Often, business owners frame their own future in stark, binary terms — either I keep the business or I sell it. This binary thinking becomes most pronounced as business owners begin to contemplate retirement or an ownership transition. In reality, there are a variety of options that can span those two outcomes. For many business owners contemplating a retirement or transition event in the next five years, simply keeping or selling are suboptimal outcomes — either tying up critical value that could otherwise be used to diversify or foregoing the potential upside value in their business. In addition, these binary outcomes often overlook other important value drivers for business owners such as legacy, succession, well-being of current employees and the continuity of their current business. When evaluating which options to pursue, it is critical for business owners to first establish clear goals that define what they want to accomplish and when. This includes an honest assessment of their personal and professional desires and other value drivers (including those mentioned above). While these options each present unique opportunities and risks, they offer business owners a more tailored and optimized approach to achieving their future liquidity, retirement or transition objectives. Mezzanine debt recapitalization A mezzanine recapitalization will often allow business owners to seek partial liquidity or growth capital, without significantly diluting their ownership. Business owners can use the proceeds to diversify their holdings, while retaining equity control and the potential upside of the business. However, this option will add incremental, high coupon leverage to the business and could limit operational flexibility in periods of economic or business distress. ESOP — employee stock ownership plan ESOPs allow business owners a tax efficient roadmap toward partial or full liquidity while creating a mechanism for transferring ownership to employees. This allows business owners to maintain short-to-medium-term ownership and helps to preserve business consistency and legacy. It also rewards employees for their hard work and loyalty. However, once the ESOP has been established, it can significantly restrict ownership flexibility. MBO — management buyout MBOs allow business owners to achieve either partial or full liquidity while maintaining operational consistency throughout the organization. The MBO also rewards management’s loyalty and performance with the opportunity to acquire a significant stake in the business. However, MBOs often require management to partner with outside equity or debt providers — which can be time consuming and introduces new partners and influences on the business. Minority investment Minority investments from an outside investor (either institutional or individual) will allow business owners to seek partial liquidity, or growth capital, while maintaining a majority stake in the business going forward. The minority partner can bring valuable outside perspectives and skill sets to supplement your own. However, most minority investors tend to be only passively involved and often require onerous ratcheting provisions that could give them control if the business fails to meet operational objectives. Partnership transaction A partnership transaction will allow business owners to seek significant immediate liquidity while preserving some ownership and elements of control in the business going forward. Business owners can use the proceeds to diversify their assets, while maintaining potential upside in the business. The new partner can bring many valuable strategic and financial resources to bear to strengthen the business and pursue growth and value enhancement initiatives. However, new partners will seek elements of control and often utilize leverage to affect the partnership. Understanding the many options available to business owners will help lead to more tailored and optimal achievement of personal liquidity, retirement and transition objectives. Josh Harmsen is a principal at Solis Capital Partners (www.soliscapital.com), a private equity firm in Newport Beach, Calif. Solis focuses on disciplined investment in lower middle-market companies. Harmsen was previously with Morgan Stanley & Co. and holds an MBA from Harvard Business School.
Most successful businesspeople agree with Benjamin Franklin’s famous quote when it comes to strategic planning, “By failing to prepare, you are preparing to fail.” A leader’s approach to strategic planning can vary greatly in length of time, measurement of progress, commitment and ultimately in the results.
I would argue that a detailed, strategic plan spanning longer than three years is too long to be relevant. Tactics identified too far in advance cannot keep up with the fast pace of changing technology, new information and changes in the economy to make the plan meaningful.
Here are my three essential elements to the strategic planning process:
Range of specifics
Leading an organization with an established three-year plan creates an environment where your internal team understands where you are going and what you must do to get there. In a franchise organization, this level of planning helps the franchisor foster confidence in franchisees that your plan is to drive revenue and profit — theirs and yours.
All three years of the strategic plan are not created equal. Here’s how plans are structured in my organization:
- Current year: Have a one-year very detailed plan where everything is accounted for. Each objective must be specific and outline tactics, deadlines, human and financial resources involved and the method of measurement.
- Year two: This plan has objectives with projected tactics and resources. The specifics will be incorporated during the annual planning process, where previous performance can be factored and available resources are clear.
- Year three: Proposed objectives are the only details required for a three-year outlook. The annual objectives outlined help determine your course of action toward the previously stated five-year overall goal.
Second to the importance of planning is tracking progress toward what you set out to accomplish. Quarterly, the board of directors assembles to receive updates from the divisions responsible for driving the collective success. The company’s leadership team has bi-weekly updates and each month, the entire organization gathers to understand the current status and how they can make an impact.
By building in regularly scheduled reviews, you are building the ability to be flexible into your business.
I’ve written about serendipity before as it relates to purchasing Mr. Handyman and being approached by an owner of PuroClean to join forces. Had our set plans been too rigid, we may have steered clear of these acquisitions due to imperfect timing and missed out on the chance to build our company’s holdings of in-demand professional home service franchises. There are times when it makes sense to adjust.
Teams must be completely committed to the annual strategic plan. It is the easy way out to simply change the plan when you don’t think you will make it. Finalize the plan, hold your people accountable to it and find ways to achieve what you set out to do.
Create incentives for your team to benefit when the shared goals are achieved. Years ago, we established a quarterly bonus program which has unified my team to work toward our revenue and store-count goals. Team members know what the company is trying to achieve, and they can also earn additional rewards for setting and meeting personal objectives in their area of influence.
As the assembly line inventor Henry Ford said, “If you think you can do a thing or think you can’t do a thing, you’re right.” Commit to your strategic plans and celebrate the successes of achieving them.
David McKinnon is the co-founder and chairman of Ann Arbor, Mich.-based Service Brands International, an umbrella organization that oversees home services brands, including Molly Maid, Mr. Handyman and ProTect Painters. To contact McKinnon, send him an email at [email protected]
When Jean-Paul Ebanga looks up at the sky, he thinks about the more than 3 million people who fly every day on airplanes powered by CFM International engines. In fact, every 2.4 seconds an airplane departs under the power of a CFM engine.
“That means our role today is far beyond delivering engines to the industry; it is also making sure people are traveling in a very safe way at a decent price,” says Ebanga, president and CEO of CFM International, a $15 billion aircraft engine manufacturer that is a joint venture between GE here in the U.S. and Snecma in France.
CFM — which gets its name from a combination of the two parent companies’ commercial engine designations, GE’s CF6 and Snecma’s M56 — combines the resources, engineering expertise and product support of these two engine manufacturers to build engines for narrow body aircrafts.
“Today, in the air transport industry, the narrow-body segment is the main segment of the industry,” Ebanga says. “Looking forward for the next 20 years, there will be a need for roughly 30,000 new airplanes; two-thirds of those will be narrow-body airplanes and CFM is currently leading this market segment.”
If being the industry leader in engine manufacturing wasn’t enough of a challenge, Ebanga also has the challenge of leading a joint venture company where compromise and collaboration is the key to success.
“If you are taking two parent companies with two different cultures and you try to blend them, this will generate some difficulties,” Ebanga says. “But the net result, because you have to find compromise, because you have to work between different cultures, will be more sound ideas and a much more efficient organization.”
Here’s how Ebanga utilizes both GE’s and Snecma’s resources to keep CFM the industry leader in narrow-body aircraft engine manufacturing.
Compromise and collaborate
While a majority of companies are focused on streamlining themselves, CFM has to take a different approach to its business. Its joint venture means CFM has to work to find compromise above all else in order to properly function at its best.
“The problem with the JV is because you have two different constituents, you have to make compromise,” Ebanga says. “There is no one voice saying this is the way and the rest of the team just follows without asking questions. In terms of leadership, it requires some things to be a little bit different than normal leadership.”
The existence of this additional challenge makes this kind of partnership too difficult for some leaders and companies. But Ebanga sees the glass as half-full.
“If you are able to find the sweet spot between the two company cultures and then work around these difficulties, you enable a new space of opportunities and strengths,” he says. “This is the essence of joint venture success.”
CFM has been known for a long time by its superb engine family, CFM56. Now the company is looking to release its next generation of engines called LEAP, for which compromise and collaboration will be key to its success.
“This new product will be designed based upon a very detailed and comprehensive market survey,” he says. “We spend more than three years asking the customer what they are looking for in the next 20 years and understanding in a granular way how the dynamics of the market can evolve, and then we define the product, which is the answer and the solution to that.”
When you have two companies, the reading of the market dynamics will be different because each company has a different way of operating and a different culture, so they will analyze all the signals in a different way.
“Maybe the solution has some things shared, but the two won’t be exactly the same,” Ebanga says. “The whole key is how you bridge the two approaches. How can GE or how Snecma can make the necessary compromise to accept that the other guys also have a great idea and how can you work together to bridge ideas that make a great product.”
The trick is being able to step back from what you believe is the ultimate answer and being able to compromise with other ideas from another company that also thinks they have an ultimate answer.
“By bridging the two, you find out that some of what’s behind the idea of the other company you didn’t think about at first and vice versa,” Ebanga says. “At the end, the product you are putting on the market is far better than the one you could have done alone.”
Both GE and Snecma own their own technology. Snecma works on the front and back of the engine, while GE works on the middle of the engine. For LEAP, they both have been developing technologies for their respective parts of the engine, but the companies don’t unilaterally say, ‘Here’s our part of the engine.’ The other company has to accept and agree with the technology based on analysis. There are checks and balances that go into the process.
“Based on the other company’s remarks, you can improve your own part,” he says. “Snecma might make some comments about the core, which is the responsibility of GE and taking into account these remarks GE will improve its own part of the engine and vice versa. It’s a mutual cross-pollination.”
The level of compromise and collaboration that CFM has developed has been built up during more than 30 years and is now a major part of the joint venture’s culture.
“In our case, the different GE and Snecma leaders, over time, understood that CFM’s success is more important than their own success,” Ebanga says. “That is to say that if I’m trying to optimize my own interests rather than CFM’s interests, at the end of the day, I would lose the game.”
CFM and GE have been very successful at carrying out this approach even though the leaders have changed.
“One way to do that is we manage young leaders in the challenges of working in this strategic partnership environment,” he says. “If you are growing leaders in this environment, eventually when they are in the top spot, they will have the framework to deal with what makes up the success of this JV.”
A joint venture takes an investment in both people and process in order to make it work.
“In a strategic partnership, it is like being a couple — you could fall in love day one and it’s great for a couple of weeks, but if you are not investing in the relationship … it won’t be a great love story,” he says.
Plan for the future
One of the main challenges CFM has is that in the ’70s it was just a start-up company. Now it has become the leader of the aircraft engine industry, and in order to remain in that position, Ebanga and the company must be forward-thinking.
CFM has several matters it needs to focus on for the future of the company. No. 1 is executing on current commitments.
“This is a big deal because we are currently developing a new engine family called LEAP, and the start of this new program has been very successful,” Ebanga says. “We are the sole power plant for the next generation of Boeing 737 MAX aircraft, one of the two engine makers of the Airbus A320 aircraft, and we are the sole power plant of the new Chinese COMAC C919 aircraft.”
Beyond making LEAP the next engine of preference, CFM also has to ensure that whatever changes the market goes through in a decade or two from now the company will be able to adapt and reinvent itself to stay in the leading position.
“When you are in this top-dog phase, it’s difficult,” he says. “It’s about working on a short-term basis and, at the same time, articulating a strategy to change the way we are running to make sure we will still have the appropriate fit 10 years from now.”
Planning for what the future has in store is not an easy task. You need to address the situation in a very humble way.
“You are already overwhelmed by the shop-time challenges and to find time and perspective to think about the long-term is rather difficult,” Ebanga says. “Being humble helps you to engage in this journey. Along the way, you will have a lot of reasons to give up for a while and stick with the short-term. I think this is a recipe for failure. You need to stay humble on one end but also stay engaged and not let things go away.”
You also need to understand your market but not in the way you understand your market for your short-term objective.
“When you are looking at the market on a short-term basis, it is to make sure you have the appropriate marketing and value proposition to get yourself up and make your numbers,” he says. “When you are looking at the long-term perspective, it’s really the ability to elaborate scenarios about the change in your industry.” ●
How to reach: CFM International, (513) 563-4180 or www.cfmaeroengines.com
Drive compromise and collaboration for best results.
Be able to reinvent your business to adapt to your market.
Develop plans for how the future of your market may unfold.
The Ebanga File
President and CEO
Born: Paris, France
Education: Graduated from École Nationale Supérieure d’Électricité et de Mécanique (ENSEM), France with a degree in engineering
What was your very first job, and what did you take away from that experience?
I was the leader of the photo club in high school. A lesson I learned from that time is that you can have some great ideas and be very fast in your head, but you have to have the ability to bring people up to speed. This is a great example of how a real organization works.
What got you into aviation?
It was the beauty and the exceptional achievement that this industry is all about. When I was in high school, I had two dreams—the first one was to be an architect and the second was to be an engineer to design great things. To imagine that I could generate some great things to enable this kind of achievement was absolutely fascinating for me. So I chose the engineering path and it still gives me great satisfaction. An aircraft engine is an absolutely amazing piece of technology, but also a piece of art.
Who is someone that you admire in business?
My first thought was the leaders and initial creators of Intel. Not only was this company able to start from nothing as CFM did and became the leading company in the microchip/microprocessor business. Initially they were the leader in the memory business and then they reached a point where they had to reinvent themselves. The reason Intel is the great company they are today is because they were able to reinvent themselves in the absolutely right way. So I admire this generation of Intel leaders.
When you’re a powerhouse player in your industry, the key to success is often the ability to step back and take stock of who you are, where you are and where you’re going. Sometimes, an existential approach is intuitive; it’s easier to self-reflect when you’re beginning a new venture or making a monumental change.
But what about when you’re experiencing success? Taking stock when you’re on top is far from redundant; in fact, figuring out where your accomplishments have come from makes you more likely to duplicate them. Here are some suggestions for seizing the moment and sizing up your business.
Don’t agonize — organize
Rather than rely on the year’s end to inspire a big-picture appraisal, set quarterly dates to dissect core activities, finances, human resources and sales/marketing strategy.
Not only will it save you from feeling overwhelmed by the immensity of an annual assessment, but it will help you reassess and realign continuously, which can help make transitions more seamless — especially when they are unexpected.
Turn projects into projections
A few years after launch, Petplan transitioned to being an entirely paperless organization. Initially the transition was a success, and operationally, the project had already paid dividends.
But as time went by, it became apparent that we needed to create a tangible product for our clients. We decided to publish a glossy pet health publication for policyholders to help communicate our company’s core values and add a “touchable” touchpoint to our customer communications.
To our delight, Fetch! magazine was an overnight success and has grown its readership from 50,000 to more than 250,000 in just a few short years. The magazine project led to some new projections about ad revenue, and we eventually began selling space in its pages.
Because of big-picture thinking in small, regular doses, we were able to take an internal project, build off it to create something new, and then leverage that to add to the company’s overall profitability.
Find a fresh set of eyes
When trends need to be changed, getting back on the right track is essential, but sometimes the people closest to the “problem” are the least likely to be able to solve it. One of the best ways to chart a new course is to bring new talent to the table. This could mean finding a mentor, hiring a new executive or perhaps finding a visionary investor.
When we launched Petplan, we focused almost exclusively on sales, and all of our customer communications reflected that. Soon, it became clear that we needed to rework strategy to include not just sales but customer service.
To help us course-correct, we turned to Vernon W. Hill, the founder of Commerce Bank. Vernon joined our board as chairman and brought extraordinary experience around customer satisfaction to the company.
This year, in an effort to evolve partner veterinarian relationships, we’ve placed a heavyweight at the helm of our veterinary channel: Steve Shell. A fresh set of eyes can invigorate vision — whether it comes from the people above you or the employees you entrust with managing the daily activities of your business.
When you commit to unplugging from the daily drudgery to assess the scope of your operations a few times throughout the year, you’ll soon find that the only place to go is up.
Natasha Ashton is the co-CEO and co-founder of Petplan pet insurance and its quarterly glossy pet health magazine, Fetch! — both headquartered in Philadelphia. She holds an MBA from the University of Pennsylvania Wharton School of Business. She can be reached at [email protected]
One of the biggest differences between running a business on the side and quitting your job to run it full time is that you lose the security of a steady paycheck. That loss of income and the uncertainty as to whether it will ever come back is enough to make anyone pause and reconsider quitting their day job.
But what if your part-time venture is beginning to pick up steam, and you earnestly believe that it needs your full, undivided attention? While it can be scary, there are steps you can take to make such a leap less daunting.
When you begin your business in earnest, take time to reduce your clutter. Working out of a messy office will eat much more time than it takes to get everything organized.
Speaking of time, making the transition to full-time business owner means also becoming much more self-motivated and coordinated. There is no one to remind you to clock in or to hound you about being late.
It’s great to go about the day without being micromanaged, but be careful. It’s just as easy to slip into a state of complacency. Organize your space, set a schedule and stay disciplined.
There is always going to be some element of risk involved in whatever you decide to do next. But there are also actions that a new full-time business owner can take to reduce some of that risk.
As a part-time owner, chances are high that your business is a sole proprietorship — sort of the default business structure. Unfortunately, that means that you are responsible for your business’s debts, and if things go south, debt collectors may start trying to take your personal assets to pay for those business debts.
When you jump to full-time, consider forming an LLC or S corporation. There are different advantages and disadvantages to these structures, but they will help protect your personal property by separating you and your business’s debts.
Make saving a priority
Take full advantage of that steady paycheck for as long as you have it and save. Anyone looking to branch out and start a business has to use every cost-cutting measure out there so they have breathing room when trying to get their new business to turn a profit. Advisers typically recommend having enough saved up to pay for four to six months of living expenses. Luckily, if a business is being run part-time, it may be pulling in money already.
There is no magic number for saving — it just needs to be enough so that you don’t have to dig for change to pay your electric bill. Meet with an accountant, crunch the numbers and make sure you’re comfortable with the recommendations they give on budgeting and working with your financial situation.
Part-time owners know their company can draw customers, sell a product or service and bring in money since it has already been doing just that. This insight makes it very tempting to throw caution to the wind and jump into full-time ownership without making the necessary preparations.
But don’t take a huge leap without ensuring your fall is cushioned. Take your time, get everything in order, protect your assets and meet with an accountant to solidify a plan. Next, take a deep breath and put in your two weeks’ notice — you’re now a full-time business owner.
Business valuation is an increasingly critical aspect in many financial planning, tax, reporting, and litigation matters. Perfect transactional evidence available between willing and knowledgeable buyers and sellers provides an accurate indication of business value, but in reality, such evidence is rarely available. Conclusions of value must be derived through a delicate combination of analysis and objective professional judgment.
Why Do You Need a Business Valuation?
A business valuation will let you, the business owner, know what your company is truly worth for management purposes and keep you informed of what investors look at when considering the value of your business. Once you grasp the worth of your business, you can plan for its future and determine a preferred course of action, whether that is succession planning, selling the business, or depleting its value either immediately or sometime in the future. A valuation will allow you to comply with the IRS requirements for gift and estate taxes, or purchase price allocations, without burdening your family or estate and can also settle irreconcilable differences with a spouse.
How Do You Arrive at Value?
There are three common approaches to developing business valuations:
Asset Approach – This approach is best suited for businesses that hold real estate or investments, start-up or early stage companies, capital intensive companies, or companies that may be experiencing losses. Basically, the company’s assets and liabilities are reassessed at market value. Consideration is also given to tangible and intangible items that may not be on the balance sheet for book purposes. The difference between what you own and what you owe is the indication of value.
Income Approach – Using this approach, the expected future economic benefits (or free cash flow) is converted into a present value. Often historical earning are analyzed and used as a basis for probable future earnings. If changes are anticipated, then a forecast could be used. The “conversion” considers the cost of capital, which can be viewed as an opportunity cost or the rate the market would require to attract an investor to your company.
Market Approach – Your company is compared to transactions in similar businesses using the market approach. Typically public companies are vastly different than closely-held private businesses. Valuators will look to databases that report transfers of privately-held companies and select a population of similar companies based on the reported data. Price multiples are calculated based on revenues, earnings, assets, equity, or other facts, and then the multiple is applied to your company. The logic of this approach is that the prices paid for similar businesses are a market indication of what your business would be worth.
Discounts and Premiums
Different approaches used to determine the value of a business will arrive at different levels of value. These levels of value may be affected by factors regarding control and marketability.
Minority versus Control deals with ownership rights. Some elements of control include the rights to change board members, set compensation, set policy, acquire or sell property, select vendors/consultants, and decide what markets to serve and what products to offer.
Discounts for Lack of Marketability deals with the ability to liquidate ownership quickly, at low cost, and for a relatively certain price. Factors affecting degree of marketability may include:
- The greater the dividends/earnings, the lower the marketability discount – investors will rely less on selling the investment to realize their return.
- The wider the pool of potential buyers, the less the discount.
- Transfer restrictions increase the discount.
- Imminent prospect of a sale will lower the discount.
Two distinct discounts may be applied to the preliminary indication of value, which will reduce the value of the ownership transfer. Business owners may benefit from transferring ownership interests without transferring the same level rights. In other words, ultimate decision making remains with you.
Valuations need to consider the following factors:
- The nature of the business and the history of the enterprise from its inception;
- The economic outlook in general and the condition and outlook of the specific industry;
- The book value and financial condition of the company;
- The earning capacity of the company;
- The dividend paying capacity of the company;
- Whether the company has goodwill or other intangible value;
- Sales of stock and the size of the block of stock being valued;
- The market prices of stock of companies engaged in the same/similar line of business with their stocks traded on an exchange or over the counter.
Companies do not operate in a vacuum. Valuation analysts will relate relevant economic and industry factors to your company using comparisons made using industry benchmarks and trade reportings of your peers. Outside influences and trends will be considered when determining the true value of your business.
The valuation professionals at Zinner & Co. have extensive expertise in accounting, taxation, economics and valuation theory. Just as important, we possess the practical experience and business savvy needed to identity issues at the industry-specific level and evaluate subjective factors that drive business value. We work closely with clients and advisors and develop objective, independent valuations that are tailored to meet our clients’ needs.
Gabe Adler, CPA, is a Partner at Zinner & Co. LLP. Reach him at (216) 831-0733 or [email protected]
The world is changing faster than ever. We now face megatrends of monumental proportions: a global population of 7 billion, greater disparity between rich and poor, increasing numbers of cataclysmic events, the rise of emerging countries, increased consumerism, increased social and technological complexity, increased globalization trends, and so forth.
As leader of a business, how do you face these trends and events?
Can you survive by conducting “business as usual,” or do you embrace, adapt and leverage their potential? Fundamentally, can a firm and its leaders operate without facing these trends and transforming their business to play a productive role in society?
For many decades now, economics and management scholars and behavioral scientists have studied and debated the role of the firm in society.
Why does the firm exist, and what is its role? From these discussions, the theory of the firm has evolved over the years from concepts of profit maximization (neoclassical economics) to customer satisfaction (customer-value theory of the firm) through the management of resources to create competitive advantage (resource-based view of the firm) and the organization of agents and actors to make choices and decisions (behavioral theory of the firm).
Among the vast array of derivative theories and multiple schools of thought surrounding the theory of the firm, none of them actually captures the fundamental question facing our businesses today: Why do firms exist in society, and what will their role be during the next 50 years?
More recently, the concept of sustainable value has emerged at the nexus of discussions about sustainability and corporate social responsibility. Based on Chris Laszlo’s work, this concept proposes that just “doing good” is no longer enough. Firms need to think strategically about their long-lasting value to all stakeholders and make it part of their strategic orientation.
This is a holistic approach that requires vision, action, support and resources. The following quote captures this concept well:
“Companies that are breaking the mold are moving beyond corporate social responsibility … to social innovation. They view community needs as opportunities to develop ideas and demonstrate technologies, to find and serve new markets and to solve long-standing business problems.” — Rosabeth Moss Kantor
So, you might ask, what does this mean for me? It means that you cannot ignore the megatrends. You and your firm can make a difference in society. The question then becomes how to get started.
The following are some recommendations for starting your journey.
Start small, but do it fully.
Select a few programs and partnerships to work on, and fully engage your firm and your staff. Less is better. At Ardex, we work closely with Habitat for Humanity and the local food bank, and we support veterans in need every holiday season. It starts at the top: Business leaders and owners are the organizational champions.
Capture the energy of your employees.
You will surprised by the amount of employee support you receive, as well as the positive impact on the organizational climate. You might not reach everyone, but many of your employees will be motivated and enthusiastic.
Leverage the power of social innovation.
Study the trends and capture their innovation potential without trying to make additional profit. Make it part of your regular business model and be realistic.
Include it as part of your DNA.
Sustainable value is not short term. It is a journey for the long term, and programs cannot be cut at every downturn. It is a transformational journey toward becoming a better corporate citizen and leading with compassion at the organizational level.
Whether you work for a small business or a large corporation, you can make a difference and create lasting value. Everything counts. The role of business is changing, and the best-in-class companies have emerged. Do not sit on the sidelines. Your community, your customers and your employees are watching. The world is watching. ●
Stephan Liozu (www.stephanliozu.com) is the founder of Value Innoruption Advisors. He specializes in disruptive approaches in strategy, innovation, pricing and value management. He earned his PhD in Management at Case Western Reserve University and can be reached at [email protected]
If you ask Doug Taylor what it’s like putting on a fireworks show, he would tell you that it’s like taking the Rolling Stones on tour. There are potentially hundreds of people involved in the background and a single show can require five or six tractor trailers, a few straight trucks and more than a week to set up, using 15 to 20 people a day.
“This should all be background for our customers,” says Taylor, president and CEO of Zambelli Fireworks. “All we want our customers and the spectators to see is 15 to 20 minutes of a fantastic display, just like the Rolling Stones really only want their spectators to see them up on stage for that hour-and-a-half concert.”
Zambelli Fireworks is one of the best-known names in the fireworks industry. The company employs 50 people year-round, increasing its employment to roughly 1,500 people around the Fourth of July. Zambelli launches 2,300 firework shows across 32 states each year with nearly 600 of them being around Independence Day.
The company puts on shows for municipalities, Major League and Minor League Baseball, the NFL, MLS, professional lacrosse, amusement parks, festivals, weddings and private parties. Productions can range in cost from $3,500 to more than $500,000.
“Our company has one of the best names in the industry,” Taylor says. “We have that, but if we don’t keep working on that every day, we’re not going to have it at some point. We have to continue to earn our reputation and that level of trust with our customers.”
That reputation, the ability to put on a fantastic show and customer service focus has been challenged recently due to three major issues that have put added pressure on Zambelli. The company has had to overcome delivery disruptions from China, the challenge of the U.S. economy, the impact of increasing raw material costs and labor problems in the Chinese market, which is the source of 95 percent of the product in the U.S.
“With those combinations we’ve seen product costs go up somewhere in the range of 45 percent in the last five years,” Taylor says.
Here is how Taylor continues to put on a great show by dealing with unexpected challenges through close relationships with vendors and customers.
Expect the unexpected
There are about 14,000 fireworks shows shot on the Fourth of July in the U.S. every year. So in 2008 when China shut down two of the four ports from where fireworks are shipped, it created a 25 to 30 percent decrease in the capacity of delivery.
“An awful lot of companies didn’t get deliveries that year and there were a significant number of shows that did not end up being shot,” Taylor says. “We ended up getting most of our deliveries that year, and with a large inventory, we survived it.”
Typically, smaller companies get in a couple of containers of product each year. They use up 90 percent of it and then order more for next year. Zambelli tends to carry over a year’s worth of inventory each year.
“That way we have a lot more cushion than smaller companies can afford to have,” he says. “That certainly helps us in a time like 2008 where the shipping was such a problem, but it doesn’t mean we had the exact inventory we wanted.”
With China controlling 95 percent of the fireworks used around the world, there really wasn’t a good alternative for Zambelli to get product from.
“You can get product out of Europe from Spain and Italy, which is extraordinary product, but it’s three to five times as expensive as what you get out of China,” Taylor says. “So that’s not a good solution. We did go out and find some pockets of product because we moved very early.
“Ultimately, we had to design our shows differently based on the product that we had available within our existing inventory.”
To help combat the issue of product availability, Zambelli put a focus on communicating with its producers in China.
“We worked for years to make sure we treated our vendors as partners and that they treated us the same way,” he says. “Because of that relationship, we began to hear early that there were going to be problems. Vendor relationships are very important — making them a partner versus just a vendor.”
Aside from problems abroad in China, Zambelli faced challenges here at home due to the poor economy. A number of the company’s customers had to rethink whether they could do a fireworks show similar to what they had done in previous years or at all.
“We saw a number of cities that had to decide where they were going to spend their money,” Taylor says.
One city in Ohio was in a position where it had to lay off more than 50 employees and as much as the leaders wanted to have a fireworks show, it was politically inappropriate to lay off staff and then spend $20,000 on a fireworks show.
“We had some communities that canceled their fireworks and a number of communities that reduced the size of their fireworks,” he says.
Zambelli has been shooting shows for some customers for more than 30 years. Maintaining those kinds of customers goes back to having a good relationship.
“We didn’t want them to begin to think about talking to somebody else, because there is always a competitor that will do it cheaper,” he says. “We worked with them and gave them as good a deal as we could possibly give them. These were customers that we had for a long time, and that’s the kind of relationships that we like to maintain.”
One of the other interesting changes that occurred during this time was that if a city couldn’t afford to pay for a show anymore, it found an outside group to take it on. Zambelli has begun helping customers find ways to afford a fireworks show if they don’t have the funds necessary.
“That’s a new role for our company and for firework companies in general,” he says. “We’re working with certain larger corporations and trying to find places where they feel it would be a good investment for their brand to go in and support a community. We’ve had to change our marketing role to where we are marketing more directly to sponsors.”
The solution to this problem again comes back to building relationships and forming partnerships.
“If you look at the crux of what a true partnership is, there are going to be ups and downs,” Taylor says. “The sooner that you can anticipate what’s going to happen, the better positioned you are to adjust to it. You have to have an open line of communication with a customer or partner.
“Keeping those lines of communication open allow you to be aware of any issues. Having that communication … helps make sure we are hearing what’s important to them.”
Improve your relationships
Due to the issues with product delivery, the economy in the U.S., the challenges of increased costs of raw materials and labor problems in China, Zambelli’s ties to its vendors and customers have had to be stronger than ever.
“Many of our customers make a decision through a purchasing agent, and they’re trained to find the best deal,” Taylor says. “The easiest way for them to find the best deal is if they said, ‘We have a $10,000 budget.’ If one company offered them 900 shells and another company offered them 925 shells, they’re going to the 925-shell company, even though they don’t fully understand how that count was come by.”
That’s one point where Zambelli will work with its customers to explain it is offering a complete event, not just a number of shells.
“We’re selling the level of trust you can have in Zambelli Fireworks because of what we’ve done for years and what we’ve done for you as a customer,” Taylor says. “We’re selling you some of the highest quality product out there. We’re selling you a safety record, which is as good as anybody’s. We’re selling an entire package. We’re not selling a count of fireworks on a page.”
This level of selling has been somewhat of a transition for the Zambelli sales force, because not only has it become more competitive over the last five years, but the Zambelli sales team has had to learn to sell a turnkey package and not let people make decisions based purely on a shell count.
“It’s been an education process to not only educate our salespeople, but for them to turn around and educate our customers so they can make better decisions,” he says. “The more understanding customers have about each decision they make and why those decisions are important, the more likely they are to hire us.
“We have to develop a level of trust with our customers that they know we’re going to deliver that fantastic show. We’re focused on maintaining and improving a high level of service to our customers and maintaining our reputation.”
How to reach: Zambelli Fireworks, (800) 245-0397 or www.zambellifireworks.com
Be prepared for unexpected challenges.
Form strong partnerships with your vendors.
Find ways to improve relationships with customers.
The Taylor File
President and CEO
Born: Port Arthur, Texas
Education: Attended North Carolina State University where he received a BS degree in science education and in zoology. He also received a MBA from Indiana University in Bloomington.
What was your very first job? What did that experience teach you?
The first job I had where I was working for someone else was mowing lawns at the age of 12 or 13. The first job I viewed as a real job was working in high school at a hardware store. What I learned there more than anything was the value of customer service.
When did you get into fireworks?
The first idea I ever envisioned of being involved with a fireworks company was in early 2007. I started work as the president and CEO of Zambelli in late May 2007.
What do you like most about fireworks?
It’s a fascinating industry, and it’s related to what I said about taking the Rolling Stones on the road. It is the entertainment business and although there are all kinds of technical and regulatory issues we deal with, at the end of the day if the spectators and the customer are happy with the result, then we entertained them.
Do you have a favorite Zambelli show?
At the Kentucky Derby Festival, we have two sets of barges that are each 600 feet long in the river and in the middle is a bridge that we shoot off of 3,200 feet of bridge. We’re able to fill the sky where people miles up and down the river are watching the show. The magnitude of that is incredibly impressive. On one side it’s the emotion and importance of the event to the community, and the other end is just the artistry and magnitude of what can be done.
What is the best business advice you’ve ever received?
My father taught me that the thing that you can’t give up is that level of trust that people have to have in you.
Dear CEOs, managers, sales presenters and meeting facilitators:
My name is Y.A., (short for Your Audience). You may think you know me well, but you probably would be surprised at how little you do. See, all those things you do incorrectly when you make a presentation or run a meeting are not fair to me. Yet, I’ve come to realize that while you’re not being fair to me, I’m not being fair to you either. I mean, how would you know where you could do better unless I tell you?
The things that make me pay attention, influence my decisions and help me perform more effectively are what can make you successful when you speak, but you’ve got to inspire me to stick around to listen to you. So, it’s time to give you the gift (seven gifts actually) that will help you become a much more successful presenter. After all you’ve put me through, it’s the least I can do. So here you go:
■ Identify who you are and why you are here so I’m not asking myself these questions while you are moving on to the next point. Create alignment right from the start so we’re on the same page.
■ Explain up front what you hope to accomplish in two to four points because if you think I want to listen to pointless rambling tangents, I will fall asleep with my eyes open right in front of you. Keep it simple and none of us will be stupid.
■ Look at me when you talk because when I feel included and valued, I’m less likely to drift off and more likely to want to listen. Comfortably move your eyes and body throughout your presentation and I will stay engaged.
■ Explain how I benefit because I want to know “what’s in it for me?” Like you, I operate out of self-interest first. Even if there’s not a direct return on listening to you, at least let me know how I play a role in the topic you address.
■ Speak with genuine passion because falling asleep in my drool is not fun for me and certainly doesn’t build you a group of loyal followers. By speaking loudly and with enthusiasm, you become contagious, and I want to hang around and listen to what you to say.
■ Remind me what I should be doing before you leave because I’m more likely to retain your message. Even better, if you can provide action steps for me to put into practice, your message might stick around and make our organization a better place to be.
■ Be confident when you speak. If you want me to believe in you, you must believe in yourself. The biggest heckler in the room is not me; it’s you. Own your value and think positively even before you walk in the room to greet me.
I certainly hope you consider these suggestions because I want nothing more than for you to succeed when you present to me. If you do, it’s a win-win for everyone involved.
Joe Takash is the president of Victory Consulting, a Chicago-based executive and organizational development firm. He advises clients on leadership strategies and has helped executives prepare for $3 billion worth of sales presentations. He is a keynote speaker for executive retreats, sales meetings and management conferences and has appeared in numerous media outlets. Learn more at www.victoryconsulting.com.
One of the most significant and enduring ways to increase business profitability is to continuously evaluate your cost structure and reduce costs where possible without sacrificing quality and customer satisfaction. You need to reduce both direct costs of producing your finished goods and business overhead.
Your profit improvement program should help you identify specific steps for cost reduction. These steps often include lowering total delivered costs with your suppliers and reviewing production processes and systems to eliminate waste.
Define material content
You want to start with an evaluation of each category of your cost of goods sold. This evaluation requires each category to be identified with the actual dollars spent and its percentage of sales.
The next step is to look at material content, which is usually your largest cost of sales category, both in actual dollars and as a percent of sales. It is not uncommon in industrial products for your material content to be between 40 and 60 percent of sales. Reducing material costs will immediately and directly benefit the bottom
line and does not require any working capital.
The next thing you need to do is define the specific material content of your products.
Work with suppliers to reduce cost
Companies should be sure to develop a global supply chain for procuring material and evaluate the suppliers for their ability to deliver on time with the required quality and lowest possible cost. Intensive Internet searches, referrals and supply chain conference seminars are all useful for finding and evaluating suppliers.
Displaying your products at supply chain open-house events can also be very effective for developing new sources of supply. Effective supply chain partners will constantly suggest product improvement and cost-reduction ideas.
Adopt an open-door policy for the supply base. You should always be willing to talk to anyone who has a potential way to help you reduce cost and improve quality.
Stratify material purchases
The ABC methodology stratifies all materials and parts purchased by a company into three groups. The A parts are the most expensive and critical to the company’s operations. They will make up 70 to 75 percent of your total material spend, but represent only 5 to 10 percent of the total number of part numbers you purchase.
B parts represent 20 percent of your material spend and about 20 percent of the total part numbers purchased. C parts represent 5 to 10 percent of your material spend but represent 70 to 75 percent of your total number of part numbers purchased. This stratification gives you and your supply base the focus to work on reducing the greatest costs.
Next you want to develop and analyze a purchase price variance report. Ask yourself what your actual spend is versus standard. What are the year-over-year changes? You should evaluate your supply chain’s delivery and quality by developing a scorecard to know how delivery and quality are influencing your total costs.
Another way to reduce material content and costs is product redesign or product simplification. Product simplification is the discipline of integrating the greatest performance functionality into the fewest number of parts using the most suitable and cost-effective materials and manufacturing processes.
Through product simplification, cross-functional product development teams have found that the rigorous combination of design and process innovation can significantly enhance market desirability and engineering efficiency.
Not only is it a team-building experience, but it is also a business opportunity that typically nets significant cost reduction and improved efficiency without sacrificing quality or product performance.
Make an effort to become a greener company by recycling. This can contribute to reduced total material content and increased profitability.
Matthew P. Figgie is chairman of Clark-Reliance, a global, multidivisional manufacturing company with sales in more than 80 countries, serving the power generation petroleum, refining and chemical processing industries. He is also chairman of Figgie Capital and the Figgie Foundation, a member of the University Hospitals Board of Directors, corporate co-chairman for the 2013 Five Star Sensation and chairman of the National Kidney Walk.
Rick Solon is president and CEO of Clark-Reliance and has more than 35 years of experience in manufacturing and operating companies. He is also the chairman of the National Kidney Foundation Golf Outing.