Porsche-Like 987 Strategy for SearchFunder Script

Searching for a Business to Buy? Consider the Porsche-like 987 Strategy Script

1. Porsche-Like 987 Strategy for Searchfunder
SCRIPT
Slide 1
All of us are searching for something. All of us want to live our lives the way we want, the way we
define what is best. I’ll help you today with your search for the perfect business so that you can
create and live the life YOU want. I’m Paul Menig and I’m a Business Accelerant. Accelerants
make things happen faster. They make the fire in your belly burn brighter and longer. I’m
enamored by sleek sports cars since I come from Detroit, the motor city. I worked for Daimler,
one of the German car manufacturers. I’ll admit that the Italian Ferrari and Lamborghini cars are
even more attractive to me. But, the number 987 is important to me in a business context.
Slide 2
In short, here’s why.
9 comes from Top Management Strategy: What it is & how to make it work by BenTregoe and
John Zimmerman. It was published in 1980, nearly 40 years ago. It’s a classic, like the Porsche
987.
8 comes from the 8 drivers of value identified by John Warrilow, the author of Built to Sell.
7 comes from my own observations of the application of Michael Porter’s 5 forces. Professor
Porter of Harvard first described his five forces framework for understanding competition in 1979.
Another classic.
Slide 3
I’m Paul Menig. I’ve been working to build profitable businesses throughout my career. I’ve worked
with startups and Fortune 100 companies. I’ve done crowdfunding, Angel Investing, helped raise
money from private equity and venture capital, and helped with mergers, acquisitions, divestures,
and sales of companies. I learned about the corporate world of M&A while at Eaton and Daimler. I
was really too early in my career to be involved at GE. Of course, GE is now a case study in poor
management and the demise of the corporation over the last 20 years.
Slide 4
Today’s topics are quite simple. First, I want to give you a short overview of the nine basic strategic
areas, the 8 drivers of value and the 7 forces to align for business success. Then, with that in mind,
I’d like to share with you a few things that I’ve learned along the way and am still learning today. I’ll
talk a little about the things I learned in the corporate world, the world of the Fortune 500. Then I’ll
add to what I’ve already shared regarding my personal search for a business to buy with my sone.
Then, I’ll finish with what I am continuing to learn as a business accelerant, a business coach
working with companies of various sizes, but mostly under $100 million in sales.
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2. Porsche-Like 987 Strategy for Searchfunder
Slide 5
These are the original nine basic strategic areas. I thought of the Rubik’s cube, because it has
multiple faces, 9 items on each face, and a seemingly infinite number of combinations of colors
behind. I wish it had 9 colors rather than just 6 for my analogy. Many companies use several of the
nine strategies, but one is much more visible that the others. For instance, take natural resources.
Mining companies, petroleum companies, natural gas companies are pretty much focused on
number 4. Portfolio companies, such as the Danaher Corporation, are focused on number 9, Return/
Profit. They have dissimilar products with few synergies. They care mostly about the return of the
entire portfolio as well as each individual company. Private Equity and Venture Capital companies
are often in this category as well. PEs and VCs are also often in the 8th area of Size/Growth. Just
watch Shark Tank and you’ll see some of the investors could care less what the product is as long as
it has exceptional growth potential.
I’d like you to think about these areas as you search for your perfect investment. What are you
attracted to? If you are all about eCommerce, then you might want to focus on number 6, method of
sale. If you like making things you might want to focus on contract manufacturing in the number 2
area of production capability. If last mile delivery is your holy grail, then you are likely looking at
number 7, method of distribution, or number 8, size/growth. The key is why are you interested? Are
you interested because you’ve always been fascinated with how fresh food get from farm to table?
Or are you more interested in getting rich quickly with the latest investment opportunity?
Slide 6
Many of you may be searching for companies between $500K and $5 million in EBIDTA. These are
typically companies bigger than what you would find on BizBuySell.com and smaller than what an
investment bank might consider. You are applying your own “blue ocean” strategy to avoid a red
blood bath. You want to find a great business with potential, but small enough that you can
negotiate a good deal with the seller and with the investor. I see this as a good opportunity for you.
The 8 drivers include some you are quite familiar with. You probably key in on financial performance
and growth potential. The Switzerland Structure comes from the neutral stance of Switzerland
throughout history. It’s all about independence. Independence from suppliers; independence from a
single large customer; independence from a few key employees. The valuation teeter totter is more
familiar to you as understanding the cash flow of the company. How quickly does it take in money
and how slowly does it pay it out. Can it finance its own growth? Does it need a big line of credit?
Recurring revenue is both easy to understand and difficult. I recently talked with a small business
owner who does the same maintenance check on a home, as required by law, every year. Since the
customers come back every year, they think that’s recurring revenue. Helping an owner understand
that a three year magazine subscription with automatic renewal is much more valuable than an
annual negotiation and purchase. For you as a searcher, you may see tremendous opportunity in a
business by creating maintenance contracts and offering other services. Monopoly control is rare to
find in small and medium businesses. It means that you’ve already created an outstanding brand or
discovered a market that you can control. When you buy a business, you want to know if the
customers will continue buying, if there is room for a price increase, and if there is room for
improvement. That’s what the customer satisfaction rating is all about. Basically, in the corporate
world it’s Net Promoter Score. Small business rarely understand anything beyond their Yelp and
Angie’s list feedbacks. Hub and Spoke is all about the internal organization and its dependence on
the owner. It is frightfully common for the buyer to want to have the seller working in the business in
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3. Porsche-Like 987 Strategy for Searchfunder
some capacity for 1-5 years with contingent bonuses. Think twice about that. You won’t be able to
change the culture and drive improvements as long as the old boss is around.
Slide 7
Here is an idea to consider. Small business brokers are getting some real mileage out of this
approach. The potential seller takes a 13-minute survey that does not require a lot of har number
information. It’s more qualitative than quantitative, with the exception of a few numbers on sales,
profits, and sellers discretionary cash or earning or EBIDTA. The seller gets a score immediately in
comparison to over 34,000 other companies. If you use this particular URL, I’ll share with you what
the quote unquote “survey says.” Many sell-side brokers charge sellers for access to the report and
then work with them to improve a few things quickly. My interest will be in being able to work with
companies you are not interested in, or working with you to improve the business should it be one
you buy.
Slide 8
As a side note, while I’ve been using the Value Builder System for 8 months now, I have also
investigated CoreValue for Advisors. It provides a similar report, but with 18 drivers instead of 8. The
algorithm was developed at my alma mater, MIT, which fits well with my company name Business
Accelerants Powered by Tech-I-M since the Tech-I-M is MIT backwards. The algorithm has been
tested and the NACVA recognizes it. But, NACVA is not the highest valued credential for business
appraisals. They have not been around as long as Value Builder, and have fewer companies for
comparison. Just keep it in mind and check back with me in March or April when I have to cancel or
be subject to automatic renewal of my Value Builder account.
Slide 9
I recently signed up for another valuation tool from BizEquity. This one provides much more specific
and detailed valuation and requires access to formal tax documents to fill out the information. It
provides Asset, Equity, Enterprise, and Liquidation valuations based on specific North American
Industry Classification System codes. It was originally set up for insurance brokers to be able to
make sure a client was buying all the insurance they need. What really attracted me to this tool, was
the search engine.
Slide 10
You can do extensive searches for businesses based on NAICS code, location, and valuation. Where
ever possible, public information is used. This could include 401K documents filed with the state and
employment records submittals. I’m thinking some of you may find the investment in this tool
worthwhile to get information on targets for acquisition.
Slide 11
Now let me quickly tell you about my 7 Forces Strategy and how you can use it to evaluate your
prospects. I’ll make this brief since there are other materials available to describe it. Coming from the
corporate world, I was introduced to Michael Porter’s Five Forces Analysis around 1985 and used it
at Eaton. I found it very useful, but not quite right for some real world instances. So, I’ve modified it a
bit. First, look at the world and the trends. These could include expanding population, movement
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4. Porsche-Like 987 Strategy for Searchfunder
toward urban centers, and aging population. Next, look at what competition is doing for the
business, both large and small. And, consider the inertia of a customer doing nothing because the
value proposition is not good enough. I think of doing nothing as a competitor. Look at the sales and
marketing channels. Often there is more than one step to get to the final user. Look at the risks of
disruption. Here I’m talking about disruption such as autonomous vehicles, drones, blockchain, and
e-commerce. But, I’m also talking about the more mundane risks such as fires, lawsuits, injuries, and
all the things that a public company has to list as risks to a business in their formal 10-K filings.
Consider what is coming in from outside the company. It used to be just parts and supplies. Today
it’s going to include information and services. Underpinning everything is the government and its
many, many regulations. Market constraints are yesterday’s competitive advantages that have
become necessary to be in the business. Overarching everything is technology and its potential to
change everything. Internally, it all comes down to people, products, and processes.
Slide 12
That’s how I choose to look at a company, from all angles, with multiple sensors, from far and near,
from looking at the big picture of the universe to looking at the microscopic operation on a daily
basis, from strategy to tactics.
Slide 13
I maintain that every company needs to grow its revenue and improve its profits. After all, why else
would an investor put money into a company rather than a bank, certificate of deposit, or treasury
bond. Remember the discussion of the Switzerland Structure? Companies often seek to merge or
acquire another company to diversify in markets and change their dependence on suppliers. Another
major reason is to avoid the risk of disruption. Remember the 9 basic strategies? What business are
you in? Pepsi is not in the cola-soda business. Hershey is not in the chocolate business. BP is not in
the oil business. GM is not in the car business. Large companies buy startups, the very startups that
are disrupting their business.
Slide 14
Unfortunately, studies indicate 50% of mergers and acquisitions in the corporate world fail,
sometimes miserably. From my study and observation, they fail due to people and processes not
matching well and not being pursued diligently. Look at the recent issues with the founders of
Instagram and WhatsApp with Facebook leaders. Even the young upstart does not know how to
deal with an upstart.
Slide 15
My son and I looked into buying a business together. I’ve reported on the experience on
Searchfunder and Shrimp Tank in Seattle. Yes, you heard that right, Shrimp Tank not Shark Tank. I
also spoke about it on Sound Financial Groups podcast. We ended up looking quickly at hundreds
of companies and closely at nearly 50 companies. Due to changes in circumstances, we’ve now
called off the search. My son had his company sold to SurveyMonkey, then a portion was spun out
to Private Equity as TrueSample, then that was merged with another company with some of the
same private equity investors involved. Now he’s working in the same industry for someone that has
been both his supplier and his customer. The company is doing well. It’s grown from under $4 million
in revenue to over $12 million in the year he’s been the Chief Operating Officer.
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5. Porsche-Like 987 Strategy for Searchfunder
Slide 16
Along the way, I formed an opinion of brokers. Some were really bad. About all they did was put
together a few pages of information to send around expecting to get a 10% commission on the sale
for almost no work. The picture on the right is taken from the cover of an eleven page document for
a company they were asking in excess of $2 million for. Really?! A cartoonish picture? I hope they
never produce any sales and marketing materials for anyone.
Other brokers were quite good and would spend 1-4 years with a client to help them improve the
company and actively market it.
The buy side broker we hired was worth it. The best acquisitions for someone searching for a
business are NOT for sale—YET! Finding them is just like any open end sales process with cold
calling and a funnel system to move the prospects along.
Slide 17
In my business acceleration coaching business, I do pro-bono work with companies typically less
than $500K in revenue. I’ve now helped over 330 people start businesses, run business, buy
business, and sell businesses. All of the 7 forces and the 8 value drivers figure into my work. I’m
currently waiting to hear how a $3 million revenue manufacturer closed their sale with the help of a
broker, Generational Equity.
My paid clients range from $10 million in sales to over $2 billion. I use the same Porche-like 987
strategies to assess where they are now, point A, where they want to be in a few years, point B, then
work with them to figure out how to get there.
One book that has proved useful to me is the 2017 Business Reference Guide. The 2019 edition is
available for just $144 at businessbrokeragepress.com
Slide 18
One tool I’ve developed is based partially on my education as an angel investor. Every startup has to
put together a variety of pitches, varying in length by the amount of time available. It ranges from a 1
minute pitch at a networking event to a 20 minute pitch to a group of investors with more financial
details than what you see on Shark Tank. I find it helpful for any and all companies to look at 10
questions in what I call the Single Sheet Strategic Summary. I could easily see a searcher asking a
company to provide this information. Brokers will sometimes do it, but it seems to take them 20 plus
pages of gobbledy gook to beat around the bush and never give the real answers. In case you are
wondering, the 10th question is on the back side of the form and asks for 3 years of past financials.
Slide 19
Once you’ve acquired a company, you’ll need to set a new plan and establish a culture that everyone
can easily understand. I use the One Page Business Plan Company and Cascade Strategy for this.
This is part of addressing the people and process issues that cause so many acquisitions to fail
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6. Porsche-Like 987 Strategy for Searchfunder
Slide 20
Further to the people issues, is getting people talking and working together effectively. There are
many, many different ways to have people learn about themselves and others. These are six that I
have easily available.
Slide 21
One last piece of advice. There is one more 7 I’ve learned about along the way. There are many
types of business that you can own and run. Even a non-profit can net the President several millions
of dollars in revenue. If you are using other people’s money, you will be pushed into Growth oriented
and mature businesses. Alan Weiss says, “Wealth is discretionary time.” It’s not just about the
money.
Slide 22
Those are my thoughts on the 987 Strategy and how it can accelerate a company.
Slide 23
Thanks for the opportunity to share with you today. Any questions or comments?-
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