By Steve McKee on May 10, 2012

If it ain’t broke, don’t fix it, is such a cliché that it has spawned its own cliché: If it ain’t broke, break it. Unfortunately, that’s just what many companies do unwittingly to their branding programs, playing into the hands of public enemy No. 1 in today’s marketing environment: fragmentation.

More and more television networks, radio stations, print titles, and outdoor billboards are competing for attention, and new marketing channels pop up every day, from apps to publicity stunts and beyond. The number of places we hit people with marketing messages these days is growing a lot faster than the number of eyeballs that can take them in, and as a result audiences (and attention spans) are becoming increasingly fragmented. That reduces the chance any message has of getting through.

Even sales channels are fragmenting beyond the online vs. bricks-and-mortar divide to which we’ve become somewhat accustomed. Desktop and laptop purchases are giving way to shopping via smartphone—at a time when many companies don’t even have a mobile website, to say nothing of e-commerce capabilities. Add inflation to the mix (even with 2-3 percent increases, the wonder of compounding is working against you), and fragmentation can shred what once was a healthy marketing budget.

The good news is that there is a powerful way to overcome fragmentation: integration. But don’t be deceived—it’s more difficult than it appears.

Integration is not simply slapping a common tagline onto all your ads, using a single color palette, or force-fitting a message that’s suited for one medium into another (great television commercials rarely translate well to outdoor billboards, which in turn are very different from online banners).

Integration means communicating a consistent identity from message to message, and medium to medium, and (more importantly) delivering consistently on that identity. It requires not only the identification of a powerful, unifying strategy and compelling voice for your brand, but the discipline to roll it into every aspect of your organization—from advertising to sales, customer service to customer relationship management programs (and beyond). It’s not for the faint of heart.

Sometimes my advertising firm does an exercise with our clients in which we ask them to recall the taglines of the world’s 10 biggest advertisers. Some respondents get a handful correct, but by and large everyone fails the assignment (underscoring the point that slogans aren’t the answer). But one company’s tagline participants often do recall: McDonald’s (MCD).

It’s not because of the money the fast-feeder spends—the other nine top advertisers spend as much or more. It’s because McDonald’s has maintained a singular focus since 2003—so long ago that the famous pop music heartthrob named Justin who helped launch the campaign wasn’t Bieber, but Timberlake (remember him?).

To fight off fragmentation effectively, everything you do to attract, convert, retain, and engage your customers should be integrated. If your brand isn’t woven beyond your marketing efforts into your human resource practices, your training programs, even your compensation and employee evaluation metrics, you’re leaving opportunity on the table. You’re also risking backlash, as spurned or burned customers use Facebook and Twitter to make their complaints heard. It’s vital to deliver consistent signals in everything you do.

That raises a question: If fragmentation is so damaging, and integration such a powerful counterforce, why don’t companies implement an integration strategy more often? It’s not for lack of understanding, desire, or even intent in the minds of most marketers. It’s for lack of perseverance.

Put simply, integration takes time. It’s not easy to integrate a brand into a wide suite of processes, materials, and messages that have been shepherded by different people, driven by different objectives, and brought to life in different places within the organization. Many companies simply don’t have the patience to see it through.

Beyond that, integrated branding takes time to soak into the marketplace. Consumers just don’t pay attention as much or as quickly as they used to. My firm’s research of hundreds of growth companies found that the average advertising campaign lasts approximately 2.3 years and that companies that maintain healthy growth over time tend to have longer-lasting campaigns, while those that struggle tend to change direction more frequently.

That’s exactly what’s happening in the cola wars. Coke (KO) has remained focused and consistent for years and is winning market share, while Pepsi recently fell to an embarrassing No. 3 (behind Coke and Diet Coke). As a result, PepsiCo (PEP) recently announced a significant increase in marketing spending and has spent the better part of a year in  extensive research and deep introspection.

by MBO Marketing Team

Although it may be tempting to view other independent professionals as competition, you may be doing yourself a disservice, as this not a black and white issue. While it is true that occasionally two independent professionals compete for the same project, in most cases it is beneficial for you to develop relationships and cooperate with other consultants for three major reasons.

1. Client referrals and networking

Occasionally you may be asked to take on a project when you are at full workload capacity. In these instances, if you’re on friendly terms with other independent consultants in your industry, it will be easy for you to help your client find another highly skilled independent professional to fulfill their needs. This is a win-win situation. The other consultant has a new project, the client gets their project finished in a timely manner, and you gain the reputation for putting client needs first (while not overloading your schedule). Additionally, if your consultant contact is asked to take on one too many projects, your name will be top of mind.

Even though you may work in the same industry as another consultant, you may have different strengths and expertise. Once you develop professional working relationships with your peers, your network will be able to assist you when you cannot meet specific client needs (for example, a programming language you don’t know as well).

2. Tips, encouragement, and friendships

Nobody can give you more insight into independent consulting in your industry than a current independent consultant in your industry. When you cooperate instead of compete, you’ll gain valuable insight that you can’t get anywhere else – about clients, projects, bill rates, and anything else you might be confused about. Additionally, when you’re facing a particularly tricky obstacle, they’ll understand the type of encouragement you need to get through it and succeed. Who knows – you may even develop long-lasting friendships with your fellow consultants.

3. Coworking

Coworking is a style of working that many independent professionals have begun to adopt as an alternative to working from home or crowded coffee shops. In a coworking space, you share a working environment – but not projects – with other independent workers. Often, the independent professionals sharing these spaces form tightly knit communities, much like traditional offices and departments. Additionally, they make “weak ties” to other professionals, which may be just as beneficial. As the co-working industry has evolved, spaces have become more specialized for different types of workers and work styles. In researching co-working spaces in your area, you should consider how your skills and work style would fit into the atmosphere of each facility.

How do you see other independent consultants: competition, an opportunity for collaboration, or maybe a little of both? Do you have any stories of a time when cooperating with another independent consultant paid off in a major way for you? Leave us a comment to let us know!

Finding Growth through Strategic Mergers & Acquisitions

April 25, 2012

by Kenneth H. Marks

Not long ago, owners of middle market companies could expect to sell their business at a reasonable value when they were ready for a transition. Their business didn’t have to be the best performer, but rather operate comparably to the performance of their peers meeting decent middle-of-the-road metrics. Not so today! Many are experiencing what the market is calling the “Value Gap.”

This gap manifests itself in a number of ways in terms of buyer interest, in terms of access to growth capital and in terms of valuation. In many instances it’s not a matter of the value of the company being low or the cost of capital being high — it is the absolute lack of any interest in financing or in acquiring the company at all.

For example, lower middle market businesses that haven’t hit their stride or met their potential — evidenced by slow growth rates, low gross margins or low EBITDA margins — but are strategically positioned and attract buyer interest; these companies have seen a continued declined in EBITDA multiples paid by both strategics and financial buyers. On the other hand, the higher performing middle market companies with EBITDA greater than $8 million to $10 million are experiencing record high multiples, even higher than those in late 2007 and early 2008. To the point, the size of EBITDA does matter!

The value gap can be illustrated by the wide difference between what is referred to as “Owner Value” and “Market Value.” Owner value is the required value in the M&A transaction by the shareholders of the selling company, whereas market value is the range of amounts that the market players place on a company based on their perspective and the market dynamics. In many cases, owner values have been driven higher by the lack of alternate investment opportunities post-closing that will yield returns with adequate cash flow to mirror those that the owners currently experience by holding their interest in their business. In many situations, market values for all but the high performers have been driven down ….thus the gap has widened.

Recent research and empirical evidence shows that the root problems causing this value gap for middle market companies are that:

• Companies don’t generate returns adequate to cover their cost of capital, and
• Management isn’t re-investing at an adequate rate to sustain growth and remain competitive and relevant in the market place long-term.

The Opportunities

M&A and the private capital markets currently present an interesting set of alternatives. As shareholders contemplate the effect of the market dynamics, their companies’ growth strategies and eventual transition plans, some are seeking deals that allow them to:

• Diversify away the risk of having too much personal net worth in a single asset.
• Minimize the risk of growth by obtaining a financial or strategic partner.
• Buy-out passive partners and make room in the capital structure for management and employees without dilution to exiting active shareholders.

So, depending upon the strength of the middle market business, its strategic position, and its financial performance relative to peers, the spectrum of options can include:

Selling to a strategic or financial buyer. The stronger or “A” players in the market will likely have the opportunity to sell their business in whole or part through a traditional buyout transaction that can provide a change of control selling the majority of the business to a private equity fund while keeping a minority portion. The advantage of this approach allows the current owners a “second bite at the apple” using the fund’s capital to further grow their business and the opportunity to sell a second time when their investors sells (some three to five years later). Strategics provide the opportunity for a complete exit at a price that the financial buyer may find difficult to match because of the inability to obtain a return outside of the pure financial metrics.

Recapitalize the existing business. Generally a recapitalization will involve a lower cash-out (as a partial or staged exit) for the active owners than a buyout (which involves a change of control). A recapitalization will most likely be focused on changing the relative mix of debt and equity with an eye toward the growth objectives of the company and the required go-forward capital. For example, a leveraged recapitalization will most likely increase the debt of the company in exchange for distributions, dividends, or purchase of equity.

Acquire or merge with a complementary or competitive player. There are various forms of acquisition financing available depending upon the relative strengths of the parties. Because of some of the structural barriers in the private capital markets, a lower middle market company may not have access to growth equity or mezzanine financing alone. However, through an acquisition or merger two businesses with the right synergies and combined cash flow may very well cross into the credit box or investment criteria that allows the newly formed business access to capital to accelerate growth, fund strategic initiatives and possibly buyout some partners or shareholders.

Acquisitions

Acquisitions can meet a number of goals if approached and executed as part of a long-term strategy. In addition to solving the “access to capital” problem discussed above, some of the typical reasons executives pursue acquisitions include:

• To accelerate revenue growth.
• To enter an adjacent market space.
• To expand into a new geography or obtain a physical footprint in a new location.
• To access new customers.
• To access technology.
• To strengthen the pool of talent and capabilities.
• To complete or augment a product or service line.
• To reduce costs.
• To capture market share.
• To prevent a competitor from gaining these advantages.

The first phase of a typical acquisition process addresses finding a target company to buy; this begins with the strategic plan that should lay the foundation to determine many of the parameters and the focus of the process. The second phase of the process is to structure the deal, close the transaction, and integrate the business.

The financing strategy to support the acquisition should initially be thought of in the context of the overall acquisition process and be defined as part of the acquisition strategy (phase one), understanding that the process will evolve and is somewhat iterative as knowledge is gained from the marketplace. If your company is cash flush or the acquisition target is immaterial in value, the financing strategy may be as simple as funding the transaction from operational cash flow or cash reserves. However, if the deal requires external funding, management must consider a financing strategy, which typically begins with understanding the acquiring or buying company. This involves:

• Determining its valuation and financial strength.
• Establishing financial objectives and benchmarks for vetting possible acquisitions.
• Determining parameters around how much the buyer can afford.
• Conducting internal discussions around an ideal or preferred deal structure.
• Establishing relationships with financing sources and obtaining buy-in regarding the acquirer’s plans.
• Obtaining evidence for potential sellers of the buyer’s ability to finance and close a deal.

From these parameters, management can then think about financing a specific target company, which is a function of the value of the target, likely cash flow of the target, the deal structure and the integration strategy.

Start by assessing the value of the target acquisition as a stand-alone business using traditional valuation approaches; then value the acquisition in the context of your business giving consideration to cost savings and lift that may be obtained on a combined basis. Another metric that may be useful in the process is to determine the financeable value. This is the amount that can be paid using external financing based on the assets and cash flow of the target.

The deal structure and financing strategy are developed by weighing a number of factors to find the optimum solution to meet the objectives of the parties involved. Among other things, these factors include the integration strategy and the deal valuation gap — in this case, that is the value that your company is willing to pay and what is required to get the deal done.

Management should keep in mind some core concepts as it takes an objective view and embarks on the acquisition process:

• Begin with the end in mind; set clear objectives and benchmarks to gauge attractiveness of potential target companies and particular deals.
• Develop the financing strategy up-front and establish relationships with likely sources of financing.
• Terms are likely more important than absolute valuation.
• Align the financing strategy with the operating/integration plan and deal structure.

Focus on Value Creation

Regardless of the eventual solution or desired outcome, start with the same process. The essence of the front-end steps in the M&A and financing process is an analysis and understanding of the shareholders’ and company’s objectives, financial and competitive position, growth strategy and initiatives, and valuation.

Keep in mind that whether financing an acquisition, selling the entire company, raising a tranche of growth capital (in the form of debt or equity), or pursuing a recapitalization, what you are really selling is the future cash flow of the business. While past performance provides credibility to management’s claims, future cash flow is the foundation for valuation and usually the primary reason for buying or investing in a company.

Kenneth H. Marks is the founder and a managing partner of High Rock Partners, a boutique strategic and M&A advisory firm. He is the lead author of Middle Market M&A and the Handbook of Financing Growth, both published by John Wiley & Sons.

Consultant/Employee

The chart above shows different perspectives of an earnings move.   Without “business value” in mind new tactics could be futile.  We are not talking about share value, value proposition, adding value, process value and brand value to name a few. You’ve heard before, “Sales are coming-in!” but, you ask yourself, “Are they profitable?” If we are not focusing on real business value, then what are we looking at?

Let’s look at a ROI example. A Business Owner invests in new tactics $10,000 to increase sales.  It worked.  $250,000 was added to revenue with 6% net profit.  Now, what if the Owner invested $10,000 into an earnings move.  The move went something like: increasing price 3%, margin 3% and decreasing advertising 3% resulting in sane revenue as above yet, this new earnings move had a 15% gain of EBITADA, and over $112,000 to business value.  It is obvious which move you would take?

While speaking with a consultant in Switzerland with a progressive software module company (world-wide) we discussed the overall  control module.  He was primarily focused on productivity and gross sales and had no metrics related to business value. If we are not focusing on business value, then what type of initiatives are we implementing?

What is your next earnings move?

Considering that a “good” business sells on the average about every three to five years it makes sense to follow business value. If you haven’t used business value metrics think again. Financial ratios get to basic areas but often overlook marketing or employee activities that could be key to the success or failure of maximizing business value.

Business value metrics begin to identify value pillars and drivers of a concern. Often times value pillars are more valuable than equipment or machinery. Once they are discovered and discussed we apply principles and laws with an earnings move. Read more about an earnings move along with principles and laws of business value in “14 Immutable Laws of Business value”.

Usually value pillars and drivers are at the core of the Business. However, typical Consultants look over these drives and use a productivity, technology or sales recommendation that does not effect business value. What are your concern’s value pillars and drivers?

Is 2012 going to be profitable for your business? You could be getting the order or close but are they making you money? After a complimentary review we begin the process of applying over 14 principles and laws of business value. Don’t try to do this on your own. Ask for a complimentary business value review.

Most programmers, website gurus and internet wiz kids fall into a common trap;  focusing totally on getting sales and ranking. They end up with putting a lot of time and energy into a great idea and then little if nothing left in three to six months but some code.  If they would only start with the end in mind.  Savvy business buyers learn to use equity early-on for building wealth.

Following the principles and  rules of business value keeps you away from this common trap.   Most online programs and courses out there teach sales and marketing.  Maybe you will make some money from one of the online coaching or webinars programs.  But in the long run, applying real rules of business value you will not be where you started but have a business.

Take your first step for online success by building a business not just a website.  You’ll find in the introduction of “14 Unalterable Laws of Business Value” ways to stay away from the trap. <a href= “http://www.growthconcepts.org/index.php/2011/08/ideal-business-model/”>Click for a guide for newbies and seasoned webexperts to focus on what is real-equity.</a>

A constant reminder rings in the ears of Business Owners, “What is my company worth?” Typically this is ignored until a disaster takes place where the owner is forced to sell. There are rarely any resources that point them towards specific value plans.  Yet alone a business value expert that does not want to sell your business(Appraiser).

Having the opportunity to do value planning many times over the years,  actual “worth” is only one part of the business value puzzle so I’ll assume you have a detailed earnings move within a value plan and know the attributes of a new value strategy that would lead to be successful.  If not we offer a complimentary review to start working towards this.

Often we recommend two strategies working together within a business value plan. An earnings move is based on the least effort and cost for the most return of business value. While the communication strategy(branding and short-term messaging) is for immediate gross profit results but has a higher up-front expense and demands more detailed measurements of tasks performed and provides for less business value if successful. The business value plan has a much higher return rate and much lower initial costs while offering to make a stronger business. You take your pick or combine them.

You should be able to find industry data on business value ranges for your type of business. A Business Broker or Appraiser might give you an income approach value or a multiple of EBITADA(usually around 3) but you should have a strategy for your position in a range from high to low. This should reflect your image in the industry and core business value strategy.

Finally, Business Owners’ usually work on productivity or sales moves that do not effect business value. If you earn one dollar in sales profit that usually increases business value about three dollars. Look at how much a similar business would have to do to sell vs. earn and then calculate how much value that generates. Don’t forget the savvy business buyer that uses discretionary and nondiscretionary (EBITADA depends on discretionary cash) cash allotments looking forward to really visualize the potential of the business. And if she/hey could afford to pay what the Owner is asking while comparing that to industry norms. This will help you understand business value and if what you are trying to obtain as a price is too low, too high or just right for your specific situation(that is why we use value metrics).  As for a complimentary review of your particular situation.

This is probably an exciting time for your business. Congratulations on taking a leap forward looking towards business value.

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Discover in the e-book:

Universal principles and laws that bring financial, organizational development and marketing worlds under the umbrella of business value.

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Over 32 Pages of Universal Principles and Laws of Business Value….

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Law of Future Business Value

Future business value is determined by hope while capturing current market share.

Business Brokers and Appraisers do not use market potential to value a business. Yet we hear a lot about the American Dream-potential. The Dream is the hope of making business value. These two opposing areas form a dream-line; from what it could be worth in the future to what my company is worth now. Business Owner’s wants and needs along with efficiency and innovation come to play before and after this dream-line. There is a lot of confusion with this area especially projecting business value along with potential customer’s needs and wants.

Market research and projections won’t cover all the possibilities. However, removing obvious blunders, pitfalls, and snares giving to experience a new realm that may lead to innovation is a start. The challenge of finding and projecting real value is finding balance between the discipline of efficiency and the craft of innovation and effectiveness. It’s a reminder that dogmatic dedication to efficiency alone, or innovation alone, is a recipe for disaster.  So, without a starting point of  business value and future business value there would be no solid hope since there are too many potential factors for the human mind to consider between needs and wants.

Below is a way of realizing how important business value is to your business vision. This brings you past the dream-line into needs.

Vision Questions:

1. If you had all money and time you needed what would you want to be doing in 5 years?

2. The ideal business is making sufficient cash flow with an absentee owner to get you to where you want to be in question 1.  Is this where you are at now or do you have plans for getting there?

To get there we have to understand your business.  Lets take an example business in dry cleaning business.

3. Let’s say, if we invested $10,000 in the business and increased monthly sales 20% that gave an additional $5,000 in bottom line income?

As you know, income is split into living and retirement commitments.  Would that additional income get you where you want to be in 5 years?  Probably not, so, it takes more than just increasing sales?

We have not included converting business value to cash for leveraging helping you realize your dream.  For example: There is income and then actual earning of the business.  Sometimes called discretionary cash.  In the example your investment was 10k which brought $5,000 to income but $3,000 to discretionary cash.  So when an owner goes to sell his or her business they have earned about $9,000 as equity-to leverage.

Business brokers know a business on the average sells every 3-5 years. Are you prepared for this transaction?

Know the difference between sales strategy and business value move!