Exit Planning Exchange

By Joseph J. Rahal

Businesses have been hard pressed to grow and to expand in recent times. Many businesses have been forced to get leaner – less people, improved processes, and have taken other measures to reduce costs. However, there are just so many places to cut.

Today’s climate creates an opportunity to grow strategically and to focus externally, to increase revenues and profits. Now is the time to look outward to the marketplace and all its constituents. It is a time to develop, pursue and execute smart and sustainable growth strategies.

There are eight core growth strategies to consider:

1. Retain existing customers
2. Grow existing customers
3. Reclamation of former customers
4. Acquire new customers
5. Build strategic partnerships
6. Expand into new markets
7. Add new products or services
8. Acquisition of a new business

Integral to the success of these strategies, is the ability of the companies to fully understand and articulate the value they bring to the client relationship. It is also important for business leaders to realize that what they did to achieve success might not be the right initiative to achieve success in the future. Businesses that rely merely on transactions find themselves behind the efficiency curve. They work incredibly hard to continuously re-sell customers over and over for each transaction and to find new customers and revenues. Also, the transactional business model breeds no loyalty between customers and the business.

Success in today’s businesses market is built on relationships. Relationships are built upon trust and decision makers seeing “vendors” as “partners” who bring value to the relationship:

• Understanding the inner workings, strategies and issues facing the client in the future
• Putting the client first
• Bringing new and innovative solutions and ideas to the table
• Deploying all available resources on behalf of the client
• Sharing market trends and information
• Challenging conventional thinking by asking the right questions

To grow successfully in 2010 and beyond, and to meet clients’ demands in today’s marketplace, businesses must first:

• Understand the basic difference between the features and benefits of its products or service
• Be able to translate that difference into the unique value it provides its clients
• Understand how to communicate and convey that differentiating and unique value
• Insure everyone in the company understands and knows how they impact the value to the client
• Communicate the value and be consistent with this message in all communications vehicles (people, printed materials, electronic, all media, etc.)

For purposes of this discussion, let’s move forward with a few more details on the first growth strategy:

Retain existing customers

It is universally acknowledged that for many sound business reasons, this strategy should be the first step. Your account database is one of your biggest assets, and it is imperative that you manage each account to its fullest. The fastest way to grow is to cultivate your current clients through “Account Management”.

Many of today’s business strategies attempt to foster the best relationship possible and to maximize results with each client. Account Management is that step that converts CRM, cross-sell, up-sell, into practical actions. It employs a more strategic approach to each client relationship versus a tactical (1 sales at a time) approach.

It costs 5 times more to acquire new customers than to service and retain an account. Sometimes we pay less attention to what is going out the back door of our business to our competitors – lost opportunities after we have spent all the time & money to acquire new clients. And, rarely does a business capture all potential revenue from a client in the first transaction. Money is still on the table and available from:

• Selling more products and services over time
• Building a relationship that helps retain the client for re-orders and re-occurring revenues
• Providing better service eliminating competitors’ entry and opportunity
• Securing referrals

NOTE: Frederick F. Reichheld, author of the widely read The Loyalty Effect: The Hidden Force Behind Growth, Profits and Lasting Value, showed that making loyalists out of just 5% more customers would lead, on average, to an increase in profit per customer of between 25% and 100%. Reichheld’s analysis showed that the cost of acquiring new customers was five times the cost of servicing established ones.

The following information is a sampling of possible tactics that might be employed specific to implementing “ACCOUNT MANAGEMENT” strategies. Account Management starts with establishing a complete profile and a total understanding of the entire account – knowing their people, their roles, their business objectives, etc.

• Conduct a comprehensive account analysis
• Understand the client’s industry trends, market and value proposition
• Develop individual client strategies
• Assign accounts to appropriate sales channel
• Create a link between the existing, “good” business and new business leveraging knowledge and success

Summary

This information presents a sampling of Rahal Consulting’s philosophy and approach toward sales and business development. With extensive and successful business experience accrued over numerous engagements across multiple industries, we are poised to help business leaders prepare for the future.

Rahal Consulting seeks to initiate a dialogue with business leaders and to objectively assist in the development and implementation of growth strategies and tactics.

To initiate a more in-depth discussion and for additional information, please contact:

Joe Rahal, Rahal Consulting

Successfully accelerating the performance of sales organizations

www.rahalconsulting.com 617 999 7262 jrahal@ rahalconsulting.com

By Joseph Rahal

A discussion about developing sales compensation plans that work.

Consistent with everything in life, careful thought, preparation and a clear objective are essential for success. Designing a successful and effective compensation plan is no different. Good compensation plans must be:

• realistic
• simple to administer and understood by all
• motivating
• an integral part of the over-all sales strategy and sales management process

Compensation plans are as individual as each business. There is no “one-size-fits-all”. There are, however, a set of standard fundamentals within each business from which all compensation plans should be developed. The components of the plan must be aligned and consistent with these basic fundamentals. When initiating a compensation plan, business leaders must start with a clear understanding of:

1. their business model and philosophy
2. their business objectives
3. the right people with the right skills in the right place and what is expected of them
4. their goals, expectations, measurements and the accountability system(s)
5. the performance management program(s)
6. their culture (do sales managers help develop skills and talents of reps; is it a team environment, etc)

In addition to the fundamentals listed above, several key variables enter into the formulation of compensation plans:

• over-all sales strategy
• sales management and its role
• the maturity of the business
• the profile of sales force
• types of sales channels
• the marketplace
• short term needs and goals versus long term
• organizational structure insuring people are assigned properly with clear, well communicated objectives and are incented and paid accordingly
• pricing and margin
• client incentive programs
• what results are covered by salary / draw versus what results are considered exceeding expectations
• total benefits (auto, expenses, cell phone, healthcare, retirement, etc)

Once a compensation plan is in place, it is not an advisable strategy to constantly change, and/or tinker with, compensation plans; but at times, change is necessary. Plans do not have to change in totality, but rather adjustments can be made such as:

• number of components in the plan
• assigned weight on each component
• individual goals versus team goals
• focus of the commission  (gross profit, margin, new accounts, retained accounts, retained dollars, add-on sales, cross selling, internal referrals, etc)
• timing of when commissions are paid
• other rewards (trips, awards, etc).

Development of an effective compensation plan is a process that takes into consideration the company’s sales objectives and strategies and aligns the plans components with the key business fundamentals. The effectiveness and success require thought and planning.

By Michael Oleksak

Over the next several decades, millions of U.S. businesses will be sold, merged, recapitalized, gifted, closed, or liquidated. In any of these events, both the owner and the company’s value will benefit from advance exit planning. Financial executives, whether internal or external, play a key role in educating company owners on the basics of exit planning.

If you are the lead financial officer of a privately-held business, such as CFO or VP Finance, part of your fiduciary duty is to protect the company from the risk of an unplanned change of ownership, through sudden death, of both the shares and the operation of the business.  You also play an important role in increasing the company’s value by strengthening it for the possibility of a future transition or transaction.

Whether you are an internal or external financial advisor, you should make the business owner aware of three things every owner must have: a will, a succession plan, and an exit strategy.

The will protects the ownership of the firm in case a tragedy or sudden death affects the owner.  With a will, the shares will stay out of probate court and land in the hands of the person or people chosen by the owner, thereby ensuring some sense of business continuity.

The succession plan will help with the orderly transition of the operation of the business if the owner is suddenly incapacitated.  The exercise of preparing a succession plan will also help establish whether internal management is strong enough to handle running the company without the owner.

The exit strategy will be the catalyst to determine whether the company is ready for some other entity to assume ownership. Are the books and records, processes and systems, management and employees, business model, brand, public image and reputation desirable enough for someone else to pay to acquire it? If the answer is yes, the next question is would the acquirer be external or internal?

Exit Options

The owner’s external exit options are sale to a strategic buyer or sale to a financial buyer or private equity group. Internal transfer options include a management buy-out, a sale of shares through the Employee Stock Option Plan (ESOP), or gifting of shares, usually to the next generation of the owner’s family. Each of these five exit options has a different valuation range, with external transfers generally having higher values. The owner will also relinquish control of the firm after the external transaction, giving up the ability to subsidize his or her lifestyle through internal expenses. The external exit option also eliminates the owner’s control over his or her legacy, so the owner must determine his or her financial and emotional readiness to exit the business.

If the owner is emotionally ready to leave the business, but needs the highest financial return, as the financial advisor you can recommend that a sale to a third party strategic or third-party financial buyer should be considered. Under these arrangements, it’s important to calculate investment banking and legal fees, as well as taxes, because all will be subtracted from the amount of the check the owner will cash at the end of the day. Due diligence by the third party buyer will be thorough. If there are family members working in the business, their employment may be at risk if the current owner is not calling the shots.  The owner may be required to bridge any financing or value gap with seller notes or earn-outs over time.

A management buyout (MBO) creates a different risk to analyze: is the management team capable of continuing to generate enough cash to pay out the owner over time? Some industries lend themselves to MBO’s better than others, such as construction. Such a deal will require outside financing from a bank or another source, and management may be required to pledge personal assets to support a bank loan. Seller notes will also likely be part of the financing. After the buyout, the owner may still be involved and may retain some financial expense benefits under the deal. The further in advance this option is considered, the better the owner can prepare the team for the execution.

An ESOP is a tax-advantaged, though administratively complex, way for the owner to take some money off the table by selling shares to employees and management. Under a buyout or transfer through an ESOP, the owner will likely remain in control if less than 50% is sold, and will continue to have some personal expenses paid by the company.

Gifting is also a tax-advantaged way to transfer ownership, usually to (hopefully capable) family members. The owner can stay in control and have expenses paid for by the firm. This option will cause complications in relationships, especially as you get deeper into the second and third generations of the family.  Capable outside consultants with experience in family business issues should be considered to help smooth out issues.

All the options that financial executives can suggest for exit strategies carry different valuation ranges, with external transfers having higher valuation ranges (and higher tax impacts). However, a clear awareness of each will help the owner and the company mitigate risk and prepare for the future.

Published in Financial Executive

Michael Oleksak was a commercial lender for 17 years at Bank of Boston. He is a principal at Trek Consulting LLC, Woburn, Massachusetts and co-founder of the Exit Planning Exchange. He works with small and medium-sized businesses to improve performance and value and to prepare for exit.

Contact him at oleksak@ trekconsulting.com - www.trekconsulting.com

© Copyright 2010 Michael Oleksak. All rights reserved.