No Mans Land - Doug Tatum - BRAG Denver Business Networking
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No Mans Land - Doug Tatum - BRAG Denver Business Networking
- 1. No Manâs Land Doug Tatum Chairman, Newport Board Group
- 2. No Manâs Land: Adolescent Stage of Business When your business is too big to be small and too small to be bigâŠ
- 3. No Manâs Land The Small and Shrinking Middle Market All in Economy Firms Employee Size 2000 2010 Count Change Establishment Change 1-19 10,582,370 18,915,551 79% 60% 20-99 650,221 659,685 2% -3% 100-249 73,499 71,518 -3% -6% 250-499 20,916 20,100 -4% -15% 500-999 9,504 8,954 -6% -25% 1000+ 9,244 9,047 -2% -35% Totals 11,345,754 19,684,855
- 4. Average Growth Comparisons (2006-2010) Based on average company in existence over all of the past five years. On average, over the past five years, companies in No Manâs Land: - added 8-times as many new jobs⊠- grew at a rate almost 4-times faster⊠- expanded 3-times more often⊠âŠthan the average US business establishment.
- 5. Contribution to US Employment Growth (2006-2010) Based on average of all companies over past five years. Companies in No Mans Land account for less than 3% of business establishments, yet they contributed 30% of new jobs added by all US businesses.
- 7. Meeting the Growth Challenge: A Map through No Manâs Land-- The Four Ms Realign with your Market Hire your Senior Management Understand your Model Raise your Money
- 9. Alignment The company is small and the entrepreneur is in control
- 10. Meeting the Growth Challenge: A Map through No Manâs Landâ Market Mis-alignment Company Simplicity Customer EARLY STAGE/ SIMPLE EARLY STAGE/ SIMPLE Multiple Customers Company RAPID GROWTH/ SIMPLE? Complexity Market Mis-alignment is the natural progression of Entrepreneurial Control
- 11. Blind Spot #3: Value Proposition 85% 7% source: Newport Navigator CEOs say their employees can clearly state their companyâs value proposition Leadership teams can articulate a common value proposition
- 12. Meeting the Growth Challenge: A Map through No Manâs Land-The Market Navigation Rule The business as a whole must become good at doing what the Entrepreneur did well with customers in order to successfully re-create Market Alignment .
- 14. Blind Spot #2: Accountability 86% 20% source: Inc. Navigator CEOs believe that everyone is held accountable for performance Leadership teams agree
- 15. Meeting the Growth Challenge: A Map through No Manâs Land-The Management Navigation Rule The founder must hire at the top first, not the middle, to successfully navigate through No Manâs Land
- 16. The Transition in the Economic Model
- 17. Meeting the Growth Challenge: A Map through No Manâs Land-The Model .
- 18. The Transition in the Economic Model Know your Profit Zones
- 19. The Case of the Freight Forwarding Industry Pre-tax Profit % by Five Year Average Firm Size $< 50 0k $5 00 k1m $1 il m il$5 m ill $5 -1 0m $1 0m il il20 $2 m il 0m il50 $5 m 0m il il10 0m $1 00 il m il p lu s 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Pre-tax Profit %
- 21. EBITDA and Adjusted EBITDA Revenue Evolution Capital: Case Study I
- 22. EBITDA and Adjusted EBITDA Revenue Evolution Capital Case Study II
- 23. Meeting the Growth Challenge: A Map through No Manâs Land-The Model Navigation Rule The businessâs value proposition must be scalable (profitable at a higher volume) to successfully navigate No Manâs Land
- 25. Illustration of âCapital Funding Gapâ Capital Funding Sources and Risks for Small and Emerging Businesses Funding Level Business Category Emerging Emerging Growth Growth Businesses Businesses $1 million âCAPITAL NO MANâS LANDâ âCAPITAL NO MANâS LANDâ -Limited Cash Flow-Limited Cash Flow- 0 (âToo big to be small; too small to be bigâ) (âToo big to be small; too small to be bigâ) Start-up and Other Start-up and Other Small Businesses Small Businesses Business Risks Investment Bankers Investment Bankers (IPO Market/Private Placements) (IPO Market/Private Placements) Commercial Bankers Commercial Bankers Private Equity Groups Private Equity Groups Venture Capitalists Venture Capitalists SBICs/SBA Loans SBICs/SBA Loans BUSINESSES IN BUSINESSES IN $250,000 Capital Sources Lower Risk Very Limited Access to Capital Very Limited Access to Capital (Angels/Factors) (Angels/Factors) High Cost of Account && Collateral High Cost of Account Collateral Management Management Business Borrowing Exceeds Personal Assets Business Borrowing Exceeds Personal Assets Investment by Family && Friends Investment by Family Friends Loans Based on Personal Assets: Loans Based on Personal Assets: Banks/Home Equity/Credit Cards/SBICs/SBA Banks/Home Equity/Credit Cards/SBICs/SBA Higher Risk
- 27. Private Equity Faces New Challenges and New Opportunities Employee Size 2010 # of Firms # of % of Total Companies Firms already Public & Financed Private Capital Backed 2010 1 in 5 are PE Ready: % Bought out 1 in 10 are PE Ready: % Bought out 100-249 71,518 3017 4% 21% 42% 250-499 20,100 1337 7% 33% 67% 500-999 8954 928 10% 52% 104% 1000+ 9047 2055 23% 114% 227%
- 28. Add-Ons as a Percentage of Buyout Deals
- 29. Number of Secondary Buyouts and Secondary Buyouts as a Percentage of Total Buyouts
- 31. Meeting the Growth Challenge: A Map through No Manâs Land-The Money .
- 32. Meeting the Growth Challenge: A Map through No Manâs Land-The Money Navigation Rule The key to raising money is reducing real and perceived risk of the company .
- 33. Invitation Get Radically Objective About Your Business
- 34. Blind Spot #1: Team Alignment 92% 2% source: Inc. Navigator CEOs say their teams agree with and can clearly communicate their strategy Leadership teams can list the same strategic priorities
- 35. General Thoughts and Conclusions Think Strategically Act Strategically
- 36. No Manâs Land Q&A
Editor's Notes
- When you want to get to the next level, but: you feel like youâre losing control and youâre too involved in everything the old rules no longer work a lot of effort, but not the results you desire (feel like youâre caught in a maze) you donât have enough time, money, people to do everything your team is not on the same page and the company has outgrown some of your employees
- Our observations of the transition have lead us to conclude that we can explain the transition and the Navigational rules by analyzing the transition in the context of the 4Mâs. The rest of the presentation is to describe the transition in each of these Mâs and then offer a navigational rule that we believe is immutable , like gravity , must be dealt with if a company is going to survive the transition.
- Dictionary Definition of a Market Driven Company because they are simple to do business with and they adjust rapid fire to customers needs.
- When the business is in its formative stages the entrepreneur is simultaneously executing the sales, marketing and operations aspects of the company. Mention the process of placing bets on the customer and the promises made that change the company. What happens is the physical limit of the leader is met.
- Continue with the story of the Used Aircraft Parts Distributor, itâs the discussion about the sustainable value proposition. Story of Georges Music: chain of very profitable music stores, 5% of the retail music business in the US through a buying coop. Ultimately this brings up the issue of management Leadership Principle Its about the enterprise not the individual and the leader needs make promises that stretch the enterprise and put it at risk. They have to be right. Issues for a Down turn Resist the temptation to buy sales Fire some customers Fire some products and services
- This is singularly the single most emotional issue of the transitions, think about it â the folks surrounding the Entrepreneur include: People with him or her from the start Know there families Many were there when there was no hope
- Story of Mikes Music, any number of cases that I have spoken to Story of the speech at Virginia Tech Story of Coon hunting â NY Not replacing themselves as CEO â used the aircraft parts mfg as an example Culture is used for failure on both sides: the issue of the inner circle and a trusted decision making process End of the letters page 77,79 Leadership Principle: Willing to have folks that will challenge them in the true inner circle and the ticket to entry is performance not personal loyalty. Down Economy Time for a (RIF) reduction in force Opportunity to steal your competitorâs best people
- Lets Transition to a discussion the companies economic model Describe what an economic model is from the book âWhen I speak of a business model, or as some call it, an economic model, I mean something quite specific: An analysis, in financial terms, of how a business makes money. Looking at an economic model means considering the capital deployed, the revenue produced by selling products or services to customers, and the changes in these elements of revenue, cost and capital under different scenarios.â Describe the software company preparing for Red Herring This slide depicts what most of these Gazelles represent to start with High Performance Cheap Labor and tas they grow they throw people at the proceeses which is why they add so many emploees. Tell the typical supervisor story : need more people
- Remarkable that both of these companies are just past $20 million. Data received from the Gazelle Institute data base, 2000 through 2005 -3 million business sample. Compiled from a variety of sources including US Census, IRS Corporate Source Book etc. From a private equity perspective, fascinating when you take into affect the assets required to get a company up into the 100 million plus range etc.
- Show you a slide I use to illustrate the idea of an economic model based on using people. They donât think in economic terms about their model and they hit a phenomenum during the transiton that can be quite dramatic.
- What a shame to enter into a transition without understanding how long the journey is. In some cases the only way to get there is with outside equity and acquisitions. Leadership Principle: The leader has a vision and a confidence in the economic future that he or she can clearly see and communicate. Down Economy Understand your business model Restructure your model around the new reality Create a daily report out of your command and control structure that lets you estimate your net income before the income statement is produced
- Capital Gap: transition form personal credit worthiness to depending on the business Quotes from a letter sent to a senior treasury official: Non-Regulated Asset-Based Lender The first interview was with a large non-regulated asset-based lender. This lender shared with us the results of a recently completed enterprise-wide customer profitability analysis. It included an analysis of the overall workload model, i.e., costs associated with Account Management and Collateral Management This analysis confirmed the decision by this particular lender to discontinue its national initiative to serve the market for asset-based loans below $1 million. The cost for this was broken down into three main categories, and included the following areas: (1) Loan acquisition costs (allocated cost of a seasoned loan officer or originator); (2) Asset monitoring costs (borrowing and reporting frequency workload); and (3) Risk adjusted cost of capital to the lender. The conclusion reached by the senior management of this enterprise was that it could not profitably provide capital to a business with asset-based lending needs below $1million at a rate below 25%. This $1 million threshold for capital associated with an overall cost to the borrower of less than 15% was also confirmed in a separate interview with a lending executive from another major non-regulated lender. One simple way to confirm our findings is to call on a random basis any number of non-regulated asset-based lenders and request information on their underwriting size and pricing models for asset-based loans. Super Regional Community Bank Holding Company The second interview was with a senior executive of a Super Regional Community Bank Holding Company. Again, this interview concentrated on the profitability analysis for smaller asset-based loans. The detailed information provided to us indicated the same types of cost constraints noted above for the non-regulated lenders. It should also be noted that this bank had migrated to funding asset-based loans at rates below 15% to companies that fit our definition as rapidly growing only if additional collateral from outside the business was pledged (i.e., real estate, certificates of deposit, etc.) of sufficient size and security to remove the need for constant asset monitoring by the bank. Even with this additional security reducing the cost of Collateral Management, we believe that if the true cost of Account Management were factored into the portfolio analysis these loans would at best be marginally profitable to the bank. Major Commercial Bank This interview confirmed the personal asset credit scoring methodology for small business loans and the Capital Gap that existed within this bank before any credit judgment methodology would be assigned to the loan request. This particular bankâs minimum loan threshold for assigning a credit officer was above our Capital Gap estimate of $1million.
- Counter intuitive issue is that its all about risk not upside the complete opposite of how the entrepreneur looks at it. The key issue is getting the risks of the transition identified and controlled etc.
- Always ask the CEOs to drive home thinking about the risk in the business and how they could get rid of it. Story of EMR and the New contracts Leadership Principle: Willing to publicly recognize and layout the real problems â the risks in the business. Economic Downtown Having and communicating early warning signals lowers the perception of risk Capital market particularly the banks supporting SMB hate surprises but will work with problems. Work to move your debt structure to higher cost lower covenant structures: make sure you have adequate liquidity. Liquidity is more important than the cost of capital in a down turn.