Posts Tagged ‘trust’

Profit In A False Sense of Security

Wednesday, April 26th, 2017

 

I am fascinated by the probable cause when owners, Boards and top management in mid-market businesses (US$10M to US$Bn), “don’t take the money” and shortly thereafter, end up with a failing or failed business. Specifically, when a serious offer is made for growth capital or even an outright sale of the business, and in the next 6-12 months after the refusal, the fortunes of the business partially or totally collapse. Nowhere is this more visible than today’s high growth private tech businesses (the infamous “unicorns”) and in an often overlooked area, service businesses with a powerful owner-operator or managing partner in a partnership structure.

The decision-making factors are consistent throughout. The business has deliberated carefully or taken an opportunistic approach to accepting external capital or key talent. What has varied is the owners’, the Board’s  and/or top management’s judgement, resilience or trust over time. Faced with changing market conditions (regulation, technological and other convergent forces), a key client “win” or “loss”, rising/declining investor or trade interest and so on, there is a discernible change. They consciously ignore other’s prudent advice that they have implicitly trusted in the past (mitigating risk). They increasingly believe that they are “impregnable” in their market position (market hype or vanity investments). They allow common sense to be distorted by inflated but unsubstantiated talk (valuations, growth prospects, barriers to entry, unique technology etc.).

Having worked with six privately-held mid-market businesses over the past 3 years around the globe, who turned down offers and subsequently, experienced very public falls from grace (legal, e-commerce, hotels, gaming, financial services), the underlying “cause” in my experience is ultimately, poor leadership. It is people, not the business that have screwed up.

For my current and prospective clients reading this, who fear my strategic advice comes with a poison in the tail, rest assured I have had a great many more winners than losers!

Yet in the immediate aftermath of a partial or total business failure, there is a rush to assume that the firm’s opportunistic or conservative approach to accepting new capital or talent is the “cause”. That is inaccurate, and here is why. There are a great many successful businesses, who have been consistent in adopting diametrically opposed approaches to accepting external capital or ownership (in insurance, AJ Gallagher vs Hub International, in hotels, Peninsula vs. Fairmont Raffles, or in the premium art business, Christie’s vs Sotheby’s). In just the same way, sticking to niche products, services or geographies or constantly, adopting a diversification approach, is rarely the “cause” of failure.

Take great care in jumping to a conclusion. Profit is to be found, as many smart long-short investors have found, in looking out for a business owner’s, the Board’s and/or top management’s increasing false sense of security, the resulting changes in their behaviour and the positive/negative impact on their business and the competition.

© James Berkeley 2017. All Rights Reserved.

 

Let’s Spend The Night Together

Wednesday, June 17th, 2015

The classic Rolling Stones refrain ends with “Now I need you more than ever”. Many experienced professionals in advisory businesses often have a very similar mindset when it comes to entering into collaborative discussions with other firms in order to profit from a client opportunity. Here is why they are more often wrong than right.  Trust trumps money. No amount of riches will arise if promises and expectations are not openly shared or honoured to the satisfaction of both parties.

In the opening conversation, my best clients at a minimum, ask five powerful questions:

1. “I am curious, what motivated you to contact us about this opportunity?” Find out the business and personal reasons.

2. “Do you a short term opportunity in mind?” You want to hear a buyer’s name, organisation and need. If the other party cannot provide that level of clarity, your retort is “I will happily tell you briefly about my firm’s expertise and an ideal client. However experience tells me it is a poor use of our valuable time to have a detailed conversation about a conceptual collaboration that may very well not happen.” Stop there, don’t go into the following questions.

3. “What stops you doing this yourself?” Identify the perceived or actual gaps in the potential partner’s competency and passion to address the client’s need.

4. “What has been the secret of past collaborations with people like me?” You want to find both the substance (expertise, knowledge, contacts) and the style (personal chemistry, appearance, image) that best suits the other party.

5. “What are your expectations about the investment each of us would ideally make in the relationship (communication, priority, accountability marketing, sales, revenue sharing, resources, branding and so on)?” You want to lay the cards on the table. Note, not all the cards are of equal value or importance in meeting or exceeding your client’s expectations so devote time accordingly.

In my experience, on average most service businesses will have between 10 to 40 such exploratory conversations in any given year. Typically, there is 1-10 hours spent on due diligence. 80% result in “it was great to meet you” and no business. Only 5% result in a long-term relationship. In other words this can be a huge “time dump” if you don’t apply the rigour I am suggesting. Equally, no advisory business can ignore alliances as a growth alternative.

Know where you are headed, ask the right questions and use your time wisely.

© James Berkeley 2015. All Rights Reserved.