TESTING YOUR GROWTH STRATEGY…before you commit!

By Stefania Aulicino, President of Capital Link

Scott never thought of himself as a business visionary, until he became one. Scott started his career with Warner Electric - a leader in motion controls, where he worked his way up from trainee to VP Sales & Marketing. Then he joined $3 billion Parker Hannifin as Group VP with responsibility for its motion control business.

With these accomplishments behind him, Scott became CEO of an 18 year old company in the motion control industry which had $4.2 million sales in 1992 named Industrial Devices Corporation ("IDC"). Over the ensuing 4 years he assembled his growth management team, introduced new ideas and implemented an aggressive new product development program which tripled revenue to $12 million by June 1996 - 40% from new products.

When I met him, Scott envisioned revenue of $30 million in 5 years sustaining the company’s historic 5% profit margins. Instead this is the story of how Scott built an organization with $100 million in sales within one year’s time. How did he do it? By using my Back Door Approach^TM, a tool designed uniquely for creative entrepreneurs: not a source of answers, but a process to unlock your own creativity and that of your team. Here is how Scott summed it up:

"The process we went through with Stefania is one that I believe has broad applicability and cannot help but result in bolder, more exciting, more wealth-enhancing plans.

I expected to raise the $2 to $3 million I thought I needed to optimally promote and support the products we had developed in order to build a $25-30 million company in 5 years. I expected to do this at a reasonable valuation while retaining control.

I got that, but, also a lot more!

I realized a better understanding of my own business:

what was unique about it

what was of real value to our customers

what was of value to investors

what was leverageable

I also got very "smart money." Not just capital, but the expertise and business contacts which these investment companies represent as well as two new outstanding board members.

Ultimately, I uncovered an entirely new growth strategy from the one I originally envisioned, one that has already resulted in a business that will be $100 million just one year from our closing with these investors. We will be public by the end of next year and I am completely confident we will grow to over $1 billion in 7-8 years."

You know, Scott never thought of himself as a "Business Visionary" until he realized he was one! I invite each of you to make the same discovery about yourself and your team. By understanding the process we went through - my Back Door Approach^TM - I hope you can see how you can take advantage of this process for yourself.

LET’S DEFINE THE BACK DOOR APPROACH^TM

Conceptually, my Back Door Approach^TM lets you see your growth ambitions objectively. Let me say that another way: The Back Door Approach^TM enables you to test your growth strategy before you commit, without exposing your company’s reputation. How? By selecting experts to provide candid evaluation of your company’s strengths and weaknesses WITHOUT knowing the company’s name, nor yours.

Just think how powerful it would be to get experts to help expose weaknesses in your growth strategy which you are too close to see for yourself. Without this kind of objective insight, you might spend lots of time fixing what you think is the problem without addressing other potentially critical issues.

This is not at all like circulating a business plan, which is more like entering the market through "the front door." The problem with the front door is exposure: everyone knows who you are, your strengths and weaknesses. This is risky at a time when first impressions are critical which makes the impact of the front door high profile and irreversible.

In contrast, my Back Door Approach^TM is designed to be highly educational, insightful, objective and anonymous. It is educational because it focuses on your company’s unique potential; insightful because it comes from people who have relevant concerns for you to consider; objective because multiple sets of eyes yield a market size reaction; anonymous which means you don’t jeopardize your company’s reputation.

My Back Door Approach^TM results in the opportunity to:

address business risks which could sabotage your success before committing to a specific growth strategy

uncover economic factors which might increase your cost of financing before going to a financing source

gain advance knowledge about your alternatives in order to make the best informed choices, with confidence.

Now I’ll explain how YOU can accomplish this Back Door Approach^TM. It is a 2 step process:

Step 1- create a Corporate Résumé^TM to share your growth strategy without exposing who you are

Step 2 - circulate your Corporate Résumé^TM to extract objective feedback about your growth strategy

WHAT IS A CORPORATE RÉSUMÉ^TM?

You need to create a one page document which describes your company uniquely, yet does not include your company’s name. I call this document a Corporate Résumé^TM.

To create such a succinct instrument, easy enough for an outsider to absorb, you need to use the language of business: dollars and cents.

In order to generate your Corporate Résumé^TM, you need to discover what I call Economic Building Blocks^TM which drive value in your business so that you can credibly communicate the growth strategy you envision.

I’ve discovered the best way to accomplish this goal is to set up a Brainstorming Session^TM with the key players of your management team. It is important that each discipline be represented; operations, marketing, finance, customer service, R&D, etc. The purpose of this is to uncover each person’s distinct perspective about your business. This is different from hearing the entire story from a single person, who by definition can only present a picture viewed from his own perspective. Obviously, a marketing manager will see your company differently from an operations manager. By bringing each of the disciplines together in interaction with each other a composite picture will be revealed.

I use a specific set of questions to involve each of the participants:

What are your company’s greatest strengths?

What are your company’s greatest weaknesses?

What market do you serve?

Profile your ideal customer.

Who are your competitors?

You might be surprised at what your operations person has to say about marketing; or your controller about your ideal customer.

These rules will serve you well during your brainstorming session:

Be sure everyone addresses each question

Create a safe environment so people will offer not only what they KNOW but what they THINK

Be prepared to address sensitive issues

Do not allow anyone to talk in short hand - i.e., don’t name a client to explain a problem, rather state the problem so an outsider can understand it.

Be prepared to receive some very odd feedback. Your managers may see things very differently from how you do. And, remember, there are no wrong answers. Each answer is, however, a piece of the puzzle.

My last question is designed to summarize the brainstorming session:

What business are you in?

You will notice that I did not say what business do you WANT to be in. Rather, what do the FACTS of our Brainstorming Session^TM reveal. Clearly you knew at one point in time, but the longer you have been in business, the harder it is to define. This question is a moving target for fast growth companies!

What is most critical to the success of this brainstorming session is maintaining objectivity. You need an objective coach. During the Brainstorming Session^TM, the role of this coach is to draw out what you might perceive to be small and insignificant points, perhaps even uncover strengths you did not acknowledge as such. This coach is then ideally positioned to summarize into your Corporate Résumé^TM all the nuggets of interactive information we have gleaned in the brainstorming session which represent your Economic Building Blocks^TM.

The role of objective coach is the one I played for IDC. It was my job to write IDC’s Corporate Résumé^TM. Let me share with you from my outsider’s perspective what occurred the day IDC had its brainstorming session and the impact it had on their Corporate Résumé^TM.

I was struck by three significant shifts in the team’s thinking which had important economic ramifications. Each are examples of how we uncovered IDC’s unique Economic Building Blocks^TM.

The first shift had to do with IDC’s market. IDC’s management team initially calculated the market it served was $250 million. By brainstorming, we uncovered the fact IDC actually served a market which embraced any automated production environment. We ultimately concluded that IDC’s global market exceeded $4 billion. The significance of that shift alone altered how big a business the team thought they could build.

The second shift had to do with who is IDC’s customer. With a dozen people in the room, it was interesting what happened when I asked this question! A debate ensued over whether IDC’s customers are the end users or distributors. Brainstorming, however, built a consensus around distributors, even though IDC is in direct dialogue with 95% of its end users. This is economically critical to IDC’s success since the end user only buys once every decade or so yet, distributors buy every week. Distributors afford IDC a predictable income stream.

The third shift had to do with "What business is IDC in?" The team thought they were in the business of selling "actuators" - logical given that 90% of revenue was derived from actuators, IDC’s only product line for more than 18 years. Instead, together we highlighted the distinction that IDC sells customized systems, made up of multiple components, in contrast to competitors who sell just individual components. Even when IDC was founded, more than 18 years ago, it offered an actuator system, not just actuator components, which was IDC’s unique value-added approach which the team now took for granted.

In my capacity as the objective coach, I summarized these three Economic Building Blocks^TM and the many others we uncovered, into a one page anonymous Corporate Résumé^TM culminating in a set of financial projections which quantified IDC’s growth potential.

As a backdrop, we were meeting at a time when IDC’s 12 month sales run rate was approaching $12 million returning to the company’s 5% pre tax profitability. Remember, Scott had originally envisioned $30 million in 5 years, sustaining the company’s historic 5% profit margin. In contrast the economic building blocks we uncovered supported financial projections with aggregate revenue of $150 million during that same 5 year period, $56 million of which was based on internally generated sales (on which IDC projected an enhanced 15% pre-tax profit) and the remainder was derived from an acquisition strategy to capture various component manufacturers.

How did Scott’s perception of his company change as a result of this one day brainstorming session culminating into IDC’s unique Corporate Résumé^TM?

"I should probably preface my remarks by explaining that by the time we commenced Stefania’s Corporate Résumé^TM development process, the management team had been working together for nearly 3 years at IDC. All members had been involved in our industry for at least 8 years, and most of us worked together at either Parker or Warner for several years prior to coming to IDC.

As a group we had been through many planning sessions together, developing Mission Statements, and related strategic planning. I mention this because you would have thought we'd have a reasonably consistent view of the business we're in, the size of the market and our strategy to penetrate it.

Suffice it to say, we didn't.

Not because we are stupid or irresponsible, but rather because we operate in many different segments of a relatively complex industry. Each member of my staff comes to the table with a different set of experiences and responsibilities.

The Brainstorming Session^TM, aided by Stefania as our outside objective facilitator, forced us to simplify our message - not just to potential investors, but to ourselves, to our employees, to our distributors and to our end users.

Stefania’s process caused us to think more expansively as she removed our self-imposed resource limitations, while at the same time focused our growth strategy to take advantage of our unique strengths.

As a result of this exercise, our five year sales growth objective increased from $30 million to $150 million (60% from acquisitions). We redefined our business as providing complete, off-the-shelf customizable solutions to motion control problems (versus "servo drives", "actuators", "motors"). We identified our distributors as our true customers (versus end users, or machine builders), because that is really where the sale is made. We identified our key strengths as being our:

• ability to provide complete integrated custom systems with very short lead time
• ability to rapidly and prolifically develop market driven products
• relationships with our distribution network which allow us to rapidly take advantage of the new products we develop

None of this necessarily seems like breakthrough stuff. But, for us, it definitely represented a new, more focused, way of looking at our business, and left to our own previous devices, I don't think we would have gotten there.

Now, a year and a half later, it still provides a very helpful framework to our planning and decision-making -- not to overlook the fact that it also led to a successful equity financing - which was our original objective."

The power of the Corporate Résumé^TM is that it articulates how unique your company is, then quantifies how big is your upside. A by-product of the Corporate Résumé^TM is its ability to harness the creativity of your entire management team in line with your company’s full potential. To use this Corporate Résumé^TM tool yourself, the key is to have an objective coach -- preferably someone with an excellent dollars and cents perspective. A fellow business owner might be an excellent choice.

USE YOUR CORPORATE RÉSUMÉ^TM TO EXTRACT OBJECTIVE FEEDBACK

So far we have relied on only the information IDC had in-house. And it’s amazing how much potential IDC’s Corporate Résumé uncovered. The next step was to discover what IDC didn’t know. Step 2 of my Back Door Approach^TM is to circulate the Corporate Résumé^TM to extract objective feedback about our growth strategy.

That begs the question, circulate to whom? The answer is: to professional investors. Why investors? Because investors are at risk, when and if they invest, in the same way that you are already at risk, as an owner today. Yet, before they invest, investors are the ideal source of objective feedback. After all, investors are in the business of analyzing a company’s strengths and weaknesses which is how they determine where to put their money to work. For business owners, these same factors drive success or failure.

To keep things purely educational, I played the role of translator for IDC. Why? Because, investors and entrepreneurs speak different languages. Another benefit of a translator during this stage of my Back Door Approach^TM is that the investors don’t know who the company is. Hence anonymity is retained. As IDC’s translator, I first selected investors capable of offering relevant and candid feedback. I sought out industry expertise as one component, but also frankly relied heavily on my personal connections to get the real story. You see, in the case of IDC, I wasn’t sure if I would get better input from an investor who understood manufacturing or one who understood technology. So I selected a few of each!

In the process, it is not atypical for one of my initial contacts to comment "you know this is a perfect deal for Harry. Tell him I told you to call." Or "John just made an investment in a company which sounds like this and could share some insights". Using my own personal contacts, developed over decades and my extended network like Harry and John, I offered IDC broad exposure to just the right objective feedback which I call Financial Market Intelligence^TM.

Next, I translated this Financial Market Intelligence^TM from investors in such a way that Scott could really respond to what he heard. Translation, as you know, is not a simple matter of just repeating what one hears, but rather probing the source, uncovering their biases, perspectives, and making an accurate analysis of what is being said.

Let me share two examples of the kind of statements I heard from investors, including how I translated those statements into terms Scott could work with and what Scott did with what he learned.

One example of investor feedback was that they liked the idea IDC used "smart electronics" to deliver customized systems. Here’s my translation of what was in the investor’s head: customization is by nature time consuming and expensive. Smart electronics might help minimize those expenses a little but investors need to know how economical it is to scale up. Can IDC really build a big company producing customized systems or will IDC be bogged down in lots of customer service, with a limited ability to profit from an economy of scale?

How did Scott use this information? Confronted by this investor reaction, Scott was able to crystallize for himself the essence of IDC’s economic business model. IDC’s systems are customized at the chip, board, and packaging level, configured from a broad range of pre-engineered parts and subsystems. IDC’s ability to scale up is driven by the fact IDC can deliver custom solutions right out of inventory!! I call IDC’s economic model "off the shelf customization". Forced to put this concept into words for outsiders for the first time, Scott strengthened his confidence in the premium prices assumed in his Corporate Résumé’s^TM financial projections which permitted profit margins to rise on IDC’s internal sales from 5% to 15% pre-tax within 5 years.

Here is another example: there was a striking consensus among the investors I polled which revealed a lack of enthusiasm about IDC’s intention to acquire component manufacturers. Since the investor challenge was pervasive, I shared the following translation for Scott: investors needs to know how IDC will profit more a) by acquiring 7 component manufacturers, as opposed to b) simply purchasing those components on an as needed basis as you do today.

Since Scott was not in dialogue with the investor source directly, he could take advantage of an objective space to let this idea sink in. Maybe investors had a valid concern - maybe acquisition of manufacturers was not a compelling element of IDC’s growth strategy. If not manufacturers, what else would accelerate IDC’s competitive advantage?

Scott began to revisit his close personal relationship with distributors which he had already begun to take for granted. In the motion control industry, distributors are the ones who decide which components an end user will acquire. Scott has an unusual personal relationship with distributors which dates back to his days at Parker Hannifin when Scott hired engineers right out of school to sell motion control components for Parker. However, Parker’s distributors back then liked the engineers so much the distributors started stealing the engineers for themselves. Cleverly, Scott responded by offering a program to recruit engineers from school and train them on behalf of the distributors. As a result, Scott personally introduced over 40% of the motion controls distributors to their current profession!! The power of this shift in thinking previously focused exclusively on manufacturers, opened new possibilities for Scott as he began to think about integrating his unique distributor relationship at an equity level into his optimum growth strategy.

These are just two examples of the objective feedback I gleaned from a dozen investors based upon circulating IDC’s anonymous Corporate Résumé^TM. It only took 3 weeks, but the impact on Scott’s thinking was enduring.

"We received valuable feedback and an education about the investor market for our company, all in advance of writing our business plan and without exposing ourselves detrimentally to any of our potential investors. The feedback didn't change our business strategy yet, but it definitely influenced how we wrote our business plan and sharpened our story. While we may not have completely eliminated the various concerns we uncovered, I think we reduced them considerably - certainly enough to get us to the next step of face to face meetings with potential investors - where we would have an opportunity to further test our plans - which as you'll see eventually led to changing them.

You can see my Back Door Approach^TM is designed to be an educational vehicle to build value and lower the risk of growth. Even though the feedback comes from investors, the Back Door Approach^TM is a critical process for any growth company, regardless of your intent to raise money.

When you want to obtain objective feedback for yourself, be sure to use a translator who has working relationships with more than a handful of investors. Perhaps a lawyer, accountant, investment banker or financial growth strategist. Be sure whoever you choose can accurately translate investor feedback into Financial Market Intelligence^TM so YOU are positioned to take relevant action on what you hear.

WHEN YOU ARE READY…ENTER THE MARKET THROUGH THE FRONT DOOR

Up to now, everything we have been discussing has preserved anonymity for the firm, designed exclusively for your education. However, once you go through my Back Door Approach^TM, you are well positioned to proceed to the market through the front door, if you so choose. The front door is where you meet investors face to face, based on a business plan.

Developing a business plan for IDC was easy, since Scott and I knew the questions investors had, based on the feedback we had gleaned from circulating the Corporate Résumé^TM.

My role during the front door process was to select the right investors for Scott to consider. What do I mean by the right investors? Investors who not only have the capital IDC required but who also believed in the potential of Scott’s plan.

Scott and I met face to face with 13 investors in 8 states. With each investor meeting, Scott had the opportunity to test his business model against rigorous yet benevolent investor analysis. With each investor interaction, Scott refined his growth strategy.

The bottom line advantage of proceeding to the market through the front door for IDC was a huge shift. Instead of building $150 million business over 5 years, by adding manufacturers, IDC became $100 million business in just one year leveraging Scott’s unique relationship with distributors to build a preeminent economic model within the motion control industry embodying a 3-5 year lead over its mammoth competitors.

How did Scott shift from projecting $150 million in 5 years to achieving $100 million in just one year?

"Face to face meetings which Stefania arranged revealed that investors were generally impressed with the relationship I had with the distributor network: One way or another, they thought there was something there of value that could be leveraged. However, most investors leaned toward a strategy of serial acquisitions of manufacturers, because it appeared to be a natural extension of our business plan, and because my experience was all with manufacturers.

I, personally, for a number of reasons, was beginning to lean in the direction of concentrating exclusively on the distribution element of the M&A strategy, doing what I was uniquely positioned to do: attracting the initial critical mass necessary for IDC’s growth engine.

My leaning became a decision following a pivotal meeting with a senior partner at one of the investment firms under consideration. This is a premier firm, second largest in the world, and this guy is in charge of all their North American investments.

His comments essentially were, ‘the manufacturer roll up makes sense, but I think the amalgamation of distributors may be more leverageable and takes greater advantage of your unique skills. A combination with distributors appears to offer more opportunities for synergism, and the growth potential is nearly unlimited.’

I was impressed with this gentleman's vision (primarily because he agreed with me). Joking aside, it was very helpful to me, as I was struggling with this decision, to have someone with this level of experience and reputation, with his investment perspectives, confirm the viability of a strategy that even my own staff was at the time seriously questioning. It was nice to have someone of this caliber on my side!

At the end of the day, we received five term sheets from professional investors all proposing to invest in IDC. The one with the highest valuation was the one from this gentleman's firm. Stefania reminded me that it is not unusual that the firm to which you are most attracted is the one that gives you the highest valuation because they are the one that most closely shares your vision and sees the value in what you’re trying to accomplish.

Two days ago we closed on the merger of the first nine distributors. Two more will close before year end, and we have signed an agreement with a third to purchase it 12 months from today. The combined revenue of these 12 distributor organizations will exceed $100 million in 1998. We have two excellent professional investor partners who have made investments in IDC's operations and stand ready to make larger investments in the combined enterprise, if needed. And through our investors we have the leading investment bank for this type of transaction wooing us for our business. We have several potential acquisitions targeted for the next 24 months. I believe we will be $200 million within that time frame.

It has been a long, interesting, educational, and rewarding journey. When I started it, I had no idea this is where I'd eventually end up. It is a much better place than the one to which I was originally heading."

The future IDC is now pursuing is safer, more profitable, more competitively distinctive than the one Scott had previously considered - even imagined!

WHAT IS THE BRAIN TRUST^TM

Scott did not have on board the full staff necessary to build his new business. But neither did he know exactly what talent he should be looking for to help him achieve his vision. I often say entrepreneurs know exactly where they want to end up, but not necessary the best way to get there, while managers know exactly how to get there, but they don’t always know exactly where they want to go! The Corporate Résumé^TM played a role in alleviating this problem by identifying talent attracted to where IDC was headed.

Since managers find it hard to identify exciting opportunities which maximize their skills, many come to Capital Link looking for growth companies. I call this group of people my Brain Trust^TM. The Brain Trust^TM is made up of hundreds of seasoned managers, with 15 to 45 years of experience, motivated by the opportunity to help build a future in which they can share.

By circulating a Corporate Résumé^TM to this Brain Trust^TM a self-selection process is created by which managers identify themselves as part of the solution to get your company where you want to go!!

Rob, a Brain Trust^TM manager self selected himself attracted by the vision articulated in IDC’s Corporate Résumé^TM. Rob not only had practiced law, but had been a Vice President and investor in a company he helped take public several years earlier. Rob was looking for where he could offer his unique skills.

"Amalgamating or merging 12 businesses at once has a number of legal, SEC and tax challenges to it. If I had been using our law firm, which is very good, it would have easily been a $500,000 bill. I never would have come up with the structure that was as creative, and favored IDC shareholders, as well as this one has. Rob has been an incredible strategic help besides getting all kinds of other things done. Again, I didn’t really know I needed this person and if I knew I needed this person, I wouldn’t have had a clue as to where to look. Stefania introduced us and we put Rob on a 3 month retainer (Stefania called this a "Beta test" relationship) to help us when we were closing the investment deal so we got a chance to work together for a couple of months. Now, Rob is a very, very, very key member of the team and he came for basically some stock options. He took a 50% cut in pay to come on board and he’s gotten some stock options. You know he HAD to believe that this thing was going to $100 million or he wouldn’t have done this, and he’ll make out very, very well."

IT TAKES AN ENTREPRENEUR TO COACH AN ENTREPRENEUR

I’ve spent 25 years getting to where I am today. Half of my career has been spent as a business owner, the other half on Wall Street. This has afforded me an unusual laboratory to learn from the successes and failures of lots of businesses. I have learned my lessons from an insider’s - business owner’s - perspective, as well as an objective analyst.

Capital Link is a firm I founded 9 years ago, but which is really the perfect culmination of my life’s work. I like to say that I’ve always been in the business of converting corporate dreams into profitable reality!

In my experience, the true test of a growth company is its chameleon-like ability to change. Without this ability to reinvigorate and revitalize continuously last year’s successful company will not remain an innovative player next year to sustain its growth in increasingly competitive environments.

I have spent years learning how to tap into the uniqueness of each company with which I have had the privilege to work. I’ve synthesized my experiences into a process which allows me to assist growth companies to tap into their own unique genius. Together we use this process to optimize a company’s growth strategy.

I hope you will utilize this process to make your greatest corporate ambitions a reality!

HOW LONG DID IT ALL TAKE?

March 13, 1996 Stefania acted as objective coach for IDC’s Brainstorming Session. 2 weeks later IDC’s Corporate Résumé was completed April 18,1996

Scott authorizes circulation of IDC’s Anonymous Corporate Résumé.

May 8, 1996 Financial Market IntelligenceÔ is gleaned from 12 investors within 3 weeks

4 weeks Stefania and Scott integrate investor feedback into IDC’s business plan

June 7, 1996 IDC’s business plan is circulated to waiting investors

July 9 - Sept. 13 13 face to face investor meetings occur in 8 states

Sept. 3, 1996 Stefania introduces BrainTrust manager Rob to Scott

Sept. 12 - Dec. 12 Rob and Scott "Beta test" a new relationship

Oct. 25, 1996 IDC’s Board considers 5 Term Sheets and selects Advent International and Shaw Venture Partners

Nov./Dec. Investor due diligence and deal documentation

Dec. 31, 1996 Closing: IDC accepts $2.5 million for internal growth plus $1 million for shareholder liquidity

Feb. 28, 1997 Scott invites Rob to join IDC’s team as VP General Council

Oct. 29, 1997 IDC’s Board approves merger with 12 distributors to form AutomationSolutions International (ASI)

Dec. 1, 1997 ASI commences operation with Scott as CEO projecting ’98 sales of $100 million.

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