Born: Blairgowrie, Scotland
Education: Higher national diploma, mechanical and production engineering and an ordinary national diploma in electrical/electronics engineering, Fife University, Scotland
What’s your biggest business challenge?
Walking into a brand-new job on Day One. It’s horrible. It’s an uncomfortable, horrible, yucky thing. Everyone’s looking at you and just goes, ‘Well, I’ll wait to see what he wants.’ Overcoming it is just very quickly getting everyone on board. When you’re walking in to facilitate what’s broken and working, the people have low morale and self-esteem. I feel so sorry for them. As fast as possible, get around to every person and tell them, ‘You’re not an idiot, and it’s a brand-new Day One of a culture change.’ Dig in because if you think about the enormity of the challenge, you won’t get there.
What’s the best business lesson you’ve learned?
I’m stupid. I know nothing. I’m not a clever person. I don’t have the knowledge. I do my job, and we have to employ the other people who are good and have the knowledge to do their job.
What was your first job?
I come from a working-class family, and my dad had to work two jobs to try to get us through school. At 14, I started to work in hotels at dish washing, assistant waiter and learn silver-service waiting, and did that all through school and college to help the family out. My first job after college, I had a unique opportunity, I could either become a head waiter of one of those five-star hotels or go into a brand-new start-up, but you weren’t allowed to start as an engineer. You had to start as a technician on the line, even with all your engineering qualifications, and it paid less than the head waiter. I had been through college to get the engineering qualifications and chose the latter.
Aleveraged recapitalization of one’s business provides liquidity for owners while retaining ownership and management control.
Typically, the three key elements in obtaining financing for a leveraged recapitalization are consistent cash flow, a strong business plan and a solid management team. With these components in place, it is often in an owner’s best interest to do a recapitalization rather than sell the business outright.
“Leveraged recapitalization offers business owners looking for personal liquidity some significant, distinct advantages over the sale of their business to a private equity firm or to a strategic buyer,” says Mike Silva, senior vice president and group manager of Comerica Bank.
Smart Business spoke with Silva about leveraged recapitalization, how companies can benefit from such a transaction, and why more and more companies are taking advantage of recapitalizations.
What is leveraged recapitalization?
A leveraged recapitalization involves a bank or other financing source lending money to a company to finance a distribution to owners so they can diversify their net worth. If you look at the typical business owner who owns a $40 million revenue business, the bulk of his or her assets are tied up in the company. He or she typically has the company and a house, but no other significant liquidity. Leveraged recapitalization allows owners to take cash often a significant amount out of their business and put it in the market and have it professionally managed.
Who are the best candidates for leveraged recapitalization?
The best candidates are companies that are established and have consistent, stable cash flows demonstrated over a period of three to five years. Generally, they have in excess of $20 million in annual revenue and/or an EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) greater than $5 million. Also, it helps if there exists some level of assets that can be used as collateral within the business.
How can a company benefit from leveraged recapitalization?
Leveraged recapitalization allows owners to take some money off the table without selling the business in its entirety or losing an interest in the business to a private equity firm. In many scenarios, private equity is a good avenue for obtaining liquidity. However, owners will end up with just a fraction, or possibly none, of their company, which will be controlled by outsiders.
Leveraged recapitalization is a way for a business owner to realize liquidity while still retaining 100 percent control of the business. Also, the financing process is quick: typically six to eight weeks. Finally, this type of financing can be done discreetly and with confidentiality, which means that day-to-day operations will not be impacted and morale will not be affected.
In what ways does leveraged recapitalization differ from private equity financing?
Typically, if a company were going to explore an outright sale to a private equity firm or a strategic buyer, it would hire an investment banker who would put together a book. The investment banker would then market the book to get as many potentially interested parties as possible. Soup to nuts, the auction process would take a minimum of six months. And over this time, there is a book on the street. Competitors and employees know that the business is for sale, which can negatively impact client relationships of the company and potentially demoralize the employee base. Doing a leveraged recapitalization provides liquidity to the owner, but is much more discreet. In all likelihood, the business owner, his or her financial advisers and the bank are the only parties that will be aware that financing took place.
What risks are involved in leveraged recapitalization and how can they be mitigated?
Any time you put additional debt on a business, its cash flows are stressed. After the recapitalization there will be requirements on the cash flow that weren’t there before. This can cause liquidity problems as well as hamper a company’s ability to grow. Everyone involved with the transaction needs to feel comfortable that the amount of debt put on the company is workable, both in a best-case scenario and a downside scenario.
Why has the use of leveraged recapitalization increased over the past decade or so?
Historically, leveraged recapitalization was frowned upon by commercial bankers and institutional investors. The concept of a business owner taking a considerable dividend out of a company’s holdings generated concerns that there would be a loss of interest in day-to-day operations.
Lately, however, the fears associated with leveraged recapitalization have largely dissipated. Banks have become more comfortable with cash-flow lending: lending without underlying asset support. Recapitalization transactions have increased more than 1,000 percent over the last nine years, from $4 billion in 1997 to $49 billion in 2006. In the past, the only way for a mid-sized business owner to get liquidity was to sell the business to someone else. Leveraged recapitalization allows a business owner to leverage the company while retaining management control.
MIKE SILVA is senior vice president and group manager of Comerica Bank. Reach him at firstname.lastname@example.org or (415) 477-3274.
Jim Steele doesn’t want any of the lip service employees often give bosses. Steele wants to know exactly what’s going on, and he
finds that out by regularly getting on the front line with his team at salesforce.com inc. To Steele, president of worldwide sales and
distribution, the only way for a leader to really know the company is to see the trends up close and listen to the people who are fighting
the battles every day. That’s why he spends a big portion of his time at the on-demand customer relationship management services
company speaking to customers and getting feedback from its 2,000 employees. So far, the results are solid: Company revenue grew
nearly 60 percent to $497 million for fiscal year 2007. Smart Business spoke with Steele about getting in the trenches with his team
and what you can learn from your employees.
Go to battle with your team to get better answers.
My style is to be down in the trenches and
side by side with the sales team. I always
tell them, ‘I’m down here to help you guys
communicate to the customer and to negotiate deals.’ That means considering myself
the face of the company and being side by
side with my team and not making them
feel like, ‘Oh, jeez, the boss is coming, so
we have to put on our best face,’ then giving me a lot of lip service on everything.
I would rather hear what’s really going
on, and I don’t want them to think the boss
isn’t listening or doesn’t care. From my perspective, if I can show good listening skills
and really understand the issues, then the
team feels better for getting those issues
teed up and feels better about their
chances of success because someone at
the top cares.
Learn from your employees. All the things that I do with them as far as coaching, I also ask
from them. I ask them, ‘What could I have
done better to help you make this sale,
what would you like to see me do to help
you with this customer, what can I do to
make you, the company and the team more
I don’t stand on protocol because of my
position in the company. I’ve got to earn
people’s respect every day. I don’t put
myself above anybody and say, ‘Well, I’m
the president, so you have to listen to me.’
I want to truly understand what the issues
are; I have to make sure that I’m always
open to new ideas so that I’m not stuck in
my old ways.
Don’t brag. You have to be unselfish and
modest and not do all the talking. I can’t tell
you how many times I’ve seen executives
just spending time talking about all the
things they’ve done and how great they are.
Nobody really cares. When I’m out with my
team or customers, I want to know about
their families and their kids and just kind of
break down those barriers.
People want to know that you care about
them as people and don’t just see them as some part of the system that is there to generate revenue for you. I think employees
are a lot more loyal when they feel a connection to their leader. I know I am. That’s
the key thing, be unpretentious.
Inspire confidence. People want to deal with people that are stable and can inspire confidence. Show them that you’re not frantic
— it’s good to have a high sense of urgency,
but you don’t want to be frenetic about it
and make everyone think that you’re in crisis mode.
You have to present yourself as someone
who is calm and cool and collected under
fire because if you can alleviate some of
that pressure from your team, it really
makes them feel like you’re taking some of
the load off of them.
Focus on the victories. When anybody does
anything that either helps drive additional
revenue, helps drive better customer success or somehow enables better teamwork
or morale, I want to make sure that they get
credit for it.
People need a lot of positive reinforcement, they’re putting their necks on the line
every day, and the positive reinforcement
from their peers and management is what keeps them going. When we get praise from
our customer, it’s like we’ve been given a
million dollars; there’s just nothing better.
Promoting any praise we get is a great
way to boost morale and commitment and
loyalty. It’s one of the things that we do all
the time because it’s cheap to do; it doesn’t
cost you anything. It takes a little bit of
time, but the return is so high that it just
amazes me when people don’t do that on a
Be an evangelist for the company. We’re like evangelists. We continually tell people who
we are and what our vision is and what our
values are. We’re the face to the customer,
and if they look at us and they don’t think
that we’re inspired and excited about this
model, then they’re going to question, ‘Is
this really the right way to go?’ The way
that we beat the other guy is we become an
army of evangelists that are so excited
about selling and using our own products.
Make sure you’re getting there with metrics.
There are a lot of people who say they care
about their customers and their people, but
we track it religiously. We always look for
proof points on that, and we communicate
that to everybody.
The metrics are the validation points. You
can have all these great values and visions
and methods, but unless you can actually
track the progress of it, you’re not putting
the points on the board.
We have a site where you can look at any
of our systems on any given day and see
how many transactions are going through,
and you can see the response time. These
are important metrics that anyone can see.
It’s like the power plant; if your lights are
out, you can’t fake it. Before, we’d always
take things anecdotally and say, ‘I’ve heard
this 25 times,’ but now we have this site
where it’s all right in front of you accurately. If you’re not close to the customer, if you
don’t work to get feedback and do something with it, that’s death.
HOW TO REACH: salesforce.com inc., (800) 667-6389 or
Born: Clinton, Okla.
School: I went to school in Siloam Springs, Ark. and Rio Linda, Calif. I took one semester at Spokane Community College after I got home from Vietnam. I thought I wanted to go to school, but I found out I really didn’t want to go to school. It just wasn’t for me. I wanted to go out and start working.
What has been your biggest business challenge?
I guess my biggest business challenge was not going to college. I think if I had it to do again, I probably would because I had to teach myself accounting and books and all that stuff. It takes a longer time to learn it. Of course, when it’s your money, you learn how to balance it really quick.
What’s the best business lesson you’ve learned?
Trust in the employees that you have. When you start to grow a big company, you have to have a lot of trust in picking the right employees that are going to be the future leaders of your company.
As a child, what did you want to be when you grew up?
I wanted to be a cowboy. When you’re a kid you want to be a cowboy or a fireman or something like that. When I got back from Vietnam, I decided I wanted to be an auto dismantler because I like cars so much.
What’s your favorite board game?
I guess my favorite board game would be Monopoly. As a kid, I always liked Monopoly, and I could buy and sell and build houses and hotels and collect money, so it was kind of like conquer the world.
The ability to prevent fraud is crucial in a competitive marketplace. Check fraud, in particular, can have a major impact on a company’s bottom line. Certainly, the use of ACH (Automated Clearing House) transactions to transfer and process electronic funds is on the rise. According to the Electronic Payments Association, 16 billion payments were made in 2006 through the nationwide ACH network, an increase of approximately 14.5 percent over 2005.
Safeguarding against check fraud both traditional and electronic requires diligence and determination, but new technologies are making the process simpler and more cost-effective.
“Financial institutions offer tools that allow customers to protect their assets for a relatively low cost,” says Lynnell Harris, senior vice president of Comerica Bank. “It’s very much a win-win situation.”
Smart Business spoke with Harris about methods that can be used to help prevent check fraud, the benefits of Positive Pay and what distinguishes ACH Positive Pay from other fraud-protection products.
What types of companies are most susceptible to check fraud?
All types of companies. In today’s environment, anyone who sends out checks or transacts business with partners or consumers is subject to fraud and should take precautions. Companies across America, regardless of their size, are at risk.
What are some methods that companies can utilize to help prevent fraud?
There are a variety of safety measures and financial tools. For example, employees can help protect sensitive information by making sure items such as checks, account numbers, bank statements and other sensitive financial information are locked up and stored away. A system of checks and balances can be employed within the company to ensure appropriate access and approval authority.
In today’s environment, electronic transfers offer more control, as systems enable companies to set up various layers of authority based on dollar amounts or transaction types. Other tools include online account review and Positive Pay.
How does Positive Pay work?
Essentially, the bank delivers information to the customer regarding checks or ACH transactions that will be posted against his or her account. The customer then has the opportunity to review the information and determine if they are valid items. The customer authorizes the posting of the transactions and notes any unauthorized transactions. When notification is returned to the bank prior to the deadline, unauthorized transactions are returned to the depositing/originating financial institution.
Tools such as Positive Pay significantly mitigate risk for the company without requiring a huge investment in technology.
How can a business utilize ACH Positive Pay to accept or reject ACH transactions before they are posted?
In a manner similar to checks, the bank will present to the customer, before posting, all ACH transactions. The customer then has the opportunity to identify any unauthorized ACH activity. The customer authorizes the posting of the transactions and notes any unauthorized items prior to the notification deadline. The bank will return those items before posting to the customer account.
What distinguishes the ACH Positive Pay service from other fraud protection products?
Solutions that enable a business to protect and control electronic activity on its accounts isn’t commonplace. Debit blocking provides one level of protection, but doesn't offer the full range of decisions that true ACH Positive Pay solutions do. By reviewing and making decisions on all ACH activity before it posts to the account, ACH Positive Pay offers a greater degree of control and information management.
If a business detects suspect items using either Positive Pay or ACH Positive Pay, what course of action can it take?
For ACH Positive Pay, simply make a decision on your items online by the deadline. You can also contact your bank to place stop payments on any item you've rejected as a second level of prevention. For check positive pay, contact your financial institution. Typically, the information regarding suspect items is available first thing in the morning. Customers pull information electronically, review it and authorize payment of the valid items. If there is an unauthorized item, they would notify their bank in that response. The bank would then return those unauthorized transactions before they post to the customer’s account.
LYNNELL HARRIS is senior vice president of Comerica Bank. Reach her at (734) 632-4989 or email@example.com.
Born: New Rochelle, N.Y.
Education: University of Massachusetts, bachelor of science, industrial engineering and operations research
What is the best business lesson you have learned?
People talking to people, people leadership. I was trained in the technical fields and really resonated to that. You don’t get anything done without people. It could be the greatest invention in the world, but if you can’t talk to people, it’s going to sit in the closet.
Childhood career aspiration: I probably didn’t know that I wanted to be an engineer, but I wanted to be involved in technology. I loved computers. They had them [way back when]. They ran on water back then. It was before you kids. It was the ’60s.
First job: Paperboy at 12 or 13. Then I was a soda jerk when I was 14 or 15. I had to get permission from the school to do it. You had to get a work permit because I was under 16. It was an after-school job. It was close enough that I could walk there.
Most admired businessperson: I would say it’s the people who built great companies. Early on, Ken Olson from Digital Equipment because I worked there, and I admired the way the company was built up. I don’t cherish the way it unraveled, but in the early days, it was run really well. It had people engagement. It had technology innovation. I have a ton of respect for that organization. I learned all the basics there. You look back and you can see all the warts, but for the time, what a brilliant leader.
Favorite board game: Monopoly because I win. I like it. I love the challenges a little bit of strategy. There’s a fair amount of luck, but there’s also some skill, and I enjoy that game.
Ed Levine is in an industry with high turnover rates, but he’s making the best of it.
Levine, founder and CEO of Left Bank Restaurant Group, a group of casual French restaurants that employs 400 people, says turnover can be difficult.
“Turnover is tough on you,” he says. “You’re trying to imbue people with a sense of culture in your organization. If those people all leave after a year, that’s a lot of imbuing of culture.”
Levine says Left Bank, which earned $21 million in revenue in 2006, is like a school for entrepreneurs who want to learn the restaurant business. He has embraced that concept, and one of his keys to retaining employees is a comprehensive training program.
Smart Business spoke with Levine about why delegation does-n’t help if you’re just putting someone in charge of paper clips.
Q: How involved in daily operations should a leader be?
You need to be aware of what’s going on in the day-to-day operations, but you can get so lost in details that you lose sight of what you’re trying to do with the business. For example, I have a VP of operations who manages day-to-day operations. My job is to manage him. I’m not clued in on whether or not we’re short busboys in Menlo Park. That’s his job to know that.
Often I’ll get feedback from guests directly, and I want to respond to that directly and appropriately. So at those times, I’ll say to him, ‘This guest had this issue. Find out about it for me so I can show them what happened, what we’re doing about it and figure out how to get them back in the restaurant.’
I don’t get caught up in the day-to-day nitty-gritty. If I did, I would probably drown.
Q: How do you motivate or empower your employees?
Give people significant chunks of responsibility. Not just a project here or a project there, but you need to make them significantly responsible for a component of the business, and then you need to hold them accountable for it.
As a CEO, you can’t manage all the details. But you have to work with people to carve out responsibilities within their organization and say, ‘This is what you’re responsible for. This is how we measure it.’ Taking the pie and cutting it up into pieces is critical if you’re going to try to grow your business.
Lots of entrepreneurs are in my situation, where it’s one restaurant and you’re heavily involved and you know everybody. But when you spread that to 400-plus employees over a bunch of different restaurants, you can’t be effective anymore. You really need to work with your general managers so they’re running the restaurants.
Delegation is important, sure, but it has to be delegation of meaningful chunks. I can’t delegate to somebody, ‘You’re responsible for paper clips.’ It has to be broader and more significant than that. You have to help them understand how they’re going to pay attention to it.
Q: How do you attract and retain employees?
We have a company that is growing. Ideally, what we do is we bring in somebody who might be young. They might start as a server or cook, but we provide opportunities for advancement. If our business is expanding, those opportunities for advancement increase more quickly than if we are static.
Frankly, quite a few people come to work for us because they want to learn about the restaurant business. It’s always better to learn about the business by working on somebody else’s nickel than on your own.
Q: How do you train employees?
I teach a financial seminar where all my managers have to come learn about what I look at in terms of restaurants and how the numbers work. We model their restaurants using a big pile of poker chips. We show them, ‘This is how many chips go to ingredient costs, this is how many chips go to labor, here’s how many the landlord gets.’ Then we compare that to the investment.
So, we spend a fair bit of time teaching our people, which helps them be more loyal, but it also prepares them for a career down the road if they decide to move on.
You’ve got to watch expenses very carefully because the restaurant business is a nickel business. Keeping people focused on that is important.
Q: How do you keep employees focused on expenses?
I pull out the poker chip box and show them. If you just saved one chip here and one chip there, you can increase your profit by 40 percent. For example, if we do an exemplary job of work safety, the amount of money we spend on workers’ comp goes from this pile to this pile. Guess where the difference goes.
When you give them that kind of example, they really see it in 3-D. It’s more helpful than trying to look at it on a piece of paper.
HOW TO REACH: Left Bank Restaurant Group, (415) 927-3308 or www.leftbank.com
Joe Gatto says the secret to his company’s success can be boiled down to having a better mousetrap in a market with a lot of money and mediocre mousetraps.
Gatto is founder and CEO of StarMine, Inc., a 110-employee investment research firm that has grown 331 percent in the last three years. Since founding the company in 1998, he has expanded its client base to more than 400 firms.
Smart Business spoke with Gatto about why it’s important to have a low bozo ratio at your business.
Q: How would you describe your leadership style?
I lead on product vision by talking with customers and connecting the dots. Everyone can talk with customers, but not everyone comes up with the same conclusion of what to build.
Vision doesn’t come from a whiteboard. It’s not an abstraction. It comes from figuring out which of those gaps we have to fill.
That’s leadership, because left to its own devices, an organization will focus on enhancing products it already has in house. To step out to a totally new bit of functionality or a new product requires more active leadership.
You need to help people see the problem experienced by customers, and see the benefits of taking on something else when those people are trying to get their jobs done.
Q: What pitfalls should CEOs avoid?
A mistake I’ve seen others make is trying to sell technology without there being a problem that it’s solving. If we do this whiz-bang thing, you’ve got to think, ‘Who will buy this, will they pay extra, who’s affected, is it one or two users or hundreds of users, what are their current approaches?’
Not, ‘Wouldn’t it be neat to look at estimates this way?’ No, that’s not interesting. That’s not compelling enough from a business case.
Does this allow them to do some bit of work cheaper or faster or in some way a higher value? The biggest pitfall I see in business plans is people who have technology in search of a problem. They don’t have any real value proposition.
You need a group of people with a willingness to pay to step up and say, ‘Yeah, I’ll buy that.’ Now you may need to show them mock-ups, but if you get a bunch of yawns, you probably don’t have a product.
If you get, ‘I need that, that would save me time, how soon can I have it?’ then you have a compelling value proposition. So, you need to separate profitable from interesting and neat.
Q: How do you attract and retain quality employees?
It’s like one of our longest tenured software developers now he’s our chief architect told me several years ago. I sometimes ask people, ‘How are we different than other places you’ve worked?’
He said, ‘StarMine really manages to weed out any bozos before they bring down the average. It’s nice to work at a company with a low to miniscule bozo ratio.’
Having smart people who are performing well around you at an organization that doesn’t accept mediocrity and coasting, along with challenging work that focuses on developing or creating new stuff people like that environment.
People like to create things and be part of that creative process, not just fighting fires. They like being acknowledged for what they do. They like the job to be a good fit for their talents. You don’t want to put square pegs in round holes.
If you get the right skill set and are surrounded by high-performing peers, it kind of raises the bar. If you were to lower the average performance of the rest of the team, everyone else would sink down to that level.
People do better when they’re not working with bozos and not working on bozo projects.
Q: How do you motivate your employees?
[Knowing the costs and benefits] helps you prioritize. If you’re a project manager, it’s a lot more motivating knowing you’re working on a project that if delivered as anticipated will deliver a half a million dollars to the company.
By being explicit about the benefits, it gets people motivated. Just the process itself is very motivating.
It makes sure you’re working on the important stuff, makes sure you’re not working on the less important stuff, with rigorous cost-value analysis backing it up.
Q: How do you communicate with your employees?
If people here haven’t heard it three times you haven’t heard it. It’s partly the logistics of a crowded room or conference call where someone gets distracted. You can’t say something once and expect that everybody gets it.
Repetition, repetition, repetition is key. In addition to those high-level company updates, then it’s shaped by working with the project team, making sure people are clear on what we’re going after, why and, to some degree, how.
HOW TO REACH: StarMine Corp., (415) 874-8100 or www.starmine.com
Upon arriving in the United States, Ly learned English, put himself through college and in 1984, pooled $40,000 with his four brothers to open the first Sugar Bowl Bakery. Today, the 400-employee Ly Corp. the parent company of Sugar Bowl Bakery is a thriving wholesale business, with customers ranging from the Costco chain of grocery stores to the luxury hotels of the San Francisco Bay, and is averaging revenue growth of 20 percent per year.
Smart Business spoke with Ly, president and CEO of Ly Brothers Corp., about the importance of diversifying your business, building a strong reputation and creating a positive work environment.
Q: How do you create a positive environment for your employees?
I read tons of books, and every time I read a good quote, I put it on the board. I want to motivate our employees to make sure when they walk in or walk out, they see that quote from me on the board.
I also challenge them to read books. Especially the books that I read and like, like “Built to Last” or “Good to Great” [both by Jim Collins], or “Pour Your Heart into It” [by Howard Schultz]. Everyone who finishes reading the book and lets me know the key points in the book, I reward them $100 per book they read. There are an unlimited number of books they can read per year.
I have lunch with my employees all the time. I try to let them know as long as we work hard and think smartly, everything can be done. I also encourage them to go to a seminar, and if they need to, go back to school.
We are willing to contribute to learning. So then I can learn from them, too. That is how I create a positive working environment and positive thinking for our employees.
Q: How have you achieved business growth?
We do a lot of R&D; we learn from customers, study trends to see what products are demanded tremendously in the marketplace. We diversify our product line based on those studies; we create products and diversify them.
We don’t just depend on one customer. We go out there and diversify our customer base across the board, whether it’s as big as Costco, Starbucks and Safeway, or as small as a coffee shop or hotel in downtown San Francisco.
Be innovative. Try to study the trends and make great products so we don’t sacrifice too much margin. We grow, but maintain margin so we can invest into our manufacturing. That’s how we make sure we have the right products in the right place across the board.
Q: What is the most important thing a CEO has to do?
You have to be a hard worker. This is where the phrase ‘leading by example’ comes into focus. This is where the tone of the company is established. People will most likely listen to you when they know that you are a hard worker.
Also, make sure you build a good reputation. You have to have good personality and character. There is a saying that ‘Good personality opens the door. Good character keeps the door open.’ As a leader, you have to have those two. We need to say what we mean and we have to do what we say. If we establish those two things, that will work for us at no cost in the future.
Q: How do you build a strong reputation?
At the time we started out, even though we struggled to pay ourselves, we had to make sure we paid our employees. Also, you have to treat them well.
Our employees can take a vacation, but I did not take a vacation for 10 or 15 years. We have to sacrifice to make sure the company is successful, but we don’t want the people who work throughout the company to suffer.
No. 2, when people are in need, like an organization like Feed the Children, or children’s hospitals, big or small, we want to donate. If we are successful, these children should not be going to bed hungry. We know how hard it is to get through those days. So we want to provide financial support or any kind of support to those people.
Those organizations are good to support and help build us a good reputation. It’s a benefit when people know we have a big heart with the community.
HOW TO REACH: Ly Brothers Corp., (415) 824-3592 or www.sugarbowlbakery.com
When these companies started developing products themselves, EFI’s services weren’t needed anymore. Revenue dipped from $588.5 million in 2000 down to $350.2 million in 2002. And while EFI, a digital imaging and print management solutions company, was still profitable, Gecht knew he needed to change its game plan to increase revenue and maintain profitability.
He initially brought in outside consulting companies to help identify problems and offer solutions, but just a short time into that process, he discovered that the existing managers knew the better questions to ask.
He engaged his management team in in-depth self-review, lengthy discussions and evaluations. And they met with customers to find out where they thought the company’s strengths and weaknesses were. “The key thing is to be brutally honest with yourself and figure out where you’re strong and where you’re weak,” says Gecht.
The company also surveyed employees to get their thoughts.
“Though we encourage open dialogue always, we made the survey anonymous to ensure that we’d receive the most candid responses,” says Gecht.
At the end of these sessions, they decided to change their business strategy and then look toward acquisitions to diversify and strengthen EFI. While changing a company’s DNA doesn’t happen overnight, it does start with one step.
Avoiding the commodity trap
Gecht’s team first decided to become more of the Lexus or Mercedes of the industry.
“We didn’t try to compete too much on price,” Gecht says. “We said, ‘You know what? We’ll leave the price battle to some other people. We’re going to stay higher-end in our value and appeal to people that want better systems and are willing to pay a little bit more.” EFI was very upfront with customers about its prices, most of whom were knowledgeable professionals not needing as much prodding as the average consumer.
“Our message is, we’re not the cheapest solution out there,” Gecht says. “If you want something that costs less, you can certainly find it somewhere else. We are here to give you the best technology for your business to make you successful. If that’s what you’re looking for, we can show you why our product is better.”
Competing on quality meant Gecht had to ensure that his products were, indeed, the best. He focused the company on innovation by partially tying each vice president’s bonus plan to innovation so they would drive it down the ranks. “It’s not only just in engineering,” Gecht says. “There’s a lot of innovation happening in every single department. If you make it part of the routine and the culture and communication, it happens by itself. We call it the voice from the top.”
To measure quarterly progress, Gecht and his team tracked one metric gross margin.
Driving innovation also involves a financial commitment, so EFI invested about 30 percent of its revenue in research and development so it could remain competitive and received heavy criticism for doing so. “We’re a technology company,” Gecht says. “We bring the best technology to the market. That’s the strategy we have. We’re always going to be the best in what we do. We need to have the brightest and best people around here.”
Gecht assured employees that as long as they performed well, they didn’t need to worry about losing their jobs.
“We didn’t want to go to the easy solution of, ‘Let’s just fire a bunch of people, and then the numbers are going to look good and we’re going to feel good in achieving numbers,’” Gecht says. “It’s not really going to help our customers or long-term viability.”
Instead, he tightened expenses in other areas and turned to employees to generate ideas. They came up with everything from eliminating aspects of paperwork to having team members check in with customers periodically. A nonexecutive team of people chose the best two ideas every quarter, and the employees who submitted them received prizes, which changed quarterly and ranged from iPods to dinner for two at a nice restaurant.
Building with acquisitions
With EFI’s business plan tweaked to emphasize quality over quantity, Gecht then started looking at acquisitions both to grow the company and to diversify it more. “Innovation is our cornerstone as a technology company,” says Gecht. “It’s our ability to out-innovate the competition that keeps EFI in the position of industry leader. That said, we are also constantly looking outside our core competencies at acquisitions that support our objective of providing best-in-breed solutions to the professional print market.”
Studying the industry and having dialogue with customers helps Gecht know what areas he needs to improve through acquisitions, but acquisitions hadn’t been part of the company’s DNA. To make up for that, he hired an acquisition specialist and a team of people in 2001 that excelled on the integration side of the equation to lead EFI’s efforts. “The price for the acquisition is a small factor in the end,” Gecht says. “There’s a lot of things you need to think about ahead of time. There is a reason why the statistics show that most acquisitions fail.”
The first aspect Gecht looks at is cultural fit to ensure that the people at the potential acquisition would mesh well as part of EFI. He then looks at leadership both in the people and products. “We want to make sure that either we’re acquiring some technology that has leadership or people that have leadership in the industry or reputation that we can build on that will add to the leadership of the company,” Gecht says. “We don’t want to buy something that won’t be as strong as EFI, that will drag down our reputation and relationship with customers.”
While it’s important to investigate the products’ strength, it’s equally crucial to look at the people, but many leaders think of them as afterthoughts. “The people part is a very important part of the equation because when you buy a company with 100 people, essentially you’re deciding to hire 100 people to be part of your team.”
To make sure those people have that ability to innovate, he spends a lot of time asking them questions about their products and customers and about where they get ideas. He also talks to the company’s customers to see how it treats them.
Then the simple but most important question is, “Do you want to be part of us?” If the answer is, “No,” then he moves on, but if the answer is, “Yes,” then he sets to work making it happen.
When the deal closes, the work doesn’t end. The new piece now needs to be integrated. While smaller acquisitions typically require shorter integration periods, large ones need tending to for a while.
In early 2005, EFI made a $280 million acquisition, which management has successfully spent the past two years working to integrate instead of chasing more acquisitions. Success requires communication and sometimes difficult decisions.
Often, Gecht needs to move EFI management to the new company or vice versa. During one deal, the products overlapped, so his team decided to kill its own product and proceed full steam ahead with the acquired one. “Sit in the room and talk about the facts,” he says. “Don’t be biased. Think about it, and after awhile, you get used to doing it. You don’t think what it means to you you think what it means to the customers. “It’s all coming down to, you just focus on looking at the company from the eyes of the customer. What do they like to see? Do they like to see Product A or Product B? Do they like to see Person A running this group or Person B? Why is it good for them? If you get yourself trained like that, it gets easier and easier.”
The next step is sitting down with management from both sides of the acquisition and collectively brainstorming where the company should be in one year and two years, and then challenging them. “If you come in and say, ‘Within 60 days, we want to A, B and C,’ you will get resistance,” Gecht says. “If you say, ‘Let’s think about where we want to be in a year and two years,’ and everybody draws nice ideas because it looks very far off, then we’ll say, ‘OK, we’ll do it faster.’ They’ll say, ‘OK, at the end of the day, if that’s where we want to be, why not do it faster?’”
If something was outlined for a year, he’d ask them to do it 60 to 90 days. If it needed two years, he challenged them to do it in a year. Quickly integrating also helps eliminate unnecessary confusion for customers, who often get the runaround during transition times. “If you move faster on integration, it’s actually working better,” Gecht says. “In many cases, there is a temptation not to touch or not to change the name or not to integrate or not to have a unified sales force, and while it’s an easy solution and doesn’t offend anybody, after awhile. there is a ‘they’ and ‘us’ environment and inefficiencies.”
Throughout major changes, it’s important to get buy-in from people. While having both sides of management work together to create a plan helps with the executive ranks, leaders can’t overlook customers and employees. “If you’re winning the hearts of customers and you’re winning the hearts of employees, you’re going to win the acquisition,” Gecht says.
To help reassure customers, Gecht visits them and also sends communication explaining how service will either remain the same or get even better and outlining the benefits that EFI brings.
During transitions, EFI team members are at the new company weekly to answer questions and help employees adjust, but those employees also need to hear information from the top. Communicating with employees often requires a different style and needs to have genuine substance the meat and potatoes of the meal instead of just the salad. “A lot of people, they don’t care to hear too much about big statements and mission statements and high-level strategy,” Gecht says. “They want to know what it means for the company, for them, for their perspective, for the customer’s perspective.”
He emphasizes being honest and answering all questions. Whenever he communicates with employees, he takes questions both from the floor and from prior submissions that allow people to ask questions anonymously if they feel uncomfortable asking in person. He also responds to e-mails personally, even if it’s to say, “The better person to answer this is so-and-so talk to them.” “You’re hiring great people, and you ask them to work hard and deliver results and stay with the company,” Gecht says. “Our commitment to them is that we’ll take them seriously.”
After the transition period ends, Gecht’s team does a post-mortem to see where it moved too slowly, too fast and just right. They use their conclusions during the next one to help ensure further success.
Gecht’s strategy has paid off in recent years, as EFI posted revenue of $563.7 million in 2006, an increase of nearly 61 percent over 2002. Gecht recognizes that EFI has improved a lot, but it still has to do the small things to keep growing. “There’s no one big huge idea that changed the company,” Gecht says. “It’s all a combination of many good ideas that made us slightly better and slightly better, and we ended up becoming a lot better company with all those marginal improvements. ... As long as you make smaller progress every day, you’re going to make big progress at some point. “Even when things are going very well, never be complacent. Know that you can always do better. Keep a critical eye and constantly challenge yourself and your employees to improve your business. Stay hands-on and close to the battlefield, talking frequently with your customers, investors, engineers, salespeople and marketing.”
HOW TO REACH: Electronics for Imaging Inc., (650) 357-3500 or www.efi.com