‘Mergers & Acquisitions’ Category

10 Steps in Buying a Business – Part 3

Monday, March 16th, 2015

This week we look at the final 6 steps to consider when buying a business.

5. Intellectual Property. Is ownership on favorable terms for access to all intellectual property that is relevant to the wellbeing of the business included in the sale price? Are patents which have been valuable in providing market exclusivity in the past, about to run out? Does the business retain the capacity for innovation or personnel that may have been instrumental to its market position in the past? Do you have what it takes to continue provide such innovation?
a. IP may include websites, designs, and other items essential to the business being recognized and found in its market. Check to ensure that the site has not been written and maintained by someone who will not come along – leaving your great marketing machine without a driver, and quite possibly, leaving it in a state that is impossible to be transferred to your marketing people.

6. Non-compete agreement to not allow your seller to become your next competitor. What restraint conditions also apply to your seller – and to the key staff you may be taking on?

7. Facilities. Is the seller going to be your landlord? If so, ensure that you agree on third-party valuations and lease conditions no more arduous than you would face from an unconnected landlord. Ensure you have clarity around your rights to alter the premises to meet future needs. It may be advantageous to include an Option to Buy if the real estate deal makes sense in its own right. Avoid taking on an “obligation to buy” under any circumstances – unless you have carefully assessed value and it is too good to miss.

8. Brains. Is it worthwhile retaining the seller as a consultant for a transition period? If so, make this a formal, paid arrangement (you could carve the projected fee out of the sell price and pay it piecemeal over the period). Utilize a formal agreement as to who does what in terms of results and outputs and for how much. Make sure the termination process is crystal clear.

9. Study is Cheap – Experience is Expensive. Educate yourself on the ins and outs of buying any business before you go ahead and do it for real.

10. Insurance. Work with a professional Business Coach with a proven track record of producing results with their clients across a wide range of industries (including the ones you are looking into) and use them to guide you in:
a. Evaluating the business and how well it fits what you really want from a business.
b. Clarifying your exit strategy. Yep, before you buy, work out how you will get out and when.
c. Negotiating the price.
d. Ensuring a smooth transition so that you retain key staff, customers and suppliers.
e. Installing the systems and processes that will take your new business to a new level, realize its true potential and provide you with a low-stress high-return investment.
f. Developing the coaching skills to lead your management team to success in a way that leaves you with the time and energy to enjoy the quality of life that you desire.

Well that does it. Not for the faint of heart, so make sure buying a business is a necessary ingredient to your future growth and success.

Combining Vision and Innovation to Create the Future

Start here to gain that competitive edge: http://www.ignition-pathway2growth.com/

© Rich Kohler 2015. All rights reserved. For copies, please contact Rich at rich@rich-kohler.com.

10 Steps in Buying a Business – Part 2

Monday, February 16th, 2015

Last time we started looking at factors to consider when buying a business. Here is another very important step focused on the financial aspects.

4. Track Record. 5 years of tax returns and their attachments will tend to tell the worst-case story as the owner will have attempted to minimize their tax by minimizing their stated earning. Tax returns tend to provide you with a test for any written back charges that the seller or their accountant may have entered into the P&L and Balance Sheet provided to substantiate their asking price.

a. Attachments will include the Aged Receivables, Inventory and Assets, and will show you the book value of these assets. Those will generally be less than the client is asking since they’ll have written down as heavily as they can to maximize tax advantages.

b. Plant and Equipment and Depreciation Schedules can tell a story. If there is a steady history of updating equipment – leases, rolling over equipment, replacement items, then you know you are unlikely to be taking on too many equipment “time bombs”. Conversely, if the picture these documents paint is one of little equipment upgrading (check the P&L expense items for equipment maintenance) you may find that you are buying into a business that has a massive need for fresh capital investment very shortly after you take over.

c. Reading between the lines of the Aged Receivables will tell you a fair bit about how well this business has been run from a credit and cash flow control perspective for the last few years. This area alone can reveal stress and reasons for your seller to sell. Remember, if their Receivables Ledger shows a bunch of free loading clients, you are about to inherit those, and changing their behavior and habits is likely to be hard, and to result in loss of business as they go elsewhere looking for easy credit. Looking at Current Customers over time will also give you some insights into the average lifetime of a key customer, their lifetime value, profitability, etc. All vital information for the future if you buy, as these will be the lifeblood of the business.

d. Customer Contracts. Assess whether the business has any forward commitments from its customers in the form of 1, 2 or 3 year service or purchase contracts. Assess how sound these are, and how profitable they are. They may be great for bulking up sales numbers, but do they yield profit? You will be asked to pay a factor of their forward value; you had better make sure that value is there.

e. 5 years of Aged Supplier Lists will tell you lots about cash flow within the business and about the relationships you can expect from the suppliers you inherit with the business. Ask for any evidence of recent changes in credit policy by major suppliers as these alone could be the trigger for cash distress and sale, indicating an underlying issue of profitability or management in the business.

f. Supplier/Distribution Contracts. Check to see what on-going and transferable contracts may give you an immediate and on-going advantage in your new business. What is the term of these? How long do they have to run? How advantageous are they? What obligations go with them?

Next time, we will look at the remaining 6 steps.

Combining Vision and Innovation to Create the Future

Start here to gain that competitive edge: http://www.ignition-pathway2growth.com/

© Rich Kohler 2015. All rights reserved. For copies, please contact Rich at rich@rich-kohler.com.

10 Steps in Buying a Business – Part 1

Monday, January 19th, 2015

Thinking of buying a business? Then you have come to the right place.

There is probably no situation more pregnant with opportunity – or risk and loss – than buying a business. You can lose by buying “the wrong business” or even buying the right business at the wrong price.

So, if you are thinking of buying a business, here are some key steps you can take to accurately quantify their potential for risk and reward in your hands:
1. Are you looking at businesses in a market in which you already have domain or commercial experience, or will you be an amateur in a market new to you? If the latter, you will need to ensure that:
a. The business comes with a stable, moral key team whom you can grow to like and who can grow to like you as their new owner; or
b. You have access to expert advisors/consultants/coaches who have experience in your new industry and market along with a track record of assisting their clients to succeed.

2. Market Research. The time to do this is before you become a member of a new market by buying a business. If you have a business in mind, compare them and their competition and see how they stack up from the customer-experience point of view. Include such interesting information as market share; relative pricing; quality of service; marketing clout. Tapping into reps from one or two key industry suppliers and asking them for their ideas on the relative ranking of the key players can provide useful insight.

3. Value. Warren Buffet’s rule for buying businesses (besides a track record of strong cash flow, excellent management and a good market relevance) is that they be priced at least 20% below their market value. It means 20% below what you think – and have calculated – they are worth, it does not mean 20% below what other people thing they are worth.

Stay tuned, we are just getting started. We will cover more steps you need to take to assure you are on track.

Combining Vision and Innovation to Create the Future

Start here to gain that competitive edge: http://www.ignition-pathway2growth.com/

© Rich Kohler 2015. All rights reserved. For copies, please contact Rich at rich@rich-kohler.com.

5 Reasons You Should Have a Business Partner

Monday, November 24th, 2014

As in life, business is easier (and more fun) when you are doing it with someone else. Success in business is a team effort, not flying solo. Finding a business partner could be just the thing you need to boost your success.

Here are 5 reasons why:

1. Make yourself take action. Having two of you will force you both to take action and provide accountability for getting things done. Having to explain to someone with a vested interest just why you haven’t done the things you said you would can be just the impetus needed to get you motivated.

2. Fill your skills gap & be good at everything. If you are like 90% of ideas people, you need to be forced to take action. If you are great at execution, you may not have a focused idea to work on. Find a business partner who has complementary skills to yours and you fill in the skills gap that each of you has alone. There are lots of examples of these sorts of successful partnerships such Paul Allen & Bill Gates at Microsoft.

3. Create synergy. Two brains are better than one. You will have better ideas, create better products and execute better with two of you working on the business. You will create a bigger pie than is possible by yourself.

4. Expand your networks. Putting your networks together will give you far more reach and contacts than you can access alone.

5. It’s more fun. It’s more enjoyable and rewarding working with others. And we need to make it as enjoyable as we can to boost our persistence.

But, I don’t want to find a business partner, I hear you say…

Two of the most common objections to having a business partner are:
a. What if we don’t get along?
b. I don’t want to give any equity away.
If you really don’t want to take on a partner, then you shouldn’t. But realize that it will limit the growth your business can achieve.

If you are open to thinking about it, I would like to offer a few pointers:
• Make sure you can work together before you formalize your business relationship. When you first have an idea is not the time to offer 50% of the company to someone else.
• Start working together to evaluate the idea, but don’t create a legal agreement or other structure until you know you have value in the business and are clear on what each person is bringing to the table. Then make sure to create an agreement which is fair to all parties and which covers all eventualities you can think of.

If you can’t trust the person you are working with to go through this process with you, then you are working with the wrong partner.

In terms of giving up equity, consider that it’s better to have a partial share of a real business that is growing and delivering value to customers, than 100% of an idea going nowhere.

There are lots of horror stories, but all start-ups that have made it big, have a team – you can’t get funding without one and you can’t grow beyond a certain size as a solo effort. So think hard about whether you need to find a business partner to move your idea forward.

Final thoughts:
• What are you lacking to move your business forward? Skills, Ideas? Contacts?
• Would having a partner fill some of those gaps? What skills and qualities would they need to have to be complementary to you?
• Who do you know who might be your perfect match in business?
• What would your strategy be for getting her or him on board? How will you do your due diligence to make sure it is a positive relationship for both of you?

Combining Vision and Innovation to Create the Future

Serious about growth? Check out the complimentary assessment: http://www.ignition-pathway2growth.com/

© Rich Kohler 2014. All rights reserved. For copies, please contact Rich at rich@rich-kohler.com.

Global Marketing – Aerospace in China

Thursday, December 16th, 2010

While China has been home to the Automotive OEM’s and their suppliers for years, the Commercial Aerospace industry could be viewed as being a newcomer. Given the demand for new aircraft from Chinese Airlines, to fly international routes and a growing array of domestic ones, China has formed relationships with Airbus, Boeing, Bombardier and Embraer to produce elements of the aircraft. In the case of the Airbus A320, China will also perform final assembly. Comac, with significant help of international suppliers, brought the ARJ21 regional jet to market.

The Comac 919 is a narrowbody designed to compete with the Airbus A320 and Boeing 737. Much like China’s manned space program, the C919 is designed to build China’s indigenous capability to design, develop and build commercial aircraft. For Beijing, it is one of the 16 top-priority science and technology projects to drive economic development. However, unlike the ARJ21, the C919 requires foreign companies to form joint ventures with AVIC systems. And this will be the primary means by which AVIC Systems will enter the global civil aerospace market.

AVIC and its partners generally share an ambition to serve a wider global market, exploiting regional R&D and manufacturing infrastructure and economies, along with local government investment. While Honeywell, Hamilton Sundstrand, Rockwell Collins, Parker Aerospace and GE Aviation have formed JV’s under this approach, Liebherr Aerospace has limited is JV to the C919 platform. Comac is counting on its suppliers to help it learn the fine art of integrating and certifying fuselage assemblies, engines, avionics, power systems and other components efficiently and cost-effectively. Honeywell with its 300 plus Aerospace engineers, 10 aerospace facilities and 4 manufacturing plants is collaborating with AVIC on Research and insertion of technology into existing products. In general, the Aerospace supply base is betting that China will develop a successful, indigenous aerospace industry. To participate, you need to be on the ground in China and have the proper relationships.

Airbus and Boeing have reached an inflection point in their China strategy. Comac becomes the third player in China providing commercial aircraft, and potentially, the global market. And while the Chinese Airlines are not required to buy the C919, no doubt there will be incentives to do so.

Formerly companies could provide “last generation” technology for the Chinese domestic market. However, given China’s focus on manufacturing and exporting globally competitive products, companies wanting access to the China’s market (this being the case with the C919), need to be willing to share Intellectual Property (IP) and transfer leading technologies.

Aerospace system and component suppliers also need to weigh the gain of demand in China and export potential of a globally competitive Comac vs. the threat to their IP. They face 3 difficult choices. Competing firms may be willing to share their technology if they choose Option 1, which is to forego the Chinese market. Tier 1 suppliers have invested substantial sums of money in new programs such as the Boeing 787, Airbus A350 and Gulfstream G650. They are IP rich and cash poor. China, cash rich and IP poor, believes they can leverage this situation to get someone to sell their IP – either you or someone else.

Option 2 is to opt in and share your current generation technology, while working to keep your next generation technology to yourself. This becomes problematic unless one can create a strong international IP position and maintain a reasonable pace of technology change. Finally, the “all-in” approach of Option 3 is jointly developing advanced technologies and next generation products which can carry with it large risks to protecting IP. As product life cycles and the sale of aftermarket parts will typically exceed patent protection time periods, the risk of one’s partner going astray is not inconsequential.

Some Aerospace suppliers ignored fledgling Airbus 30 years ago, and vow not to make the same mistake. However, China and Comac are a different breed of cat. Should suppliers be reluctant to send their best technology into a country with weak protection of IP? Are they planting the seeds for tomorrow’s low-cost Chinese competitors as did the US Electronics’ industry outsourcing of manufacturing to Asia, only to see innovation and market share follow that initial migration.

Aerospace CEO’s believe a globally competitive aerospace industry is still a ways off. The best defense is to stay ahead technologically. While China is good at producing existing technology at low-cost, it still lacks the ability to truly innovate.

The sheer size of the Chinese market, and the expectation that Comac will strive to become a global competitive force, pulling AVIC Systems with it, creates the need for Aerospace suppliers to develop a deep understanding of China’s culture, objectives, posturing and negotiating strategies. With this as the background, they can develop and execute a more profitable and balanced business strategy.

Combining Vision and Innovation to Create the Future

© Rich Kohler 2010. All rights reserved. For copies, please contact Rich at rich@rich-kohler.com.

Mergers & Acquisitions within Aerospace and Defense – Reshaping the Industry

Monday, November 8th, 2010

Mergers and Acquisitions within the Aerospace and Defense market have had a large part in shaping the industry. Some organizations have flourished like Northrop and L-3, venerable names McDonnell Douglas and Grumman have gone away, others have changed their stripes and retooled their businesses like General Dynamics and Finmecannica. What has not changed is how this strategy helps increase the speed of change in capability and market position that an organic strategy cannot match.

Rockwell, once an Aerospace company, remade itself into an Industrial Automation company through the acquisition of Allen-Bradley and divestment of its aerospace assets to include Rockwell-Collins. Goodrich, once an Automotive company, has remade itself into a leading Aerospace supplier. BAE Systems (BAES) moved from being primarily a UK-Based company to one with its largest base of operation within the US. The acquisition of Alvis (2004), United Defense (2005) and Armor Holdings (2007) were key to BAES establishing a global land business that reached $12 B by 2008. This part of its product portfolio achieved significant benefit from the conflicts in Iraq and Afghanistan. L-3 under the direction and deal-making of Frank Lanza, grew from a Loral spin-off to a $10 B broad-based Product, Subsystem and System Integrator.

Large US Defense Prime Contractors – Boeing, Lockheed Martin, General Dynamics and Northrop have and continue to employ acquisitions to move into adjacent and new market segments. These include Electronic and Information Systems, Command and Control, Intelligence, Surveillance and Reconnaissance, Sensing, Data Mining and Fusion, Homeland and Cyber Security, IT Services, Cyber Security and Unmanned Systems, Mission Readiness and Sustainment. Lockheed Martin has evolved from building aircraft (now 25% of sales) to a broad array of capabilities to include Maritime and Land Vehicles.

One need not be a market giant to successfully employ an M&A growth business strategy as has been employed by US firms like Moog, Curtis-Wright and Transdigm. Such a strategy can also be used to execute a global marketing strategy, and build a new position on foreign soil to become one of the “in-country” suppliers as has UK-based BAES, Smiths PLC, Cobham, Qinetic and Chemring PLC. A modern day British invasion. Italy’s Finmecannica utilized acquisition of DRS to overcome high barriers to US procurement policy witnessed by foreign companies. Additional benefits also included allowing the broader Finmecannica Group to increase its presence in the US market while creating a strategic marketing opportunity for DRS to expand in global markets overseas.

M&A activity ties closely to the direction of the industry as it relates to market growth or decline in Commercial aircraft sales and Defense expenditures. In the current economic environment, as the Commercial market segment turns up and the Defense market turns down, M&A activity in both segments of the market has increased with a related increased in EBITDA multiples. During a cycle one always hears that companies are getting too expensive, multiples are getting out of hand. However, this is not always looked at in the context of missed opportunities and time to market. How much does it cost to have your strategic plan stymied? As a market consolidates, how many more moves on the chessboard are out there?

As in a chess game, M&A strategy can provide market and product positioning moves, allowing your opponent to move you methodically into a corner – and then, checkmate. It was not always clear from witnessing L-3’s acquisitions, which direction they were going. It did not make sense until perhaps 3 or 4 were made, the first as a beachhead and the others to build breadth and depth. Rockwell’s acquisition of Teldec in Germany was not about technology, it was about market access to European defense programs.

In the end, Mergers and Acquisitions follow strategy, not lead it. Opportunities can come up that you have wished for, but now, are not prepared for. There is seldom a perfect time. Ready or not, you need to get in the game, and help create the future. Otherwise it may define you.

Combining Vision and Innovation to Create the Future

© Rich Kohler 2010. All rights reserved. For copies, please contact Rich at rich@rich-kohler.com.

Niche Marketing Strategy – Going against conventional wisdom

Saturday, November 6th, 2010

As with all industries, the Aerospace and Defense market has its cycles, whether it be sales growth and contraction or operating philosophies and business strategies. During the early part of the decade, the Aerospace market trend seemed to be pointing in the direction of Customers desiring more integrated subsystems and systems vs. products. Not unlike that which I experienced earlier within the Automotive industry, this was somewhat different depending upon market segment. The Commercial Aerospace market was requesting more than the Defense segment, and the Regional and Business Jet segment more than the large Commercial Transport market.

In order to successfully compete, the general belief, or the strategy being proposed by leading Management Consulting firms, was to move from being a product level supplier up the value chain to a system integrator. This looked to be a plausible strategy, and large global competitors, some with greater product breadth and depth, were employing it. However, one fact was somewhat unclear –  could you prosper and make money at it? Studies done within the Automotive market had shown that the higher firms moved up the value chain in serving the Automotive OEM’s, they actually became less, not more, profitable. Broad-line system integrator or focused niche product firm, which way to go?

TransDigm Group is a good example of an Aerospace & Defense market participant who has followed a disciplined and quite successful niche marketing strategy. As the industry goes, the products, which include ignition systems, pumps, valves, motors, actuators and controls, batteries and power conditioning, cockpit security, audio systems, lighting and displays, are not that visible or on the leading edge. However, the strategy is more about products that are proprietary and sole source in nature that create barriers to entry and stable recurring revenue, can be used across all market segments and aircraft types, and that not only create an Original Equipment (OE) position, but also a large Aftermarket. Transdigm states that 60% of sales come from the Aftermarket which can be quite profitable. For Transdigm, Aftermarket revenues can generate 20-50 times, or more, OE revenue.

This niche market strategy has also been utilized in its acquisition strategy as Transdigm has built its business through a series of almost 30 acquisitions since its inception in 1993. Once acquired, the organization works to quickly focus Product Management on profitable new business development, implement value-based pricing, productivity and cost improvements. While typically paying 6-10 X EBITDA, the recent acquisition of McKechnie Aerospace Holdings was purchased for $1.27 B and 12 X EBITDA.

Employing its niche business strategy has enabled Transdigm to grow through all phases of the market cycle within the Aerospace industry. It has grown from $48 M in 1993, to over $1 B in 2010, with an average sales and EBITDA growth rate of 19% and 25% per year, respectively.

It turned out in the Automotive market, as it does in the Aerospace market, that a strong proprietary technical position and differentiated product offering that creates high levels of Customer Value helps drive sales growth and profitability. And while many firms believe that the only path to market, and route to success, is to be a system integrator, it might be instructive to take a look at one who played to a different drummer.

Combining Vision and Innovation to Create the Future

© Rich Kohler 2010. All rights reserved. For copies, please contact Rich at rich@rich-kohler.com.