How to get the most out of a business transition
“You were born to win, but to be a winner, you must plan to win, prepare to win, and expect to win.” – Zig Zigler
Most of the business owners we talk with have a fundamental misconception about the business sale or the business transition – they see exiting their businesses as an event instead of a process. From our experience, viewing the business transition as an event instead of a process can lead business owners to make decisions that lead to unwanted outcomes. Without a proper mindset, business owners who go through the transition process typically do not end up optimizing either their business or their personal outcomes.
For many mid market privately held business owners, a majority of their wealth is tied up in their business. Consequently, lack of proper perspective and planning for the business transition can lead to significant financial distress for the business owner.
A mid-market business owner typically plays two roles: The first role is that of an executive who runs a well oiled machine with obligations to employees, suppliers, customers and the community. The other role is that of a shareholder who is trying to maximize the return on investment for the benefit of self or family or an estate. Depending on individual perspective and situation, the transition being sought could be to get out of one or both of these roles.
We view business transition as a multi step process that should be started several years in advance of the planned exit date. The first step in business transition planning is establishing the motives for seeking the transition and identifying the desired outcomes of the process. Depending on the individual situation this could be a very simple or complex matter.
The next step in the process is to establish a proper transition channel that can produce the desired outcomes. The transition channel could be internal or external. An internal channel could be a business transition to heirs, employees, co-owners, etc. An external channel could be an acquisition by another company, PEG, individual buyer, or going public, etc.
Once the proper transition channel is established, the next step is to check the feasibility of making the transaction work with the desired target within the chosen channel and the methods that can be applied to make the transition occur. The methods used should be picked after careful tax and estate considerations. In cases where the owner is relying on the cash flow from the business to retire, special consideration needs to be given to ensure the seller gets a cash flow that is commiserate with his or her expectations. Care also should be taken to protect the cash flow and ensure a comfortable retirement. For internal transitions, ensuring the company has a good capital position and access to needed capital helps to make sure the transfer is successful.
Once the motivations, goals and outcomes are well established and refined, the business owner needs to establish a timeline for the process. A properly planned transition will allow the business owner to position the company in a desirable light during the exit process. Positioning the company makes the value of the company visible to the acquirers. Attention needs to be paid to topics such as:
- Has the business been built for a transition?
- How will the transition occur?
- Is there a logical evolution path for the business? What is the potential?
- What level of investment is necessary to sustain the business or grow it to the next level?
- Who would be the ideal person or what would be the ideal entity to be the next owner?
- Is there a legacy that the owner wants to leave behind?
- Is the business environment expected to face a head wind or tail wind in the coming years?
These questions and others need to be answered in the context of the mindset of the likely acquirer. For example, a typical acquirer for a mid market company is likely to be a PEG, a consolidator or a large company. The business owner needs to be keenly aware that these acquirers have considerable experience making acquisitions and among other things they are going to be looking carefully at how the company performed in the past and how it will perform during the exit process.
A business is ready for the market only after the business is prepared for the anticipated inquisition. The subsequent steps including the transaction itself and satisfaction of the post transaction obligations are complex matters that require a tremendous amount of creativity, negotiation skills, understanding of the tax laws, attention to details, and other deal making skills.
In summary, business transition can be a complex process and needs to be tended to with care. Lack of understanding of the process means that the business could wither away without a transition ever occurring or the business owner could get much less out of the business than what is possible. The business owner needs a disciplined process that can achieve the necessary outcomes. Having a proper mindset about business exits is imperative to protect one’s nest egg and the family estate.
A competent mergers and acquisition advisor who can walk the business owner through these steps can help the business owner to establish and achieve the desired outcomes.
Monday, October 19, 2009
Friday, July 03, 2009
Know What You Are Getting With An Earnout
A Guide To Structuring An Earnout
“Experience is what you get when you don't get what you want.” - Dan Stanford
Before one digs deep into the structure of the earnout it is important to understand the motivation of the parties in structuring the earnout. Is the purpose of the earnout to bridge a valuation gap based on legitimate differences of opinion about the amount of future earning streams? Does the earnout have to do more with potential business transferability issues? Is the earnout primarily about creating incentive for delivering high performance?
Historically, earnouts have been used by M&A advisors to bridge a valuation gap between the seller and the buyer. Sellers typically tend to value their business much higher than a buyer and an earnout can be great way to satisfy both parties. Astute acquirers have also used earnouts to incentivize and motivate sellers to deliver on a performance promise post close.
The above thinking has changed significantly in the recent past. The recession and credit crisis have put the acquirers in the catbird seat and acquirers are demanding earnouts primarily as a negotiating lever - sometimes in situations where none would be warranted by historical precedents.
The structuring and negotiating of the earnouts should be based on a clear understanding of the motives. Regardless of the motives, all earnouts have several key components:
Duration of the earnout: Most earnouts last between one and three years. Anything shorter than a year is typically meaningless to the acquirer. In most cases, duration longer than three years significantly increases the chance of unforeseen events impacting the business and makes projections used for earnout unrealistic. To the extent used, longer term earnouts need to be written to decrease the uncertainty and reduce the inherent risks.
Identification of milestones: Milestones for earnouts can be financial or non-financial. For financial earnouts, sellers typically prefer revenue based milestones because they are easier to achieve and monitor. On the other hand, acquirers prefer net income based milestones because revenue based incentives may motivate the sellers to drive revenue at the expense of profitability. An EBIT or EBITDA based milestone can often provide a good compromise between a buyer’s and seller’s needs. To reach a comprehensive agreement, acquirers and sellers should clearly understand the factors effecting EBIT/EBITDA, including the pre and post close accounting methods used to compute the milestones.
Operation of the business during earnout period: The goals of the acquirer and the operation of the business post-acquisition could be substantially different from the seller’s goals and the pre-acquisition operational model. For the earnouts to be meaningful, the acquired business should be operated in a predictable way that, among other things, reduces mismanagement and malfeasance on the part of both the acquirer and the seller. Employment agreements should also be put in place to ensure the seller has a say over relevant control issues. The earnout may also be adversely impacted by how the acquiring company allocates operational overhead and other expenses in the earnout calculations. A merger or acquisition of the acquiring company or the acquiring division, or a divestiture of the division or a product line, could also create situations where the earnout metrics become meaningless. It is imperative that the earnout document contain clauses detailing operational, accounting, and employment specifics and identifying conditions under which the earnout may have to be modified or accelerated.
Establishing if/when milestones are achieved: Typically it is the acquirer’s responsibility to identify when an earnout milestone is achieved and provide the calculations pertinent to the earnout. A prudent seller should ensure that he has access to audited/auditable books that relate to the earnout calculations should a dispute arise. The parties also need to establish mechanisms to deal with any challenges to the earnout calculations.
Method of payment: An earnout may be paid in cash, stocks, bonds or other securities. If the payment is made in forms other than cash, the seller needs to be cognizant of the potential variability in the payment stream. The acquirer may offer 10,000 shares of the company’s publicly traded stock at a stock price of $50 at the time of the deal and unanticipated events could result in the stock price being $5 on the day of the earnout payment - effectively driving the value of the earnout to 1/10th of the anticipated value. Earnouts paid in private company securities could be even more of a challenge as they are illiquid and are more easily subject to manipulation.
Tax impact: The earnout language should be drafted meticulously to ensure proper tax treatment of the earnout. Depending on how the earnout is written, the payments could be capital gains, payroll income or independent contractor income – all with very different tax implications. It is imperative that the language be carefully addressed to avoid conflict and to reduce the tax bite.
Summary:
Earnouts, no matter how well crafted, can contain pitfalls for both sellers and acquirers. Parities to an earnout agreement must understand each other’s motives and craft an operationally workable win-win agreement that reduces scope for potential conflict and litigation. It is imperative that both parties know what they are getting themselves into with an earnout agreement.
“Experience is what you get when you don't get what you want.” - Dan Stanford
Before one digs deep into the structure of the earnout it is important to understand the motivation of the parties in structuring the earnout. Is the purpose of the earnout to bridge a valuation gap based on legitimate differences of opinion about the amount of future earning streams? Does the earnout have to do more with potential business transferability issues? Is the earnout primarily about creating incentive for delivering high performance?
Historically, earnouts have been used by M&A advisors to bridge a valuation gap between the seller and the buyer. Sellers typically tend to value their business much higher than a buyer and an earnout can be great way to satisfy both parties. Astute acquirers have also used earnouts to incentivize and motivate sellers to deliver on a performance promise post close.
The above thinking has changed significantly in the recent past. The recession and credit crisis have put the acquirers in the catbird seat and acquirers are demanding earnouts primarily as a negotiating lever - sometimes in situations where none would be warranted by historical precedents.
The structuring and negotiating of the earnouts should be based on a clear understanding of the motives. Regardless of the motives, all earnouts have several key components:
Duration of the earnout: Most earnouts last between one and three years. Anything shorter than a year is typically meaningless to the acquirer. In most cases, duration longer than three years significantly increases the chance of unforeseen events impacting the business and makes projections used for earnout unrealistic. To the extent used, longer term earnouts need to be written to decrease the uncertainty and reduce the inherent risks.
Identification of milestones: Milestones for earnouts can be financial or non-financial. For financial earnouts, sellers typically prefer revenue based milestones because they are easier to achieve and monitor. On the other hand, acquirers prefer net income based milestones because revenue based incentives may motivate the sellers to drive revenue at the expense of profitability. An EBIT or EBITDA based milestone can often provide a good compromise between a buyer’s and seller’s needs. To reach a comprehensive agreement, acquirers and sellers should clearly understand the factors effecting EBIT/EBITDA, including the pre and post close accounting methods used to compute the milestones.
Operation of the business during earnout period: The goals of the acquirer and the operation of the business post-acquisition could be substantially different from the seller’s goals and the pre-acquisition operational model. For the earnouts to be meaningful, the acquired business should be operated in a predictable way that, among other things, reduces mismanagement and malfeasance on the part of both the acquirer and the seller. Employment agreements should also be put in place to ensure the seller has a say over relevant control issues. The earnout may also be adversely impacted by how the acquiring company allocates operational overhead and other expenses in the earnout calculations. A merger or acquisition of the acquiring company or the acquiring division, or a divestiture of the division or a product line, could also create situations where the earnout metrics become meaningless. It is imperative that the earnout document contain clauses detailing operational, accounting, and employment specifics and identifying conditions under which the earnout may have to be modified or accelerated.
Establishing if/when milestones are achieved: Typically it is the acquirer’s responsibility to identify when an earnout milestone is achieved and provide the calculations pertinent to the earnout. A prudent seller should ensure that he has access to audited/auditable books that relate to the earnout calculations should a dispute arise. The parties also need to establish mechanisms to deal with any challenges to the earnout calculations.
Method of payment: An earnout may be paid in cash, stocks, bonds or other securities. If the payment is made in forms other than cash, the seller needs to be cognizant of the potential variability in the payment stream. The acquirer may offer 10,000 shares of the company’s publicly traded stock at a stock price of $50 at the time of the deal and unanticipated events could result in the stock price being $5 on the day of the earnout payment - effectively driving the value of the earnout to 1/10th of the anticipated value. Earnouts paid in private company securities could be even more of a challenge as they are illiquid and are more easily subject to manipulation.
Tax impact: The earnout language should be drafted meticulously to ensure proper tax treatment of the earnout. Depending on how the earnout is written, the payments could be capital gains, payroll income or independent contractor income – all with very different tax implications. It is imperative that the language be carefully addressed to avoid conflict and to reduce the tax bite.
Summary:
Earnouts, no matter how well crafted, can contain pitfalls for both sellers and acquirers. Parities to an earnout agreement must understand each other’s motives and craft an operationally workable win-win agreement that reduces scope for potential conflict and litigation. It is imperative that both parties know what they are getting themselves into with an earnout agreement.
Thursday, May 07, 2009
Focus On The Balance Sheet
Navigate This Recession With a Successful Financial Model
“Learn from the mistakes of others. You can't live long enough to make them all yourself” - Unknown
When it comes to mid market M&A, both business sellers and business buyers have traditionally focused in on the top line and the EBITDA. Sell-side M&A advisors have counseled their clients to focus on the P&L and do whatever they can to improve the revenues or EBITDA to get the most out of their business at exit. Similarly buy-side advisors have tended to counsel acquirers to look at the growth prospects of a target company instead of mundane things such as assets and liabilities.
The current recession and associated liquidity crisis are making business owners and advisors rethink the P&L focus. With deal flow down more than 50% in most sectors, liquidity being at a premium, multiples down across the board, and deals taking a long time to close, it is becoming increasingly clear that the P&L focus is no longer a proper approach for most businesses - especially for growth companies.
Assets and liabilities may not sound as exciting as revenues and earnings but now is the time for business owners to increase their focus on the balance sheet. Balance sheet focus can provide an early warning system and help the business owners identify the company’s shortcomings and improve the company’s health and help the company survive or thrive as we exit out of this recession. Without the focus on the balance sheet, it is easy for a company to find itself in a position where the company is under-using or misusing its assets or, worse yet, in an over leveraged position. Once a company finds itself in these situations, balance sheet repair can be a time consuming process. If a liquidity crisis develops for the company with a weak balance sheet, there may not always be sufficient time to pull itself out of an impending crisis.
To analyze the balance sheet for liquidity and performance issues, one needs to focus on four key areas: current assets, non-current assets, current liabilities and long term liabilities.
Current assets
Current assets are the assets that are likely to be used up or converted into cash within one business cycle. Typically these include: cash, liquid investments, inventories and accounts receivables. The main aim of analyzing current assets should be to find ways to strengthen the cash position and bring down the level of inventories and accounts receivable to a sensible level.
Even in relatively well run companies, it is common for a company to have stale inventory or have inventory that is significantly overstated or understated. A thorough evaluation of inventory should include ensuring accuracy of inventory, converting stale inventory into cash, and putting in place a process to keep the inventory levels current and lean. A company needs to ensure that its inventory turnover (cost of goods sold divided by average inventory) is high and the company is quickly moving product through the company at a rate better than its competitors. The analysis of inventory should also take into consideration how the inventory levels have been changing historically compared to its sales. Barring special circumstances, it is a sign of poor inventory management if the inventory is growing faster than sales.
Analyze the accounts receivables to understand how quickly the company is collecting on the customer accounts to ensure that its collection methods are not unduly lax and are competitive with the rest of the industry. If a company's collection period is higher than industry norms then the company may be accumulating subpar customers and/or leaving money on the table by letting customers stretch their credit beyond what would be considered a good business practice. Either of these conditions, even if intentional, may be unsuitable for the current economic climate.
Non-current assets
Non-current assets are all assets the company possesses that are not current assets. The balance sheet is typically deficient in accurately reflecting the value of non-current assets. Most assets that fall into this category have speculative values and may be of little use if there is a liquidity crunch. The analysis needs to identify ways of monetizing these assets if it makes economic sense or if it becomes necessary.
The analysis should include a spotlight on “off balance sheet” assets and hard-to-measure intangible assets and intellectual property items such as patents, trademarks, and copyrights. Special attention should be paid to non core brands and other items of goodwill that can fetch value if necessary.
Analysis of non-current assets should also be focused on ensuring that these assets are realistically valued. In addition to other benefits, valuing assets periodically may help the company write down asset values and reduce the tax bite and thus improve the company’s cash flow.
Current Liabilities
Current liabilities are obligations a company must pay within a business cycle. Typical items include payroll liabilities, payments to suppliers, and current portion of long term debt. Inability to pay current liabilities is the primary reason why many companies go bankrupt.
Analysis of current liabilities should include a thorough evaluation of how the company pays its suppliers, employees, and the government. It is necessary to clearly identify the company’s total short term obligations (including upcoming maintenance, capital purchases, current portion of long term debt, and any special or one-time payments to vendors, customers or government). Many a company has found itself in a cash crunch situation by failing to account for a liability that could have been easily forecasted with proper planning. Historical context is essential for predicting future liabilities. Having a historic context on how individual line items have varied over time with sales can also show if the company is overburdened with liabilities it does not need.
Analysis should also include an evaluation to determine if the proper form of financing is being utilized by the company for asset purchases. For example, is the company using short term debt to finance capital budget items?
Long term liabilities
Long term liabilities are non-current liabilities – i.e. the liabilities that the company owes in a year or more time. Long term liabilities typically consist of bank or bondholder debt. Sometimes “off-balance sheet” debt may have been used to finance capital expenditures while keeping the apparent debt levels low. Business owners must realize that carrying undisclosed debts can be dangerous in the current environment – especially if the resulting short term liabilities are not properly accounted for in cash flow calculations.
Summary:
In the midst of a recession and an unheard of credit crisis, even a moderately leveraged company may have difficulties raising capital. If the debt level is high by traditional standards, the company may be headed towards bankruptcy.
For a growth company looking to grow either organically or through acquisitions, being highly leveraged may mean that it may not find sources willing to provide debt financing. In this case, a company may find itself in a situation where it may have to issue stock on unfavorable terms. Worse yet, the company may find itself with a strong P&L but growing itself out of cash and into a bankruptcy.
Management should review its appetite for risk, the level of debt it wants to carry and whether it is using a proper mix of short term and long term financing and the overall degree to which a company is leveraged. A company that finances its assets with a high level of debt is risking bankruptcy. This may happen if the economy does not recover as expected or if the business does not perform as well as expected for other unrelated reasons. Business owners must comprehend worst case economic scenarios and ensure that they have sufficient resources to make debt payments.
A thorough focus on the balance sheet and a somewhat reduced focus on the P&L will help the company survive and thrive in the current environment.
“Learn from the mistakes of others. You can't live long enough to make them all yourself” - Unknown
When it comes to mid market M&A, both business sellers and business buyers have traditionally focused in on the top line and the EBITDA. Sell-side M&A advisors have counseled their clients to focus on the P&L and do whatever they can to improve the revenues or EBITDA to get the most out of their business at exit. Similarly buy-side advisors have tended to counsel acquirers to look at the growth prospects of a target company instead of mundane things such as assets and liabilities.
The current recession and associated liquidity crisis are making business owners and advisors rethink the P&L focus. With deal flow down more than 50% in most sectors, liquidity being at a premium, multiples down across the board, and deals taking a long time to close, it is becoming increasingly clear that the P&L focus is no longer a proper approach for most businesses - especially for growth companies.
Assets and liabilities may not sound as exciting as revenues and earnings but now is the time for business owners to increase their focus on the balance sheet. Balance sheet focus can provide an early warning system and help the business owners identify the company’s shortcomings and improve the company’s health and help the company survive or thrive as we exit out of this recession. Without the focus on the balance sheet, it is easy for a company to find itself in a position where the company is under-using or misusing its assets or, worse yet, in an over leveraged position. Once a company finds itself in these situations, balance sheet repair can be a time consuming process. If a liquidity crisis develops for the company with a weak balance sheet, there may not always be sufficient time to pull itself out of an impending crisis.
To analyze the balance sheet for liquidity and performance issues, one needs to focus on four key areas: current assets, non-current assets, current liabilities and long term liabilities.
Current assets
Current assets are the assets that are likely to be used up or converted into cash within one business cycle. Typically these include: cash, liquid investments, inventories and accounts receivables. The main aim of analyzing current assets should be to find ways to strengthen the cash position and bring down the level of inventories and accounts receivable to a sensible level.
Even in relatively well run companies, it is common for a company to have stale inventory or have inventory that is significantly overstated or understated. A thorough evaluation of inventory should include ensuring accuracy of inventory, converting stale inventory into cash, and putting in place a process to keep the inventory levels current and lean. A company needs to ensure that its inventory turnover (cost of goods sold divided by average inventory) is high and the company is quickly moving product through the company at a rate better than its competitors. The analysis of inventory should also take into consideration how the inventory levels have been changing historically compared to its sales. Barring special circumstances, it is a sign of poor inventory management if the inventory is growing faster than sales.
Analyze the accounts receivables to understand how quickly the company is collecting on the customer accounts to ensure that its collection methods are not unduly lax and are competitive with the rest of the industry. If a company's collection period is higher than industry norms then the company may be accumulating subpar customers and/or leaving money on the table by letting customers stretch their credit beyond what would be considered a good business practice. Either of these conditions, even if intentional, may be unsuitable for the current economic climate.
Non-current assets
Non-current assets are all assets the company possesses that are not current assets. The balance sheet is typically deficient in accurately reflecting the value of non-current assets. Most assets that fall into this category have speculative values and may be of little use if there is a liquidity crunch. The analysis needs to identify ways of monetizing these assets if it makes economic sense or if it becomes necessary.
The analysis should include a spotlight on “off balance sheet” assets and hard-to-measure intangible assets and intellectual property items such as patents, trademarks, and copyrights. Special attention should be paid to non core brands and other items of goodwill that can fetch value if necessary.
Analysis of non-current assets should also be focused on ensuring that these assets are realistically valued. In addition to other benefits, valuing assets periodically may help the company write down asset values and reduce the tax bite and thus improve the company’s cash flow.
Current Liabilities
Current liabilities are obligations a company must pay within a business cycle. Typical items include payroll liabilities, payments to suppliers, and current portion of long term debt. Inability to pay current liabilities is the primary reason why many companies go bankrupt.
Analysis of current liabilities should include a thorough evaluation of how the company pays its suppliers, employees, and the government. It is necessary to clearly identify the company’s total short term obligations (including upcoming maintenance, capital purchases, current portion of long term debt, and any special or one-time payments to vendors, customers or government). Many a company has found itself in a cash crunch situation by failing to account for a liability that could have been easily forecasted with proper planning. Historical context is essential for predicting future liabilities. Having a historic context on how individual line items have varied over time with sales can also show if the company is overburdened with liabilities it does not need.
Analysis should also include an evaluation to determine if the proper form of financing is being utilized by the company for asset purchases. For example, is the company using short term debt to finance capital budget items?
Long term liabilities
Long term liabilities are non-current liabilities – i.e. the liabilities that the company owes in a year or more time. Long term liabilities typically consist of bank or bondholder debt. Sometimes “off-balance sheet” debt may have been used to finance capital expenditures while keeping the apparent debt levels low. Business owners must realize that carrying undisclosed debts can be dangerous in the current environment – especially if the resulting short term liabilities are not properly accounted for in cash flow calculations.
Summary:
In the midst of a recession and an unheard of credit crisis, even a moderately leveraged company may have difficulties raising capital. If the debt level is high by traditional standards, the company may be headed towards bankruptcy.
For a growth company looking to grow either organically or through acquisitions, being highly leveraged may mean that it may not find sources willing to provide debt financing. In this case, a company may find itself in a situation where it may have to issue stock on unfavorable terms. Worse yet, the company may find itself with a strong P&L but growing itself out of cash and into a bankruptcy.
Management should review its appetite for risk, the level of debt it wants to carry and whether it is using a proper mix of short term and long term financing and the overall degree to which a company is leveraged. A company that finances its assets with a high level of debt is risking bankruptcy. This may happen if the economy does not recover as expected or if the business does not perform as well as expected for other unrelated reasons. Business owners must comprehend worst case economic scenarios and ensure that they have sufficient resources to make debt payments.
A thorough focus on the balance sheet and a somewhat reduced focus on the P&L will help the company survive and thrive in the current environment.
Sunday, February 08, 2009
Grow Your Business During This Recession
Success Strategies For Business Executives In Recessions
“ When Times Get Tough, the Tough Get Going” - Anonymous
As the pundits debate if we are in a recession or in a depression, companies are looking forward to see what they can do to get back in to growth mode. We looked back at the learnings from the past recessions, and have come up with a list of things that have worked well in the past and are likely to work well again in the current environment.
1. Improve cash flow. This is by far the most important thing to do for companies looking to survive and prosper in recessions. As simple as this may sound, increasing sales is not the only way to improve cash flow. We are constantly amazed by how lax businessmen and organizations become in good times and how much room there is for improvement. Some simple and effective ways to improve cash flow include:
Ø ensure accurate book keeping and audit for abuse and theft
Ø collect accounts receivable early and delay accounts payable without incurring penalties
Ø clear out underperforming or unused assets and slow moving or stale inventory
Ø delay capital purchases and look to coincide purchases with vendor sales
Ø review payroll and other large expenses and look for cutbacks as appropriate
Ø negotiate favorable rates and payment terms from suppliers or switch suppliers (easy targets include rent, insurance, workers comp, and telephone system)
Ø purchase essential items in bulk to save shipping costs and get price breaks
Ø charge customers upfront fees/payments where possible
2. Maintain a good cash position. Since no one really knows when a recession ends and the next growth cycle starts, it is imperative that companies maintain a good cash position through the down cycle. Cash cushion is critical for a company and also puts the company in a strong position vis-à-vis suppliers and bankers.
3. Consider an active acquisition strategy. During a recession, there will be a lot of good opportunities to expend cash to invest in undervalued assets or businesses that provide strong cash flow. Retain a competent advisor to develop and implement a cohesive acquisition plan.
4. Understand how customers determine value in tough times. Tailor product offerings to more closely reflect the changed customer needs. The key is to provide more value to the customers without sacrificing margins. Look for creative product and service bundling opportunities and keep on constant lookout for ways to retain existing customers. Keep in mind that attracting new customers is several times more expensive than retaining existing customers.
5. Fine tune marketing campaigns. Recessionary time is typically not the best time to cut marketing spending but is the time to use the marketing budget more wisely to increase return and create a stronger brand. Look for competition that is unable to address client needs and go after their customers. Customer acquisition costs are much lower for you if your competitor is going out of business. Target some of the marketing dollars to go after customers of companies that are going out of business. For the stronger companies, recessions are the best time to gain market share.
6. Negotiate long term supplier deals at below market rates. Can you get an extraordinary lease on a prime property because someone else went out of business and the landlord is desperate to get a tenant? Can you negotiate a favorable long term advertising rate? Recessions are the best times to lock in long term supplier deals. Good deals are nearly impossible to get when the market is hot.
7. Build or improve your distribution/sales channels. In tough times, distributors and sales people are hungry for business. Current channels may be more receptive to your needs. Some desirable channels that were not open to your company before may open up. You may be able to negotiate more favorable terms from your existing distribution channel or get a stronger channel to replace your current channel more cost effectively.
8. Stay away from general cuts across the board. Cuts, if needed, should be in areas that do not create value or business areas that are not part of the core business. Look to divest or outsource non-core operations and invest in areas that are the future growth areas of the company.
9. Build employee loyalty. Employees will remember you for sticking with them through the tough times. Operate the business by emphasizing core values and leading by example. When tough decisions need to be made, solicit employee feedback. Use slow times to invest in employee training and developing compelling marketing and sales strategies and tactics. Communicate profusely and make sure the morale stays high.
10. Have a clear vision of where the company needs to be when the recession is over. Managing your business is a lot about allocation of resources and prioritizing where to prune and where to grow. Having a clear vision helps make tough choices that need to be made along the way.
Work out a solid plan. Implement it. Grow your business during this recession!
“ When Times Get Tough, the Tough Get Going” - Anonymous
As the pundits debate if we are in a recession or in a depression, companies are looking forward to see what they can do to get back in to growth mode. We looked back at the learnings from the past recessions, and have come up with a list of things that have worked well in the past and are likely to work well again in the current environment.
1. Improve cash flow. This is by far the most important thing to do for companies looking to survive and prosper in recessions. As simple as this may sound, increasing sales is not the only way to improve cash flow. We are constantly amazed by how lax businessmen and organizations become in good times and how much room there is for improvement. Some simple and effective ways to improve cash flow include:
Ø ensure accurate book keeping and audit for abuse and theft
Ø collect accounts receivable early and delay accounts payable without incurring penalties
Ø clear out underperforming or unused assets and slow moving or stale inventory
Ø delay capital purchases and look to coincide purchases with vendor sales
Ø review payroll and other large expenses and look for cutbacks as appropriate
Ø negotiate favorable rates and payment terms from suppliers or switch suppliers (easy targets include rent, insurance, workers comp, and telephone system)
Ø purchase essential items in bulk to save shipping costs and get price breaks
Ø charge customers upfront fees/payments where possible
2. Maintain a good cash position. Since no one really knows when a recession ends and the next growth cycle starts, it is imperative that companies maintain a good cash position through the down cycle. Cash cushion is critical for a company and also puts the company in a strong position vis-à-vis suppliers and bankers.
3. Consider an active acquisition strategy. During a recession, there will be a lot of good opportunities to expend cash to invest in undervalued assets or businesses that provide strong cash flow. Retain a competent advisor to develop and implement a cohesive acquisition plan.
4. Understand how customers determine value in tough times. Tailor product offerings to more closely reflect the changed customer needs. The key is to provide more value to the customers without sacrificing margins. Look for creative product and service bundling opportunities and keep on constant lookout for ways to retain existing customers. Keep in mind that attracting new customers is several times more expensive than retaining existing customers.
5. Fine tune marketing campaigns. Recessionary time is typically not the best time to cut marketing spending but is the time to use the marketing budget more wisely to increase return and create a stronger brand. Look for competition that is unable to address client needs and go after their customers. Customer acquisition costs are much lower for you if your competitor is going out of business. Target some of the marketing dollars to go after customers of companies that are going out of business. For the stronger companies, recessions are the best time to gain market share.
6. Negotiate long term supplier deals at below market rates. Can you get an extraordinary lease on a prime property because someone else went out of business and the landlord is desperate to get a tenant? Can you negotiate a favorable long term advertising rate? Recessions are the best times to lock in long term supplier deals. Good deals are nearly impossible to get when the market is hot.
7. Build or improve your distribution/sales channels. In tough times, distributors and sales people are hungry for business. Current channels may be more receptive to your needs. Some desirable channels that were not open to your company before may open up. You may be able to negotiate more favorable terms from your existing distribution channel or get a stronger channel to replace your current channel more cost effectively.
8. Stay away from general cuts across the board. Cuts, if needed, should be in areas that do not create value or business areas that are not part of the core business. Look to divest or outsource non-core operations and invest in areas that are the future growth areas of the company.
9. Build employee loyalty. Employees will remember you for sticking with them through the tough times. Operate the business by emphasizing core values and leading by example. When tough decisions need to be made, solicit employee feedback. Use slow times to invest in employee training and developing compelling marketing and sales strategies and tactics. Communicate profusely and make sure the morale stays high.
10. Have a clear vision of where the company needs to be when the recession is over. Managing your business is a lot about allocation of resources and prioritizing where to prune and where to grow. Having a clear vision helps make tough choices that need to be made along the way.
Work out a solid plan. Implement it. Grow your business during this recession!
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