10
A Blank Check for Growth
Once hired, Peggy asked Alex to provide a three-year business plan for the Stapleton Agency. She wanted Alex to include financial projections along with a description of the target market and the overall opportunity Alex envisioned for the business of creating logos. Peggy explained that Alex’s plan would become the foundation for a lot of her work and it was important for the plan to be solid.
Alex had never planned more than one year in advance and found the process of writing a three-year plan daunting. One assumption led to the next, and by year three of the plan he felt like he was writing a work of fiction. In writing the financial projections, he anticipated a 20 percent top-line growth rate for the next three years. He kept his 20 percent profit margin goal steady. Once the plan was complete, Alex e-mailed it to Ted to get his input.
Ted asked Alex to meet him at Starbucks across the street from his office.
“Good morning, Alex,” Ted said, smiling. “What are you having?”
Ted turned to the barista and ordered a Grande Bold and a bottle of water. They found a quiet table in the corner and Alex began.
“What do you think of the plan?”
“It’s a good start. Before we get into the plan, I want to talk coffee.”
Alex was puzzled. “I noticed you ordered water. We didn’t have to meet here for my benefit. You know we could have—”
“No. I wanted to meet here to talk about Starbucks. They’ve built an amazing business, don’t you think?”
Alex didn’t know where Ted was going with this but continued to play along. “They have stores on just about every street corner in America.”
“And they’re all pretty much the same. They even have their own language that you coffee drinkers have all learned fluently.”
“What does this have to do with my plan?”
“Alex, I’m challenging you to sprinkle a little Starbucks in your plan.”
“What do you mean?”
“When a company looks for an acquisition, it’s usually because they want to grow. Often, they are not able to grow as fast as they want organically, so they acquire companies to bolster their top-line revenue. For you to get the highest valuation for the Stapleton Agency, you need to show how you can be an engine of growth for an acquirer.”
“What does that have to do with Starbucks?” Alex asked.
“When you write your next draft, think about how aggressively Starbucks has grown. Imagine that you have a blank check to grow the Stapleton Agency as large and as fast as you possibly could given unlimited resources. You need to paint the picture for an acquirer of what is possible for the business of creating logos.”
“But isn’t that like lying?”
“Not at all. Your plan has to be possible but not necessarily achievable on your own. Peggy is going to approach companies that are a lot larger than you. They will have more money, more physical offices, more employees, more of everything. If you can plug the Stapleton Agency into a big company’s resources, you will be able to grow much more quickly than you could on your own.”
“How do I write the plan without knowing who the acquirer will be and exactly what resources they have?”
“The best way to do it at this point is to imagine you have a blank check and unlimited resources. There will be plenty of time for an acquiring company to scrutinize your plan and discount your projections based on what they think is reasonable. I want you to take off your conservative business owner hat and imagine what is possible. Could you start a satellite office in every major city in the country? Could you double your sales force? Could you make better use of the Internet to sell logos? Think like Starbucks.”
Ted wished Alex luck and left. Alex ordered a refill and started scribbling notes.
Draft two of the plan was more fun to write. Alex suspended reality and imagined satellite sales offices of the Stapleton Agency in Houston, Chicago, Los Angeles, New York, and Atlanta. He planned a telephone operation with eight phone reps selling the Five-Step Logo Design Process to small businesses in rural America with no access to design resources. The new plan called for revenue of $12 million in three years. The more Alex wrote, the more
TED’S TIP # 15
Think big. Write a three-year business plan that paints a picture of what is possible for your business. Remember, the company that acquires you will have more resources for you to accelerate your growth.
he believed the plan was actually possible if he found the right acquirer.
Alex e-mailed draft two of the plan to Ted. Ted’s response came over e-mail a few hours later:
Alex:
I like the new plan. Lots of Starbucks—I think it will serve you well.
I’d recommend you make one small change: Stop referring to this year’s financials as a “Forecast.” You need to communicate that you’re confident in this year’s projections. Instead, refer to your projections for this year as “Current Year.” By the time we get to the offer stage, you will be three-quarters of the way through this year and you want an acquiring company basing their offer on $5 million in revenue and $1 million in profit, not last year’s numbers. It’s a subtle shift but it’s important.
Great job!
Ted
Alex walked over to the whiteboard in the middle of the office. He saw that his salespeople were tracking well to plan. Each rep had at least six appointments set for the week and they were each on target to sell four logos for the month.
He walked back to his office and opened draft two of the plan on his desktop. He found the page that referred to his financial goals for this year and replaced the word “Forecast” with “Current Year.”
Peggy Moyles was in her late forties. Salads for lunch and a daily appointment with a treadmill ensured that she looked five years younger. She had just come from a lunchtime Pilates class designed to help her posture, which on the occasion of her first working session with Alex was good. She offered Alex a firm handshake as he arrived at the offices of EMG Capital Partners.
She took Alex to a small boardroom where she arranged two copies of the plan Alex had e-mailed her, pencils, a calculator, and two bottles of water.
“Alex, the purpose of today’s meeting is for me to understand your plan in enough detail that I can write a two-page teaser about your business and start work on the Book.”
Alex needed a primer on the language of a deal. “What’s a teaser?”
“A teaser is a one- or two-page description of your business, which announces that your company is for sale and paints the picture of the opportunity your business offers a potential buyer.”
“But won’t my employees and customers find out that the company is for sale?”
“No. We disguise the teaser so that your business is anonymous. If an acquiring company is interested, we’ll send them a nondisclosure agreement. If they sign the NDA, then we’ll send them a complete description of your business and your plan. We call that the Book.”
“How many people will you send the teaser to?”
“Ideally, we should agree to a short list of around twenty companies. I’ve started a long list, and I’d like your help to narrow it down to just the companies with a compelling strategic reason to acquire the Stapleton Agency.”
“I’ve heard about strategic buyers and financial buyers. I assume you’re recommending we look for a strategic buyer.”
“Strategic buyers will typically pay more because you’re worth more to them than you would be to a financial buyer. A strategic buyer will model how you would perform as a business if they owned you and applied all of their resources to your business. A financial buyer is simply looking for a return on their investment and wouldn’t bring much more than their checkbook to a deal. With few synergies to exploit, financial buyers will typically offer you a lower price to ensure they get a good return on their money.”
“So which companies do you think would have a strategic reason to buy us?” Alex asked.
Peggy pulled out her long list of potential buyers and showed it to Alex.
“As you review it, consider the companies that have approached you for a partnership. Think about your suppliers and other companies you come into contact with. Your plan calls for more offices and more salespeople, so think about companies that already have a lot of salespeople or offices in other cities. Which companies have the most synergies to exploit?”
Peggy and Alex brainstormed companies and rated each one for their strategic fit. After two hours, Peggy narrowed the list to twenty-three companies with a compelling strategic reason to acquire the Stapleton Agency. Each company had enough cash to buy Alex’s company and, as far as Peggy was aware, was open to the idea of an acquisition.
For the first time that spring, Alex opened the sunroof. It was the last Tuesday in March and the sun showed the first signs of warmth after a long winter.
Alex started their Tuesday get-together with a description of his meeting with Peggy. Ted waved him off.
“Before we talk about Peggy, give me this week’s numbers.”
Alex was caught off guard, as he had expected Ted to want to spend their Tuesday time on Peggy’s work. Nevertheless, he thought back to the whiteboard and summarized their progress.
“We’re on track. Angie’s team sold eight logos last week, which makes twenty-seven for the month, and we still have three selling days left in the month. Rhina just hired another account director, so she now has five people on her team. Chris is interviewing another designer next week, and our old client Natural Foods has come back again for another logo. This time Ziggy is launching a line of organic chocolate milk.”
“I thought tree huggers were all about healthy living,” Ted said with a cheeky grin.
Having dispensed with the banter, Ted got serious. “Alex, your work with Peggy is going to eat up a lot of your time. As hard as it is going to be, you have to keep your eyes on the Stapleton Agency’s performance. You have to make sure your current-year projections are achieved.”
“I’ll keep my eye on the ball,” Alex said.
“There’s one other thing I want you to think about. I noticed you used the word ‘client’ to describe Natural Foods.”
“Yes. Ziggy’s been a client of ours for a while.”
“That’s good, but I want you to replace the word ‘client’ with the word ‘customer’ when you talk about the companies that buy your process.”
Alex couldn’t believe Ted was nitpicking over a single word. “Why does that matter?”
“Service firms refer to their customers as clients and product businesses refer to them as customers. You’ve worked hard to transform the Stapleton Agency from a service business into a product business with a standard scalable and repeatable process. Using words like ‘client’ subtly communicates to a potential buyer that you still think of yourself as a service business.”
“It’s just a word. Surely that can’t matter to a potential buyer,” Alex said.
“At this point in the process, appearances matter a lot. An acquiring company will be trying to put you in a box in their mind. They have a box for product companies and a corresponding process for acquiring them. They have a different box in their mind for acquiring service businesses, and you don’t want to land in that box.”
“Why not?”
“Because their service business box has a formula for acquiring a business that uses a three- to five-year earn-out with only a small amount of cash up front. If you land in their service business box, you’ll get an offer with most of your money at risk and tied to an earn-out. You take all of the risk and they get most of the reward. You’re going to have to agree to leave some of your money in an earn-out, but our goal is to get you as much cash up front as you can. That means doing whatever you can to communicate the fact that the Stapleton Agency is not a plain old service business.”
TED’S TIP # 16
If you want to be a sellable, product-oriented business, you need to use the language of one. Change words like “clients” to “customers” and “firm” to “business.” Rid your Web site and customerfacing communications of any references that reveal you used to be a generic service business.
“So I need to start referring to clients as customers.”
“Yes. And think about the other words you use that are the typical lingo of a service business. I’d stop calling the Stapleton Agency a ‘firm’ and start referring to it as a ‘business’ instead. Replace the word ‘engagement’ with the word ‘contract.’ You want to do whatever you can to communicate to a buyer that you’re a real business, not just a flighty collection of temperamental professional service providers.”
