Companies typically want to do what’s right for those they serve. Key priorities should be customers, investors, employees and the communities in which the company is located — but not necessarily always in this order. The dilemma, however, is that many times short-term decisions can prove to be long-term problems that cause more pain than the initial gain.
It’s difficult to make all constituents happy every time. As a result, management must prioritize decisions with a clear understanding that each action has ramifications, which could manifest themselves in the short, intermediate or long term. Seldom does a single decision serve all of the same timelines. There are no easy answers and anyone who has spent even a short amount of time running a business has already learned this fact of life. So what’s a leader to do?
It’s a sure bet that investors want a better return, employees want more money and benefits, and customers want better quality products, higher levels of service and, oh yes, lower prices. This simply all goes with the territory and is a part of the game. The problem can be that, most times, it’s hard to give without taking something away from someone else. Here are a couple of examples.
Take the case of deciding to improve employee compensation packages. Ask the auto companies what happened when they added a multitude of perks over the years, as demanded by the unions? The auto titans thought they didn’t have much choice, lest they run the risk of alienating their gigantic workforces. History has shown us the ramifications of their actions as the majority of these manufacturers came close to going belly up, which would have resulted in huge job losses and an economic tsunami.
Basic math caused the problems. The prices charged for cars could not cover all of the legacy costs that accrued over the years, much like barnacles building up on the bottom of a ship to the point where the ship could sink from the weight. Hindsight is 20/20, and, of course, the auto companies should have been more circumspect about creating benefit packages that could not be sustained. Yes, the employees received an increase to their standard of living for a time anyway, but at the end of the day, a company cannot spend more than it takes in and stay in business for long.
Investors in public companies can present a different set of problems because they can have divergent objectives. There are the buy-and-hold investors, albeit a shrinking breed, who understand that for a company to have long-term success, it must invest in the present to build for the future. The term “immediate gratification” is not in their lexicon; they’re in it for the long haul. Another type of investor might know or care little about a company’s future, other than whether its earnings per share beat Wall Street estimates. These investors buy low and sell high, sometimes flipping the stock in hours or days. And, actually, both types are doing what’s right for them. The issue becomes how to serve the needs and goals of both groups. When a company effectively articulates its strategy, it tends to attract the right type of investors who are buying in for the right reason. This will avoid enticing the wrong investors who turn hostile because they want something that the company won’t deliver.
When interviewing and before hiring employees, it is imperative that candidates know where the company wants to go and how it plans to get there. Many times, this means telling the prospective newbie that the short-term compensation and benefits may not be as good as the competitors’ down the street, but in the longer term, the company anticipates being able to significantly enhance employee packages, with the objective of eventually outmatching the best payers because of the investments in equipment being made today.
The key to satisfying employees (present and prospective), investors, et al, is communicating the types of decisions a company will make over a specific period of time. Communication from the get-go is integral to the rules of engagement and can alleviate huge problems that can otherwise lead to dissatisfaction.
Knowing what is right for your company, based on your stated plan that has been well-communicated, will help ensure that you do the right thing, at the right time, for the right reasons.
Michael Feuer co-founded OfficeMax in 1988, starting with one store and $20,000 of his own money. During a 16-year span, Feuer, as CEO, grew the company to almost 1,000 stores worldwide with annual sales of approximately $5 billion before selling this retail giant for almost $1.5 billion in December 2003. In 2010, Feuer launched another retail concept, Max-Wellness, a first of its kind chain featuring more than 7,000 products for head-to-toe care. Feuer serves on a number of corporate and philanthropic boards and is a frequent speaker on business, marketing and building entrepreneurial enterprises. Reach him with comments at firstname.lastname@example.org.
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Volatility in the marketplace can have a significant impact on investors’ accounts and psychology.
But while many people think of volatility as a negative, there is an upside, says John Micklitsch, CFA, director of wealth management at Ancora Advisors LLC.
“For those who are still accumulating and investing in the market on a regular basis, volatility to the downside can create buying opportunities and the ability to buy shares on weakness,” says Micklitsch. “However, if you’re at a point in your life where you’re done adding to your account, volatility can be very frustrating and emotionally challenging.”
Smart Business spoke with Micklitsch about why the markets are so volatile right now and how to approach the market in this environment.
What is volatility?
Like everything there is a technical and a practical definition of volatility. To most people, however, volatility is a change in the value of their investment accounts from one measurable period to the next. Generally speaking, volatility is associated with risk.
Why are today’s markets so volatile?
It goes back to the globalization of the world economy. It used to be that what happened in a small country such as Greece, stayed in Greece. But today, everything is linked. Financial institutions hold sovereign bonds to facilitate worldwide trade and then hedge positions with other global financial institutions and incur counterparty risk. Corporations generate earnings from all over the world and now investors can trade in just about any market with the click of a mouse or tap of a smartphone. It’s all linked and it is in our face all the time with the 24 hour news cycle. For a long time, globalization has been a good thing, but lately it seems we are only as strong as the weakest link. Add in the uneasiness associated with huge, unresolved global debt levels and you can begin to see why markets have been so volatile.
Is volatility the new normal for investors?
Volatility in many ways, is the norm for now. We are in a period of relatively low returns in both the equity and fixed income markets due to sluggish economies. Buy and hold investors are frustrated. As a result there is tremendous pressure on managers to generate returns for clients with many now resorting to trading in an attempt to generate returns. There are inverse and leveraged vehicles that allow investors to turn risk ‘on’ and ‘off’ in their portfolio throughout virtually every minute of the day. Until we get sustained improvement in the economy this in and out activity is going to be the norm. The IRS and brokers will be happy, but it is less clear how investors will fair.
How should investors approach a volatile market?
The best way to approach today’s volatility, like anything, is to have a plan. Every investor should know how much of their portfolio they want to have in a given asset class and the potential volatility of their overall asset allocation. Then, when volatility soars they can dial into that plan to see just how much their actual allocations have deviated from their target percentages and whether reallocating or rebalancing is necessary. By having that plan in place, a touchstone if you will, investors are more likely to stay the course, as opposed to falling into that ‘just sell everything’ mentality. We think it is best to work with a financial professional to create long-term targets that are appropriate for your risk tolerance and your stage in life because they have the tools to help you model risk.
How often should that plan be reviewed?
The plan should be a living, breathing reflection of your goals and objectives at any particular moment in time. You should work closely with your advisers to update them on your changing risk profile and needs. If your risk profile changes and it is not reflected in your investment allocation, your portfolio might be more volatile than is appropriate. That could lead to making poor decisions at a market cycle bottom or in a period of particularly high volatility. Taking a few minutes to regularly review your plan can reassure you just enough to avoid making a 100 percent move to the sidelines, because then the challenge becomes deciding when to get back in, an error that could compound the situation.
What advice would you give to investors in this market?
There is a tendency for people to find safety and security in a stock market characterized by high prices. Although it is counterintuitive, the lower the stock market goes the safer it becomes from a margin of safety standpoint.
To reverse that basic decision-making apparatus and embrace lower prices is really the key to long term investing success. The only time volatility is not something to take advantage of is when you are done accumulating shares. At that point in life, you should probably have a more conservatively positioned portfolio that is not as highly impacted by market swings. All of this can seem overwhelming, which is why it is important to work with a professional adviser who can help you plan for and manage volatility in your portfolio.
John Micklitsch, CFA, is the director of wealth management, as well as an Investment Advisor representative, of Ancora Advisors LLC, an SEC Registered Investment Advisor. Reach him at (216) 593-5074 or email@example.com.
Insights Wealth Management & Investments is brought to you by Ancora
NEW YORK - Investors eager to rush in on Pandora Media Inc.’s Wednesday stock listing may want to take a moment to figure out how the Internet radio service will make money in the years ahead.
Pandora shares will start trading in the wake of a spate of initial public offerings for Internet companies that have seen soaring valuations.
Oakland, Calif.-based Pandora priced its IPO late Tuesday at $16 a share, above its recently raised range of $10 to $12 a share, giving it a $2.6 billion valuation.
But at least one set of Wall Street analysts are skeptical if the largely advertising-supported Internet radio service can bring in the dollars to justify its price tag.
“It’s not that we think Pandora won’t be profitable; we don’t think that profits will be enough to justify the valuation,” said Richard Greenfield, an analyst at BTIG Equity Research.
Greenfield added that the IPO would be “more compelling” at a range between $4 and $5 a share.
The fear is that as more users start listening to Pandora on mobile devices rather than on traditional computers, the shift from online ads to less lucrative mobile audio ads might eat into advertising revenue. The problem is likely to grow as the number of listeners turning in on mobile devices increases.
The proportion of hours of Pandora music streaming to mobile devices rose to 60 percent last quarter from 4.6 percent in 2009, according to a Pandora filing.
The company said its advertising revenue last year was $119 million, 87 percent of total revenue. The rest came from subscribers who pay a premium for ad-free listening and other perks.
Pandora’s filing disclosed that “we have not been able to generate revenue from our advertising products delivered to mobile devices as effectively as we have for our advertising products served on traditional computers.”
Pandora’s filing noted that audio and video advertising products better suited for mobile devices have not been as widely accepted by advertisers as traditional display ads.
Also a worry: royalty costs are set to rise in the next four years as its number of listeners grow.
One advertising executive acknowledged the drawbacks of mobile advertising.
“Online, Pandora can build a bigger brand experience by, for instance, featuring a banner message that takes over the entire screen,” said Sal Candela, director of mobile strategy for media agency PHD. “There isn’t the opportunity to do that on a Smartphone screen because of limited real estate.”
Candela, who has developed ad campaigns for clients on Pandora, said that mobile ads have their benefits, though — for example they can be tailored to consumers’ locations at a given moment.
But advertisers have only started to embrace mobile platforms as in the past year, said Candela. He added that mobile ad campaigns are harder to implement because the mobile market is cluttered with different devices.
Have investment questions? Of course you do.
Now, you have answers. Dan Lubeck, founder and managing director of Solis Capital Partners and contributing columnist for "Investor's Perspective" in Smart Business Los Angeles and Smart Business Orange County, has found his way to our blog. Last week, he debuted "Ask the Investor" by responding to some common investment questions that come up when buying and selling a company.
E-mail your investor questions to Dan@SolisCapital.com and his responses will be featured in future blog posts.
Q: Why is there so much focus on EBITDA by potential purchasers of my company?
The Investor says: At the end of the day, the most important aspect of value is how much cash a company will generate over time. EBITDA, or earnings before interest, taxes, depreciation and amortization, is an easy way for investors and purchasers to understand historical cash generation for most types of companies (except for those that require significant, recurring capital expenditures). The historical EBITDA often is a good indicator of what the future EBITDA will be.
Other critical factors include quality of leadership, ability to defend the niche, market dynamics, proprietary technologies or processes, contacted business and any other items that help assure future EBITDA. The investor or purchaser will value a company based on a multiple of EBITDA. Companies with the highest certainty of the fastest EBITDA growth typically will receive the highest multiple valuations. In addition to expected growth, companies with higher historical EBITDAs often will receive higher multiple valuations merely because of size. For example, a company with over $10 million of trailing 12-month EBITDA generally will fetch one times EBITDA more than a company with $5 million or less of trailing 12-month EBITDA.
Q: Should I hire a broker or investment banker to help me sell my company?
The Investor says: The answer to this question is “maybe.” The fees charged by intermediaries are significant. However, there are scenarios when qualified intermediaries can add value in excess of their fees. For example, if your company has performed well for the past two to three years, you want to sell most or all of it, there are a large number of potential buyers and/or you have no idea who the right buyer will be, a sale process run by an intermediary potentially can generate a much higher value. Another scenario is where the intermediary has particular expertise and experience in your industry, and there is “story” required as part of your sale presentation.
There are many scenarios where an intermediary will not add value. For example, if you know the one or two likely best buyers, then you should be able to maximize value with the assistance of an experienced transactional lawyer (which you need regardless). Another example is where there is significant risk to your business if the word leaks that you are selling. In this scenario, you are likely better off working with your experienced transactional lawyer.
We use intermediaries about half the time when selling our portfolio companies. Often it’s a good idea to seek the advice of your CPA when making this decision. If you decide that you need an intermediary, please do not base your decision on the firm name. Be sure that the individuals that will be representing your company (often not the senior partner that comes in for the dog and pony show) have the talent, experience, time and drive to get your deal done.
Q: Can I sell my company even if I have not made any profit the last couple of years?
The Investor says: You can always sell your company. The question is: Will you receive a value sufficient to satisfy your personal objectives? Although your historical EBITDA certainly is a factor, the value will depend largely on what EBITDA you can prove for the future. If, for example, you have landed large new contracts, you likely will be able to get value for most of the EBITDA that those contracts will generate. I suppose the tougher question here is: Why are you selling your company now? If you have no choice, then you should prepare the best you can, potentially hire a broker to help you tell the story, and get the best value possible. If you don’t have to sell now and you think the future looks better, you likely will get more value if you wait.
Dan Lubeck is Founder and Managing Director of Solis Capital Partners (www.soliscapital.com), a private equity firm headquartered in Newport Beach, CA. Solis focuses on disciplined investment in lower-middle market companies. Lubeck was a transactional attorney and has lectured at prominent universities and business schools around the world.
After taking a turn for the worse during the recession, it appears that L.A.’s commercial real estate market is finally poised for a rebound. Banks are cautiously considering new loans, life insurance companies and institutional investors are wading back into the market and the FDIC plans to close its Irvine office in early 2012, which points to the improving health of the region’s banking industry.
But high unemployment, rent concessions and shifting consumer preferences could sabotage uninformed investors who inadvertently venture into unstable submarkets. It seems that while investors were napping, the rules changed, and big returns in commercial real estate are no longer guaranteed.
“Overall, commercial real estate is heading in the right direction, but it’s not the heyday of 2005 to 2006 when virtually every investment paid off,” says Rocco Pirrotta, senior vice president and manager of the Commercial Real Estate Group for Wilshire State Bank. “Investors need to do their homework and partner with a creative banker because, this time, your mistakes will definitely come back to haunt you.”
Smart Business spoke with Pirrotta about the opportunities and pitfalls awaiting local investors in today’s commercial real estate market.
Which submarkets offer the best deals?
After falling precipitously during the recession, several submarkets are starting to gain traction. First, the recession virtually halted the construction of new apartment buildings and condos, so apartment vacancies are starting to decline and rents are inching up, which will ultimately increase owner cash flow and may even boost property values.
Second, retail sales were up in the fourth quarter and landlords are granting fewer rent concessions, but consumers now prefer the convenience of one-stop retail centers and success hinges on local demographics as well as tenant mix and longevity. Industrial properties have been steady performers and container volume continues to rise at our local ports, but investors should be cautious about purchasing office buildings, as companies are still reluctant to hire, vacancy rates are high and experts say it will take two to three years to absorb the existing excess space.
Finally, avoid the hospitality sector, car washes and gas stations, because many of these businesses are still struggling.
What’s the key to evaluating prospective deals?
Investors can’t rely on superficial analysis; they must review data and confirm anecdotal market intelligence supplied by owners and brokers to accurately estimate their ROI.
- Rent rolls. Review a six-month collection history to see if tenants are making their scheduled payments and to expose disparities between scheduled and collected rents, which may indicate concessions. On the one hand, investors may be able to boost cash flow as rent concessions expire, but on the other hand, financially strapped tenants may be unable to pay the higher rents and they might request additional concessions if economic conditions don’t improve.
- Tenants. Are apartment dwellers working? Are suitable jobs available in the local area? Do retail centers have financially sound anchor tenants like banks and grocery stores that draw traffic and provide critical services? Centers could be in trouble if tenants rely on discretionary consumer spending, especially in economically depressed areas. Consider the local demographics along with each tenant’s business model and customer base as these underlying factors influence a property’s return.
- Lease terms. Banks have historically preferred long-term leases when evaluating commercial deals, because tenant longevity favors the buyer. Now most commercial leases average one to two years, which could be advantageous if tenants renew at higher rates, but short-term leases also allow viable tenants to negotiate a better deal or shop the competition and defect to other properties.
What else should investors consider before making a commitment?
Investors should ignore the national trends and focus on local economic conditions that directly impact commercial real estate submarkets, since our recovery is lagging behind other parts of the country. They should also spend an entire day at the property to assess the neighborhood, traffic flow, vacancies and competing projects to see if the property attracts an ample number of customers and prospective tenants. Finally, examine the owner’s recent marketing expenditures, because abundant giveaways and free rent could be a sign of a troubled property.
How can investors partner with bankers to secure a loan?
In this age of cautious underwriting, investors need a creative financial partner who understands the need for liquidity and is willing to consider options that satisfy the needs of both parties. For example, bankers used to consider future cash flow when determining funding limits, because they assumed the owner could raise rents to cover the increased debt. Now, bankers may need to offer a smaller loan, such as an earn-out loan, where future time-sensitive benchmarks allow them to increase the loan as occupancy rates or rents rise. The lender usually agrees to fund future loan increases at today’s rates, which protects investors in a rising rate environment. Collaborative evaluations and creative financing protect both investors and lenders in this new world of commercial real estate, where not every deal is a guaranteed winner.
Rocco Pirrotta is senior vice president and manager of the Commercial Real Estate Group for Wilshire State Bank. Reach him at (213) 427-6592 or firstname.lastname@example.org.