or beneficiaries,
and the more successful the business, the more divergent can
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