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MY ASSUMPTION IN THIS BOOK IS that you are ambitious for growth and are seriously considering acquisition as a way to reach your goals. So here we are together, embarking on a journey that will demand a great deal of learning, persistence, discipline, and flexibility. The purpose of this chapter is to prepare you adequately for the challenges ahead.
Because growth, especially external growth, turns our attention to opportunities in the world beyond our own operation, it's easy to rush into action without an adequate review of where we are coming from. This would be a big mistake, so the first and essential step in the Roadmap to Acquisitions process is to look within. Before you grow your company, you need to develop the best possible understanding of it. By "best," I mean the most accurate, the most dimensional, and the most practical. This is obvious if you think about it. The outcome of your growth program may be a marriage of some kind, and you will be scrutinizing many potential partners. But how do you judge if the match is good without understanding yourself as well as you do the acquisition target?
As a CEO or senior executive, you may feel that you know everything about your company that can be known, especially if you are the founder. In reality, my consulting experience tells me otherwise. Over time, owners get consumed in the effort to hold things together and keep their enterprise on the road. Their original vision gets obscured by the dust they kick up as they drive along. It takes a strong intention to pull away from day-to-day issues and review your company as an organic whole.
The discipline of introspection has a double benefit. Not only does it provide a rational foundation for making growth decisions, but it also gives you practice in the kind of analysis you will apply to potential acquisitions. "Know thyself" is the prerequisite to knowing others, on a company level as well as for individuals. Ignorance of self, conversely, dims your eyesight. It renders you less perceptive when you come to assess prospective partners in growth. Not surprisingly, true self-knowledge is as rare on the corporate level as it is among individuals. It takes the kind of effort and attention that your daily business activities simply do not usually require.
So in this process, I will be taking you through the kind of self-exploration that I teach my clients. If you are the owner, I would expect you to experience a mixture of confirmation and surprise, of meeting the all-too-familiar and spotting a few things that perhaps you knew but never really wanted to know. If you are a senior employee, I advise you to find a tactful way to engage the owner in the process. When my firm works with clients, we function as a team involving all the people who are likely to play a key role in future external growth activities.
THE SEVEN STRATEGIC QUESTIONS
In any business endeavor, having the right questions is often half the battle. For this review, we will work with seven powerful questions that I have tried and tested with dozens of clients at the outset of their growth program. Here are the seven questions you will need to answer:
1. What business are we in?
2. What is our core competency?
3. What are we not?
4. Where is our pain?
5. What are our dreams?
6. What is our risk tolerance?
7. What is our company DNA?
In the coming pages, I will explore each question with you in some detail. You will gain the most benefit if you break off from reading at each step and make some brief written notes of your insights and observations. (If it helps, you can use the self-assessment tool in Figure 1-2 at the end of this chapter.) At each stage, I point out how the question we are addressing impacts growth strategy. This is important to bear in mind. We are not conducting a theoretical exercise in navel-gazing. The information you produce will be decisive as you venture out in search of acquisition partners.
"What Business Are We In?"
Let's admit it right away: This is a trick question. The correct answer is usually not the first answer. Here's a classic example from the annals of corporate America: Union Pacific thought they were in the business of railroads—the commonsense answer. In reality, they were in the business of mass transportation. Had they recognized this early enough, they might today be flying planes or building hybrid cars. Here's a more recent example. A client of ours supplying the upper end of the bicycle industry thought they were in the business of making brake mechanisms. Their special capacity was in lightweight solutions, and we resolved that they were in fact in the business of making racing bikes faster. This realization led to a strategic expansion into gear systems. It took a process of careful self-examination to discover what now looks obvious but was not when we began.
So exactly what business are you in? Among all the mass of activity your company is engaged in, where is the beating heart? Step back, look at the big picture, and ask yourself: "What is our business really about?" The answer should be as short as you can make it:
* "We are in the custom car auto parts business."
* "We are in the investment advice business."
* "We are in the residential community planning business."
* "We are in the organic fertilizer business."
You may need to take several shots at this. There is a tendency to either be too granular ("railroads" rather than "transportation") or too global ("creating exceptional customer satisfaction"). Remember that growth is your purpose. You need to define your business in a way that sets a trajectory broad enough for expansion and focused enough to stay on track.
Getting a clear answer to this first strategic question may, in fact, require you to address the other six. So I suggest you make an initial attempt at it now, and then return to review and possibly revise your answer when you have considered the other questions.
The challenge of knowing what business you are in goes beyond how you define your product or service. It extends to the kind of customers you are seeking. Here is one question I have found especially revealing: "Assuming the same revenue outcome, would you rather have 10,000 low-value customers or 1,000 high-value customers?"
Take a moment to answer this candidly. If you are inclined to take the 10,000, you are more likely to be at the commodity end of the market. Nothing wrong with that, although it definitely carries challenges. That choice may also indicate you have more confidence in your marketing than in your product (a distinction we explore in the next segment on core competencies). If you prefer the 1,000 high-value customers, that suggests to me that you have the potential for a strongly branded position, and you probably see unique strengths in your product or service. To flourish at this end of the spectrum, you should also have considerable confidence in your capacity for customer retention. In that case, you are a relationship company.
So what business are you in? Don't underestimate how powerful this apparently simple question can be. Your decision will almost certainly impact the trajectory of growth you choose. What makes this so important is that in a world of rapid change and expanding global markets, you face an almost intolerable surfeit of opportunities. Without being anchored in a strong, unmistakable self-definition, you will be easily dragged this way and that.
"What Is Our Core Competency?"
Sometimes history is powerful. We once had a client who thought he was in the business of manufacturing pet toys. He was consumed with questions of how to extend his product lines and enhance his production technologies. Once we drilled down with the question of core competencies, we discovered he was really a peddler—and a very good one, too. The client's founder, long since passed away, was a brilliant salesman who had gradually taken control of the manufacturing company he'd worked for in the last phase of his life. His son, the current owner and our client, had assumed not only his father's mantle but also his magical knack for sales. So we built a growth plan around this discovery, bringing him back to his roots and strengths.
Your company's core competency may well be influenced by its history. It may be reflected in the kind of hiring decisions you make and where the greatest talents lie. How your market perceives you can also tell you a lot, as does where you are making the most money.
The point is that companies, like people, often have mistaken ideas about where they truly excel. And like people, they sometimes need an outsider to shake off their illusions and get clear about the reality. So when you go in search of your core competency, follow some simple guidelines:
* Don't trust your own assumptions.
* Look at your company from functional angles.
* See where your resources are concentrated.
* See where your successes are concentrated.
* Ask informed and intelligent outsiders.
Here are some specific tactics that can help you focus on your core competency. Review the key functions of your company— operations, marketing, sales, finance, management—and ask yourself which is the strongest and which is the weakest. If you have a superb manufacturing plant staffed by the best in the business, but your sales team is struggling and your marketing strategy is gathering dust, it's pretty obvious where your strength lies.
Another tactic is to view your company in a competitive context. What do you do differently and better than your nearest competitors? What do clients seek you out for? Why do they stay? Is it something about the product itself or a quality of your service and how you deliver? Or is it a perceived value in your brand, a matter of historic reputation, or newcomer's cool?
If you see your strength in technology or product, take a close look to see if you have the best technology or the winning technology. There is a significant difference between "best" and "winning," as those who remember the sad story of Beta and VHS well know. While Beta remained the trade standard for videocassette tapes, VHS owned the huge consumer space prior to DVD. The best technology wins awards, rave reviews, and an honored place in the Smithsonian. The winning technology is the one that does the job and is coupled with an effective marketing strategy that installs it as the solution of choice.
Other ways to identify your strengths are to look at your employee retention. If turnover is high, what weakness does this reveal and where is the compensating strength? If employees tend to stay with you for the long haul, why? (If you don't know, ask them!)
Perhaps your strength lies in a culture of innovation. To be objective about this, you can review your investment in R&D relative to industry norms, the number of patents you hold, and the kind of encouragement you give employees to generate new ideas.
Some companies are masters at neither technology nor marketing per se, but they have an exceptional capacity in distribution. They can move product quickly and effectively to all corners of the earth and show up on the shelves of the least expected outlets. Is this you? Or is distribution something of an Achilles' heel?
Knowing your core competency and the associated strengths is a truly critical factor in building your growth strategy. For one thing, you will be looking to leverage those strengths as you expand, rather than taking them for granted. Then you will seek to complement them by finding external resources that compensate for your weaknesses. Finally, your strengths represent a marketing asset when you approach a potential acquisition. As you will discover, the strategic buyer actually has to sell himself. Your strengths are part of the story that will make a seller take interest in a potential union.
"What Are We Not?"
This is really a subset of questions one and two, but it is so powerful it deserves separate attention. (For companies with a single product or highly focused offering, the question "What are we not?" poses no difficulty and you can quickly move on.)
As an enterprise expands and becomes more complex, this issue becomes one of crucial strategic importance. Rapid success often blinds owners and leads them into areas where they have no business to be.
When you answer this question, you needn't list all the obvious things you are not. If you are a dental technology company, of course you are not a mortgage broker. The point is to list the possibilities you might be kidding yourself about. This takes some attention to subtleties. For example, you are a dental technology company, not a general medical technology company. Or you are a dental technology design company, not a dental technology manufacturer. It is those areas that legitimately lie on the margin of your operations that can confuse the picture.
Needless to say, just because you are not something today doesn't mean you cannot become it tomorrow. The important thing is that any move from what you are to what you can be should be conscious and intentional, and not based on a misconception of your starting point.
Here's why. By blurring the boundary between what you are and what you are not, you can deceive yourself about competencies. I had a client that made fish products for manufacturers, which in turn created packaged delicacies for the end consumer. My client was tempted at one stage to drift into making consumer products themselves, but they had absolutely no experience or competency in this area. It seemed to them that it was just a step away, but actually, there was a gulf between the two competencies.
So this is what to do when you review the question "What are we not?" Look at what business you are in and where your core competencies are. Identify the closest cousins that surround those core essentials. Make a list of the business activities and sectors closest to your own. You are now staring at a list of pitfalls—pitfalls that could become opportunities, but only if you proceed with eyes wide open.
"Where Is Our Pain?"
For most companies, this is usually an easy question to answer— painfully easy! My assumption is that your pain involves some kind of barrier to growth. What stands in the way of your reaching that next, elusive level?
The barriers you face probably lie in one of the key functional areas that exist in every business:
* Operations: The creation of your product or service
* Marketing: How your product is getting to customers
* Finance: Your capacity to implement the decisions you make
* Management and personnel: Your human capital
We can break these down easily enough. If your operations are problematic, it could be because of a systems deficiency, inadequate technology, or a gap in human resources. If your marketing is weak, internal reasons might include lack of brand strategy (very common and underdiagnosed), a weakness of message, lack of targeting, or insufficient resources. External reasons could be changes in demand or new competition. Regarding finance, internal issues can include cash flow constrictions or debt problems, while external pressures may come from factors such as interest rates. As for management and personnel, you might be lacking in a specialty expertise or in the capacity to drive performance required for aggressive growth. There can be a host of other problems not listed here. The likelihood is that you know what they are.
Or do you?
In chiropractic medicine, there is a telling concept called "referred pain." Your foot hurts and you go to the podiatrist, but it still doesn't get better. How so? It transpires that your foot pain may originate from a misaligned vertebra. The pain shows up in a location that is different from where the problem originated. In business terms, your failure to attract a key human resource may reflect a branding problem. Marketing may be getting dragged down by operations. Cash flow anxieties might be best relieved by overhauling the sales process.
In other words, when we use a functional model to diagnose business problems, we need both an analytic and a holistic approach. This has immediate bearings on growth strategy, because insofar as your growth plans are influenced by your current pain, you want to be sure you are curing the disease, not just masking the symptom.
Excerpted from Successful Acquisitions by David Braun. Copyright © 2013 by David Braun. Excerpted by permission of AMACOM.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Introduction: From Beginning to Beginning................... 1
PART 1: BUILD THE FOUNDATIONS....................
Chapter 1: Know Thyself.................... 19
Chapter 2: Pathways to Growth.................... 37
Chapter 3: Prepare to Buy.................... 57
Chapter 4: Assembling Your A-Team.................... 71
Chapter 5: Researching and Selecting a Market............... 83
PART 2: BUILD THE RELATIONSHIPS....................
Chapter 6: The Prospect Funnel.................... 105
Chapter 7: Making the First Contact.................... 121
Chapter 8: Face-to-Face with Opportunity.................... 133
Chapter 9: First Assessments.................... 145
Chapter 10: Negotiating with Prospects.................... 163
PART 3: BUILD THE DEAL....................
Chapter 11: The LOI: A Gentleman's Agreement................ 177
Chapter 12: Getting Down to Business.................... 191
Chapter 13: Integration: An End and a New Beginning......... 207
Executive Summary: The Top Ten Lessons.................... 221
Appendix: Sample Letter of Intent.................... 235