WealthEsteem.org :: Psychology of the Deal

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If you are an entrepreneur of any age and any stage you should be reading Australian Anthill magazine. For 24 issues now,  this bi-monthly magazine has covered entrepreneurs, angels, VC’s  and the startup scene in Australia. They’ve grown readership and circulation and are entrepreneurs themselves.

Business is a crazy rollercoaster ride and there is a huge benefit to connecting with others who’ve trod a similar path.

And if you’ve got some experience, consider contributing an article. Read the style and submission guidelines.

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Popularity: 18% [?]

Crazy John’s founder John Ilhan dead at 42. The Aussie mobile phone entrepreneur was estimated by BRW to be worth $310 million.

I’m stunned at the moment, the news reports say he died of an apparent heart attack while walking this morning. Looking at his recent philanthropic efforts I think he died too soon.

It reinforced for me that work/life balance is important. Even when business gets crazy, it’s important to take time to enjoy the journey.

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Popularity: 14% [?]

An unreal valuation is a price that a strategic investor pays because they have non financial objectives.
- Fred Wilson A VC via twitter

That really puts the concept of the Strategic Sale succinctly. When the fit of the vendor’s business to the acquirer is so compelling, that traditional accounting based measures are not sufficient.

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Popularity: 19% [?]

I went to the Sydney OpenCoffee Meetup this morning. I love the tagline: “Place for people who love startups to hang out and meet”. So I met a bunch of startup entrepreneurs, a few advisors and a funder or two.

I attended looking for two things:

1. New Product Development ideas/team/products to put through the distribution channels I have built at work.
2. Entrepreneurs, products or companies to invest in, either through my work or through the loose network of friends and associates who like startups.

Today’s meeting was mainly online startups, a few even show promise. Even better I got to chat informally with entrepreneurs who are pursuing their dreams.

Click here to check out
The Sydney OpenCoffee Meetup!

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Popularity: 16% [?]

Surely that’s a dumb question to be asking myself right now. I had to answer it on the application. I’ve committed the money and time to it. I’ve even started the first course - Accounting and Financial Management.

That first course is looking to be as easy as I thought. Which on one level really frustrates me. Why am I paying to do a subject I am already unconsciously competent at? It’s a good way to ease into studying again after all these years.

Strangely I found myself wondering about some of my fellow students. They don’t seem to understand the broad accounting aspects of their businesses. Maybe it was me, but all my career I’ve been interested in the Profit & Loss Statements and Balance Sheets of my employers.

Back to the question at hand. Why do it? Career prospects? More money?

For me it the answer is to change my life. To understand business and industry with a new depth and rigour. To use to time to change my world-view and internalise my studies in a way I could not appreciate when I was an undergrad. My business interests are in fast-growth, entrepreneurial firms. That is where my MBA is leading, although I can’t say exactly where yet.

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Popularity: 22% [?]

I’ve been negotiating the potential acquisition of a private industrial company. All the details are covered by a non-disclosure agreement, so I can’t provide a case study (yet).

At this point in time the deal is not going through once we asked the target what their price expectation was. The target has retained the services of an accounting firm and are obviously being fed strategy from their advisers. This is a good idea, except when the advisers queer the deal.

From my analysis, the target company is barely making money. From the accountants approach, they’ve produced a set of accounts with huge add-backs to support a high purchase price. Add-backs are expenses incurred by the owners/managers of a private company that an acquirer can reasonably expect not to incur. For example the all-expenses paid “Manager’s Conference” on the Gold Coast by the directors and their spouses, it’s just a legitimate perk that a public company would not continue.

So there is an initial dispute over the actual earnings of the business. I don’t see that as an insurmountable obstacle. That can be verified during the due diligence phase of the acquisition.

The accountant is pushing for a valuation of 5 times EBIT (Earnings Before Interest and Tax). Let’s assume we’re looking at a valuation around 3 times EBIT which is in line with typical family-owned businesses and business-broker transactions. So once we resolve the multiple, we determine the purchase price during due diligence.
What other flies are in the ointment? What if the family have debt that needs to be cleared out of the sale of the business? In that case discussions about multiples of EBIT are irrelevant. The debt needs to be addressed and that calls for a different set of solutions.

Additionally if I am correct and the business is not really making any money, we could acquire the assets in 6-24 months if the company goes broke. Not an ideal outcome as I’d rather have a going concern rather than a shell. However the risk of running out of cash is significant.

I don’t have enough information to determine this yet. I’ll update later once I’ve done some more research.

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Popularity: 17% [?]

Yeah I misspelled Theory of Constraints in my rush to post earlier. I don’t normally spell Thoery of Contraints
I thought I’d add another point that I learned from The Goal. In business accounting Inventory is an asset, which normally means it is a good thing. However inventory must be insured, counted, protected and marketed. Inventory becomes obsolete. Inventory consumes working capital. You can go broke with inventory.

As an exercise, value your inventory at fire sale prices. Then realise that someone, somewhere in the world is offering a product that is a replacement for yours at a fire sale price.

Inventory is only an asset at the moment it is turned into cash - not sold, but when you actually get paid.

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Popularity: 18% [?]

I got a question on my mention of Theory of Constraints (TOC) in an earlier post.

As my factory production has reached capacity, my most critical goal is to introduce TOC into my production facility. I first heard of the Theory of Constraints in the book The Goal by Eliyahu M. Goldratt and Jeff Cox.

The TOC is based on the view that there is some essential limiter in a system, i.e. at least one bottleneck. Overall increases in production can only be achieved by increasing the throughput of that bottleneck.

The steps to implement TOC are:

1. Identify the constraint (bottlenecks are identified by inventory pooling before the process)
2. Exploit the constraint (increase its utilisation and efficiency)
3. Subordinate all other processes to the constraint process (other processes serve the bottleneck)
4. Elevate the constraint (if required, permanently increase bottleneck capacity)
5. Rinse and repeat (after taking action, the bottleneck may have shifted or require further attention)

source wikipedia article on Theory of Contraints

I’ll provide updates here on how the process at my factory goes.

You can buy the book from Amazon

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Popularity: 21% [?]

A former CEO of mine was a micromanager. I knew this before I took the job as the company was a client for a couple of years. Socially, I like my boss and we’ve know each other for many years. I’d even call us friends.

Given my interest in entrepreneurship, I have strong feelings against micromanaging. Fool that I am I thought there was no way he’d try to micromanage me. Surely I was immune. Ha!

So I chaffed at the bit — I’d left lucrative contracts before when a client attempted such behaviour. I got stellar results: sales were up, gross margin was up, profit was up, costs were lower. I should have got all the freedom to run my division as I pleased.

But my boss comes from a retail background. I think retailers especially like to run things by the book. They love an operations manual which clearly spells out the detail of every step from opening in the morning to closing at night.

I then realised that it wasn’t his problem, it was mine. I try to deal with what is rather than what should be. Once I accept the reality I can start doing something about it.

Then I accepted I’m never going to change my boss. As a matter of fact until we worked together I liked spending time together. So how will I deal with this?

Understand the boss’s priorities. What are the top 5, 3 and 1 items for me to focus on? Reconfirm regularly to ensure they haven’t changed.

Use my communications skills. I am an excellent communicator. Start tracking the list of assigned tasks, negotiating deadlines that I can meet and renegotiating priorities as they change. This involves instigating planning discussions with my boss and organising my calendar to clearly show available resources.

Commit to frequent and regular updates. When I delegate to one of my team, I want to know if the task is on track and I want early warning if it’s leaving the rails. Other than that I don’t need the detail. The micromanager needs to know every step of every task. This means anticipating update requests but at the same time scheduling time in advance for progress briefings.

Document agreements. Followup verbal briefings, requests and agreements with an email to avoid confusion.

Micromanagers fear disorganisation and idleness. The best way to contain their excesses is to be organised. That’s tough as I am not a naturally organised person, but if I want the freedom to run my division I’ll need to meet the boss’s expectations. That’s what he pays me for.

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Popularity: 23% [?]

I’m developing a series of KPI’s for a retail operation. They own nine garden shed outlets and don’t currently track anything. It’s late and I’ve got a pile of notes, but I’ll document the process here.

One of the key elements is avoid collecting useless data, and reward the collection of useful data that reinforces the corporate values, empowers the store managers and is an aid profitability through performance measurement.

Obviously the store managers are going to have a say in the KPI.

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