The three major car companies announced their pending closure in late 2013; with Ford’s closure due for late this year and both Holden and Toyota next year, time is virtually up.

It was reported in Oct 2015 in the SMH, that;

Professor Goran Roos – who has advised state and federal governments and was on former prime minister Julia Gillard’s Manufacturing Leaders Group – was quoted.

“On average, he says, it takes a company about seven years to build alternative income streams and a new customer base. Professor Roos acknowledges this is difficult – particularly when a business hasn’t already started on a diversification plan.”

He also, estimates about 75 per cent of industry will shut down when Ford, Holden and Toyota quit local manufacturing.

Source: http://www.smh.com.au/business/the-economy/australias-car-industry-one-year-from-closing-its-doors-20151012-gk7ip0.html#ixzz48mRGCN2C

So rather than hoping state and federal governments will come to the party to help out the suppliers and save the jobs in the sector. It is my opinion that these businesses should be proactive and diversify themselves quickly using the high level of skills they have developed.  But with time now running out they cannot do it via the development of new products and markets alone.

These businesses need to be proactive by taking control of their own future and not rely or hope on government assistance which is not coming.  They need to undertake a series of strategic acquisitions to diversify their products and markets.

By taking their existing core strengths and leveraging off them and buying the right company (or companies) to move into a new product and or market sector. Trying to diversify organically by developing new products and markets just takes too long and often fails.

Right now there are numerous quality businesses out there owned by Baby boomers who are keen to sell and move into retirement, many of these companies have strong products and markets, but may lack the skills and equipment that a quality automotive supplier would bring to the table.

In summary Automotive manufacturers have a great opportunity if they want to take it, they just need to get into the right gear quickly and diversify or crash.  If they don’t start the acquisition process now then about 75 per cent of the Industry will just shut down as Professor Goran Roos estimated.

Warren Otter, is the author of “Crank It UP; the proven way to grow your business to greater wealth”; and is a Specialist Acquisitions advisor, who assists businesses take control of declining growth and leverage their core strengths into stronger and more profitable outcomes. He previously grew his own metal manufacturing business fivefold by using the same strategy of growth via acquisitions.

Currently 22% of businesses in Australia are owned by the Baby Boomer generation (born between 1946 and 1963), and these Baby Boomers are looking for an exit strategy.

Each day more and more of these business owners are considering how they exit and they are either putting their businesses up for sale formally, or planning for the sale process.

So whilst it is a great strategy to grow a business and there is ample supply; don’t fall into the 7 Common Mistakes.

Mistake 1:

Believing that acquisitions are only for big companies and you can’t afford to do it

Most business owners believe that their true focus should always be the day-to-day running of their business and continuing to do what they do well. It can be many years until the growth eventually flattens out. Unfortunately many of these business owners believe that acquisitions could not possibly be part of their scope. They prove this to themselves by imagining they also could not possibly afford to consider an acquisition a part of a growth strategy. And they will continue to believe this without ever investigating the opportunity or the benefits.

Mistake 2:

Trying to do it without a detailed knowledge of all the required steps and potential pitfalls.

Like any skill or profession you need to be trained and highly experienced to be considered an expert. There are eight important stages to be undertaken and carefully checked to reduce the risks of an acquisition becoming at best a complete waste of time, or at worst fatal to your core business. We have all heard of occasions when a company has bought out one or more businesses with a view to growing and yet has failed, resulting in closure and bankruptcy in just a few years.

Frequently this can be due to the acquiring organisation believing that they knew what they were doing or simply calling in their external accountant or solicitor to assist with the process. Again in many cases, the accountant and the solicitor are trained and experienced at what they do well, but a very high proportion of the time their experience and skill set does not cover off all eight stages required to reduce the risk of a poor acquisition and give the highest chance of completing a strategically successful acquisition with a high return and relatively high chance of success.

Mistake 3:

Not knowing how to identify and find the best opportunities

Many business owners, when first learning about the concept of growing their business via acquisition in order to solve their declining sales and profits, are generally excited about the possibility of solving their business problems in one ‘easy’ step. All too often they are unaware of the proven ways of identifying the right types of organisation that best suit their needs. It is important that the company fully develop a strategy for medium-term and long-term success and that is in accord with the owner’s expectations as well as the organisation’s skill set.

Mistake 4:

Forgetting to independently ascertain the target business is ripe for acquisition

Too often businesses that are selling are doing so because the business owner is stressed and looking to bail out. The seller may well be trying to disguise these difficult issues from the potential buyer. Whilst on face value you should believe what businesses are putting forward as being correct and accurate don’t always believe what they say; it is critical to have an independent advisor investigate the target company and assess it for its readiness for acquisition.

Mistake 5:

Thinking the first opportunity will be the solution (or being too selective and not making a decision)

Once a business owner has come to terms with the concept of growing their company via acquisition then the concern is that he or she might jump in too quickly and buy the first business that comes their way. It is like most things – once you have become aware of a concept and opened your mind to it, you will suddenly see opportunities everywhere. By definition this is because you are now aware of what you are looking for, whereas in the past, similar opportunities were probably there but you were simply not conscious of them.

So the big mistake, having become aware of the benefits, is a temptation to get started quickly and make up for lost time. A word of warning – be careful and take your time to work through all the steps thoroughly. I recommend that you review numerous companies even if at a superficial level. Eventually the right one starts to show itself. This search process can be narrowed down by careful research prior, but be careful about jumping into the first one that comes your way.

Mistake 6:

Trying to negotiate directly with targets and either doing the deal too quickly and paying too much for the wrong business – or trying to smash them on price and terms only to end up losing a potentially good opportunity.

If the business decides to take on an acquisition strategy, another key mistake that many make is to take their eye off their current business and go to the market themselves. Or they may try to negotiate deals not knowing exactly the ins and outs of how qualified and experienced advisors do it. This can lead to several problems including taking too long to do a deal efficiently, paying too much for the target business or not paying enough attention to the due diligence process. Another possible problem is in not understanding all the issues involved in the integration phase to solidify the benefits of what the company has purchased.

Mistake 7:

Aiming too big and looking for the one big quick fix

Another key error is that once a business has accepted the concept that acquisitions can assist their growth, they misread the fulfilment part of the strategy by trying for a one-time quick fix tactic. Rather they should understand the ongoing strategy of continuous, modest sized acquisitions and building the business profitably and sustainably over many years, which is how a considered and measured strategy should be implemented. Some businesses see the concept as a quick fix and look for a relatively large target. My definition of a large target is a business which is greater than 65% of the acquirer’s current size. Now this is not a hard fixed number, as there are numerous ways to measure the size of a company; turnover, number of employees, capital employed or alternatively, it may be the number of locations or diversity in products and markets, which are issues that the acquirer will have to deal with when taking over the target.

My experience with the first acquisition that I undertook in my own business was strategically very important and critical to the next growth phase of the business. However it took far too long to negotiate the deal. My competitors became aware that the target business was for sale and also took the opportunity to look at it themselves, thus understanding exactly what we had actually bought. Following the transaction, our major competitor believed they could better our prices in the marketplace and cause stress to our business, which it did very successfully. Do not underestimate the need to negotiate reasonably quickly and with a closed shop. Also don’t underestimate just how your larger competitors may react in the market following the acquisition.

About the Author: Warren Otter

Warren Otter is both an investor and a specialist advisor to medium-size business owners. He is the author of ‘Crank It UP: The proven way to drive your business to greater wealth’ and has been a business owner in the manufacturing environment since the early 1990’s.

He grew his first business from $4.5m to $25.0m revenue back in 2005. In that year he won the Monash Business of the Year award, beating many larger and more well-known businesses.

At that stage Warren had just completed his third bolt on business acquisition and both the award and growth was largely due to the A grade management team he developed.

Also, have a look at the other articles on this site.  Best of luck in running and growing your business via acquisition.

From my experience there are two types of proactive business owners when it comes to the issue of growing or turning around a business. The first type are those owners who believe strongly in traditional organic methods of growth, as outlined in the Ansoff Matrix, which in summary is as follows;

1. Market Penetration; sell more of your existing product or service to your existing customers and in your existing markets,
2. Product Development; develop new products to take to your existing customers and market, or
3. Market Development; take your existing products to new customers and markets.

The traditional model argues that there is also another, slightly riskier path to take:

     4.  Diversification; develop new products and attempt to find new markets for them.

The latter is generally used if the existing industry sector that the company operates in is in serious decline and or the existing products are at the end of their life.

I find that many private businesses will use strategies one to three, and I would be pleased to say that very few would attempt the fourth strategy of diversification, as this has the highest risk. However, while strategies one to three above are common practice, these approaches require intense new product and or market development, innovative new marketing approaches, potentially lots of investment dollars, and time. They also require a lot of effort, skill and focus from the existing management and key staff to effectively implement these strategies.

While these are sound strategies, many times they become just another tacking manoeuvre which yields lower than expected outcomes.

Most business owners who follow the traditional organic (slow) path may be uncomfortable with a non-traditional (non-organic) approach to growth. If you are a member of this group of business owners, the first part of my book (Crank It UP) is designed to enlighten you to the alternate opportunity of business growth via acquisition (i.e. buying a motor for your yacht). This utilises strategies one to three from the above model, but takes them to a new level.

The second group are business owners who have either heard of or seen a friend grow their business via an acquisition or two and generally believe that growth via acquisition is a viable option. Often though, these owners are unsure as to the process and methods of achieving strong results from this strategy. In many cases whilst these business owners may have some previous awareness of the strategy they may not be fully aware of the best ways to gain strong profit and wealth outcomes in a short time frame and they may not have the necessary skills or experience required to reduce the potential risks.

For both groups of business owners, my book will help provide the knowledge of how to develop the required skills, as well as the confidence to proceed with a strategy of growth through acquisition, which is utilising traditional growth strategies but at an accelerated rate.

Investing for Organic Growth

Most businesses have started from humble beginnings with the owner putting his or her time, effort and personal capital (savings and many times borrowings against their primary home) into growing the business from scratch. At this stage the concept of reinvesting in the business is fundamentally core to most business owners, particularly when they start to generate profits and then reinvesting those profits in the business.

The typical strategy here is to take advantage of the growth phase by hiring more staff to grow sales, or managers to manage and develop the processes. Other characteristics include investing in plant, equipment and other fixed assets such as machinery, computers, software, motor vehicles, as well as intellectual property through research and other forms of reinvestment. All of this reinvestment in the core business is focused on allowing the business to grow to the next stage. The alternative would see a business owner taking funds from the business as drawings.

Generally when a business owner makes the decision to reinvest his or her profits into the business, they will conduct an evaluation (either formal or informal) prior to that reinvestment as to what that new asset is going to achieve in assisting the business in its growth phase. Naturally there will be an expectation that the reinvestment is going to generate a return on investment in the foreseeable future. You would therefore expect that as the business grows the organisation would ensure that they have installed a more formal analysis of the pending return on each piece of equipment or every dollar of reinvestment before they actually committed to the investment in equipment or assets.

However, many private companies invest in the next piece of equipment (or the next salesperson or the new software), based largely on a gut feeling that it is the right thing to do to move the business forward. As a consequence, this kind of investment is largely undertaken without a great deal of formal analysis of the time frame required in order to achieve an appropriate return on investment or a clear understanding on what the return on investment will be. Many times it is the business owner that makes the decision on the key investments, only superficially involving the experience and advice of senior staff and management. While the business owner may have discussed or involved the senior staff/management in the process, the staff are generally not held accountable for the results of the investment and hence, do not have the same level of commitment to the success of the new investment as the owner.

It is not uncommon for an organisation that is well into its growth phase, yet experiencing a slow-down in sales growth and a decline in profits, to attempt a reinvigoration of their business by reinvesting in new equipment or systems. This is when the business owner starts to feel those previous strong winds lose their strength. He or she can sense a slow-down is coming, and starts to consider investing in new sails or equipment, tacking in one direction then another in an attempt to hopefully catch the changing winds.

This usually involves an effort to make the business more efficient by bringing down the unit cost or keeping capital equipment up to date. It is at this point, when growth has slowed down significantly, that these businesses must consider the potential benefits of reinvesting in new equipment and/or additional key staff in the business. How much of a return is really possible?

Far too often, I have seen businesses that are well beyond the growth phase (and in fact probably in the later stages of maturity or in decline) when the owner(s) decides that the way to turn the business around is to reinvest in more modern equipment, which is designed to make a different or more cost-effective product, on the basis that this formula has worked for the business in the past. However, this ignores the stage in the business lifecycle, and the effects of the product or business cycle. Many times when a business’s growth has slowed right down and is potentially in decline it is imperative that a capital reinvestment strategy (whether it be for more equipment or faster equipment or similar products or new IT systems) is carefully discussed and analysed, because often, when critically reviewed, the answer could be that it would be best to invest another way. As a minimum, an investment plan should be formally developed and critically reviewed with buy-in by senior staff who will be given the responsibility to implement.

A clear assessment of business risk and return is required at this time.

Many times the certainty of what an acquisition strategy can bring to an organisation in relation to return on investment and future growth is much greater than what the return would be if the equivalent investment was in capital equipment or other types of assets in the business. I have also found that by involving senior management in the process, the capable ones who can take your business forward, stand up and support the investment and work with you, while those who do not openly support the direction are generally already holding you back and will continue to do so.

Businesses need to have a strong focus on running their company efficiently and effectively. I’m not advocating that growth via acquisition is the only answer to growing a successful business. Businesses also need to continue to focus on improving their systems, marketing, employee development, LEAN (business efficiency programs) tools and the like, along with all the other aspects of the business that they have been working on throughout the journey. However, growth by acquisition gives an additional boost that these tacking manoeuvres cannot. An acquisition can be a motor for your business, whereas everything else is trying to chase the elusive, fading wind.

Businesses need to understand their numbers and ensure they have good reporting procedures and quality staff who are accountable for results. They also should take on development programs for their key managers as it is important before a company undertakes an acquisition strategy that the key management group is well developed and skilled. As the business owner can only stretch him or herself so far, it is critical that the business has a team of strong, reliable people with systems, procedures and accountability measures to enable the company to have confidence moving forward into an acquisition strategy or any form of new investment.

Not reinvesting in one’s business for a prolonged period is a sure-fire way to accelerate the business demise; so the only real strategy is to continually reinvest in your business to gain the best results. This reinvestment includes strategically reviewing your industry and product lifecycle to ensure you are not on a dead end path, before you invest further into it.

Investing via Acquisition

An alternate way to invest in and grow your business or to turn it around is through an investment in the acquisition of other businesses by applying the Ansoff principles that we have covered off above.  My view is that too often the focus is on utilising the above strategies in an organic manner to gain growth; I strongly believe in and have had success in taking these same well-structured strategies and accelerating them via utilising the acquisition approach.

Be aware that often once business owners learn about acquisitions as an opportunity to grow their business, some incorrectly believe it to be a quick fix. However they can neglect the problems in their existing business and try to turn the business’s fortunes around or improve the results solely through acquisition. If the foundations of the core business are not strong, the combined and enlarged new business could suddenly become a bigger problem and more difficult to control rather than providing a solution. Therefore, for organisations that have not undertaken acquisitions in the past or have attempted it without yielding the expected benefit it is generally a wise decision to involve an experienced adviser in the early conceptual stages to assist in reviewing the core business and the strategy before moving forward.

We all see a large number of publicly listed companies posting profit growth year on year. The main reason for pursuing this growth strategy is that they have a shareholder base that is ruthless for growth in their dividends and share price. Most of us now have money tied up in superannuation funds, which invest in, among other things, publicly listed companies; and we all expect our superannuation portfolio to earn a good return each year and grow in value. Hence the pressure is on the CEOs and Boards of these public companies to grow the profit and value of the business each year. In short – slowing in the maturity phase or falling into decline is not an option. They must keep growing, whether the wind is in their sails or not.

So how do they do it? Largely they achieve this by thinking and acting outside the traditional way of growing a business organically. They use strategic acquisitions.

While it is no secret that growth via acquisition is regularly undertaken by large companies, that doesn’t mean that this strategy is the exclusive domain of large companies. One of the key benefits of businesses of all sizes, small, medium and large is to use such acquisitions to grow their business at a predictable, steady and controllable pace with a much better idea of what impact it can have on their business post-acquisition. Once the business is clear about its strategic objectives, the strategy should be to concentrate on the wide range of available organic growth tactics (e.g. marketing), with a view to trying to maintain some base organic growth rather than decline, even if that growth only amounts to some 2% to 5%. Alongside these tactics I recommend the company should include the strategic approach to acquisition with the intention of adding 15% to 25% (either annually or bi-annually).

There are various strategic approaches to growth via acquisition and the most effective one will depend on the numerous factors facing the business, some of which will be outlined later in this book.

About the Author: Warren Otter

Warren Otter is both an investor and a specialist advisor to medium-size business owners. He is the author of ‘Crank It UP: The proven way to drive your business to greater wealth’ and has been a business owner in the manufacturing environment for over 20 years.

He grew his first business from $4.5m to $25.0m revenue back in 2005. In that year he won the Monash Business of the Year award, beating many larger and more well-known businesses.

At that stage Warren had just completed his third bolt on business acquisition and both the award and growth was largely due to the A grade management team he developed.

Also, have a look at the other articles on this site.  Best of luck in running and growing your business.

What might have started off as chasing the dream has probably changed over the years. If your business is starting to keep you awake at night and becoming an occasional nightmare, it is time to re-evaluate.  You need to understand why you’re in business NOW, and also what you want out of your business in the future.  Are you achieving all your dreams or are they becoming a distant memory.

Many business owners start their business for different reasons, but fundamentally the majority of them want to earn a much better income on their own terms, rather than working for somebody else. I frequently ask business owners to review and evaluate (both in their minds and with their families) whether they have been successful in achieving their original business goals. Are they getting the balance of income and lifestyle that they believed they would, by owning their own business? Or has the business started to take over their lives, to the extent that they spend most of their time working in or on the business to get the outcomes they desire?  Many business owners spend their daylight hours working in their business and their out-of-business hours losing valuable leisure or family time by working on their business or worse thinking about the problems .

If you have managed to take a business beyond that difficult start-up phase and then through the growth phase and now have a business that is fundamentally sound and stable, are you able to take an extended period of leave without its performance sliding? If the answer is ‘no’, then what you have probably unwittingly created is a very large job (which becomes a headache); a business that relies on you to personally attend to it to achieve success. In saying that, you are also a very small step away from leveraging off the systems and structure that the business likely has in place to allow you to start looking beyond the current structure and size of the business.

On reflection, is the business generating personal and family wealth beyond your original expectations, or is it just allowing a modest (or just better than modest) level of income? Is this income level in proportion to the amount of time and effort you are putting into business? If, at your core, you still wish to grow the business to a much higher level of profit and generate the wealth you want for your family, then it is time to start to think outside the square and consider the opportunities that strategic growth via acquisitions will provide for you and your business.

I subscribe to the fundamental philosophy that anything that you want to achieve is achievable if you want it hard enough and keep on track with your core purpose. Too often business owners have a fundamental core belief and purpose as to why they went into business, but then the daily pressures of the business take over and before they know it their initial goal or objective is starting to fade or lose itself. Business owners can easily become disillusioned with the whole concept of what being in business is all about, and become increasingly cynical to ideas such as quick fixes and short cuts to success. They already know how difficult being in business can be and may not believe in ‘short cuts’, even though at their core they would love to get back on track and achieve their original goals of wealth creation quickly.

I also believe strongly in the belief that, when building something from scratch, why not learn from others who have already been there and achieved great results. In other words, why try to reinvent the wheel?

Be clear on your Personal Wealth and Lifestyle goal

So you now find yourself owning a business which should be providing you wealth, security and a great lifestyle. Unless you are more than 100% happy with your level of wealth and the security it offers then you have some more work to do before you can fully enjoy that lifestyle you deserve.

The majority of businesses owners typically have a number of reasons for being in business. They enjoy doing what they are good at and want to work for themselves, but they also have a core goal of creating their own income and wealth, which is substantially greater than if they worked for others. So, while they may say the main reason is not the money, money and wealth creation should be one of the core objectives that a business owner is trying to achieve.

Unless businesses are making strong and repeatable profits, they will eventually lose their ability to grow and be viable. Strong and growing profits are also a scoreboard of how well you, as a business owner, are actually running the business; and reviewing the profits gives you constant feedback on your level of success.

What I advise all business owners is to ensure they have a strong focus on growing profits and ensure it creates independent wealth. Do not view strong profit as a negative in any sense – the profit is what will fund the lifestyle you want to create for yourself and your family. This is not a matter of being greedy, but a matter of business necessity.

Being in business is risky, and the returns need to justify the risk. If a business owner is struggling to make a good living out of their business then I would  ask, how are you going to turn it around quickly so the business starts to work for you and pay what you are worth, plus a return for your capital and expertise? In other words, if you aren’t getting a decent return for the investment of your time and effort, then why be in business?

To assist business owners develop clarity with their wealth aspirations, I ask them to consider what lifestyle they and their families would want ideally (trying to remove the constraints of the business from their thinking) then to work out how much income and base assets would be required to provide that lifestyle. This becomes the basis of a target to achieve as well as an inspiration to change.

In summary you should refocus on your goals and allow your business to create the wealth and lifestyle for you and your family that you know it should.

About the Author: Warren Otter

Warren Otter is both an investor and a specialist advisor to medium-size business owners. He is the author of ‘Crank It UP: The proven way to drive your business to greater wealth’ and has been a business owner in the manufacturing environment for over 20 years.

He grew his first business from $4.5m to $25.0m revenue back in 2005. In that year he won the Monash Business of the Year award, beating many larger and more well-known businesses.

At that stage Warren had just completed his third bolt on business acquisition and both the award and growth was largely due to the A grade management team he developed.

Also, have a look at the other articles on this site.  Best of luck in running your business

Otter Associates April Seminar Invitation

Standing still or just tweaking around the edges in an effort to improve results is dangerous, as competitors are finding ways to step around those businesses that are less effective with their changes.

Working harder or longer hours in an effort to improve results is not only stressful, it is dangerous to your businesses health and yours.

So, how do you grow a business in today’s economic climate – particularly one that is at the end of its natural growth cycle?

Many advisers recommend that a business consider the following basic ways to grow its profits:

1. Increase prices
2. Sell more volume
3. Cut costs

Others might advise a business on improving its business systems or increasing efficiencies.

While all of this advice is correct, I’ve found that these strategies all assume that the underlying industry and economic cycle is just that; cyclical. Unfortunately we now live in a fundamentally different economic landscape; the winds are unpredictable and unreliable and, for most private businesses, these strategies alone will not yield positive results quickly enough to keep the business afloat. These tactics will not satisfy the business owner’s needs, nor do they address the fundamentals of a sustainable growth model.

So, how do we proceed in unfriendly winds and uncharted territory, without working harder?

One way is to apply some of the principles that many successful companies are applying. One of those strategies is growth through strategic acquisition, in other words, buying a motor and bolt it on.  Although not always front of mind for business owners, business acquisitions can represent a viable strategy.  If done right, such a strategy can offer the acquiring business important potential synergies, valuable earnings enhancements and tremendous opportunities for superior long-term growth as well as significant increases in business value and personal wealth.

You do need to be mindful of the strength of your management team; ensure you have an A Grade team to assist you with your growth and share the work load.  (Have a read of my article under Leadership Management and cutting out the cancer in your business).

In my book ‘Crank It UP’ I outline how to help you avoid the frustration of reverting to the old, organic methods of growing your business. I know when you are trying to turn your business around and inject real growth it can feel like you are banging your head against the wall. The book offers a proven alternative method to get results back into your business.

What’s Possible with Acquisitions

In my opinion, with an open and entrepreneurial mindset, a $5 million business can become a $10 million, then a $15 million business with accompanying strong profits in a relatively short period of time, with the right strategies and with the right structures in place.

When larger companies sell, they generate a higher multiple of their profits. So the goal by undertaking these acquisitions is both to increase the profitability on a year-on-year basis to improve cash flow, and to increase the overall value of the business when it sells. For example, a company with $10 million worth of sales and $1 million of EBITDA (earnings before interest, tax, depreciation and amortisation) may be worth a three times multiple (i.e. 3 x $1 million EBITDA being $3 million sale value).

When this same company undertakes just two medium-size acquisitions each of, say, $3 million in sales with $300,000 EBITDA, and pays a multiple of 2.5 (so $750,000 each, being $1.5 million in total), the company will now have an EBITDA of $1.6 million (it’s original EBITDA of $1 million, plus the total EBITDA of the acquisitions, which was $600,000). And that’s without adding other synergistic benefits! As a result, the company could expect to get a multiple of its EBITDA of up to 4 times creating $6.4 million in value, when previously the business was valued at just $3 million.

The combined cost to achieve this result was $1.5 million. In this instance the net increase in value after the cost of the acquisitions has been $1.9 million extra value in the business. The leverage factor is impressive to say the least.

The reason the business now has a value based on a multiple of four, or possibly even more, is because as businesses grow larger and more stable they become more attractive to private equity firms , small public companies and overseas purchasers as targets. Not only are these sized companies willing buyers, but they have a history of paying higher multiples for target companies that are in the right sector and at the right size. Many public companies are actually valued on the stock market multiples above 8 to 10 and in many cases much higher.

In addition to the numbers, other benefits of strategic acquisitions include:

• Creating greater economies of scale quickly by absorbing other businesses
• Considerably improving profits, cash flow and business value
• Adding stimulus and interest to your business
• Diversifying the business into higher growth sectors/products
• Introducing the business to new geographic markets
• Creating a broader customer network to sell associated products
• Taking out a competitor before someone else buys them
• Attracting top quality executives (who can assist in running the business, and working towards an eventual sale or exit)

My book ‘Crank It UP’ will demonstrate via case studies not just how this is possible, but also how other business owners have already used an ongoing acquisition strategy to grow profitably and create much higher levels of personal wealth than previously.

About the Author: Warren Otter

Warren Otter assists medium-size business owners with their growth and lifestyle ambitions. He is the author of ‘Crank It UP: The proven way to drive your business to greater wealth’ and has been a business owner in the manufacturing environment for over 20 years.

He grew his first business from $4.5m to $25.0m revenue back in 2005. In that year he won the Monash Business of the Year award, beating many larger and more well-known businesses.

At that stage Warren had just completed his third bolt on business acquisition and both the award and growth was largely due to the A grade management team he developed.

Also, have a look at the other articles on this site.  Best of luck in running your business

I believe it is an important concept for business owners to fully understand, as I have found that clarity on the principles of how people earn their income can also be an insight for many owners of businesses as to what may be holding them back from achieving their massive creation of wealth.

The principle here is, on which side of the vertical line do you earn the highest portion of your income?

Let me give you my interpretation of how this model works. It’s fairly clear that as an employee (top left) you work for a company and earn a salary or wage based on your attendance or your hours. Annual leave would be paid along with various allowances for sick leave and public holidays. Your ability to earn more money as an employee will come down to your skill and ability in your workplace combined with your capacity to negotiate pay increases and bonuses on an annual basis. Overall many people will say if you are an employee of a company then your income is fairly well set.

The next is being self-employed (lower left). This is where a person chooses to move away from the relative comfort of working as an employee and works for themselves. Examples of self-employed professionals can vary – think of consultants, tradespeople, dentists, doctors, freelance writers and photographers. They are effectively working for themselves and put in the hours and effort to enjoy the result of their income. One issue here occurs when a self-employed person takes holidays, their income ceases (or significantly declines) during that period of leave. Whether you are an employee or a self-employed person, both models rely on the individual to physically attend the place of work and put in the hours and the effort to earn their income. Furthermore, your income is limited to the maximum sustainable hourly rate, multiplied by the number of hours that you could work.

Now let’s move across to the business owner quadrant (top-right). The business owner model is a system which is based around a business that produces either products or services on an ongoing basis. It employs staff or contractors and has learned how to leverage the employees’ skills via a series of processes in order to generate income (i.e. sales). Business owners in the true sense can earn a strong income from their business without the ongoing hourly input. In other words the business can operate effectively day to day and week to week without the owner having to be physically involved with the business to ensure its smooth operation. You might consider how many weeks you could be absent from the business, and remain comfortable that the business could still earn as much income as if you were physically there during that period.

This, in my opinion, is the real difference between being self-employed and being the owner of a business system. A lot of people who own businesses have not been able to successfully move from being self-employed to being the owner of a business system, and this is one fundamental issue which needs to be understood and conquered if the business owner wants to generate the wealth and have the freedom of time and lifestyle that they believe owning a business would bring them. Too many business owners find themselves trapped in the business working long hours and making most of the decisions and not getting the rewards that they want. This occurs for numerous reasons but mainly because the business owner does not believe they have a strong enough management team that is able and willing to develop the business systems and take the business forward. This enters into a whole new area of business restraints and human resource management issues; but in short, if the owner cannot work for extended periods away from the business, whilst it continues to flourish, then the business is a big job and hence a potential headache and restriction on your lifestyle.

Business owners who have successfully worked this out are able to take on more issues and grow their businesses quickly and successfully because they don’t need to be hands-on. As a result, they aren’t restricting their business size and or growth rate based on their available time or skill set. These business owners tend to have more spare time away from their business and are able to create higher levels of personal wealth then the average business owner.

So when it comes to the issue of growing your business through acquisition, a lot of business owners don’t understand how they’re going to find time to take on another business when they are already struggling with the one they are currently running. The emphasis here is on the fact that they are currently running their business rather than having the business working for them. It is often at this point that I ask business owners to reflect on other successful businesses that they have seen around them to understand how those businesses have grown to a considerable and profitable size when many of them started off as small privately-owned businesses.

Finally the other quadrant of income generation model is the investment quadrant (lower right). This is where an investor can accumulate funds and invest them so they are passively making money both during daylight hours as well as when they sleep and are on holidays. Examples of this for an employee could be superannuation or an investment property where the employee passively generates income without a direct involvement on a weekly or monthly basis. The same applies to self-employed people as well as business owners who can take their surplus earnings and put them into wealth creation investments.

It is clear how investing in shares, superannuation, property, gold or the like does not require the individual’s constant attention, or take up all their time in managing their investment. This does not mean that investments are ignored; however, they can be looked at and managed from afar. To my way of thinking, a business is to some extent like any other investment; you have good people looking after it for you, and following your direction based on the returns you would like and how it should be operated. This concept works well for those business owners who have got it right and understand the benefits of acquisitions, because on the one hand each acquisition is leveraging off their existing business systems and on the other hand it is adding to their passive investments.

Warren Buffett is a good example of taking this concept to the extreme. While he is known as an investor, with many people believing he buys shares in companies, what he actually buys, in the majority of cases is a controlling interest in those businesses that he believes in, and he can then work on them from a distance. Buffett very rarely becomes actively involved at an executive level. So he has taken this concept of being a business owner to the fullest extent by demonstrating that the business should be treated as an investment which you take a keen interest in, but not necessarily become too active.

While you don’t necessarily need to go that far, it is possible for you to become wealthy by owning business systems and growing them successfully, rather than trapping yourself in the world of being self-employed where your business controls you.  So through the strategies shared in this book, you’ll see that this is possible to learn and implement a different way of thinking how to ‘own’ your business and develop a more relaxed lifestyle and wealth creation system.

About the Author: Warren Otter

Warren Otter assists medium-size business owners with their growth and lifestyle ambitions. He is the author of ‘Crank It UP: The proven way to drive your business to greater wealth’ and has been a business owner in the manufacturing environment for over 20 years.

He grew his first business from $4.5m to $25.0m revenue back in 2005. In that year he won the Monash Business of the Year award, beating many larger and more well-known businesses.

At that stage Warren had just completed his third bolt on business acquisition and both the award and growth was largely due to the A grade management team he developed.

Also, have a look at the other articles on this site.  Best of luck in running your business.

Cut out the cancer and build an A grade leadership team

By Warren Otter, Principal of Otter & Associates

For a business to be truly successful, it needs a great team. However, one of the biggest challenges of private business owners is not having a strong and effective leadership team.

If you don’t have a strong and effective leadership team you are left with;

• all the problems,
• having to develop all the solutions and
• left with trying to implement those solutions; which the team
  • a/ may not agree with your solution, so not get behind it, or
  • b/ be unable to execute

One of the key benefits I found when I built my A grade team was being able to focus less on the day-to-day and week-to-week running of my business. Instead, I was able to add far more strategic value by planning the future of the business. As a result, my business grew organically from $4.5m revenue to $8m before it flattened out. At this point, with our strong management structure I was able to take on a series of strategic bolt-on acquisitions, which took the business to $25m revenue with 90 staff (profitably), with no more stress or hours spent in the business then when it was at $4.5m revenue.

How can you achieve these results in your business? Read on to learn how to build an A grade team which will allow you to grow significantly with less stress and input.

A, B and C grade players

In his book Jack, ex-CEO of General Electric Jack Welch stated that at GE they constantly sorted their leadership team into A, B and C grade players.

A grade players are filled with passion and are committed to making things happen. They are open to ideas and understand the need to continue to develop themselves as well as develop those around them for the business to be successful.

Jack writes that they have what he calls ‘the four Es of GE leadership: high energy, the ability to energise others around a common (agreed) goal, the edge to make tough decisions and finally the ability to execute and deliver on their promises.’

Adding to the four Es, I believe that A graders are highly aligned with a company’s values, love to solve problems and take them off their boss’s desk, take responsibility seriously and don’t give excuses. A graders also have a natural thirst for lifelong learning and development as well as strong ethics and high emotional intelligence.

B grade players are aligned with the values and goals of the business and bring energy and passion on a consistent basis.  They contribute consistently  and their focus is to assist with what is required of them, they may lack the ability to solve problems or to get the required results at a high level. They run at an acceptable level with limited concerns or problems.

Every business needs a good number of strong B graders in areas where the business needs to get ‘stuff’ done on a day-to-day and week-to-week basis. You would, however, want to see that a strong number of these B graders are able to be groomed and developed to become A graders; even though not all of them will become leaders.

Finally, C grade players are the trouble makers. They are the ones who have attendance problems, and/or are not aligned with the values and goals of the business.

Some may not have the skills, competencies or intelligence as required by the business and are not trainable to the required standard. Those staff who do possess the skills to achieve acceptable or even relatively strong outcomes, but are not aligned with the company’s goals and do everything their own way, often to the detriment of those around them, are in my view  C graders.

Ultimately, C graders suck the energy and life out of a business.

Too often, however, businesses accept C graders for too long. In part, they are unsure of how to move them on, particularly due to concerns about employment laws, which are seen to protect the weak.

At GE, Jack used this grading system to sort out their leadership team and structure, with the A grade players being the top 20 per cent, B grade players being the vital 70 per cent and the C grade players being the bottom 10 per cent.  This is a forced distribution model and does not actually mean that the bottom 10% are poor leaders or C Graders.

To remain competitive and maintain GE’s strong growth, under his leadership the company had a practice of constantly identifying  the bottom 10% of leaders, and moving them out of the business, if it was justified.

Whilst I am utilising the broad concept of Jack’s A B C grading, I do not follow the forced distribution model of 20-70-10. That is not what I suggest you do in your business; you should evaluate and grade all your staff according to their individual merits, and not have a forced situation in which 20% are A , 70% are B and 10% are C graders.

Leadership grading in your business

While GE’s leadership grading methodology is easily applicable to large businesses, how can a medium-size private business use this concept to strengthen their team and improve business outcomes?

I like to use the fundamental A-B-C ranking process in two parts:

1. For the leadership group, including second-level managers; and
2. For the balance of the entire staff.

I have adapted some of Jack Welch’s comments, along with those of Dr Bradford Smart in his book Top Grading, and blended them with my own practical experience of developing strong and aligned A grade teams.

The goal: minimum of 80% A graders

In medium-size private businesses, a great team consists of as many A graders as you can muster. A strong A grade team does not rely on the owner to make all the decisions and solve all the problems, which reduces key person risk and gives the business tangible value. Therefore, the higher the percentage of A graders in your team, the better the chance for growth and the easier it will be to achieve and maintain improved results.

To achieve this, the goal is for at least 80 per cent (preferably 100 per cent) of your managers and middle managers to be A graders within six months. The senior management team, in particular, must all be strong A graders to add real value and to reduce stress for the owner to a minimum.

Step 1: Grade your leaders

The first step is to sit down and objectively grade all of your leaders. These are the top line managers and the managers/supervisors who report to them.

When ranking your senior and middle management group, don’t be generous or lenient – you need strong A graders in your management group. Incorrectly ranking a B or C grader as an A grader or potential A grader because they are likeable or have years of experience or specific knowledge will be detrimental to your success and business value.  There are specific measuring tools which will assist you grade your leaders, it would be wise to seek the appropriate professional assistance when grading your leaders.

Step 2: Grade your staff

Once you have completed this process for senior and middle management, the next step is to introduce the concept to your senior managers and ask them to grade all their staff on the A-B-C scale.

Compare your assessment openly with each of your senior managers; allowing them the opportunity to have a different opinion to you.

Step 3: Cut your C graders

Once you have graded all staff, the list of C graders needs to be clearly identified and an exit strategy developed to cut them out.

Using a metaphor, C graders are the same as an operable cancer. If you have been diagnosed with an operable cancer, what do you do? You would get the best advice as quickly as possible and have the cancer removed without delay. Your focus would not be on the cost of the removal; your focus would be on executing the operation. You cannot afford to develop excuses or reasons why you cannot remove the cancer; you just need to set the plan of action and cut it out.

Similarly, C graders are like a cancer in your business – highly destructive and worse than cancer because they have the ability to infect those around them. Like a living being, an organisation cannot survive if it has untreated cancer that is allowed to grow and spread. Therefore, you shouldn’t muck around – get a specialist to help cut them out straight away.

The specialist needs to be able to deal with the matter quickly and completely, do not engage a practitioner who diagnoses and reviews and then repeats without a quick and clear outcome.

Once the cancer is cut out, the rest of the body and mind feels stronger and can focus on the future. The same applies in a business – once the C graders are eradicated, the rest of the staff are relieved and can start to function without the burden of the cancer eating away at them and holding everyone back.

Keep in mind that if any of your top-level managers are B graders and you honestly do not believe that they can quickly become A graders then they are, by my definition, C graders and need to go as soon as possible.

Step 4: Nurture your A graders

It’s important to understand the critical elements of not only building an A grade team, but how to create and maintain an environment in which A graders flourish and continue to develop.

A graders thrive in a growth environment in which their input is valued and they are allowed to directly contribute to the ongoing improvement and outcomes of the business. They do not stay in stale or stifling environments or in businesses that suck the oxygen from them. They need to have an environment that trusts them, allows them to add value and invests in their learning.

Finally, A graders want to work with other A graders and need to have respect for their manager which was earned.

The challenge here is to develop and create an environment that fosters, encourages, attracts and retains A graders.

This starts with putting a stop to the cycle of acceptance of underperformance and mediocrity. A key part of developing and creating your A grade team is to improve the recruitment and review process for staff and management in particular. This will involve clearly articulating your business’s values, culture and objectives, and may entail engaging specialist recruitment personnel to assist with best selection of staff.

Are you ready to grow your business to the next level?

Once you have identified the need to develop a strong A grade team, then you are also ready to engage with the massive growth opportunity facing all private business owners: strategic acquisitions.

Strategic bolt-on business acquisitions to me is an underutilised and often misunderstood strategy for the private business sector. It is a key area for quick and greater reliable growth especially when organic growth has stalled.  There are enormous opportunities in the acquisition space currently and this is where private businesses who have (or willing to develop) a strong A grade team and are keen to have significant growth, can participate.

To learn more about building A grade teams and the different strategies strong teams can implement to achieve more robust business growth, attend one of Warren’s seminars for qualifying business owners. Learn more via his website

About the Author: Warren Otter 

Warren Otter assists medium-size business owners with their growth and lifestyle ambitions. He is the author of Crank It UP: The proven way to drive your business to greater wealth and has been a business owner in the manufacturing environment for over 20 years.

At that stage Warren had just completed his third bolt on business acquisition and both the award and growth was largely due to the A grade team he developed.

With an A grade team beside him, Warren was less stressed and was able to spend more time out of his business looking towards the future.

As an exercise, make a short list of some of the internal ideas / tactics for improving the sales and profit that you have implemented over the past 12 months.  Then rate them as to the overall effectiveness against your initial expectations and also against the overall benefit to the business.

In most cases these well-meaning and necessary ideas / tactics either underperform significantly compared to the original expectations, or the results, if positive, do not make a significant enough impact on the businesses profit or cashflow to satisfy the stakeholders.

This is not to say that you should abandon this approach, all businesses should continue to develop and implement short and medium term tactics and plans to improve the business; you just cannot afford to rely on these tactics alone.    One of the best ways to improve the results in your business is to have a clear and powerful vision for your business.  This will assist greatly in inspiring and involving your key staff to drive the necessary plans.  Also, a clear vision leads to the development and clarity of a positive big picture strategy for your business, unlike the series of short term tactics that seem to bounce around the organisation and either fail or just underperform. (See further reading article below by Collins and Porras in Harvard Business Review)

In my opinion (any many other experts) for companies that are nearing the end of their growth phase or are in the maturing phase (see below)   they need to consider as part of a 5 year Vision for the business, to have a Strategic Acquisition plan to add significant growth to the top and bottom line of the business.  An acquisition strategy at this stage greatly assists the maintenance of the business growth cycle.  Acquisition strategies should not to be undertaken at the total expense of organic growth plans; this skill is still critical and will be beneficial when adding new products, services or clients to your business.

Strategic Acquisitions are one of the main strategies that large companies have used for decades and continue to use to ensure they have continuous growth.    You would have heard many times about the mergers and acquisitions (M&A’s) that occur at the big end of town and the large accounting and specialised M&A firms that assist them with their strategy, negotiation and execution of these acquisitions and mergers.

Take for example Warren Buffett and Bill Gates; two of the most successful entrepreneurs of the modern day.  Both of them in different ways continue to grow their wealth by an aggressive acquisition program combined with organic growth strategies within their companies.  Microsoft alone has purchased outright over 146 companies and acquired majority stake in over 60 other companies. (See further reading below for link to Microsoft acquisitions).

An Acquisition strategy also can work extremely well for private companies.  However, I understand that this is not an area of growth that most private business owners have traditional thought of as being within their reach or understanding.

Some of the benefits of growth via acquisition:

• Can create greater economies of scale quickly by absorbing other businesses
• Can improve profits, cash flow and business value considerably
• Adds stimulus and interest to your business
• If part of the longer term strategy, acquisitions can help diversify the business into higher growth sectors
• Creates stronger customer network to sell associated products
• Can take out a competitor before someone else buys them
• Growing businesses attract top quality executives ( which can assist with running the business and an eventual sale or exit)

There are numerous other benefits of acquisitions and any potential acquisition should only be done as a considered part of an overall Vision and strategy for the business.

With any business direction or decision comes risk; growth via acquisition also has its risks as there are no 100% guarantees in business.  However, I recommend if a business is looking at making an acquisition, then start with a target that is no more than 1/3 to 1/2 the size of your existing business.  This will always depend on balancing the specific issues of the deal such as pending complexities of integration and or financial risk compared to the potential short and longer term benefits.

It has been well documented that there is a large number of business owners of the baby boomer generation that are looking to exit their businesses.  Hence, supply is good for acquisitions; however the challenge is to find an appropriate business with the right synergies to increase the likelihood of post-acquisition success.

When it comes to financing these acquisitions; generally it is perceived that funding is tight, however, I know from experience that banks are more than willing to assist their quality clients with funding on acquisitions that the bank knows has been well researched and considered as part of the 3-5 year Strategic plan.

Here are a few thought provoking quotes to be inspired by;

“If you do what you’ve always done, you’ll get what you’ve always gotten.” -Tony Robbins

“Your life does not get better by chance, it gets better by change.” –Jim Rohn

“It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.”  – Charles Darwin

If your plan is to sell in the next few years then consider the following:

Firstly, be careful and do not allow your business to slowly drift towards retirement, as it can easily fall into the later phase of the business life cycle being decline / decay and prospective buyers will not find it attractive.

A structured and active growth strategy for the business is critical, as the best time to sell a business is when it is still growing and is supported by several years of growth.

Hence an Acquisition strategy (combined with organic growth plans) is ideal if the business owner is contemplating selling or retiring in the foreseeable future as it creates size and can significantly increase business value.

The strategy is to have growth via a series of modest, safe and high returning acquisitions; there are a lot of businesses opportunities with turnover between $1 to $10+million which will enable you to grow quickly and profitably.   My view is that businesses need to grow to a size that makes them attractive for small public companies or Private equity firms to acquire them in the future.  These companies do pay higher multiples and have a strong appetite for growth via acquisition, but they will avoid buying “small” companies as they see them as a risk and not worth their effort.

Make sure you are ready for a sale.  By following this acquisition strategy your price could increase greater than fivefold in just a few years.   Plus an additional benefit is the growth strategy generates a large amount of energy and interest in your business, which makes it an exciting environment.

If you are now interested or motivated to understand more about accelerating your business growth via acquisition, then consider the fact that the large public and private equity firms consistently utilise specialists to assist them.   It would be wise to be guided via an experienced and qualified professional in this area.

Hope this assists your planning for growth.

Further reading

Build your Company’s Vision” ; by James C.Collins and Jerry I. Porras

Harvard Business Review Article, September 1996

http://hbr.org/1996/09/building-your-companys-vision/ar/1

Warren Buffett’s Best Buys  ; find it at –

http://www.investopedia.com/articles/stocks/08/buffett-best-buys.asp#axzz28lQjaS00

List of mergers and acquisitions by Microsoft ; find it at –

http://en.wikipedia.org/wiki/List_of_mergers_and_acquisitions_by_Microsoft

Smart Acquisitions

By Tom McKaskill : Lecturer at Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia.

http://www.ceoonline.com/expert_talk/succession_merger_acquire/buy_business/pages/id20007.aspx

Time has come to change direction, being proactive by taking control of your own future is the only way forward. The wind in the sails of the automotive supply sector is now virtually exhausted, diversification is now critical and not an option, but how?

One of the most proven ways to diversify is via strategic acquisitions; taking your existing core strengths and leveraging off them by buying the right company or companies to move into a new industry / market sector. Trying to diversify organically by developing new products and markets just takes too long and often fails; so it is time to have a strategic review of your business and diversify via acquisition quickly. There are numerous good quality businesses out there owned by Baby boomers who are keen to sell and move into retirement, many of these companies have good products, good markets, and generally good staff to assist.

Every situation has two sides to the coin, so ensure you are looking at the opportunities to grow your business as they are out there. Crank it up.

To read more have a look at my new book “CRANK IT UP”

Warren Otter, is the author of “Crank It UP; the proven way to grow your business to greater wealth”; and is a Specialist Acquisitions advisor, who assists businesses take control of declining growth and leverage their core strengths into stronger and more profitable outcomes.