In the late 90’s, I became the CEO of a $6M IT services company and after a couple years of organically building the business to revenues of $20M, we decided we would attempt to take the company to the next stage.

The two founders owned the majority of the company and both were active members of the board of directors.  The founders were looking to exit the business and since we had a strong, but young leadership team, we charted a leveraged management buy-out as their exit strategy and our strategic plan.  From Chicago to Washington to New York, we went in search of financing. Since this was before 9-11 and a large part of our business was with the federal government, valuations at that time were in the 3-4 times earnings ballpark.

 

Our plan painted a strong picture of the future. We had identified two additional companies to buy, we were going to jettison an unprofitable piece of the business and we lined up two additional senior leaders poised to join the company. We knew our current customer base, knew our competencies and how to package them and we felt like we knew what the market was going to buy.

We planned and practiced, practiced and planned and met with a number of private equity, venture groups, and mezzanine financing firms.  There was one particular group in New York that I was eager to work with. The name of the firms was Fox Paine.  They had a good reputation in the leveraged buy-out world, had only been in the private equity business at that time for a few years and their portfolio was strong, diverse and we felt we could leverage those companies with our customer base.

So my CFO and I made the trip to NY to meet with SaulFox.  We met in a professionally decorated conference room and I gave, if you don’t mind me saying so, a “10” presentation.  I hit every high note and made every point I had planned to make.  I was just waiting for Mr. Fox to ask me for our bank account so the money could be transferred!

Instead he waited for a moment and asked me “Marty, what would you say are the 4 or 5 pieces of your business that will really drive enterprise value?”   I did an average job at answering that but I also noticed during my answer, that one of the factors I mentioned was not even in my presentation.  Then he asked “What are your plans for moving the needle on each of those value drivers?” Again, I did an adequate job at answering his questions, but there were still more disconnects between my original presentation and my answers.

We talked more and instead of leaving with a check, I left with the gift of a lifetime.  Saul Fox didn’t give me any money; he gave me a better way to think about my company.  A gift that has changed how I view managing companies in the middle market.

CEO’s in the middle market should always know the four or five most significant value drivers for their business and be prepared to answer those two great questions.

What are the four or five most important value drivers in your business?

What are your shovel ready plans for moving the needle on each of those value drivers?

Thanks Mr. Fox.