Recovery continues to be slower than most businesses would prefer. Part of the slow growth is due to concern from many business owners regarding whether they can trust some of the leading economic indicators released in the past few months.
On a positive note, recent trends have shown that unemployment is being reduced overall. The National Association of Manufacturers also reported that more than 31,000 new U.S. manufacturing jobs were created in February. This increase, however, is tempered with the belief that many unemployed individuals have simply given up on job searches, as they have now been out of work for an extended period. The end of their search effort causes many to fall off of the tracked statistics. This may be causing some lower-than-actual unemployment numbers to be reported. In addition, a recent University of Michigan study showed consumer confidence figures have fallen slightly due to weakening perceptions about the economic environment.
Two other areas facing business owners have caused them to move at a slower pace when considering expansion, acquisitions and hiring of additional employees. These two areas are taxes and the looming health care changes. With the potential for higher taxes and higher health care costs on the horizon, many entrepreneurs are taking a wait-and-see approach. Thus, the reports of companies continuing to pay down third-party debt and stockpile cash still exist.
It seems businesses have returned to profitability as a result of their concentrated efforts implemented to endure the economic downturn. The threat of losses, liquidity issues and, in some cases, covenant violations forced many businesses to lean up operations, challenge spending and do more with less. As a result, many are producing more with fewer resources and have improved their processes. Earnings levels have improved, but most results are still below the levels experienced in the mid-2000s.
Also of concern is uncertainty in foreign markets. While we have had a credit and debt crisis here, overseas trouble has many business owners contemplating international business relationships and opportunities. In the mid-2000s, many production jobs were moved overseas to benefit from inexpensive labor. With the current domestic economic conditions and the lack of stability driven by the uncertainties in the Eurozone, there are rumblings that U.S. companies may work to grow domestic manufacturing and pull jobs back to the U.S. Innovations also are occurring in certain niche areas, and the shrinking cost advantage of outsourcing production is becoming more evident. Job growth continues to be a major focus domestically, and labor negotiations of major industries, such as auto makers, have demonstrated the desire for large companies to guarantee sustainability and promise to keep jobs in the U.S.
There is also concern regarding the stability of the buying power of foreign markets. U.S. companies have continued to expand their penetration into foreign developing markets. The ultimate results of the various national debt issues in the Eurozone could create an economic ripple effect that could affect demand for U.S. products in many foreign markets. Also, the continued political changes and instability in eastern countries can create swings in energy prices and product demand in those markets. This creates difficulty in planning for growth and expansion — and correspondingly a fair amount of caution when it comes to the timing of capital investment and business expansion.
Merger & Acquisition Activity
While the aforementioned factors have slowed down private business owner activity related to expansion and acquisitions, another business segment seems to have picked up. Private equity groups and private investors have been much more active in recent months. There has been significant public discussion in the past 18 months regarding cash that is on the “sidelines” waiting to be invested. We have seen that as the economy begins to expand and smooth out, more M&A deals are being contemplated. Also, business valuations are returning to more normal and expected levels driven by those wishing to market their businesses, and banks are becoming more willing and involved in financing such deals. We view this as an encouraging sign and an indication of continued movement in the right direction.
Each business faces unique challenges, but all ultimately need to consider, plan for and execute a succession plan. Whether the plan involves selling the company to an unrelated third party, transitioning or selling the company to the next generation, an ESOP or some combination of these, this issue has to be addressed. The recent increase in merger and acquisition activity has been driven in a number of cases by exit strategies employed by many business owners. As the baby boomers continue to exit the workforce and leave their businesses, we will see more and more movement and opportunity in this M&A wave. When these decisions are made and the process starts, planning can have a significant effect on the company’s valuation and the ultimate profit realized by the owner. This truly is one of those areas where “an ounce of prevention (of negative results) is worth a pound of cure.”
Here are a few planning ideas that can be game changers when an owner is looking to improve value:
- Perform due diligence on your business and your business processes and activities. Many sellers believe the diligence process is the buyer’s responsibility. While buyers will spend a great deal of time and effort on due diligence, performing self due diligence can overcome a number of surprises, allow the seller time to position its operations and activities to provide the greatest advantage and better prepare the seller for questions asked during the process. Being prepared when soliciting bidders also will likely increase the number of bidders you may be able to attract.During this process, you should consider reverse due diligence, or preparing the data that will likely be requested during the due diligence process. These are standard documents requested in most diligence engagements. Having this information ready on the front end adds value and helps move the process along. Delays in outside or third-party diligence have been proven to affect deal values.Also, have your company’s financial statements audited by a firm that potential buyers consider reputable. Audited financial statements provide immediate credibility.
- Make sure you impress upon buyers the value of the company you are offering to them. Build a business case for why the company will continue to prosper and grow and what positive effects the existing infrastructure will have on such growth.
- Document agreements with employees and third parties. It is important for buyers to mitigate the unknowns when buying a business, so the more documentation for contractual arrangements, the better.
- Be proactive relative to unresolved or potential litigation. Review pending or threatened claims with your attorneys and be honest about what situations exist. Resolve issues as diligently as possible. Make sure to include all potential human resources issues that may exist.
- Avoid accounting discrepancies, unusual transactions and changes in reporting methods. An audit, as discussed above, can assist with this. However, remember that any such instances will need to be explained and will be challenged by a buyer. Clouding facts will lead to more questions and may ultimately impact the value of your deal.
When it comes to the value of your company, you can never be too diligent. For more ideas on how to enhance value, contact a BKD advisor.
Scott L. Fields is a partner at the Houston office of BKD, LLP. Reach him at firstname.lastname@example.org.
Article reprinted with permission from BKD, LLP, www.bkd.com. All rights reserved.
Dick Giromini had never seen the likes of it ? a drop in business that would bring just about any company to its knees.
Giromini, president and CEO of Wabash National Corp., was in shock as he and other executives in the transportation equipment industry saw the recent economic downturn cause nearly an 80 percent drop from the peak in 2006 to the sinking operating levels in 2009.
His challenge was one of survival. In the first quarter of 2009, Wabash National sales dropped by more than half from the same period in 2008. The manufacturer of flatbed trailers, dry freight vans and refrigerated vans wanted to avoid what other companies ended up facing ? a restructuring filing.
“We were burning cash. It was really trying to find a way and a means to carry the company through the toughest period it ever faced,” Giromini says.
All the traditional cost optimization moves were made, including consolidation of plant operations and idling of work locations. Unfortunately, some 40 percent of the salaried work force and nearly 70 percent of hourly employees were laid off.
A shared-sacrifice approach was taken with the remaining workers: senior executives took 17.5 percent pay cuts; all the rest of the salaried workers took 15 percent; and hourly workers took a 5 percent pay cut.
“However, the drop in volume required us to do even more,” Giromini says.
What he did next ? to keep the company operating and indeed to rebound ? was to secure a private equity cash infusion of $35 million.
“We met with many potential investors and went through an assessment process. A number of them made investment proposals, we selected one and then went forward.
“The process took several months. It was nip and tuck as we continued to manage cash availability to be able to continue to pay suppliers, and I give a lot of credit to them with their extended payment terms as being part of the solution that helped us get through this.”
It was the final touch that saved the company, and after 14 months of astute management and economic recovery, Wabash National was free of its commitment to the private equity firm, and was back to being a public company. Many laid-off workers returned to work.
Here’s how Giromini took the steps to douse the fire that was burning Wabash National’s cash and injected fresh air into the $1 billion company.
Get the data and be decisive
When faced with financial challenges, you cannot afford to stall or appear uncertain of what to do.
“One of the most important things I learned early in my career was to be decisive,” Giromini says. “You can’t be afraid to make the decisions. You have to collect as much information as you can, but there is an element of gut-feel that has to come into this and also knowing that you’ve got to move.”
Taking a long period of time, for instance to wait and see what the market will do or the fear of acting lest it be a mistake, can be detrimental.
“I had one boss who would use the expression, ‘paralysis through analysis,’” he says. “That’s the one thing you have to avoid in business. You have to be able to collect as much information as possible, but you have to do it in an expeditious fashion. Then you’ve got to go.
“Never be afraid to make decisions, because you’re probably making far more decisions than the fellow who is afraid to make them since he may think he is batting 80 percent on decisions, but only makes 10 decisions. You make 100 decisions, bat 50 percent and you make 50 good decisions in that light.
“That’s the way I’ve always tried to operate, and I think leaders need to be decisive and act fast when faced with that kind of challenge.”
You’ve got to trust your judgment on that, and take the actions and move forward. That is critical to your success. Employees have to see that you are in charge and have a plan to execute.
“They have to buy in, they have to understand the burning platform that exists, the need for quick action, the need to buy in, and so I think it is very important to keep them informed about the process to assure that the support is there to be able to implement the actions necessary,” Giromini says.
Get a grip on fear and rumors
If you have a good relationship with employees when an economic downturn starts, consider yourself fortunate. If you communicate well with them, it probably will increase your chances of getting the buy-in needed to help turn around the situation. However, it may make the human side of employee cutback decisions more miserable for you.
That’s not a case for building only superficial relationships between management and labor so you can avoid some pain during financial straits. In the least, you have to take stock of your emotions and communicate to your work force that you are doing all you can do to survive the situation and to lessen fears.
“Fear is in the hallways, in the office, and in the aisles of the plants,” Giromini says.
“Those were tough, tenuous times. The work force and the community all understood when they didn’t see trailers in the lot waiting for customer pickup. That’s not a good sign, and when they didn’t see cars in the parking lot and saw all but one shift and not even that on Fridays, that’s not the normal way our business operated.”
When facing a dire situation, company employees may resort to drawing conclusions of their own and starting rumors. Management should expect that this is probable and should have a game plan to deal with them.
“Your senior management needs to go out and make sure that the message was received,” he says. “You’ll need to get in front of the work force to deliver a message, and you have to make certain that the communications are frequent and to the point so you can minimize as many of those rumors as best as you can.”
You’re never going to get them all. But you have to do the best you can to reduce them.
“My role was to be out there to continually reassure the work force, both the salary and hourly work force, that we were doing everything that we could and that we were going to get through this thing ? and to stick with us and see it through,” Giromini says.
“When I was able to communicate the actions that we had to take, they also understood that that we were doing it on a basis of who could deal with it the best. The executives and salaried workers took the bigger cuts, and we tried to preserve as much of hourly workers’ earning power as we could.”
One advantage that will be in your favor is if your corporate offices are connected to your main manufacturing operations. This will help break down the barriers that can prevent the flow of communication, and barriers in general.
“We don’t have any exclusive executive cafeteria, or any of those types of things,” Giromini says. “We don’t have reserved parking for executives. So I park where everybody else parks, and it’s first-come, first-served. I dine where everyone else dines. Our folks tell me, they know me by first name, they understand and trust when I tell them what the situation is.”
Meanwhile, during a downturn, your management team will be gaining experience that only comes once in a great while. It will make them a lot more knowledgeable, a lot more capable, and they also will go forward with confidence that no matter what any economy throws at them in the future, they are going to know how to deal with it.
“I’m really proud of them,” Giromini says. “It’s made them all better leaders as a result of having gone through the experience they went through in 2009.
“I like to tell them that they added tools to their toolbox that others who may be in the industry for 40 years and never have the chance to have those tools added. What we hope is that we never have to utilize some of those tools ever again. But they’re there.”
This is also time to build strong, healthy relationships with your suppliers as you do with your customers. You will accomplish long-range benefits if you view your suppliers as partners.
“You are only successful in this if you have strong relationships with your suppliers,” Giromini says. “They are only successful if you succeed also, so believe in reaching out. Have a high level of engagement with your suppliers. Start regular webcam teleconferences with them on a monthly basis so that they know what’s going on in your business. Also invite all of your major suppliers in for an annual supplier conference.
“We’ve enhanced the engagement with suppliers as the years have evolved but I think having an episode like we all faced in 2009 ? and many of our suppliers faced a very similar challenges that we faced ? I think it always does bring you closer. I think any time you face that kind of a challenge, it’s just going to make partners truly realize who their real partners are.”
Diversify and develop
While your company is trying to keep its head above water during an economic slowdown, remember you have to be ready for the finish line. Many companies learned the hard way when a customer that accounted for a large part of its business went under. It’s time to keep a focus on diversifying and developing.
“Never lose sight on diversification efforts for your business,” Giromini says. “Stay focused on finding ways to diversify from a sole dependence upon an industry to leveraging both the physical assets and the intellectual assets you have as an organization into other areas.”
Once you establish your survival game plan, it’s an opportunity to go revisit your core values, especially that of developing solutions for customers, to strengthen your position when the recovery picks up steam.
For instance, Wabash National formed a products group for its Duraplate composite panels. Rather than being used only in trailers, the panels are used in the manufacture of all PODS storage containers.
“Developing solutions is based on working with customers, identifying what their needs are,” Giromini says. “That’s the value you bring to the customers in the area of innovation; working with them and saying, ‘What are the problems that you have? What are the things that could make you more cost-effective, make you more productive, could help enhance your bottom line, relative to your product?’
Then you go back and your engineers work with your customers to develop solutions to those problems.
“Now with the recovery picking up steam and hopefully with the work we’ve done and the diversification efforts in our business, we’ll continue to grow and actually be able to have record levels as we go through the cycle over the next three to five years,” Giromini says.
How to reach: Wabash National Corp., (765) 771-5310 or www.wabashnational.com
The Giromini File
Born: Syracuse, N.Y.
Education: I have a bachelor of science degree in mechanical and industrial engineering and a master of science in industrial management, both from Clarkson University, in Potsdam, N.Y
What was your first job?
There are three or four that all could’ve been clearly characterized as my first job: babysitting, mowing lawns, shoveling snow or my paper route. I did all of those. Interestingly, as I think about it, I was in high demand, and I know now why because I only charged 25 cents an hour. I don’t think I was very smart as a salesman, but I could sure bring in the volume.
Whom do you admire in the business world?
Rather than focusing on a single person, I tend to think about what attributes that I admire. I really do admire those individuals who are able to lead their companies to outperform what the norm may be for their industry ? finding ways to be creative, innovative and having a business model that provides for long-term sustainability of their business but that has flexibility to allow them to adapt and adjust to the ever-changing business and economic environment that they face.
When we look at that, we look at the sustainable models of year-over-year improvement ? those are the businesses, and there are many of those. I think it’s unfair to single out a person because industries are so different.
On a more personal basis, the person that I certainly respect and admire is my dad who really is the one who taught me those basics that live with you forever. He said no matter what job you ever accept, for whatever pay you’ve accepted, you do that job to the best of your ability because that’s what you’ve agreed to. That’s a contract that you have entered into.
I’ve always believed that, and I kind of think it follows along with ‘your word is your bond.’ So that was the way we were raised, and he always taught us just good solid, core values of relationships and doing business that I never thought would translate into how I would act or perform years later.
What was the best business advice you ever received?
I had a boss when I was just a young graduate out of college who was talking about decision-making. He said, ‘You never want to be afraid to make a decision.’ His point was not to shoot for a 50 percent success rate but to make good decisions. The only way you can do that is to make a decision in the first place. So I’ve always remembered that throughout the years.
What is your definition of business success?
It goes in line with the attributes that I admire. I would like to look back and say that we were able to build a business model that was sustainable, we were able to build one that was flexible, we were able to adapt to whatever the operating environment this economy would throw at us ? it’s a global economy now. There are challenges continually that you have to be aware of and you have to be able to adapt to. That’s how I would view success, as being able to have that model that is sustainable, that means you are able to create jobs, sustain jobs, provide for families and be recognized as good corporate citizens that support the communities that you operate within.