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If you would be interested in learning more about
the types of services we most often provide to privately-owned businesses
controlled by unrelated persons, 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
most small businesses is through what is typically referred
to as internal or organic growth. However, the vast majority
of most small 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 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 account receivables,
finished goods inventory and fixed assets or 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 privately owned businesses there are both owner
and non-owners who are part of the management team. As a principal
owner of a privately 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 often
create management team development challenges for smaller
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 privately owned business is a challenge. It is sometimes
harder to recruit or retain strong management candidates to
a smaller, privately owned company. Non-owner management candidates
are often concerned that the owners will have a bias when
it comes time for salary and bonus reviews or internal promotions.
Also, most smart managers soon realize that the owners who
work in the business will ultimately be dependent upon the
company to support their lifestyles. The perception can develop
that a small company will be at a growth disadvantage because
of the financial demands placed on it by the owners. Our experience
with hundreds of privately 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 small 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 small 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 a 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 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 companies continually fall-short
of the sales growth targets, 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 account receivables,
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, 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, 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, many medium-sized, businesses are not served
properly by their existing banks 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 small 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 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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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. Their 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
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 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 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 privately owned businesses there are both owners
and non-owners who are members of the management team. As
a principal owner of a privately 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. These
factors are often cause management team development challenges
for smaller 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 privately owned business is
a challenge. It is sometimes harder to recruit or retain strong
management candidates to work in a privately owned company.
Management candidates are often concerned that the owners
will have a bias in favor of owner-members of the management
team when it comes time for salary and bonus reviews or internal
promotions. Also, most smart managers soon realize that the
owners who work in the business will ultimately be dependent
upon the company to support their lifestyles. The perception
can develop that a small company will be at a growth disadvantage
because of the financial demands placed on it by the owners.
Our experience with hundreds of privately 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 owners and non-owner
managers. For more information on this subject click
here.
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Strategic Sourcing & Supply Chain Improvements
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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.
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Business Governance
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We believe that effective Business Governance
is a process through 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 privately
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 privately
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 privately
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 privately-held medium-sized companies
are controlled by persons over 58 years of age. Finally, the
average tenure of a president in a privately-owned business
is 22 years (as opposed to less than 5 years among public
companies) and, the survey reported, two-thirds of all medium-sized
businesses expect to have to find a replacement for their
presidents 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 privately owned businesses. For more information on Business
Succession Management click
here.
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Owner Exit Plans & Inter-Owner Business
Transfers
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Many owners of privately owned 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 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 privately owned companies also delay the implementation
of inter-generational business transfers, when some of the
current owners' interests may be transferred to younger generation
family members who make takeover the companies. This 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 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 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 interest click
here.
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c. Revenue from $50MM-to-$150MMM
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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 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
for companies with revenue between $50MM-to-$1500MM click
here.
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Tax Planning for C & S Corp Conversions
re. New Dividend Tax Law
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Most privately owned businesses with revenue
between $50MM-to $150MM 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 dividend income 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. For more information
on this tax planning idea click
here.
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Strategic Sourcing & Supply Chain Improvements
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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.
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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 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 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 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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Accessing Non-Dilutive Growth Capital
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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.
Owners of a 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 privately-owned businesses generally attempt to undervalue
their investments, which increases dilution and attendant
capital cost, and (ii) the governance of a privately-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 privately owned
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 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 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 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 company, or to learn how to
reduce the cost of your senior debt click
here.
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Business Governance
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We believe that effective Business Governance
is a process through 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 privately
owned businesses because such companies typically lack a diverse
group of shareholders and, therefore, they receive more limited
external input. Furthermore, as company grows or is transferred
from founders to second or third generation owners, there
are often fewer family shareholders 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
be the view and the more their is to argue about. Obviously
disharmony is not desirable either during social gatherings
of owners or within the business. As a company grows, improved
Business Governance becomes increasingly essential. Effective
Business Governance involves assembling a trusted governance
team, which typically includes controlling shareholders, capable
outside members of a board of directors or a 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 conti | |
