5 Mistakes to Avoid … If you Want to Build Superpremium Value

1.You are owned by your customers. Many midrange businesses depend on a single customer or a small (less than five) group of customers for the majority of their revenue. A lack of diversity in one’s customer base hurts at valuation time. What if one of those customers fires you? Where would you be then? Along the same lines, some companies fail to manage their legacy products and never succeed at migrating their customers to new or next-generation products. The challenge is to balance diversity and focus with the objective to minimize your overexposure to one market.

2. You are still thinking small. Recently, a company was considering the purchase of a second business that would double its size. The founder of the target company wanted to retire, and it was extremely important to him to find a home for his staff. The work of the two companies was compatible, and the target company’s owner was ready to take the deal. The deal represented a big risk for the buyer, though, not just financially but also in terms of his thought process. Excellence and comfort are usually enemies, and the owner of the acquiring company had to expand his thinking to accommodate a new enterprise that was double the size of his former one. Making this leap is not easy, and post deal integration doesn’t always get done. Take a look at AOL and Time Warner, Chrysler and Mercedes, or going back further in time, General Motors and Ross Perot’s Electronic Data Systems. After an acquisition, it shouldn’t be just one plus one equals two. It ought to be one plus one equals three-or more. A study done by the audit and tax consulting firm KPMG in 2001 indicated that in 83 percent of the deals they examined, the post acquisition value of the acquiring company didn’t rise at all, and value degradation sometimes occurred when two companies were put together. Mercer Consulting published another report in 2001 indicating that 50 percent of merger and acquisition deals actually reduced the combined value. On the other hand, a Manufacturers Alliance study in 1999 suggests that CEOs consider only 11 percent of the deals they’ve done to be failures. Business owners must have the courage to step up and make a strategic acquisition when appropriate, and they also need the skills to integrate the two companies after the deal has closed.

3. You’re undercapitalized or overcapitalized. For the most part, overcapitalization took place during the dotcom era. For example, a fiber company in Dallas had $50 million in venture money but never earned higher than $8 or $10 million in revenues and never made money. You should have seen its plush offices, though. This was in the era when companies routinely spent millions of dollars on image advertising during the Super Bowl and $500 a day on fresh fruit for their staffs. When the fiber company went out of business, it vacated some awfully nice offices. If you’re a sports fan, you may remember PSINet. It was the hottest Internet service provider during the dot-com era and even purchased the naming rights for the NFL stadium in Baltimore. Despite growing like crazy and being very well capitalized, the company was never profitable. It was a popular stock with analysts because of its rapid revenue growth and aggressive expansion plans, but by 2000, after spending money like drunken sailors, PSINet began to struggle. The company lost more than $5 billion in 2000 despite having almost doubled its annual revenues to $995 million. By the middle of 2001 it had built a debt of $3.5 billion and called it quits. The opposite side of the coin is undercapitalization. It’s “business school 101” to know that an undercapitalized company is doomed to fail. But it happens all the time. Midmarket companies can find all sorts of ways to capitalize growth. They can leverage traditional banking relationships and turn to asset-based lenders. They can also create new channels and get their partners to capitalize their growth. One fast-growing consulting firm paid its employees a month in arrears. This took great pressure off its cash flow and allowed the company to expand into new markets.

4. You have no ability to scale. It’s ironic-few people plan to fail, but even fewer plan to succeed. Companies have great ideas for success but they never ask, “What if this goes well? What infrastructure will we need? What about collateral for the sales force? What kind of credit line will we need?” Companies need to be able to scale processes, people, technology, the product or service they offer, and methods of delivery. They may have beautiful numbers in their proforma financial statements, but what happens when those numbers don’t turn out to be accurate? In the 1950s, Leonard Wibberley wrote a novel called The Mouse That Roared, which later became a Peter Sellers movie. The premise is that a small country in Europe, the Grand Duchy of Fenwick, invaded the United States expecting to lose the war and receive generous foreign aid to rebuild. Unfortunately for Grand Fenwick, it won. Now what? How do you keep success from turning into catastrophe?

5. You fail to reinvent. Tom Peters once said that we all have to “eat change for breakfast.” The only constant in the business world is continuous change, and yet many companies try to live in the old world and play by the rules that might have been in effect a decade or more ago. This just doesn’t work. Have you ever tried to impose a hierarchical corporate structure on employees who are part of the demographic group referred to as “millennials” or “generation Y”? It’s not going to work. A generation ago, employee attitudes might have been “We’re going to win one for the Gipper,” and “We’ll stay up all night, if that’s what it takes to secure the victory.” Today’s workers say, “Forget that. I just want to win one for myself.” Any company trying to survive under the old model is destined for disappointment and heartache. Another example of this sort of failure is when a non-techsavvy CEO says, “We don’t need to be on Facebook or YouTube or MySpace. I don’t even know anybody who goes on those places, aside from my kids.” You know who goes on those places? Your customers do. Failing to keep abreast of changes that affect your business can set your company on the road to disaster.

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