By Lisë Stewart, Owner and Founder of Galliard Group
As business owners we are often faced with a myriad of decisions to make about an astounding array of complex issues. One of the greatest complaints that we hear from the families that we work with is that they are often overwhelmed by the broad range of topics that they need to deal with as owners of their own businesses. As family business owners, you wear many hats!
In this Quarterly Newsletter, we're sharing some ideas and information about a few of the management issues that our clients are telling us are important to them. It is certainly not an exhaustive list and we'll have more to come in the months ahead, but it's a start.
First, one of the most common questions our managers ask is "how can we be profitable in this economy?" Bret Baker, one of our senior consultants and an experienced CFO, sheds some light on how both price increases and price decreases can positively impact your profitability under different circumstances. Pete Butler, Principal of Valtrend and a Chartered Financial Analyst, is continuing his series of information on Buy-Sell Agreements and the confusing issue of Life Insurance in this issue - again, answering some of the challenging management questions that many owners are facing.
Amy Davis, our Senior Associate, is describing one of the techniques that we use at Galliard Group to try to help managers to share some of the burden of making management decisions and reaching consensus. It is called the 'Fist of Five' and is one of our most useful tools in our kit of facilitation and meeting management techniques.
Finally, we've asked one of our favorite professional partners, Melissa Kelly-McCabe, the Director of Clear Intent Strategy, to answer some questions about Executive Coaching. Melissa is a very wise and experienced coach and we know that the techniques she utilizes can be some of the most powerful strategies that managers can use to gain mastery in their management and leadership skills. We have asked Melissa to offer her insights over a series of Newsletters, so you'll be hearing more from her in the future.
We hope you enjoy some of the ideas and information we are sharing and please feel free to let us know what issues you'd like to learn more about in the future. Here's to a safe and relaxing summer!
By Bret Baker, Senior Business Advisor
Management of many companies were able to maintain profitability during 2008 -2009 by making drastic cuts in costs and expenses to reduce cost structures to match the dramatic revenue decreases. Now, some managers are using more selected, targeted actions to rebuild their company’s profitability during this “recovery.” Here are some specific examples of things that companies are doing to increase profitability and how they are doing it.
Price increases – Across-the-board price increases, even very small percentages, generally aren’t successful in most markets right now. A couple of approaches that companies are using to effectively raise prices are commodity-based surcharges and elimination of pricing concessions and discounts.
Many products and some services have a commodity (fuel, metal, plastic, energy, etc) that is a significant component of cost. Most of those commodity prices declined in early in the recession (reducing costs and helping companies salvage profitability) but have been rising for the past several months or longer. Establishing a surcharge for that commodity component, based on a widely published index for the commodity can be an effective way to pass through those increased costs. Customers are generally more accepting of a commodity-based increase, especially if it is presented to them in advance. An example of this commodity-based increase could be: “Commodity x was $0.80 per pound at the beginning of last year, is now $0.92 per pound. We have absorbed those cost increases, but it the price reaches $0.95 per pound we will begin charging a surcharge of $xx,” (with further explanation of how the surcharge will change as the commodity price moves up and down.)
Companies that need to raise prices are eliminating price concessions and discounts for specific customers that are no longer justified by their current situation. Again it is not easy, but is somewhat more acceptable to explain a price increase by telling specific customers that their pricing was based on a volume which is no longer being achieved. This also provides the company’s sales force an opening to discuss opportunities for the customer to increase their volume and retain their favorable pricing.
Price decreases are also being used to increase profitability. For example, companies are reducing or eliminating planning, design and engineering fees for products in situations where they have excess planning or engineering capacity due to reduced demand levels and sales can be made at prices lower than normal but more than recovering the costs of delivering those products or services. This can be very effective for long-term profitability if the planning and engineering phase is fairly short and the production and delivery phase is much longer.
Similarly, manufacturing companies are pricing jobs below their normal price but at levels that fully recover all variable costs and make some contribution to fixed costs of the period. Again, this must be applied selectively, limited to utilizing available but unused capacity for the period. Companies are carefully communicating and contractually avoiding making commitments for this lower pricing into periods in the future when demand returns in their industry.
Companies are even making permanent price decreases on some higher-profit products and services to increase overall revenues and profitability. They are targeting products where their reputation, design or some other competitive advantage allowed them to command a premium price in the past due to reputation, but sales volume has declined significantly (even before the recession) because their competitive advantage has eroded. Reduction of their pricing premium to more accurately reflect their current competitive position allows them to gain new customers or regain former customers. (This is the approach that Sam Walton used to grow Wal-Mart—passing savings through to the customer to increase sales.)
Management needs very good, timely objective information to make decisions as to which of these targeted approaches may increase profitability for their company. They need dynamic financial models that can show the potential impact of contemplated actions on profitability and cash flow. When they do make a decision, “If we do X then we expect Y result,” they need to be able to measure X and Y on at least a weekly basis. Of course, they need very timely income statement, balance sheet and cash flow statements each month to validate their actions.
It is difficult and somewhat risky for management to take targeted, sometimes counter-intuitive, actions to increase profitability in these uncertain times. However the alternative is having to do another round of across-the-board cost cutting measures in the near future to achieve acceptable profitability for a smaller organization with less capacity to grow.
Bret Baker has been an ad hoc financial officer since 1993, working with company owners and managers to increase profitability and cash flow so they can achieve the long-term objectives of the business and its owners. Baker & Cole is located on Grand Lake in northeastern Oklahoma, bret.baker@mobakers.com or 918.801.3324.
By Peter J. Butler, CFA, ASA, MBA and Family Business Advisor
As I concluded the last article on Buy-Sell Disagreements, I mentioned the importance of life insurance. Yes, I believe most business owners should have some. But, the issues are bigger than that.
Whether the company owns the policy or not can have drastic repercussions on the seller/estate and the company in the event of death. The best way to show this is by way of example.
Let’s presume that an independent credentialed appraiser valued a 100% ownership interest in XYZ company at $10M. (Note: after reading the last article, the business owners ordered a certified valuation – fortunately, it was completed before the untimely passing of a 50% owner named Jim). Moreover, the Buy-Sell Agreement stated that the respective owner’s interest will be bought out at fair market value (FMV) upon death. Assuming no discounts, the estate is due $5M, or is it?
For illustration purposes, the company had been paying term-life insurance premiums on $6M policies for each owner. But who owns the policies – XYZ or not? The two scenarios are shown below:
• Scenario 1: Life insurance proceeds are NOT XYZ’s assets
• Scenario 2: Life insurance proceeds are XYZ’s assets
Intuitively, one might think that Scenario 2 is better for the company. Let’s find out.
Under scenario 1, Jim’s estate gets $5M as determined by the Buy-Sell Agreement. What happens to the company, however? Let’s say that the company loses no value with the passing of the one owner, so it is still worth $10M. Remember, the insurance proceeds were $6M, however, and the estate only received $5M, leaving $1M for the company who was paying the premiums. Thus after insurance proceeds, the company is worth $11M ($10M + $1M).
Under scenario 2, the $6M in proceeds becomes XYZ’s asset, resulting in a 100% value of XYZ equal to $16M ($10M + $6M). Splitting the value in-half results in an amount due to Jim’s estate equal to $8M. The insurance proceeds only represent $6M, however. Where does the other $2M come from? It might come from newly issued XYZ debt, assuming the credit markets are not frozen. Can the company even take on this amount of debt to fund the liability without jeopardizing its future? Both sides get $8M in equity though. Jim’s estate gets $6M (proceeds) + $2M (from XYZ in some fashion). Commensurately, the Company is only worth $8M ($10M - $2M) now. Thus, the life insurance proceeds actually destroyed $2M in value for the company. This does not feel good, even though everything is allegedly equal.
In summary, be careful how much you are insured for. In a perfect world, know the value of your business and insure accordingly. The second scenario while “fair” doesn’t seem quite right, especially if the company enters into financial distress to meet its obligation. While there may not be many “correct” answers, a potential tweak to scenario one where both sides split any excess insurance proceeds may be the optimum solution. This would result in $5.5M ($5M + $0.5M) in proceeds to Jim’s estate and a company worth $10.5M ($10M + $0.5M).
In any event, please consult with an attorney in drafting Buy-Sell Agreements. Upon consultation with you and your partner(s), attorneys will be able to carefully review how best to handle life insurance proceeds. As you can see, issues such as the hypothetical one described above can catch the unprepared by surprise. Don’t be unprepared.
Peter J. Butler, CFA, ASA, MBA specializes in the valuation of privately-held companies and assisting owners in maximizing the value of their businesses. He is also a Galliard Group Certified Family Business Advisor. He can be reached at (208) 371-7267 or www.valtrend.com.
By Amy Davis, Galliard Group, Senior Associate
Many managers complain that meetings take up too much time and don’t achieve their goals. Sometimes attendees seem to agree to action items during the meeting but drop their interest and commitment as soon as they leave the room. Maximizing team members’ time and expertise is the underlying goal of a skillfully managed meeting. You want to make sure that your team members are being heard and that they don’t passively agree to actions for which they have little commitment.
Team members come to the table with their own priorities, expertise and desired outcomes in return for the investment of their time in the meeting. A consensus-building tool known as the Fist-of-Five can help quickly identify the level of consensus regarding important issues and ensure the commitment necessary to move toward implementation.
Consensus is defined as broad not universal unanimity. The Fist-of-Five may be used during a discussion or as a group is coming close to resolution on a decision.
After discussing an issue, and as you begin to move toward a decision or resolution, the facilitator will ask everyone to rate their current level of interest or commitment by using the Fist-of-Five. Each person responds by showing a fist or a number of fingers that corresponds to their support:
Fist - a no vote - a way to block consensus. I need to talk more on the proposal and require changes for it to pass.
1 Finger – I am not comfortable and need more information or to discuss this further (perhaps this is tabled to another discussion).
2 Fingers - I am more comfortable with the proposal but would like to discuss some minor issues.
3 Fingers - I’m not in total agreement but feel comfortable to let this decision or a proposal pass without further discussion.
4 Fingers - I think it’s a good idea/decision and will work for it.
5 Fingers - It’s a great idea and I will be one of the leaders in implementing it.
If most team members are showing 2 fingers or fewer – then you have not reached consensus and you may wish to table the discussion for a more in-depth debate at another time.
The Fist-of-Five allows each member of the team to have their “voice” heard quickly and quietly as they move to consensus on any discussion or decision. A minimum of three fingers or higher from each team member should be achieved before moving on to the next issue or agenda item. As a facilitator, you might ask “what can we do to move you from a 3 to a 4 or 5?”
Note: This tool was originally designed by the American Youth Foundation.
By Melissa S. Kelly-McCabe, MS, GPCC, Clear Intent Strategy, Inc, Galliard Group Advisory Board
Executive Coaching is making big inroads in family business. In fact, in the 2010 Sherpa Coaching LLC study states, "Executive coaching is seen, more and more, as part of succession planning. From VP level all the way to the top, a generation of leaders is ready to retire. Those we talk to are sincere in their desire to leverage a legacy: a great place to work for those who follow them." And they often use the skills and outside perspective of an Executive Coach to help them. So, really, what is an Executive Coach and how could you benefit from one?
In this Galliard Group Executive Coaching Series, we will provide a compilation of what the experts say about Executive Coaching, give you some concrete suggestions about selecting and working with a Coach, and answer your questions.
What is Executive Coaching?
The International Coach Federation defines coaching as "partnering with clients in a thought-provoking and creative process that inspires them to maximize their personal and professional potential." (www.coachfederation.org) For the executive, this means meeting regularly with a trained, often credentialed, Coach, with the specific intention to accelerate business performance and effect positive change in the business and the leader.
Why hire an Executive Coach?
While in the past it was common to hire a coach "to usher a toxic leader out the door," in the January 2009 HBR Research Report “What Can Coaches Do for You?”, the authors site the top three reasons coaches are engaged.
1. Develop high potential or facilitate transition 48%
2. Act as a sounding board 26%
3. Address derailing behavior 12%
(See http://www.coachfederation.org/includes/docs/101-HBR---What-Can-Coaches-Do-for-You.pdf for the full article)
I completely agree with these reasons - and would summarize by saying "It is lonely at the top ." The CEOs that I meet have great ideas, long-term goals and dreams for their companies, and want to improve their leadership effectiveness. At the same time, they are so busy working IN the business, they don't have time carved out to work ON the business ~ you know, to wrestle with difficult issues, figure out where they want their business to go, and to create their own legacy.
How does it work?
Usually Executive Coaching arrangements are for a defined period of time (for example, twice a month for six months) and involve assessments, goal setting and action plans, and an accountability process. Meetings can take place in-person, by phone, and via Skype with a video camera. Some of of the more progressive executives take "personal retreats" to work in a more intensive coaching environment which accelerates goal attainment.
What's next?
In future issues we will discuss emergent topics, and we would like to answer your questions. To submit a question or an example of an Executive Coaching experience that you have had, email info@galliardgroup.com
Melissa S. Kelly-McCabe, MS, GPCC, is a credentialed Executive Strategy Coach, who works with new CEOs to accelerate their business goals as they imprint their personal style on their business. She is located in the beautiful Finger Lakes Region of New York State. www.ClearIntentStrategy.com