SURVIVE OR THRIVE?

By Stefania Aulicino, President of Capital Link

Like all entrepreneurs, Wayne had a vision. Like many entrepreneurs, he usually gets to where he wants to go. But something funny happened to Wayne on his way to implement his vision. His dream changed from $25 million in revenue in 3 years to $25 million in one year! What’s the difference? Wayne acquired a new perception of his own company. Wayne is the owner of Landmark Industries, which he grew from $2.7 million to $7.8 million with one plant using only internally generated funds. After taking on growth capital from a minority investor, Wayne is on track to grow from $7.8 million to $25 million this year with four plants in operation. These results are so striking in contrast to his initial vision that Wayne wrote a poem expressing how his thinking was blocking his potential:

"I thought I knew what I had

I didn't

I perceived attracting resources for my growth would be hard

It wasn't

I thought I'd hate the process and the people

I didn't

I developed a network and friends

I thought I'd hate sharing my company

Now I can't wait to share more of an even bigger company

I thought it would be expensive

I was right and wrong

It was the best money I ever spent

The return is automatic and many fold

So, just remove the word expense from your vocabulary

I thought you plan, execute, then accept what you are offered

I discovered I had choices and control."

Wayne McFarland, President of Landmark Industries, Inc.

VISION - Which Future Are YOU Working To Accomplish?

Wayne had grown his company with internally generated funds by squeezing increased productivity out of a single plant. He knew he had more demand from his customer and he wanted to build capacity to take advantage of it. But, Wayne, like a lot of entrepreneurs fell into a trap. All business owners know business strategy and finance strategy are interrelated. Unfortunately, most link them in the wrong sequence. They focus on resource availability first and then let finance strategy limit business strategy. Wayne had already been turned down by his current bank and several other financial institutions for the $1 million he needed to build the new plant. He was sure resources were scarce. So, he designed his company's entire future based on limited resources- without ever questioning his assumption! Fortunately, I questioned his assumption for him.

Wayne's Shifting Perception Of His Own Company

Wayne was surprised by my initial questions. What if you could have more than one plant? How would your plan change? What if resources were not a constraint? How would you build your business to activate its full potential?

Landmark upholsters hand-crafted interiors for the cabs of long haul trucks for a single customer, PACCAR. He urgently needed capacity because PACCAR, the industry's third ranking manufacturer of heavy trucks, was willing to give him as much business as Landmark could handle. When I asked Wayne why, he explained matter-of-factly that Landmark hand upholsters more than 7,000 different parts in multiple colors and fabric combinations which it delivered, just in time, to its customer's different plants with less than a 0.1% defect rate over the last 3 years. Landmark was already recognized as the highest quality interior vendor for the trucking industry based on Wayne's introduction of a high level of professionalism and computerization in an industry where Mom and Pop competitors still did their books manually. As I asked questions about the economic building blocks which drove value in his marketplace, Wayne let his imagination go wild. "If I had capacity," he mused, "I could duplicate my success in the trucking industry in other industries including the marine, automotive, trains and buses."

As we went through a methodical brainstorming process, Wayne discovered he was living a tiny fraction of what his future could be. Wayne converted his thinking about serving the trucking industries (which supported a nice $25 million business plan) into being a provider of interiors to the entire transportation industry which converted his dream into a $100 million business. As Wayne amplified his vision, I helped him convert his dream into financial projections to make his future a saleable asset. To leverage this information for action, I reduced his dream vision into a Corporate Résumé^TM, for all the same reasons its so hard for anyone to write their own curriculum vitae. For Wayne, as with many business owners, this was the first time he had articulated a future he had dared not shared with anyone before. The shift in his financial projections had to do with the size of his vision and his willingness to put his dream in action.

Look Before You Leap

Wayne was excited, but incredulous. Did he have what it took? Was his strategy financeable? After all, he had trouble getting just $1 million from his existing bank for a second plant. How would he get the money to fund this $10 million, multi-plant expansion? Would investors believe him? I suggested Wayne test his strategy with professional growth investors knowledgeable in his industry. But circulating a business plan is like entering the market through the front door. The problem with the front door is its exposure, expense, risk, commitment and irreversibility. In contrast, my back-door approach lets business owners see their growth ambitions through professional investor eyes, but without exposing their company's reputation. How? I shared an anonymous version of Landmark's Corporate Résumé^TM to selected professional investors, expert in Wayne's business, who were willing to offer their candid reactions on both the company's strengths and weakness without knowing the company's name. I offered Wayne my low-risk, low-pressure, inexpensive, educational back-door approach to:

> uncover business issues affecting financing before going to the market

> discover investor reactions before writing a business plan, and

> gain advance knowledge in order to make informed choices.

Within a week, faster than Wayne thought possible, investors who didn't even know who he was, shared their candid and insightful feedback about the economics of his strategy.

On the positive side, investors gave Wayne credit for

> impressive historic growth

> an industry leader customer relationship

> stunning capacity utilization generating increasing sales and profit out of a single plant.

On the negative side, investors perceived risks arising from

> 95% concentration with a single customer

> the highly cyclical nature of the trucking industry

> growth being dependent upon labor intensive plants expected to operate within 9 months

> the Chief Operating Officer was Wayne's brother, causing investors to question the rigor of Wayne's management selection process.

Wayne's Fortified Strategy

Investors have the same concerns you should, I explained to Wayne. After all, who's the biggest investor in your company? Each issue the investors highlighted, I helped Wayne explore. While it was true that Landmark had a dominant single client, it was more important that Landmark provided that client with an expanding array of services. Initially, Landmark provided just upholstered parts, then just-in-time delivery with complete in-line sequencing to demanding requirements at three plant locations so parts arrived at the right plant for the right chassis at the right time. Then Landmark kitted multiple parts for each chassis. Next, subassembly of multiple parts from other vendors was added. Today, Landmark is even involved in product design making it possible to produce parts more cost effectively. In fact, Landmark grew from 40% to 60% of PACCAR's volume over three years. In this partnership relationship, Landmark received premium pricing for its excellence as a preferred provider and was just designated as a single source for all internal trim requirements. PACCAR didn't want a second source backup! PACCAR is actually dependent upon Landmark, not the reverse. While Landmark's process was labor intensive, even a high turnover rate did not interfere with the company's excellent just-in-time delivery with less than a 0.1% reject rate because of the excellent training systems designed by Wayne's brother to minimize the labor risk. These were facts Wayne had been missing about his own company, hence he could not sell them to investors, until now!

The Power Of Insight

Profiting from the back-door feedback, Wayne integrated the reactions of different investors to strengthen his strategy. Customer concentration became penetration and a minimum-wage labor force became a portable assembly system. As Wayne had to respond to each investor issue, he called upon his own entrepreneurial skills to strength his plan and actually heightened his awareness of how to leverage his company's worth. He became clear about what value he offered clients and how to communicate that to both industry insiders and outsiders for greater profit. Although I designed the back-door process to allow business owners to glean critical investor insights affecting valuation and to avoid pricing surprises, Wayne also benefited by getting powerful verification that others valued his dream.

Until now, Wayne had thought he would have to accept whatever investors offered. Instead, by knowing investors concerns up front, Wayne took action to resolve issues which otherwise would have cost him more for the capital he was seeking. Through my back-door approach, Wayne controlled the outcome by understanding investor concerns and proactively reacting to them to his advantage.

Which Investors?

Any business owner has three choices to finance future growth:

1) Creditors willing to give you credit for what you have, like the banks.

OK for financing slow growth, perhaps, but not a very effective way to finance a quantum leap.

2) Traditional equity investors willing to gamble on your ability to achieve your vision.

In the public market, as an example, value is based on the last buy/sell transaction, influenced heavily by the risk of your failure to achieve. That is why traditional equity is so expensive.

3) Growth equity professionals willing to help you build a future, based upon shared vision and goals. Private professional growth investors are attracted to large profit opportunities and are willing to contribute what you need to enhance your ability to succeed. Plus, this market, called the private equity market, is a negotiated market, which means you can get credit for your future TODAY, if you identify the right investor who believes in your future.

Since Wayne's future is definitely worth more than his past, I introduced Wayne to the private equity market which today exceeds $45 billion. With that much capital available, you can see the problem is not finding growth equity investors, but rather choosing the right one for you.

Not All Money Is The Same

Not all money is the same. Some money is smarter about your business than others; some money has a higher "multiplier"effect because it can attract other capital; some money can open doors and offer nonmonetary contacts worth a fortune. The real question is: Which money is right for you?

When Wayne was ready to formally enter the market with a business plan under his own name, I identified 30 interested investors, each well suited for Landmark and Wayne's vision, to ensure Wayne would have choices. I choose investors based on several parameters. Some parameters are related to Landmark, like the company's industry, stage and rate of growth. Some are related to the investors, like their risk appetite, exit horizon, areas of business expertise and location. Because all growth investors have their own risk-taking appetite, it's important to get the right fit.

Do You Know What You Are Looking For?

Many entrepreneurs who seek growth capital go to the wrong investors and don't realize that the rejection they receive has more to do with the investor that it does with them. A typical professional growth investor will receive more than 1,000 business plans a year, most of which do not meet their investment parameters. They will typically respond to about 150, mostly only those which are "sponsored" as opposed to those which just come in "over the transom" as they say in the industry. Ultimately, such professional growth investors will only meet with about a dozen business owners per year.

Choices Build Confidence

In contrast, Wayne met with 9 investors with industry-relevant expertise. To make Wayne an informed decision maker, I scheduled all investor meetings back-to-back. Wayne and I traveled to five states to meet his nine investors over one and a half weeks. He was amazed how differently each investor perceived the risk and opportunity of his business. Wayne discovered there is no such thing as "intrinsic value." Value is not objective. (If it were, you would not have both a buyer and seller willingly exchanging stock at the same price in the market daily.) Rather, valuation is a matter of perception. My job was to coach Wayne before each investor meeting, to share with him the investor's perception and then to debrief him after each meeting because initially, investors and entrepreneur don't speak the same language. Therefore, I act as the interpreter.

The Perfect Match For Wayne

Not only did he have a choice of all the money he wanted, but Wayne got to choose among important nonmonetary attributes available to support his goals. Wayne chose Blue Chip Capital Fund. He liked the personality match between David, the manager of Blue Chip's fund and himself. He felt David understood and respected Wayne's plan, and was investing in Wayne's ability to execute a vision they both shared. In fact, the Blue Chip investors were really "great guys," not at all like the investors most entrepreneurs hear about and fear that are out to replace the company owners. Wayne's investors were prepared to be a sounding board for his ideas and challenge him, then offer their contacts and the resources he needed to enhance his strengths. Blue Chip unlocked numerous doors and supported Wayne in multiple ways. Two of the largest banks in the state were pension investors in Blue Chip's fund and every single state pension program was a major investor. David's next door neighbor was the Director of the Ohio Department of Development, terribly convenient considering Wayne wanted to open a new plant. In short, Blue Chip had more to offer than Wayne ever imagined.

To address a deadline to get extra business from PACCAR, Wayne needed timely activity to open his Ohio plant. These Blue Chip investors dropped what they were doing because of the value Wayne's business plan had to them, sticking their neck out for him prior to completing their due diligence. David put $1.5 million of equity into Wayne's pocket as a bridge loan which triggered a vital banking relationship and liberated cost-effective state funds aggregating $7.3 million.

Wayne discovered the power of investors who supported his biggest ambition. They offered introductions and helped leverage his equity and theirs. Because they were selected based on a shared vision, his investors wound up being very much "hands off." They trusted Wayne to accomplish their shared goals. Best of all, his investors offered the emotional support and professionalism to position Wayne to grow his company into the one he wanted--one able to venture a future public offering. Wayne did not just assume these attributes. He verified them through his own due diligence by speaking with each of Blue Chip's portfolio companies and comparing the input he got directly and indirectly with his other investor choices. It's easy to know you have the best deal when you have alternatives to choose from. Wayne was confident of his decision - he closed the deal with Blue Chip and had $3.1 million of equity in his bank account in ten weeks flat leveraged by bank and state funds to minimize his equity give up while funding his full $10.4 million multi-plant expansion plan.

Terms Of The Deal

Wayne thought he would have to accept what was offered. He did not expect speed, much less choice, and he certainly did not expect to have the opportunity to negotiate.

"Its important to understand we, the entrepreneurs, set the terms of the deal. We take it or we don't - not the investor. They make an offer, but we accept or counter. We sign up only when we are ready. We are not at their mercy."

Wayne captured $10.4 million of growth funding by securing precisely the right $3.1 million equity partner. Through Blue Chip's introduction and support, Landmark got the bank debt he sought and state funding. Plus, Blue Chip's deep pockets enabled the fund to set aside an additional $1 million to provide follow-on cash for acquisitions, another growth phase or just in case "a wheel fell off Wayne's cart."

Growth Takes More Than Just Money

Wayne knew exactly where he wanted to go, but not necessarily the best way to get there. After all, Wayne had never operated a business bigger then the one he had today. Plus, he had never operated more than one plant. So, I introduced Wayne to the concept of managers willing to invest in his future via my "Brain Trust^TM." Today, the Brain Trust^TM is made up of over 700 managers with 15-45 years of industry relevant experience who came knocking on my door looking for high growth companies. Some have sold successful businesses or taken early retirement, others have simply gleaned extremely valuable growth experience they are now prepared to leverage with a company on the fast track. As fellow visionaries, all Brain Trust^TM managers are willing to "invest," but investments can take many different forms. Brain Trust^TM managers might offer below-market "bartering" of their significant skills and/or capital side-by-side with their talents in exchange for the opportunity to share in the value they help create, NOT the value you have created already.

The selection process is the key. With 700 managers, the issue is not resources, but rather which one is right for YOU. Instead of the company reviewing manager resumes, I circulated Landmark's Corporate Résumé^TM, which articulated Wayne's vision, strengths and weaknesses so Brain Trust^TM managers could "self-select." Ironically, Brain Trust^TM managers are only attracted to businesses faced with challenges they have the skills to address. By reversing the resume flow, Brain Trust^TM managers can take a proactive role in selecting YOU. The benefits to your company can be striking and innovative, as Wayne discovered.

Wayne took advantage of a Brain Trust^TM Manager with 28 years of profit and loss responsibility. This former general manager of a $400 million General Motors division had opened numerous new plants in the U.S., Europe and Pacific Rim. A manager of this caliber was not someone Wayne might have sought at this juncture but Wayne was certainly willing to talk when Bob approached him! As a result of this proactive selection process, Wayne not only benefitted from a safety net of experience but he gained high level industry contacts in a new market he wanted to penetrate!

Turbo-Charge Your Vision With Implementation Talent

Wayne's vision had already been expanded by his back-door feedback but Bob's 28 year hindsight fueled Wayne's vision with ideas Wayne could not have had based on his own experience. Within hours, Bob was downloading knowledge, expertise, contacts and more. Bob saw Landmark as a platform he knew he could build upon. While Wayne didn't think he could get another part out of his plant, which ended calendar '94 with $7.8 million in revenues, Bob was operating at an annualized revenue rate of $21.6 million, doing $1.8 million per month by the end of January and that was only 30 days after he started!

Bob's value to Wayne was driven by the fact that Bob didn't want what Wayne already had. Bob wanted to share in the creation of a future that did not exist. That's a great deal for Wayne because for every dollar of new value he shared with Bob, Wayne kept $7!

How Long Did It Take?

June 20, 1994 Wayne and Stefania met for the first time

7 days later Landmark's Corporate Résumé^TM was complete.

July 5, 1994 Anonymous Corporate Résumé^TM is circulated

1 week later Investor intelligence gleaned from back-door feedback

1 month vacation Wayne takes a break!

2 weeks Stefania assists Wayne integrate market feedback to sharpen growth strategy

September 15, 1994 Business plan completed and circulated to awaiting investors

October 3-12 Nine Investor meetings occur

October 7 First meeting with Blue Chip Investors

November 14, 1994 Wayne accepts $1.5 million from Blue Chip to meet a client imposed deadline and $7 million bank and state funding is received

November 2,1994 Stefania introduces Brain Trust^TM manager Bob to Wayne

one week later They met; Bob's expertise allows Wayne to see an even bigger vision

12/31/94 Due diligence and deal documentation consummated with Blue Chip

FY12/94 Landmark completes year with $7.8 million in sales

January 1, 1995 Bob is on board

January 31, 1995 Landmark is generating $21.6 million annualized sales out of its single plant

June 30, 1995 Four plants operational; Landmark's annualized revenue exceeds $25 million.

When asked what would have happened if he had gotten the $1 million from his bank initially, Wayne said:

"It would have been a nice, but small business, doing $25 million with no knowledge of the phenomenal opportunity I had left on the table. Getting turned down for that $1 million opened the doors to a future I didn't know I could have. Why didn't I do this earlier? Why do it at all? Am I really ready for the full potential of my dream? I was scared to death. Even though we were the industry leader at $7.8 million in sales, I was afraid to ride the wave of that success and tell people about the potential I could see. I was afraid of embarrassment, not having all the answers, and of being boastful. I was afraid of sharing information with bankers, managers and most of all with investors who would not share my vision and would divert attention from my goal. I was afraid of sharing ownership. Afraid of the expense of the process of growing. I had heard stories of "vulture capital" and how friends had embarked on capital raises that went no where. Above all, I was afraid to admit I was not going to get any further without outside help. These were all scary issues only because I didn't know enough about them to address my fears."

 

Could You Be Limiting Your Company's Potential By Not Exploring All Your Options?

Wayne is not unique. Mike, an experienced engineer, had been building his business to $3 million over 6 years, selling a top-of-the-line $1,000 custom-tailored seating cushion to people confined to wheelchairs, while competing with products selling for a few hundred dollars.

His growth, he thought, was limited by the size of the wheelchair market and the expense of producing his high tech solution - even though his seating systems offered dramatic therapeutic advantages, like better breathing and greater freedom of motion. Mike decided the only option for his growth strategy was to raise $5 million to diversify outside the wheelchair market into the automotive and furniture markets.

Instead of accepting Mike's $5 million estimate, I circulated an anonymous Corporate Résumé^TM to solicit professional growth investor feedback on Mike's strategy. Collectively, they questioned an engineer's ability to implement a marketing program in an entirely new industry. Mike had no marketing talent in-house because his current products sold on engineering attributes alone. So, I suggested the Brain Trust^TM as Mike didn't know what to look for in a marketing person having only worked for his father's prothesis practice and himself.

One Brain Trust^TM manager named Jim had just been merged out of a company which designed medical insurance reimbursement programs. While Mike's game plan had merit, it was very expensive - the result of an engineer designing a marketing strategy. Without a marketing person on board, Mike's company was blind to the variables which drive customer buying decisions. Instead, Jim immediately zeroed in on pricing as a key competitive problem affecting Mike's marketing strategy.

Jim offered to design and install a software system for Michael's existing distributors which would allow insurance reimbursement at point-of-sale. Michael's product price dropped from $1,000 to $200, by dint of an 80% insurance reimbursement! Jim was even willing to defer his compensation for the opportunity to share in the value he created. Sales skyrocketed. Michael was delighted to find someone so creative in attaining his goals.

The cost of Mike's new marketing strategy, $250,000 was funded by another Brain Trust^TM manager.

With less cash then he ever believed possible, Mike 's business tripled within 3 years, attracting an offer from a major integrated health products company. That company was attracted to Mike's business because Mike's price point was within the range of their product line and his sales were now large enough to command a hefty purchase price. At Mike's stage of life, he found the offer very attractive and chose to sell his company.

Are YOU Ready For The Full Potential Of Your Dream?

Wayne and Mike's experiences are not unique. The difference is that they took action to discover what possibilities they weren't seeing. Are YOU ready for the full potential of your dream?

Whether you would benefit most from professional growth investors feedback or Brain Trust^TM managers depends on your unique situation. However, every company which has circulated a Corporate Résumé^TM has profited from invaluable insights in a matter of weeks via a dramatic, no-risk, educational process. In Wayne's words:

All It takes is a willingness to learn about your business, the financial markets, your customers and yourself, and the guidance of a unique company, Capital Link!

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