Archive for the ‘Finance’ Category

Unlock the Potential in Your Business

Sunday, July 13th, 2014

I recently met with a group of investment bankers. I asked them how they perform a valuation for a business that they intend to buy or sell. Unsurprisingly, one banker started to talk about assessing the value of the assets in the business. I figured he was going to speak of capital equipment, real estate, cash on hand, and other investments (which he did) but he surprised me by offering a broader definition.

“When we place a value on a business”, he said, “we look at four quadrants of assets:  financial assets, of course, but also human capital, intellectual property, and customers. It’s the combination of these assets that provides the best view of both the current and future potential for the business.  The company must have quality assets in each quadrant.”

Traditional financial assets (including intellectual property) reflect current value.  People and customers (along with products) represent future income potential.  So, yes, ultimately it is a financial calculation but the model is also useful for managers.

Think of a radar chart like this:

Slide1

The blue line might be a product business, with strong technical or entrepreneurial staff, that hasn’t quite tapped into the right markets for financial success.  The orange line might be a mature business that’s been milking its products and strong embedded market position.  Both businesses have the potential to grow with the appropriate investment in sales/marketing (blue) or product/IP (orange).

When assessing a product business, the strength of the company’s IP is particularly important.  In a professional services business, it’s the quality and loyalty of the people that must be carefully considered.

It’s not a bad way to approach strategic planning to ensure you are progressing in each core area that adds value to (and drives the valuation of) a business.  Business owners and managers (“operators” in banker-speak) seeking to increase shareholder value should have initiatives to strengthen each “asset class” in their businesses.  That’s how you unlock the potential in your business.

And that’s some business advice you can really bank on!

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Posted in Corporate Strategy, Finance, Human Resources, Intellectual Property, Mergers and Acquisitions, Planning, Product Management, Uncategorized | No Comments »

The Price is Right

Sunday, July 14th, 2013

Pricing – it isn’t glamorous but it certainly has a long-term impact on sales effectiveness and profitability.  It’s actually one of the most important things a marketer does. Here’s a primer on what to think about when tackling those tough pricing decisions:

  • Start off with a clear pricing strategy:  what is the basis for the price level and model?  Make sure it’s supported by a strong business case for using the product so it’s easily justifiable to a customer.  And benchmark against equivalent pricing for both competitors and substitutes.
  • Should you consider a “loss leader” or “freemium” pricing model to encourage experimentation and early adoption?  What’s the upgrade price?
  • Is the product meant to be sold through channel partners?  What price do you want your channel partners to sell for (e.g. an “MSRP”) and what mark-up do you expect them to take?  You must ensure that selling your product is profitable for your distribution channels while keeping it attractively priced for end users. It’s even more complex when there are two mouths to feed with two-tier distribution (i.e. a distributor selling to dealers).  When making your pricing decisions, don’t forget about the services the channel partner will add to your offering and how this will impact the total price to the customer.
  • Does your price include delivery, initial set up, technical support, training, feature updates, warranty, etc.?  If the product is software, do you intend to charge for major feature upgrades on a per-user or per system basis in the future?  If so, you’ll need to make that clear up front in your published pricing.
  • When many people in an organization will use a software product, consider pricing models based on:  time (per month, per year), user or device licenses, site licenses, system license, etc.  Using different variables, or a combination of variables, provides flexibility in setting a price curve to address different applications (large vs. small, single site vs. multi-site, short term vs. long term use, etc.).  But don’t be too clever!  Your customers and sales reps shouldn’t need a PhD to figure it out.
  • Set pricing for any professional services, warranty, technical support or consulting, that will be sold with the product.  Look for opportunities to generate recurring revenue steams rather than just one time sales.
  • What’s the opportunity to create a multi-product bundle, including discounts, to increase the size of the sale?
  • Will you offer volume discounts to channel partners or direct customers?

A well-planned product development program will consider pricing strategy up front.  This ensures that product modularity, optional features and tracking mechanisms can all be incorporated into the design specification.  That way, at launch, you’re not struggling to ensure the price is right!

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Posted in Finance, Marketing, Product Management | 1 Comment »

10 Ways To Build A Fortress (Marketing) Balance Sheet

Sunday, August 14th, 2011

If you’re like me, you find the current economic turmoil a little disquieting. I worry about where the market is going but try not to to obsess over the state of my investment account. At this point there really isn’t much to do except ride things out. Hopefully I am sufficiently prepared.

Many corporate CFOs have spent the past couple of years preparing their companies by creating “fortress” balance sheets. According to Moody’s Investor Services, US public companies have hoarded a staggering $1.5 trillion in cash. Clearly CFOs have been planning for the worst. What about CMOs? Does your company have a “fortress” marketing balance sheet?

Here are 10 things your CMO should have been doing to strengthen the marketing balance sheet in anticipation of tougher times:

  1. Building the brand (awareness and reputation)
  2. Improving channel effectiveness and loyalty
  3. Implementing strategic account and customer loyalty programs
  4. Creating a strong community (based on a strong social media presence)
  5. Nurturing relationships with media and analysts
  6. Establishing a bullet-proof lead management process (including appropriate CRM and Marketing Automation infrastructure)
  7. Improving the website (design, SEO, registration and conversion capabilities, etc.)
  8. Updating sales tools including the collateral suite
  9. Developing the competency of marketing staff and recruiting quality vendors
  10. Justifying and obtaining a stable budget to sustain marketing programs

It’s quite a list, isn’t it? Nobody said a CMO’s job is easy (except maybe the CFO!). To determine if your marketing balance sheet is sound, consider the following metrics:

  • New customer growth
  • Customer retention/renewal
  • Cross-sell ratio (breadth of portfolio sold to customers)
  • Share of wallet (share of customer spending)
  • Revenue and margin per channel partner
  • Customer satisfaction and channel satisfaction
  • Funnel performance: lead value, aging and conversion rates
  • Brand awareness
  • Website traffic, site ranking and keyword rankings

A strong marketing balance sheet is just as important as the financial one when it comes to preparing for tough times. Like a good investor, you want to avoid being forced to make a snap decision during a crisis. Take the time to review your current marketing mix so that when the inevitable belt-tightening comes, you know what’s expendable.

Market leaders reap the benefits of strong balance sheets by staying engaged with the market and using times of uncertainty to pull ahead of their competition. So, by all means, build a marketing “fortress” but for goodness sake don’t raise the drawbridge, hide in your tower and wait for the barbarians to retreat!

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Posted in Finance, Marketing | 1 Comment »

Selling Out & Starting Up

Friday, November 5th, 2010

This post is an excerpt from an article published Nov. 1, 2010 in the Ottawa Business Journal

We often hear about local high-tech companies being bought, usually by foreign companies. There are inevitably opinions describing this as a loss to the region and to Canada.

But is this really the case? Cisco established itself in Ottawa with the purchase of Skystone. Alcatel-Lucent acquired Newbridge Networks. IBM broadened its footprint in Ottawa by acquiring Cognos. All of these organizations have flourished under the new parent. Other examples include the acquisition of Lumenera by Roper Industries and the purchase of Semiconductor Insights by United Business Media (UBM). Both have grown substantially since their acquisitions.

In these cases, and many others, it could be argued that the acquired company benefited from the buy-out. Moreover, the acquisition created significant wealth for the founders and investors, many of whom went on to help start up or invest in other companies.

So are acquisitions good or bad?  That’s like asking if mothers-in-law are good or bad: it all depends!

Many acquisitions happen because the acquired company wasn’t able to get traction in the market or stumbled. In that case, the acquired company may have been bought for the technology rather than the business as a going concern. In this situation, the local region probably won’t benefit that much. On the other hand, had the company not been acquired it likely would have failed anyway. So, better to be acquired.

Some acquisitions leave most of the local management team in place or allow members to expand their mandate, taking on larger assignments that give them more experience. Not everyone continues to reside in town, but those who do develop a better base of experience and a richer network of contacts to offer to their next employer. The local community certainly reaps the benefits.

While individual acquisitions aren’t necessarily bad for the local economy, we certainly will be in trouble if we don’t foster the creation and growth of new companies.

A recent study by the Ewing Marion Kauffman Foundation showed that in the US between 1977 and 2005 the only net new jobs were created by start-ups. This is counter-intuitive because we expect companies like Google and Apple – high-growth, larger companies that have been around for a few years – to drive job creation. They do, but at the same time, companies like Ford and GM destroy jobs. On average, older companies destroy more jobs (e.g. through layoffs) than they create (e.g. through hiring). Only start-ups create more jobs than they destroy.

What this means for the local economy is that we shouldn’t worry too much about acquisitions as long as we have a healthy start-up environment. It is the start-ups that will drive job creation. The acquisitions will help feed the start-ups with talent and money.

The good news is that there are many exciting start-ups today in Ottawa. These are supported by excellent government assistance schemes like the SR&ED investment tax credits and other directed programs like IRAP. What we lack is availability of angel and venture capital. Last year, VCs invested about half as much per capita as compared to the United States. Without this capital to fuel growth, local start-ups are at a disadvantage compared to their international competitors.

If only we could sell more companies, generating better VC returns and providing more experience and wealth for the founders and other investors!

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Posted in Corporate Strategy, Finance, Management, Policy, Start-Up | Comments Off

Funding Your Business

Monday, October 11th, 2010

With reduced levels of funding from venture capitalist, delays in new product introduction or a slower revenue ramp, many innovation-based companies are seeing their cash flow diminish quicker than initially anticipated. Companies in these situations reduce or eliminate costs wherever possible. However, along with cost controls, management should consider sources of funding from governments or government-funded organizations. For instance:

  • Has your management team considered the Industry Research Assistance Program (IRAP) which provides funding for innovation-based companies?
  • If your company is forging a path towards a greener Canada, maybe funding from Sustainable Development Technology Corporation (SDTC) is in the cards.
  • If your company is developing technology with a Canadian university while working with a partner on commercialization then Precarn Corporation could be part of the answer to your funding needs.
  • Are you an innovation-based Canadian Controlled Private Corporation (CCPC)? If so, ensure that your Scientific Research and Experimental Development (SRED) claim is completed in a timely manner as a percentage of costs are recoverable with certain criteria and limits. There are also lending organizations that will advance your SRED claims based on your history with the program.

These programs are just a few of the many sources of funding that can provide your company with additional cash flow while your revenue ramp takes hold or more traditional funding sources materialize.

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Sinking Exchange Rates – A Sales Nightmare!

Monday, September 20th, 2010

Canadian companies pay close attention to the ever-changing exchange rate to the US Dollar. Most companies selling products or services in the US (or worldwide) bill in $US and are subject to this constantly moving demon.  I remember a time when my company increased revenues in $US by about 15% in a quarter, while the exchange rate decreased by about 16% (leaving us with lower $CDN sales than the previous quarter)! Until you have actually experienced the negative results of exchange rates it is hard to appreciate their full impact.

So, how can you minimize the potential negative impact of fluctuating exchange rates?

Start by getting alignment between the CEO, CFO and VP of Sales. This can be a complicated affair when setting the rate for the annual budget. Once agreed, it locks in the budget for the next 12 months and by default the $CDN sales targets.

Budgets are almost never revised to accommodate changing exchange rates. Sales organisations are usually challenged to “make up the difference” in revenues due to a negatively moving exchange rate. My advice (although it is tough medicine), is to hold your Sales organisation accountable to deliver in the currency reported by the organization.

To mitigate the negative impact of exchange rate variation, companies can:

  1. Re-align expenses to be more $US weighted
  2. Place financial hedges (at a specific cost) to offset changing exchange rates
  3. Build exchange rate clauses into customer contracts
  4. Learn to accurately forecast geographic revenues over the longer term.

As a more extreme measure, a public corporation can be listed as a $US revenue company thus taking a large portion of the challenge away (this makes sense if most or all of the revenues are actually in $US). All of these approaches have varying degrees of success.

There is of course a potential silver lining. Exchange rates can move in the opposite direction too yielding more $CDN revenues. This windfall should be considered “extra”, with CEO and VP of Sales still driving for a higher “base number”. 

Oh the joys of the exchange rate rollercoaster!

If anyone has any other tips on ways to minimize the impact of moving exchange rates I’d love to hear about them.

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Posted in Finance, Sales | Comments Off

Think Twice Before Going Public

Sunday, June 27th, 2010

This article is a companion piece to my March 29, 2010 post “Why IPO?”

With entrepreneurs once again having dreams of taking their company public and adding more cash into the bank, they should consider carefully the challenges of being a public company.

Once public, the governance structure of the company will require significant change, particularly if it was previously operated by a founder with little outside influence. As a public company, the entrepreneur will be required to establish a board of directors that will include a number of independent board members. Following the establishment of the board, a number of board committees will need to be created including an audit committee and a corporate governance committee. The board and the various committees will typically meet on a quarterly basis to review the financial results and operations of the company.

The financial results for the company, which were private in the past, must now be presented to the world at large including employees, competitors and customers. Each may use this information in different and unexpected ways. Along with the financial results, details of compensation levels for the top executives will also be made public as part of the annual filings with the securities commissions. The CEO and CFO will be required to certify quarterly that the internal controls were efficient and effective during the reporting period.

The filings as a public company will place an added burden on the finance team with the requirement for additional information such as the management discussion and analysis (quarterly and annually), the management information circular (annually) and the annual information form (annually). Filings will also be required for any material change to the business such as a significant contract, mergers and acquisitions, or equity offerings.

Other factors to consider are:

  • The increased insurance costs, particularly if you are listing on a US exchange
  • The challenge of short-term decision-making that may influence the stock price one way as compared to a decision having long-term benefit of the company that could influence the stock price in an opposite way. For example, many public companies are influenced by quarter end boundaries regarding product pricing and discounts
  • The management team, and in particular the CEO and CFO, will be working with a new group of shareholders and analyst who will require more attention and time than in the past.

Becoming a public company has many significant benefits but entrepreneurs need to temper their enthusiasm and carefully consider all aspects of the decision before taking this big step!

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Posted in Corporate Strategy, Finance, Governance | Comments Off

Why IPO?

Monday, March 29th, 2010

Many entrepreneurs have the dream of taking their companies from a start-up to one that is very successful and growing significantly. Part of that dream typically involves the company becoming public with its shares traded on a recognized stock exchange.

Why do entrepreneurs have this dream of taking their companies public?

The public markets allow companies to raise an important amount of capital that may not otherwise be available to small privately funded companies. We have seen and read stories over the years of companies struggling to raise capital in the private markets. A number of executives have developed good strategies for their companies. However, they often have limited financial resources to execute on their strategies as existing and new shareholders are unwilling or unable to provide additional funding. The public markets may eliminate part of this risk, thereby allowing the company to grow to the next level.

Many entrepreneurs take their companies public as a mechanism to allow their initial shareholders (friends, family, venture capitalists, etc.) to achieve some liquidity on their original investments. Most investors in start-up companies make their investments expecting that one day these companies will have their shares traded on the public markets, thereby allowing them to dispose of their shares and reap the benefits of their initial investment.

Another benefit to being a public company is the increased credibility that the company may have in the eyes of its customers, suppliers, partners, employees and the community at large. Public companies tend to have more visibility within business circles than private companies, as many people perceive being publicly traded is one of the criteria to being a successful company.

The compensation of employees through a stock option program is generally more valuable in a public company setting than that of a private company, as employees have an opportunity of assessing the value of those options through the movements of the stock price. Over the last decade, many employees in private companies have questioned the value of stock option programs, particularly as companies have struggled to close their next round of financing. Stock option programs of public companies could therefore be seen as a competitive advantage for attracting and recruiting new employees.

Public companies whose strategies include growing through mergers and acquisitions have a significant advantage in using their shares as a currency for the transaction when compared to private companies.
Once a company has become a successful public entity, it can go back to the markets for additional funding through the issuance of new shares to allow even further expansion. Many factors will influence the company’s ability to return to the markets for additional financing such as, its success in delivering on its strategy and expectations, the receptivity of stock markets to financings in general and the appetite of investors for the shares of the company. With the challenging markets of the last couple of years, we have seen periods during which very few offerings were brought to market, as investors had little interest in increasing their exposure to the equity markets.

Good luck to all entrepreneurs with a dream!

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