Directional Aviation Capital’s Kenn Ricci
Principal talks about why assessing the balance sheet is critical
ASPIRE 2017 started out with an Entrepreneurs’ M&A Roundtable featuring four of Northeast Ohio’s most prominent business leaders — Kenn Ricci, principal, Directional Aviation Capital; Len Pagon Jr., chairman, Robots and Pencils, chairman and CEO, Next Sparc; Stewart Kohl, co-CEO, The Riverside Co.; and Charles E. Hallberg, CEO, Renew Advantage.
The group, moderated by Jerry L. Kelsheimer, former regional chairman, Fifth Third Bank, shared anecdotes and advice from their experiences buying or selling businesses, and the challenges — and opportunities — they faced.
Kelsheimer asked Ricci to talk about how he managed his portfolio to maintain an optimized value when the aviation industry requires capital and may see swings over time.
Ricci answered by sharing his company’s 16.6 Rule and why discipline and rigor — a commitment to a plan — are so important. What follows is a transcript of the above video, edited for readability.
Managing your portfolio
When you’re in a capital-intense business, we actually manage to return on invested capital. People that run — even down to the division level — always have something they need. There’s always a new computer system, there’s always another airplane, there’s always a bigger hangar. But when our managers, when someone that runs a portfolio wants to do something like that, we assess them for an invested capital hurdle, and for some reason, 16.6 percent showed up years ago and that seems to be what we assess them for today. So within our company, we have this 16.6 Rule. I still don’t even know where it came from, but that’s the rule.
So that’s the number one thing, because the balance sheet is so important. I find with entrepreneurs a lot of times, a lot of them can run an income statement, but a lot of them don’t understand the balance sheet, and they’re not good balance sheet managers. And sometimes when you’re growing a business, it’s just capital wherever I can get it, and you don’t pay attention if it’s mezzanine or if it’s senior, it’s just I got the cash, so that’s number one.
The second thing is, in any of our businesses, we make them define on an annual basis what their unique competitive advantage is. What’s unique about your business? If I look out across your competitors, what’s unique to you? And if we can’t identify that — well, first of all, we wouldn’t look at a business that we couldn’t define what that was, and sometimes you lose that. Like Chuck [Charles E. Hallberg, CEO, Renew Advantage] said, they always change, but we force our managers to come back to what are they doing uniquely. If we can’t see how that’s going to be established and remain, then we figure out how to not be in the business.
Assessing them for the balance sheet is huge, because they scratch their head all the time. We might have a fleet of grounded planes that we’ve taken out of service, and someone wants to put them back in service in Europe. And they say, ‘Well, you’re not using them, shouldn’t I just get them for free?’ Well, they don’t understand that we could actually sell the assets, we could part the assets out. So assess — and even if it’s only in your mind because you run your own business —yourself for the cost of capital. I even know some people want to assess for intellectual capital, so they want to assess for the intellectual time it takes to run a business. And so I think that’s important when you think about both real capital and intellectual capital, to know that there’s a cost for that.