Meridian is fortunate to work with some of the most highly successful family businesses in the nation, our origins starting in multigenerational family-owned petroleum businesses. In our experience, there comes a critical point in a mature company’s growth cycle where management realizes that cash flow has stabilized, but will not enjoy another significant increase with out diversification.
This is a critical decision point for the company. An effective strategic diversification strategy can breath new life into a stagnant company. Ineffective, happenstance diversification, however, can wreak havoc on an otherwise successful company, draining cash flow rather than producing it. So what’s the answer?
First, accurately assess your company’s core business. Are you satisfied that you have maximized cash flow in your core business?
Ask yourself these questions:
- Are we maximizing revenue from our existing sites and assets?
- Is our market share penetration at our desired level?
- Have we negotiated the best deals with vendors in both pricing and terms?
- Are we collecting all receivables via EFT?
- Do we pay sales commissions based on collected funds?
- Are our billing and invoicing systems error-free and efficient?
- Do we have our inventory down to a fine science, including our ordering, intake, and warehousing procedures?
- Is our operating budget lean?
- Do we perform a net present value calculation on all new projects and significant capital expenditures?
- Does our company adhere faithfully to profit and return on asset targets?
- Is our company leverage at or below industry averages?
- Are our hiring and promotion procedures producing employee retention that is better than our industry’s average?
- Do we have a strong, loyal customer base as evidenced by customer retention data?
- Are our capital assets kept in peak running order via smoothly flowing maintenance systems?
If you answered yes to all these questions, your company is ready for a diversity strategy. (If you answered no, it’s best to cure your deficiencies now before you embark into new industries.) Now it’s time to take stock of your diversification alternatives.
First, perform an internal assessment of your company’s greatest strengths. Some possibilities include:
- Outstanding high locations-traffic store locations.
- A large, loyal wholesale customer base.
- A creative customer billing system.
- Technological strength.
- An extraordinarily efficient distribution system.
- One or more departments having a fabulous staff of outstanding, top-performing people.
This list of strengths are meant to start your thinking, not be exclusive. Make your own list of your company’s top qualities, then make qualitative judgements about the strengths. Rank them in order from your best strength down to items that are strengths, but not much out of the ordinary.
Next, take an inventory of existing businesses in your area, highlighting those where your company’s number one strength would be critical or enhancing to their business success. For instance, if your distribution system is your company’s best strength, you would highlight any business category that requires fleets. This would include any distributor, repair services, landscaping companies, moving companies, etc.
Once you have identified potential businesses that could use the expertise you bring to the table, research the average cash flows and profit margins for that industry. For this part of your research, enlist the help of your banker who has easy access to all industry financial averages via his professional association.
Once you have selected complimentary, cash and profit producing industries, it’s time to start making contacts. Owner to owner inquiries usually produce the best results. Call on every business in your area within your target industry(s). Remember that many owners would love to get out if an acceptable offer came along, but they don’t have their company up for sale.
As you consider prospects, remember that “merge” may be a more ego-saving, palatable word to a business owner than “buy.” There is prestige in merging with a large successful company. You can use this perception to your advantage.
Once you have interested parties, it is now a matter of careful, thorough due diligence as with any buyout. Be sure you fully understand the new industry and the company’s particular situation before you tender an offer. Also be sure you can effectively manage the new company so that it will meet your cash flow targets.
Finally, when delving into a new industry, it’s prudent to retain the prior owner and/or key managers via no-compete contracts and consulting salaries. No matter how much you do your homework, you will want the security of a veteran from the industry on your staff.
As you go forward into the year, diversification may be just the ticket your company needs for a major cash flow boost.
Meridian Associates has been partnering with family-owned businesses for over 30 years to remove barriers, accelerate business growth, build their legacy, and reduce stress levels. With three, high-impact business events each year, The CEO Exchange, Women in Family Business, and The Family Business Intensive, we continually provide best practices & proven strategies that keep multigenerational businesses thriving. Discover how Meridian can help your business thrive through our combination of high impact business coaching, advisory, M&A, and precision company valuations by visiting www.askmeridian.com or calling us at 817-594-0546.
