The process of raising finance is expensive, time consuming and demanding on the company’s resources.  Therefore when completed, there is a sense of jubilation as well as relief.  However, reality is that once funding is agreed, the ‘real’ challenge begins, the challenge of delivering on the investment potential.  So what can the company do to enhance its chances to reach its potential?

One of key tools that should be put in place is a Performance Measurement and Reward system.  Such a tool will monitor the progress of the company against its objectives and peers, and motivate staff to collectively deliver the vision, strategy and objectives of the company.  The key building blocks are:

• What should be measured?
• What standards are set for these measures?
• What are the rewards for achieving the targets?
  
  

1. Measures

An accepted phenomenon is that ‘what gets measured gets managed’ as its focuses the participant’s minds on that being measured.  Traditional accounting measures, in the form of management accounts, are very limited in providing a complete measurement tool as:

• The information measures past performance only, i.e. historical information
• It measures only one dimension of the business, the financial dimension
• It ignores important areas such as measuring customer satisfaction and service, the efficiency of internal processes and the competency of staff.

A more useful measurement tool is Kaplan and Norton’s ‘Balanced Scorecard’ which compliments ‘financial measures with operational measures on  customer satisfaction, internal processes, and the organisation’s innovation and improvement activities that are the drivers of future financial performance’.  The tool has four dimensions namely, Financial, Customer, Internal business and Innovation & Learning perspectives.  The Balanced Scorecard not only measures past performance, but also puts on measures that monitor aspects that will effect future return to the company.

2. Financial

The Financial Perspective should include the traditional measure of comparing actual results to budgeted and/or forecast.  The company should also focus on the ‘key financial drivers’, drivers that will deliver the preferred financial results of the future. These might, for example, in a technology company include analysis on sale leads and orders, analysis of product mix and their contribution to the company’s bottom line or labour cost as a percentage of sales revenue.

3. Customer

The Customer Perspective needs to focus on the needs of the company’s customers.  Measures should be put in place to evaluate customer satisfaction with the company’s products and pre and post sales service.  This might include delivery lead times, number of defect products, how long it takes customer service to respond to a customer inquiry or the volume of repeat business, which is the ultimate measure to customer satisfaction.  A word of caution, make sure that the item that you are measuring is important to the customer, for example there is no point in measuring if customer service answers the phone within 10 seconds if the customer is not concerned about this.

4. Internal Processes

The Internal Business perspective should focus on the internal items that the company needs to excel at in order to succeed.  For example, in a technology company a key item is its ability to recruit and retain software developers, hence a measure may be staff retention measures.  Other measures would include production efficiency and production quality measures.

5. Innovation & Learning

The Innovation and Learning perspective focuses on items that will ensure the company can continue to improve and create value.  This would include measures on employee competency, training provided for employees and process change and improvements.

6. Standards

Once the company has established what should be measured, it then needs to establish

• Who owns each of these measures and;
• What target should be set for  each measure.

The measure owner is the individual or group of individuals who have the greatest influence on that being measured.  It is important when setting measures and the targets in particular, the measure owner is involved and ‘buys into’ both the method of measuring and the target being set.

The target needs to be stretching of the owner’s ability but yet achievable and fair.  This will ensure that the owner is motivated and focused on the key drivers for the company.  It is also important to include some form of benchmarking, comparing performance with both internal peers and external competitors.  The external benchmarking will ensure that the company keeps a focus on the market environment outside the company.

The targets set need to be reviewed on a regular basis to ensure that they remain realistic and equitable while bringing the best out of the owner of the measure.  Targets would need to be changed if they were not correctly set initially or if there is dramatic change in the environment that the company operates.

7. Rewards

The reward system is used to guide individuals to deliver the standards set out above. The system should be clear, motivate the individuals who are included and the outcome needs to be in the control of the person being held responsible.

The reward system needs to be clearly linked to the measures and targets set out by the company.  These links should be clearly understood by all employees.  The individuals should know what the company is trying to achieve, what is expected from them and how they contribute to the overall success of the company.

The reward system is intended to be motivating, hence the rewards should encourage the right behavior.  They should rewards that the employee is willing to change his behavior to achieve, i.e. be worth the effort.

8. Link To Strategy

The objective of the setting up a Performance Measurement and Reward system is to motivate individuals to deliver on the potential of the company.  Therefore the company needs to clearly define its vision, the strategy it has to achieve this vision and the stepping stone objectives in delivering the strategy.  The Measurement & Reward system should than be tightly linked to these objectives.

Apart from being a motivation tool, the benefits of a Performance Measurement & Reward system are:

• It ensures that all employees are in pursuit of a common company strategy
• It enables the company to identify where they are on the road to delivering the company’s vision
• It allows employees to see how they contribute to the company’s goals, and
• It enables them to share in the success of the company.

Once put in place, the system can be the difference between the vision becoming reality or just remaining a vision.

Contact: fcoombes@coombesfinance.com

This is the Second of a series of 6 articles aimed at Owner Managed Businesses addressing various issues that they face through the complete business cycle from Start-Up, through expansion to final exit. By Frank Coombes, Coombes Corporate Finance

Owner Managed and Privately owned in Ireland are certainly in expansion mode.  A recent survey in this sector showed that almost 30% of the sector expects to see some M&A activity within the next three years.  The sector is seen as buyer as opposed to sellers.  Discussions with financial institutions support this expansion mode as they see strong growth in the Owner Managed Sector.  This expansion required capital investment.  This article sets out the key steps in a fundraising process. It can relate to raising debt, equity or the various financial instruments in between and it can relate to fundraising for startup, expansion, project finance or acquisitions.

The fundraising process behind these transactions involves a number of stages, during the course of which a company appoints advisors, prepares a Business Plan, defines their funding strategy, presents to potential investors, undergoes a due diligence investigation and finalises the detailed legal agreements before finally receiving the investment funds.

1. Appointing key Financial Advisors

For many Owner Managed Businesses seeking finance, they have a small core management team, a team that should be fully focused on delivering the objectives and goals of the company. The common error made is that during the funding process, management’s focus is distracted away from the development and operation of the company’s core business. On appointing Financial Advisors, the company can ensure that this distraction is minimised and the necessary skills to assist the fund raising process will be sourced.

The Financial Advisors should advise, manage, and work closely with management in executing the financing process. The Advisors will also have access to a network of contacts including financial institutions, private equity Investors, Venture Capitalists, and debt financing investors. It is this network of contacts that will greatly increase the company’s ability to raise the appropriate funding mix at the best value for the Owner Manager or existing shareholders.

2. the Business Plan

Irrespective of whether you are raising debt or equity, it is important that the company prepares an informative, clear and concise Business Plan.  Normally this plan is the investor’s first view of the company and in this situation, first impressions are vital.  The Plan should include a short executive summary and sections on:

• Company Background.
• Product or Service
• Market and Marketing
• Management Team
• Financial Information
• Risk factors and rewards

Any potential investor will focus on the experience and expertise of the management and the exclusivity and growth potential of the company’s market. These two sections should highlight the company’s unique selling points.

3. Defining the funding strategy

Once the Business Plan is completed and the amount of funding is established, the company should identify with its Advisors the key sources for its finance.  The sources could include one or more of the following:

• Debt – core and non-core
• Venture Capital Investment
• Private Equity Investment
• Trade Investment
• Partnership or Alliance Investment

It is important to note that no one source of finance may be ideal to satisfy the full financing requirement, hence it is important to break down the funding requirement into various components.  Each component may be financed from a different source.  Once identified, the fund raising strategy should then be established with key steps and milestones in managing the process.  Such a strategy should form the project plan in completing the financing process.

4. Seeking the right Investors

The Advisors, in association with the company, should then identify the potential investors, be they debt or equity investors. Initially a business summary is sent to potential investors and if they are interested the full Business Plan is forwarded for their consideration.  If interested, they will then proceed to meeting the company.

5. Presentation Roadshow

This key part of the process will require significant time input from the core management team, as the investor wants to obtain a view of the team’s capability and experience.  The presentation should be based on the business plan and delivered by members of the management team. It should highlight the core drivers and unique selling points of the company.  It is also important, that the company and its advisors evaluate the potential Investor, as many investors will be actively involved with the company during the investment period.

6. Heads of Agreement

Based on the business plan and presentations, the company should endeavor to receive offers of funding from more than one potential investor.  This gives the company greater strength and flexibility for negotiation.  Prior to selecting one offer over another, the company should evaluate the financial and non-financial issues of each offer of finance.  It may often be the case that the long-term benefit that can be gained from the expertise of the investor may out weigh some short-term financial benefits.  Where possible, all of the contentious terms of the potential agreement should be agreed prior to signing the Heads of Agreement. The heads of agreement will include:

• The Offer detailing the equity/debt financing that the Investor is offering and return to that Investor be it by way of security, shares…etc.
• The Proposed Finance Structure.
• The Due-diligence required by the Investor.
• The main terms of the proposed Shareholders Agreement or the Lending Agreement.
• Negative pledges – commitments not to perform certain tasks without the consent of the minority shareholder
• Exclusivity for an agreed period.
• Exit mechanism – if the process does not conclude

For Equity investments the valuation of the company will be a key negotiating factor.  The final valuation will usually come from detailed negotiations between the company, the Advisors, and the Investor but in the end it must be one that all parties are comfortable with.

7. Due-Diligence

On agreeing the Heads of Agreement, the due-diligence process begins.  This will be on behalf of the investor and normally include:

• Financial due-diligence whereby the Investor will look at the current state of affairs of the company, the past performance of the company and a detailed look at the financial projections of the company including the underlying assumptions.
• Commercial due-diligence with a look at some of the key issues that drive the business from a commercial viewpoint.  This will include the markets, the production process if any, the selling and the distribution process, the key suppliers…etc.
• Technical due-diligence – where the product or service is of a high technical nature the Investor may appoint an independent assessment of the product or service.
• Legal due-diligence is to include a full legal review of the title deeds, patents, etc.

This process can be the most time consuming part of the financing process taking 4 to 6 weeks for equity investors, but shorter for debt investors, and it is important that this process is managed correctly to ensure that no undue delays occur.

8. Completion

Once the Investor is satisfied with its due-diligence, they will then proceed with the company to drawing up final agreements.  When these are completed and signed off by both parties, final approval is received and the investment can be exercised.

It is important to note the typical length of time that it takes to complete the financing process, particularly for equity investment.  From the time that an interested Investor has been identified, it should typically take 12 weeks to complete the process.  It is important to note this length of time when drawing up any financing strategy.

Once the financing has been received, all that remains is that the company and its management team deliver its objectives and maximise the full potential of the company!

Frank Coombes – Coombes Corporate Finance 021 4943944

Part of an ongoing series on issues arising with Owner Managed Businesses through their complete business cycle

 Many Owner Managers find it difficult to exit their business as they are emotionally attached. However it is important to remember that the business is a “vehicle” for you to create income and wealth, and one that needs to be “driven” carefully in order to maximise your return.  This is particularly important when it comes to the time you wish to exit the business, whether it is retirement or just moving onto something else, and that you prepare for the event years in advance.   

The first and foremost preparation point is to ensure that the business is independent of you, i.e. that the business can function without your involvement.  This requires that you have a strong management team employed in the key business areas and that this team works well together.  A strong management team enhances the value of your business to a prospective buyer and conversely without a strong management, the business value is less.  To put this in place can take significant time and effort in identifying the right people, putting succession planning in place, training them in the various management skills and ensuring they work well as a team.

Furthermore, it is important to ensure that all the key relationships with customers and suppliers do not reside solely with the Owner Manager and are passed onto or at least shared with another manager.  Customers in particular are the life blood of the business and most customers like to do business with people, hence relationships are important.  Therefore prepare by involving another manager in the customer relationship well in advance, bring him/her to meetings, golf outings, etc and let he/she become the “owner” of that customer.

An area that can significantly enhance the exit value for the Owner Manager is a well planned and funded pension scheme.  Owner Directors can avail of significant tax efficient methods of getting value from their company that include tax relief on company contributions paid into the Owner Director’s pension with generous maximum contribution rates depending on your age; tax free growth on your money while in the pension fund; and the ability to take up to 25% of the pension fund out tax free when you retire.  These pension funds have many rules and it is advisable to talk to you pension advisor a number of years in advance of an exit to ensure maximum benefit. 

Careful planning of operational items will also enhance the value of your business.  For example, you should put in place written contracts with your customers where possible. A potential buyer likes to see as much security of business continuity as possible and customer contracts gives the buyer this confidence.  One thing to note in preparing such contracts is be aware of any “change of control” clauses that would allow the customer to terminate the contract if your business ever changed ownership.  These should be avoided if possible.

The value enhancement brought by having customer contracts, can also hold true for suppliers and having contracts with key suppliers is important.  However with suppliers, you will need to use your commercial judgement on the terms, ensuring the security of supply of key materials or services without over committing the business and any new owner.

Other items that should be planned in advance of sale to enhance value include:

• Ensure that employment contracts are in place for all employees
• All property titles are clean and straight forward
• Ensure any current or pending litigation issues are resolved or boxed off as much as possible and that any potential liability is quantifiable and minimised.
• All tax affairs and company compliance issues are up to date
• Ensure that staff pension schemes are fully paid up
• Put in place good reporting and management communication disciplines, such as monthly management accounts, weekly/monthly review and planning meetings, etc.

The final step in maximising your value from the company is the sale or exit process itself.  It is important to employ suitably qualified experts during this process to assist in maximising this value, as the process of selling a business is a delicate one and typically you get one chance to get it right.  Having a well run sale process will significantly enhance your exit value and this process will include preparing a Information Memorandum or “Sales” document about your company; identifying potential buyers; ensuring confidentiality and managing sensitive company information; managing the buyers due diligence process; and managing the completion process including negotiating various legal agreements.

In summary, without trying to sound like a school teacher, good preparation will enhance the results and this is particularly the case when it comes to exiting your business, so don’t leave it to cramming the night before the exam!