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Building a Family Business that Lasts
Inside Louis Vuitton’s success
Using Water Wisely: The Business Case for Sustainable Water Management
Revolving Door Deals by Peter Ireland
Bebo’s $849M Implosion Teaches a Brutal Lesson in Business
This news story gave me a chuckle as I have a long-held fascination with revolving door deals. There are two basic kinds. The unintentional and the intentional. The Bebo one is an example of the unintentional variety with a spectacular payoff.
Also-ran social network Bebo has been bought back by one of its founders for$1 million five years after that same founder, along with his wife, sold Bebo to AOL for $850 million. Sure, the couple made out like bandits, but there’s a bigger lesson here: Buying a copycat social network is a terrible idea. (source)
In a nutshell, a revolving door deal is one in which a company is sold and then taken back when the buyer is unable to make his payments. The seller gets to keep the down payment and all the other payments received to date in addition to regaining full control of the business. I believe the term was first coined to describe Kirk Kerkorian’s various deals involving Las Vegas casinos and movie studios. When a buyer came along who needed seller financing help, Kirk would accommodate them but under some pretty onerous conditions. These were created by having a set of covenants that would create a death spiral in the event that the buyer failed to comply with even a single one.
The Death Spiral
Kirk Kerkorian the master of the revolving door deal.
Let’s take a quick look at an example involving public company. I will keep this as simple as possible to get the basic concept across. If the buyer misses a single debt payment a penalty would be triggered. The penalty could be the release of a sizable block of free trading common shares to the seller. If the share price then dropped below a certain level as a result of the market being flooded with new shares, it would trigger a second penalty such as the release of more stock to the seller. If this then drove the share price down below another level, it would trigger cascade of other events which would start returning control of the company to the seller. This could be more shares, more board seats, and even the ability to replace the CEO. Think of it as a chain reaction triggered by a single incident. Kerkorian was a master at this game who sold some companies multiple times. We analyze one of them in detail in the Playbook.
Lesser tycoons use this same tactic with certain types of smaller privately-held businesses. It’s not uncommon for inexperienced buyers to run into trouble making payments and then lose the company back to the seller. Indeed some business owners see revolving door sales as a source of extra revenue. As a result, the practice is common in industries where the business is basically faceless and the customers don’t care who the owner is. Think self-serve businesses such as car washes, gas stations, laundromats, and storage units. With these types of businesses customer interaction with staff is minimal or non-existent. In other types of business the human interaction component is very important, so if the buyer rubbed enough of the customer base the wrong way there may not be anything worth recovering by the previous owner. That’s the key factor in whether or not you can play this game with a particular type of business.
During the years I worked as a broker I knew of several such businesses that were sold annually and reeled back within 8 to 12 months.
Isn’t It Time You Bought Your Competitor Lunch? by Tom Deans
For me, business has always been about dominating the competition – not just beating them but seriously overpowering them. Personal enmity has never driven this approach but rather a kind of institutional loathing underpinned by the idea that there is a finite number of customers worth battling for. I have never sought my inspiration from business books, but rather from centuries-old classics like The Art of War.
One of the most surprising aspects of selling our family business in early 2007 was how effortless it was to bury the hatchet with the competitors who bought us. In some peculiar way I think our “dominate our sector” attitude made us oddly attractive to our competitors. “Attractive” may be the wrong descriptor – perhaps “irritating” better captures the essence of why they bought us. It would be awfully tempting to imagine that our purchaser was enamored with our technology, our marketing moxie, or our nimble turn-on-a-dime management style, but in moments of clarity it seems reasonable that they simply wanted us gone.
And so it was on a cold, gray February day in 2007 in a downtown Toronto skyscraper that we closed the deal. I remember my father – founder, chairman – being handed the check and making an inspiring, heartfelt and sincere speech. There were no quips about nailing the deal of the century, no comment about how much fun he was going to have golfing, traveling, and indulging his passion for his new vineyard – there was none of that.
Instead, I watched and listened to a founder methodically wish his acquirers well with his business. It was real, it was touching and everyone in the room felt it – the junior law clerk across the room shot a look to a colleague that told me she knew she had just witnessed something rare. Little did I know that six months later that poignant moment would help guide my pen as I wrote Every Family’s Business.
From Warrior to Poet
That short, powerful, emotional speech didn’t frame the deal as win/win. It was utterly devoid of spin, politics, and ego. It was instead a speech full of hope, promise, gratitude, and humility. Only a business founder who truly understood the essence of commerce, who understood the role of business, could have given that speech.
It got me thinking how utterly amazing it was for a founder to make the transition from warrior to poet. It got me wondering how many business owners will never get to experience that beautiful moment when a check crosses the boardroom table, a life’s work monetized, because for them business will forever be war. As long as the buyer of a business is cast as the victor and the seller as the vanquished, too many business owners will miss their exit and miss the opportunity to experience the bliss of being both – which is precisely what they are when they sell.
One of the clear takeaways from our exit from the business is that we chose the time, the place, the buyer, and the price. We exercised control and we exchanged our company – our market share – for money. Business has always been about control; you either have it or you don’t. And exercising control over one’s exit takes introspection and clarity about what your business represents. If your business defines who you are, if it represents your identity and your family’s identity, chances are your exit will be emotionally tough, bitter, and acrimonious – and most of all, postponed.
For business owners who never lose sight of the fact that a business is an instrument of wealth creation – nothing more and nothing less – there’s a good chance that they have already bought their competition lunch and explored their exit precisely when that exit is neither desired nor feared.
As an advisor, have you encouraged your business-owner clients to buy their competition lunch? Have you bought your own competitors lunch?
Entrepreneurs and Small Business Owners Can Use Acquisitions to Double or Triple Their Customer Base Overnight
Business Growth Strategies
What many business owners don’t realize is that it can be cheaper as well faster to go with the acquisitions growth strategy. To illustrate this, let’s take a look at cases where this was capitalized on from the recent past. Specifically, let’s look at businesses which utilized subscriber revenue models such as cable-TV and Internet service providers. If you owned a small system in either industry, you were faced with a choice of growth through marketing or acquisitions. Now suppose that you had set as your goal a doubling of your subscriber base in five year’s time. We will assume that this target is extrapolated from your growth rates over the last three years. An analysis of your customer acquisition costs needed to double your sales over three years may show that a marketing based strategy’s costs will exceed those of an acquisition strategy. Morever, the acquisitions route will achieve your goal by doubling the subscriber base as soon as the deal is finalized.
Business Growth via Acquisitions
Back in the 1990s, there was a great deal of M&A activity in the printing industry. One large printer embarked on an acquisitions strategy to expand the market for its three core services: document scanning, fast high-volume printing, and distribution of legal documents, such as proxy statements and collections letters. As a result, the company focused on acquiring small printers which offered only one of these three services. After the acquisition, the absorbed company would be able to offer its customers the expanded range of services made possible by the acquirer. This, in turn, enabled them to win over larger local accounts that they could not have otherwise serviced before.
This is a typical example of what drives a company to employ an acquisitions strategy.
The Tycoon Playbook covers the details of designing a successful M&A strategy for small businesses and entrepreneurial companies.
Chris McKnett: The investment logic for sustainability
Sustainability is pretty clearly one of the world’s most important goals; but what groups can really make environmental progress in leaps and bounds? Chris McKnett makes the case that it’s large institutional investors. He shows how strong financial data isn’t enough, and reveals why investors need to look at a company’s environmental, social and governance structures, too.
Chris McKnett helps institutional investors put money toward sustainable and socially-forward assets.
WHY YOU SHOULD LISTEN TO HIM?
At State Street Global Advisors, Chris McKnett thinks deeply about how large investors, like banks, pension funds and endowments, can put their money in the right places — not just for better business, but for a better world. In his role as the head of State Street Global Advisors’ Environmental, Social and Governance Investing (ESG), McKnett develops sustainable-strategic products and integrates sustainability thinking directly into the investment process.
Small Business vs Entrepreneurship vs Capitalism
If you are trying to get a handle on The Tycoon Playbook as some still are, I think this may help.
Think of the business world as having three separate rungs. At the bottom you have the small business rung. The consensus definition of small business is that it’s primarily about having a steady pay-check for oneself with a little extra left over, hopefully, for the Golden Years. As a result, typical small business owners are concerned with playing it safe, taking as few risks as possible, and basically maintaining the status quo. Once a small business owner has reached a certain level of income their focus shifts to merely maintaining it rather than increasing it. Many small businesses can be found along the proverbial “Main Street.”
On the next rung up is entrepreneurship. Entrepreneurship is an entirely different game. It’s about marshaling resources and taking calculated risks to create something new that will hopefully reward the founders with substantial wealth. Entrepreneurship has no allegiance to the status quo. Rather it’s about starting from scratch and disrupting the marketplace. Most entrepreneurial ventures will be found in emerging industries and fast growth markets.
A few years ago I found myself in a heated exchange with a college business professor who was claiming that there is no difference between small business and entrepreneurship. I was flabbergasted by his inability to see the obvious differences.
The highest and most lucrative rung is capitalism. Capitalism is simple to grasp if you think of it this way. It’s about using capital to acquire more capital. To make the concept as simple and clear as possible, it’s about starting with a single cashflow, in most cases, and then using it to keep acquiring more cashflows until the clock runs out.
If you study how billionaires have made their fortunes over the past 200 or so years starting with the first tycoon, Commodore Cornelius Vanderbilt, you will see that wheeling and dealing in assets is the most proven route to great wealth. Most people today don’t understand this because for the past 15 years the media has been obsessed with the Internet and technology wunderkind.
This narrow focus has led the masses to conclude that the Internet is the only road to wealth creation. However, for every online success story you hear about there are hundreds of failures, and I am only counting the teams which had a shot a success. I am excluding all the one-person blogs and sites that comprise 99.9999% of the 250 million domains registered as of December 2012.
To put it bluntly, there’s just too much competition online today. All of the low-hanging fruit that could be picked by the little guy or gal was gone ten years ago. Today you need a high quality team and financial backing to go after any online opportunity still worth pursuing. Another serious problem with doing business exclusively online is the culture. No one under a certain age wants to pay for anything anymore. They expect everything to be free. Finally, Google’s now quarterly algorithm updates have made it extremely difficult for new sites to rank well. If you are going to make it online today you need the true commitment necessary for 12 to 15 hour days of constant fine-tuning and testing. The Internet Gold Rush is officially over in case you hadn’t heard.
How to Get Rich Today
So, let’s get back to old school capitalism. Most people associate it with tycoons such as Warren Buffet and Carl Icahn and assume that the game is out of reach for them due to all the usual excuses. What they don’t realize is that there are thousands of mini and up-and-coming tycoons out there quietly rolling up assets and building empires of varying sizes. They will always be out there creating wealth while shunning the media limelight and time-wasting cyber-culture bullshit like the current social media fad that has all the lemmings distracted. One of the major pluses of going the tycoon route is that you end up selling goods that people have to pay for. You don’t deal in bullshit online fads that come and go every few months.
The Internet isn’t going to change how people chew gum. That’s the kind of business I like.– Warren Buffett on his acquisition of Wrigley
This why I hope Marcus Lemonis’ new reality show The Profit succeeds and inspires people. Marcus is a perfect example of an old school tycoon accumulating cashflows. He could be the poster boy for The Tycoon Playbook. The Gores brothers, Tom and Alec, are two more examples of tycoons. These men remind us that there is another way to get rich for those who aren’t technological wiz-kids. Not everyone is suited to programming smartphone apps for 15 hours a day, months on end, while tucked away in a cubicle. Some of us are people-persons who prefer interacting with other humans. Being a tycoon is more about having good horse-trading sense than almost anything else.
Capital is that part of wealth which is devoted to obtaining further wealth. —Alfred Marshall, economist
Learn how to play capitalism successfully.
Family vs. Business by Family Wealth Coach
As a business owner, you take on a unique challenge. Every day you are faced with both business and family decisions. And family business owners deal with this even more.
Sometimes people feel that those two aspects of their lives are really at odds with each other. They absolutely can be—but they don’t have to be if you manage both of them carefully.
Think about your family and business in terms of a pendulum, or a teeter-totter. Your family is on one side, and your business on the other. Every decision you make will have both business and family implications. For example, promoting one of your children as CEO, or even deciding when your children will engage with the business as either employees or shareholders, will have an effect at home and at work.
Sometimes you will have to prioritize business over family, or family over business. Again, think of the teeter-totter, when you make a decision for one side, the other side will also be impacted.
The key take away here is that Estate plans have to consider both – who gets voting control, who will manage the business, how will you look after your family? Balancing a teeter-totter (or a family and a business) is not easy when both sides are so intricately linked to each other.
The name “teeter-totter” may suggest otherwise, but finding the equilibrium is always possible with some careful planning and accurate adjustments. The same is true for your family and your business.
Harish Manwani: Profit’s not always the point
You might not expect the chief operating officer of a major global corporation to look too far beyond either the balance sheet or the bottom line. But Harish Manwani, COO of Unilever, makes a passionate argument that doing so to include value, purpose and sustainability in top-level decision-making is not just savvy, it’s the only way to run a 21st century business responsibly.
Harish Manwani joined Unilever as a management trainee in 1976; he is now the company’s chief operating officer.
WHY YOU SHOULD LISTEN TO HIM?
Harish Manwani is a Unilever man through and through. Having joined the company in 1976, he imagined that his time would be taken up with selling soap and soup. Not so, his then-boss told him. “You’re here to change lives.” It sounded far-fetched, but as the years went on and as he moved through the ranks of the corporation, Manwani began to understand his mentor’s wisdom. Those words remain close to his heart even in his current role as the company’s chief operating officer.
Now based in Singapore, Manwani graduated from Mumbai University and has a master’s degree in management studies; he also attended the advanced management program at the Harvard Business School. He is the non-executive chairman of Hindustan Lever and a member of the executive board of the Indian School of Business.
“Harish Manwani is a strong believer in leading by vision. “A vision is not about setting targets, but about changing behaviours and motivating people to go the extra mile,” says Manwani. “A good leader must have the ability to define a compelling destination combined with a sharp operational focus on the ‘here and now’. That is key to delivering long-term success.” Yet, Manwani admits that he had done little long-term career planning, choosing instead to focus his full efforts on whatever tasks he was assigned at the time.” HQ Asia