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Operating Like a Turnaround (Before You Have To) — Part 3

[Part Three in a three-part series discussing the benefits to healthy, profitable companies in taking a page from the turnaround management playbook.]

In our previous blogs, we discussed operational analysis and expansion planning as it pertains to unlocking capacity and growth. In this installation, we focus on the projection, timing and tracking of cash flows.

HOW CAN YOU HIT A TARGET IF YOU’RE AFRAID TO CREATE ONE?

The 13-week cash flow forecast is the industry standard for basic performance measurement in a turnaround situation. Every cash inflow and outflow is matched against projections, with variances (positive and negative) scrutinized for the underlying causes.  This tool provides an enhanced level of transparency into a company’s performance, which is at the same time crucial for management and demanded by creditors.

When applied to a healthy company, the 13-week cash flow forecast allows management enhanced clarity and transparency at a granular level. This can lead to quicker, more informed decision-making in both the core operations and expansion initiatives. This level of clarity, starting at the C-Suite, can be pushed down into the entire organization, unifying all manager-level employees with a common language.

The 13-week cash flow forecast can roll forward on a weekly or monthly basis, creating benchmarks for monthly tactical reviews and quarterly strategic reviews.  Essentially, it becomes the core tool to benchmark a company and its management against an agreed strategic operating plan, with factual data forcing accountability for performance.

IMPLEMENTATION & TRACKING

Tracking actual performance to projections is a powerful indicator for your business. It provides a crucial level of awareness, giving you the opportunity to detect problems, recognize strengths and evaluate initiatives. Without some form of tracking vs projections, you’re really on a road trip without a map: no destination and no evaluation of progress towards the same.

Cash inflow projections are based on detailed knowledge of your operational capacity, sales cycle and customer pipeline. They should reflect what you can realistically expect your system to generate: known customer demand, order backlog, production capacity, inventory, length of sales cycle – all these factors must be carefully considered in creating your revenue projections.

Remember that you’re not just projecting revenue – you’re anticipating when cash will actually hit your bank account and be available for use. Cash inflows that fall short of projections provide notice as to a host of potential issues, including operational/production, sales efficacy, customer demand and customer solvency (collections).

Alternatively, cash inflow actuals deviating substantially to the upside alert you issues such as market demand and “sweating” assets, potentially indicating the need for expansion and investment. In either case, deviations from projections can be given immediate attention rather than delaying or ignoring issues due to ignorance or untimely knowledge of them.

Cash outflows are created based on when you anticipate actual payment of expenses. Factors to be considered are escalations (think rent and inflation), anticipated equipment/asset purchases and hiring initiatives. If you pay expenses with a credit card, those payments should be considered cash outflows – money that has essentially left your bank account and is no longer available for use. Actual outflows that exceed projections could be an indication of a lack of grounded operating knowledge, inefficiencies, supply chain issues or a lack of proper controls.

TIMING & ALLOCATION

It’s also important to get the timing of cash flows right. Every business essentially matches cash inflows to outflows, with the goal of being able to meet obligations as they come due and to calculations of IRR. Cash that comes in later than expected can cause a lot of heartburn when outflow obligations materialize, leading to ad hoc cash management that diverts cash from other pre-planned activities. Cash flow mismatch also communicates to investors that you don’t have a solid grip on your cash management, eroding confidence in management and the business in general, potentially resulting in valuation discounts.

Projecting future cash balances allows you to plan for capital allocation and anticipate financing needs. Accurate cash flow forecasting shows lenders/investors/buyers AND current shareholders (including yourself) that your company is tightly run and it instills faith in your management acumen.

Perhaps most critically, a well-executed cash flow forecast creates a level of fact-based understanding of your company’s operations that can be used as benchmarks for accountability for you and all those in executive or management functions.

The bottom line is that as a business owner, you must have deep knowledge of how both cash and work flow through your business. Lack of visibility on either of these key aspects leaves you vulnerable to very unpleasant, yet very avoidable surprises.

Mark Taffet is CEO and Wolfgang Tsoutsouris a Managing Director at MAST Advisors, Inc., an M&A and strategic advisory firm focused on maximizing value for middle market companies.

Securities Offered Through SPP Capital Partners, LLC. 550 Fifth Avenue, 12th Floor, New York, NY 10036 Member FINRA/SIPC

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Operating Like a Turnaround (Before You Have To) — Part 2

[Part Two in a three-part series discussing the benefits to healthy, profitable companies in taking a page from the turnaround management playbook.]

In our last blog, we discussed how and where you are generating your profits and how detailed examination of this can unlock capacity and growth. In this installation, we address growth via both expansion and acquisition. This may seem a departure from the Turnaround theme, but the rigor of critically evaluating opportunities is indeed applicable.

How and Where Do You Want to Expand?

Many companies begin their expansion planning focused on what THEY do well, or where THEY have additional capacity for new products/services that THEY have developed.  This internally focused methodology often leads to a “Ready, Fire, Aim” scenario and disappointing outcomes.  A far more effective approach is to start with a verified knowledge of demand rooted in the perspective of YOUR CUSTOMERS & CLIENTS.

Successful growth planning begins with listening: What are your clients’ problems and pain points? They may not tell you up front, or even have clear ideas on what they are. They may not even be totally aware of them.  Invest in understanding your clients’ needs better than they do.  Invest in this with both internal and external resources.  Then look inward and match customer demand against the specific product/service extensions where your company has a competitive advantage.

When expanding into new customer segments for your existing products/services, examine each opportunity and how they match with your specific competitive advantages.  Keep this examination simple:  if your company has the production capacity, expand where there is a proven demand that fits your strengths.

Once an addressable demand is solidly identified, investigate your company’s ability to address it. Is the solution within your current skill set? If so, it may be as simple as making minor adaptations to existing products/services or Sales & Marketing programs that can be easily implemented. If not, can you develop it internally with existing resources, perhaps supplemented by some key hires, technologies or other assets? If internal development is not realistic, then one must consider an acquisition, joint venture or partnership. This process is more succinctly described as the classic “build vs buy” analysis.

Whether expanding more deeply into current markets or new markets, whether expanding organically or via acquisition/partnership, the key determinant in assessing viability is current or potential customer demand.

Regardless the path, simplicity is critical. It is usually most effective to focus on 1, or perhaps 2 things at a time. Trying to “multi-task” often leads to dabbling and confusion, and when you make the decision to play, don’t play for pennies; allocate the necessary resources and play to win.  Alternatively, if you don’t have a verified market edge or lack the willingness to invest sufficiently to truly win, don’t start.  Don’t dilute your human, financial or operational capital with multiple, complex and/or poorly funded initiatives.

“Operating like a turn-around” means identifying and investing in the specific things needed to succeed. This doesn’t mean under-investing: it means focusing resources on the simplest path to achieving as close to a pristine implementation as possible.

It also entails creating a realistic budget that your company can fund. Establish benchmarks to justify the ongoing investment and the discipline for monthly tactical and quarterly strategic reviews. If the project progresses successfully, please revert to the discipline outlined in Part 1! Then keep at it or double down.  If performance lags the established benchmarks, determine the specific reasons. You may have to change tactics or even recognize that the initiative should be re-thought and/or perhaps curtailed.

Negative Example (“Ready, Fire, Aim”):

A specialty food manufacturer desired expansion into markets tangential to their core customer base. A thesis was developed internally as to the potential accessible market without any research or fact-driven confirmation.  Loathe to spend money on consultants or market experts and relying solely on their own perceptions, the company simply applied the same marketing and advertising approach that had worked in their core business. They then proceeded to commit significant capital and resources to a build out, tripling their production capacity.

Fast forward 18 months, having failed to confirm and identify the accessible market, the increased production capacity remained unused, and the static marketing strategy not only failed to reach a new audience, but even grew stale with their core customers. This in turn resulted in shrinking of revenues and a significant decrease in their optionality for either a desirable liquidity event or attraction of growth capital.

Positive Example (“Ready, Aim, Fire”):

A home goods manufacturer grew exponentially in one specific product category by providing a key client with extraordinary service and consistent quality.  As the client’s demands grew, the company applied financial and human capital in a well-planned strategic initiative.  The result was a nine-fold increase in revenue from that account in eight years, taking total sales into nine figures.  Then, having established mutual trust, the company approached this key customer to manufacture products in a second category requiring a very similar manufacturing expertise.  The client accepted the proposal and participated as partners in a tightly planned product line expansion.  Within three years, this category too generated mid-eight figure revenue for the company.

“Operating like a Turnaround” means taking a “Ready, Aim, Fire” approach focused on meeting proven demand in the simplest manner.  This will diminish internal friction while increasing the odds of sustainable top-line growth, stronger bottom-line results and much higher ROI.   That in turn optimizes value, whether for a liquidity event or in seeking further growth and funding capacity.

Mark Taffet is CEO and Wolfgang Tsoutsouris a Managing Director at MAST Advisors, Inc., an M&A and strategic advisory firm focused on maximizing value for middle market companies.

Securities Offered Through SPP Capital Partners, LLC. 550 Fifth Avenue, 12th Floor, New York, NY 10036 Member FINRA/SIPC

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Operating Like a Turnaround (Before You Have To) — Part 1

[Part One in a three-part series discussing the benefits to healthy, profitable companies in taking a page from the turnaround management playbook.] 

How & Where Are You Generating Profits?

Imagine running your company with a laser focus on where it is generating profit.  Imagine trimming or eliminating unprofitable functions, retaining only those aspects of the business that provide the best returns and opportunities for growth.

This is the discipline that turn-around professionals bring to troubled businesses.  This discipline, when applied to healthy companies, makes them even stronger. It rallies resources around the company’s core mission, manifesting profitable growth and allowing significant, retentive awards for the company’s key assets: its people.

Many companies have a great set of core products/services.  They have developed a competitive advantage in those offerings and understand the specific market subsegments that find value in their purchase.  These core activities create strong, sustainable profits.

But then arise the dual temptations of 1) “mission creep”: the expansion beyond these core offerings, and 2) “avatar creep”: marketing/selling to customers who do not perceive/receive the highest value from these products/services. These diversions start out innocently enough, often as tangential add-ons, but are borne not of true market demand, but from an inwardly focused culture.  These initiatives may appear to address customer/market needs, but often merely distract management from addressing growing internal problems. They add operational complexities, confuse both consumers and employees, and can ultimately lead to cultural friction and diminished financial performance.

A ”mission creep” example: a company offering a nascent, evolving technology finds that their  offering(s) are not performing exactly as anticipated or promised. Customers ask for supplementary or stop-gap services, which customer service staff tries to accommodate. Instead of confronting the core issues around product improvements, a spiral of ad hoc deliverables takes hold. This unsanctioned “sub-division” consumes the attention of your most valuable people, squeezing out bandwidth for critical “must-have” improvements which would more effectively improve customer satisfaction. This bandwidth shortage leads to more hiring, misaligned with the company’s core mission.  Before you know it, payroll has ballooned past the point of profitability without cementing core customer relationships.

An ”avatar creep” example: An industrial services company finds that a particular type of client receives very high value from its services. These clients are large, sophisticated, and their needs align precisely with the company’s services. In an effort to generate growth, the company markets to smaller, less sophisticated customers. While sales to these customers increase revenue, it is at far smaller margins. Customer acquisition and service costs increase, production assets are strained and customer service demands may skyrocket – all contributing to decreased profitability, and if left unchecked, a potential cash crunch.

Examples of how this looks when acted upon: a healthy restaurant group operating in multiple venues undertook a broad analysis of their portfolio. This analysis revealed underperformance in a distinct segment, which led to shuttering numerous locations. While revenue decreased, margins strengthened and bandwidth was unlocked, allowing them to double-down on their profitable core and pursue a new venue type with far stronger growth potential.

A profitable 3PL enterprise performed a granular review of their client base, which revealed that many of their customers were in fact unprofitable. This detailed analysis resulted in culling 60% of their clients, refocusing on their best clients, and increasing EBITDA margins from 5% to 16%. This allowed the company to explore additional services and expansions that will further serve their core customers and at stronger margins, positioning them to attract additional clients of similarly high value.

In short, when companies take a page from turnaround management, doing a deep dive into core competencies that match specific high-value customer demands and shedding margin dilutive activities, friction in product development / distribution is minimized and Sales & Marketing messaging is clarified. Costs are reduced, and while revenue may lag in the short-term, increased margins and customer satisfaction open the door to far greater, more profitable revenues in the future.

This also highlights the rigorous due diligence necessary to undertake expansion. It involves an examination of specific customer demands, how they match with the company’s capabilities and a robust buy/build analysis. Stay tuned for our next blog, which will address this in greater detail.

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Mark Taffet is CEO and Wolfgang Tsoutsouris a Managing Director at MAST Advisors, Inc., an M&A and strategic advisory firm focused on maximizing value for middle market companies.

Securities Offered Through SPP Capital Partners, LLC. 550 Fifth Avenue, 12th Floor, New York, NY 10036 Member FINRA/SIPC

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Playing the COVID Bounce

There is a saying: “A crisis is a terrible thing to waste”.

The COVID pandemic has been a monumental crisis that has impacted our way of life and virtually every business.  Most business leaders have gone from anxiety to adrenalin rush, to frantically addressing never before seen challenges.  Many business leaders are now happy to have regained some normalcy and are perhaps a bit numb.

We are not yet out of the pandemic woods.  But increasing distribution of vaccines and acceptance of business and lifestyle practices that mitigate health risks are creating light at the end of the tunnel.

Some CEOs simply want and expect things to go back to “business as usual”.  Others are repairing companies that have been weakened financially, operationally or culturally by the pandemic.  If you have competitors who fit those profiles, opportunity may be knocking at your door.

Right now the time to capitalize on the expected post-pandemic economic bounce.

There are two paths to address specific opportunities COVID presents to your company:  Internal evolution driving organic growth, or external growth driven by acquisitions, joint ventures or partnerships.

It is a classic “Build or Buy” scenario.

Builders will have the advantage of tailoring an exact fit to their strategic needs. Resources can be allocated towards competency enhancing investments, including but not limited to:

  • Talent Acquisition: “Work from Anywhere” is a pre-pandemic trend that is accelerating. This creates opportunities recruit outside normal commuter geographies, with talent and fit overwhelming proximity as key drivers.  For companies in expensive metro areas where demand for talent is high and supply dear and expensive, recruiting remote workers in other regions has become a practical option.  For businesses in less populace geographies, recruiting high value remote workers outside their footprint is likewise a practical option.
  • External communication: Prior to the pandemic, video calls were a tool to be used judiciously. Now they are an accepted norm.  Your company requires technologies and training to execute on this evolving “business process”.  Client/customer exchanges are made more efficient, allowing your best client facing people and teams to interact more frequently with a greater number of accounts.   Business travel has been reduced and will be a source of continued savings.
  • Digital Customer Interaction: In-person B2B interactions are becoming increasingly digitized, fundamentally changing both the creation and implementation of “go to market” strategies.  Order lists, product availability, scheduling, exchange of documents and plans were all trending digital pre-pandemic, and those behaviors have accelerated.  Even more stark is the rapid acceptance of digital purchasing in the B2C sector.  This trend is over a decade old and is still picking up speed.  The pandemic has made it clear that consumers will engage in digital purchases even of products thought to necessitate in-person “touch” (perfume, candles, food products, furniture, etc.).  The extent of “Brick & Mortar Retail” disintermediation from the
  • Supply chain has yet to be seen; but retail real estate investors are clearly concerned. In either B2B or B2C interaction, business processes including but not limited to message crafting, customer acquisition, sales & marketing, and customer relationship management need to adapt both in terms of optimal skill sets and optimal business process platforms.
  • Reduced physical footprint: As a portion of employees work remotely part or full time, the need for office space will decrease, creating potential savings in physical plant.  Office space will need to adapt and be more flexible to meet those evolving needs.

Becoming “leading edge” in business processes might be considered primary targets for investment.

These might also be among the areas requiring a highly tailored tactical implementation of a company’s strategy.

Buyers may find opportunity in transactions involving wounded or distressed companies or assets.  A buyer can use their existing commercial platform to create operational leverage, significantly enhancing the performance of acquired assets or organizations.

Combined with efficiencies gained through business process evolutions described above, does this create an opportunity for your company to:

  • Acquire or merge with a competitor and materially rationalize staff and physical plant
  • Acquire or merge with a competitor and upgrade their business process through implementation of the acquirer
  • Acquire or merge with a direct competitor to drive increased market share
  • Acquire or merge with companies at rational values that are in adjacent markets or geographies
  • Seek any of the above in a manner that would scale your business to a point where its valuation is enhanced, access to financing increased and/or it becomes an attractive home to superior talent?

Driving growth through organic or external initiatives can both succeed.  The choice is case-specific.  The critical point is that if you and your company “lean into” where your industry is evolving, you have a competitive advantage over companies and executives who are just happy that the pandemic is receding, waiting for a return to the way things were, are still a bit numb and/or have seen their companies weakened by the pandemic.

It’s time for a “bias towards action”.

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Maximizing Value in a Corporate Sale: Business Infrastructure

Is your company’s infrastructure adequate to support its current operations? Is it adequate to support your projected growth?

Your company’s infrastructure includes many things. Office, manufacturing and/or warehouse space; IT systems; purchasing and supply chain logistics; administrative functions; and more.

Potential buyers will view your company’s infrastructure as either mitigating or creating risk to your quality of earnings and growth potential.

If your company’s infrastructure is where it needs to be, the business will be more robust and able to take on challenges and growth opportunities. If it is fragile, and barely able to keep up with current operations, then the possibility that something will go wrong (whether or not you sell) skyrockets.

Inadequate infrastructure signals to prospective buyers that there is high risk to quality of earnings and potential for growth. Any prospective buyer will understand that they will have to develop and implement an investment plan to improve the basic assets of your company. This represents additional time and cost, and slows down a buyer’s post-acquisition plans.

Alternatively, having your company’s infrastructure primed, and ready to take on growth opportunities and industry challenges provides assurance to prospective buyers and mitigates their perception of risk.

Company infrastructure is an aspect of your business that you may take for granted; potential buyers won’t. Due diligence will unveil the adequacy of your company’s infrastructure and will be a factor in whether or not you are able to maximize value in a sale.

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Maximizing Value in a Corporate Sale: Obsolescence

If obsolescence issues are present in your business, potential buyers will naturally understand there is increased risk for your quality of earnings and growth potential. One question any good buyer will ask is “are your products/services going to be obsolete in the next 3-5 years?” Smart buyers will not stop there.

With evolution in business accelerating, potential buyers will ask if your products/services will simply be less competitive in the near to mid-term. If they are, risk to quality of earnings and growth potential increases.

Most company’s products/services will not be obsolete in the next five years. Smart CEOs and owners make sure their company is always improving what they deliver to clients and customers.

The area many companies ignore in regard to obsolescence issues involve their business processes:

Are your revenue generation processes becoming obsolete? Sales, marketing, advertising?

Are your financial control and reporting functions keeping up with your company’s growth?

Are you employing financial and operational analytics and business intelligence tools that are becoming standard operational tools for strong businesses?

Is the management team that got your company to where it is the right one to get it to the next level?

Are the production methodologies used for your products/services at a current state of excellence?

The list goes on.

As you examine all aspects of your business, do so with an eye towards competitive analysis. That is what good potential buyers will do in due diligence. The more competitive your products, services and business processes, the greater the likelihood that your company will have high quality of earning and growth potential. Potential buyers will factor that into their valuation.

You can sell your company if there are weaknesses in regard to obsolescence. You will simply not maximize value.

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Maximizing Value in a Corporate Sale: Quality of Strategic Plan

How potential buyers think your company will perform once they own it will determine their valuation.

Your strategic plan is the single best tool for explaining to potential buyers that your company has achieved its current performance due to thoughtful, calculated, well planned and implemented strategies. Your current strategic plan will show potential buyers that the same quality of analysis and thought provides them with a blueprint they can implement that maximizes the likelihood of continued success for your business.

If you don’t provide potential buyers a strategic plan that is clear and coherent, there will be an assumption that luck or you personally are wholly or largely responsible for what your company has achieved and what it might do in the future. Luck and your executive capabilities will be perceived as risk to your company’s future quality of earnings or growth potential under the ownership of a potential buyer.

Many companies small and large, do not have prior or current strategic plans that are clear, coherent and actionable.

All the thinking and information might be in your head, but if it is not written clearly and coherently, other people will not be able to understand it. If this describes your company, putting a plan together will pay off when you move to sell.

If your company does not have a quality strategic plan, it is important to hire an investment banker who will generate one for you. Having your “story” told in a way that potential buyers can understand, and which will stand up to the extreme scrutiny of due diligence, is critical to the process of allowing potential buyers an opportunity to understand why maximum value should be paid for your company.

If you don’t have a quality strategic plan, or an investment banker who can explain your business’s historical and going forward business strategy you can still sell your company. You simply will not get maximum value.

 

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