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LEVERAGED CAPITAL NEWSLETTER Leveraged Capital, is a free monthly newsletter that presents growth and strategy issues effecting entrepreneurs and owners of small to medium size enterprises (SME's). Leveraged Capital is published and delivered electronically to subscribers. Your privacy is strictly respected and we do not share or sell subscriber email addresses to anyone outside of Graham Financial Corporation. If you enjoy what we present, please forward a copy of Leveraged Capital to clients and associates. They can subscribe to Leveraged Capital, by clicking on this link: http://www.GrahamFinancial.com/newsLetter.htm and filling out the quick form. =============================================================== Since our last edition of Leveraged Capital, I have been profoundly struck by two independent issues. The first is a need for a call to integrity and true leadership within the business community. Call me naive or idealistic, but I believe that despite the darker side of human greed, to which we all have been or will be tempted, we can take steps in our own circles of influence to establish firm foundations of a high standard of integrity. We can take a stand against the obscene amount of fraudulent activity that is daily coming to our attention and against the countless unseen "smaller" levels of dishonesty that serve to erode the very fabric of capitalism. It starts with you and me. The second was my friends two year old son near death from a rare form of cancer in his brain. Tobin's healing in the past two weeks has been nothing short of a miracle from God. Seeing the roller coaster emotions that my friends rode for the past two weeks has provided a sharp lens of perspective when I read about inaccurate earnings reports and declining markets. As King Solomon wrote, "There is a time for everything, and a season for every activity under the sun". In the past few weeks in conversations with various business people, there was a sense of doom and gloom because of declining portfolio values, and general cynicism about corporate governance. In the Haas family, there is nothing but rejoicing that their son Tobin went home from the hospital this weekend, very much alive, before he begins his chemotherapy next week. Much (long-term)
success to you, DPG. ===============================================================
14 Years of Exceptional Service Contact Nikki Barnett (416) 367 - 1055 =============================================================== In This Months Issue: (Click on the Article Title To Go To The Full Story.)
=============================================================== Quote Of The Month: Investment Hindsight: ===============================================================
This tale of five young travelers in search of wealth and wisdom illuminates the perils awaiting those who seek riches. The five young men gathered close around the fire. The day-long trek
across the arid high plains had left them weary and discouraged. Was this
journey an act of otherwise sane men? Yet many had traveled to the eastern mountains in search of this man, and all had returned weeks later with nothing to show but callused feet. Was it all just a wistful tale; a fantasy concocted to give the people of their desperately poor village a reason to hope? This was the question that plagued the five travelers as they bedded down for the night, their hearts full of hope and their heads full of doubt. The sun rose to find only four travelers remaining; the fifth having let doubt win over. His note by the ashes of the fire implored the four to push on, but he had returned to the village, unable to pursue a journey that held no promise. And so the four travelers hiked throughout the morning and reached the tree line of the eastern slopes by mid-day. It was a welcome escape from the relentless heat of the desert sun. They had not walked more than 100 yards beneath the shade of the trees, when they happened across an old woman. They told the woman of their quest to find a man called Jambali, and asked if she knew where to find him. She exclaimed that they were indeed fortunate, for he was a nomad and was camped for the day just over the next rise. She bid them caution however, as he was not fond of unannounced strangers to his camp. Thanking the old woman, they hastily made their way to the rise and thereupon did devise a plan. One of them would ascend the rise to investigate the layout of the camp and then report back to the others. In this way they could best decide upon a method of entering the camp. They elected a scout, and he ascended the rise while the others anxiously waited. After a short time the scout returned looking forlorn and discouraged. He announced to the others that he did not see the camp of a wealthy man, rather was it the camp of a pauper. He spoke of a man dressed in rags and a tent of simple design. And then this traveler did proclaim their journey a fool's adventure, and he marched back into the desert with a heavy heart. The remaining three travelers
were not so easily dissuaded. One was elected and he ascended the rise to scout
the camp. He shortly returned with a puzzling report. Not only was this man
without wealth, but he was also crazy. He told of a man standing in front of his
tent waving his arms wildly in the air, screaming obscenities at an unseen
demon. The remaining two travelers had not come this far to give up so easily. One of the pair ascended the rise, only to quickly return shaking with fear. He exclaimed that the man was indeed acting crazy, but not because of an unseen demon, rather because there was a tiger crouched in the trees ready to devour the man. This traveler hastily declared their journey a fool's adventure, and hurried back into the desert… with a fearful heart. The last traveler began his ascent. He reached the top and peered into the camp. He too witnessed a tiger of great ferocity, but he put his fear aside and decided to help the man defeat the beast. He quickly fashioned a makeshift spear using a dry branch sharpened with his hunting knife. He ran down the hill and jumped between the man and the snarling tiger. He readied his weapon and was on the verge of thrusting it into the beast, when the man suddenly let out a shrill whistle and grabbed the spear from the traveler's hands. The tiger abruptly ceased its attack, then trotted over to stand next to the man. Obviously, a cruel trick had been played upon the traveler. Distraught over what had just transpired, the traveler demanded an explanation. The man explained that the old woman had seen the four travelers approaching from the desert, and had warned him of their arrival. He explained that his antics were designed to invite only the most sturdy of heart into his camp. The man went on to introduce himself as Jambali the
Wealth-Giver. He invited the traveler to sit beside him and tell of his journey.
The traveler did so, explaining that the trip had began with five, of which he
was the only one remaining. He went on to tell Jambali about his people's belief
that all who visited him would receive wealth and wisdom. "The first traveler gave up on the first night. He did not want to work at acquiring wealth." "The second traveler saw a poor man's camp. He had not the vision to perceive wealth among ordinary things." "The third traveler witnessed a crazy man. He had not the vision to perceive wealth among non-ordinary things." "The fourth traveler witnessed a man-eating tiger. He was not ready for wealth because he had not the courage to overcome fear." Jambali watched as the traveler digested these words. They were powerful words that sank deep into the traveler's heart. Then, suddenly and without notice, the traveler rose to his feet and thanked Jambali for these wealth-giving secrets. He was overwhelmed with exhilaration at the wisdom he had just received, and could barely contain his desire to depart for the village with news of his good fortune on this journey. He quickly bade Jambali farewell and promised he would tell his people what he had learned. And so, this traveler did declare the journey a success, and he trotted into the desert with a glad heart. As the traveler disappeared from sight, Jambali strode into his tent and filled a ruby-rimmed cup to overflowing with a dark, red wine. He drank largely, allowing the warm liquid to both caress and exhilarate his senses. A drop escaped from the corner of his mouth and momentarily danced upon his chin, as if unsure of which direction to fall before relinquishing its hold to the ground below. Jambali tossed the cup, gestured loudly to the barren desert which had swallowed the travelers, and dispensed his last bit of wisdom, "And the fifth traveler was ready to receive wealth, yet received none, because he did not ask for it." © 2002 B-K Publications Brett Krkosska provides how-to advice on family and home-based work issues. Get start-up guidance, business ideas and inspiration at http://HomeBizTools.com. Become a subscriber for a fresh and original perspective on today's business issues: mailto:enews@homebiztools.com ==============================================================
Your parent company is under the microscope to increase earnings, particularly in the past few weeks and months. You know that your company may not be a fit for the new strategic direction. Perhaps the patriarch or matriarch of the family business you and your management team have been committed to are going to sell out. The thought of working for someone else is at best the least palatable option to you. You and your team know there are better ways to run the company but are hampered by the owners – what to do? A Management Buyout may be a viable solution. What actually happens in a typical employee buyout? Employee buyouts can be structured by various stakeholders: the owners of the corporation, its board of directors, a union or an association of employees, senior management and/or an investor group such as industry consolidators. Purchasers unrelated to management may choose to provide ownership for employees in the acquisition to keep key talent from leaving for competitors post-acquisition. Often times, an MBO occurs because the owners may want to sell the company in a very private manner – the existing management team allows for a relatively quick sale if the company is valued properly. The typical MBO is a leveraged buyout (LBO) in which the acquisition purchase is leveraged by financing debt against the assets and projected cash flows of the business being acquired. As in any acquisition, debt financing is less expensive than equity financing because the interest on acquisition debt is a tax-deductible expense whereas dividends on equity are paid in after-tax dollars. The very nature of an LBO will, in theory, generate a higher ROI for investors once the company is refinanced with traditional financing debt structures; it is for this reason that funds for MBO’s are available not matter what economic conditions may be a the time. In fact, we have seen a greater pool of available capital for MBO’s in down times of the economy because valuations are likely to be lower and the opportunity to leverage the assets and cash flows is increased. Management has an advantage to other purchasers in that the management group should have a clearer understanding of the true value of assets as well as the ability to more accurately assess future cash flows of the existing operations. There are many variations on financial structures for LBO acquisitions, but there are three basic levels of financing that are utilized in an MBO: Senior Debt; Subordinated Debt; and Equity. Financing raised is typically used for working capital needs of the company, new capital equipment and other capex purchases, hire or replace additional management or consulting expertise, as well as other specific needs for the company related to the restructuring of the company. Senior Debt. Senior lenders, usually banks, lend to the buyout group money against the collateral value of the current and long-term assets. Senior debt holds the lowest risk profile of the financing package and as such pricing is reflected in this relative risk. In the case of a bankruptcy, the senior tranche of financing to paid back first. Senior debt typically is structured around 50-75% of the acquisition financing. Senior debt involves (a) a revolving line of credit based on the appraised orderly liquidation value of the eligible accounts receivables and inventory, usually offered on an annual term with renewal provisions based on certain operating covenants and ratios and is priced between the prime of interest to 6% over prime; and (b) term debt is based on independently appraised fair market value of the land and buildings and the orderly liquidation value of the machinery and equipment, usually limited to a term of 5 (US lenders will typically lend for longer terms than Canadian lenders) to 8 years priced at a cost between the prime rate of interest to 3% over prime depending on the assets. Subordinated Debt. Subordinated lenders are prepared to take a secondary position to senior debt on assets. This level of debt is retired from cash flows of the company in excess of requirements to service senior debt in exchange for a premium rate of return. Sub-debt typically represents 15-30% of the total financing and is often sourced from insurance companies directly or raised in the form of high yield (junk) bonds from insurance companies, pension funds, investment funds, other institutional investors or through public offerings. Sub-debt terms range from 7-15 years with recent lending terms trending toward the lower end of the term range; principal payments are quite often deferred until after the senior debt is retired or within an agreed up period of time within the term. Sub-debt is provided on the predictability of cash flow in excess of what is required to service senior debt. This type of debt is priced between 2 to 12 percentage points more than senior debt. In many cases, particularly in private companies, subordinated debt is given back to the seller as a part of the purchase price and is often structured on an earn-out formula related to future cash flows.. It is of note that Canadian institutions are significantly less apt to lend on a true subordinated basis when compared to American sub-debt lenders. Quite often, what Canadian lenders represent as subordinated debt is merely a variation on simple term financing. A significant market exists in Canada for true sub-debt but institutions have been slow to respond, particularly in the small to mid size marketplace. Equity. The equity portion of the MBO financing holds the greatest risk since it typically unsecured and subordinate to all other tranches of financing. As such, equity investors expect higher returns. Equity typically involves 10-20% of the financing and is the difference between the financing required to complete the transaction and the financing raised through debt. Institutional equity investors will require 30-40% compounded annual total return depending on the risk profile of the transaction. Other sources of equity are management, leveraged buyout funds or employees who contribute savings or retirement funds. In some situations, usually found in union based companies, workers enhance the cash flow of the company by accepting wage, benefit, and work rule concessions or "sweat equity" in return for ownership and board representation. There are a number of ways in which the total percentage of ownership for employees is calculated in an MBO. The simple and most obvious answer is that employees receive the same amount of equity for cash brought to the transaction table as any other equity investor. In practical terms, other variables such as "sweat equity" in the form of wage, benefit, or other concessions such as contract changes must be considered and the “investors” will receive an ownership percentage in return for these concessions. Concessions accepted by management and employees help reduce overall compensation costs of the company, increasing cash flow which can be applied to retiring debt. The actual equity ownership achieved by management is often times a function of negotiation with lenders involved in the transaction. Another
common element of employee/management equity participation can be achieved
through an Employee Stock Ownership Plan, or ESOP. An ESOP is a trust representing all employees that in turn
borrows money to buy part of the company. The company guarantees the loan
and makes payments out of cash flow. These payments are deductible from the
company's corporate income before it figures the taxes it owes. Note that no
employee savings are involved in an ESOP, nor do employees need to put up their
individual assets as collateral for the loan;
and ESOP is a vehicle by which employees as a group leverage their
portion of the acquisition. At Graham Financial Corporation, we predict that MBO and LBO activity within the SME marketplace will increase dramatically over the next decade as a result of the demographic of SME ownership, which is most significant factor effecting ownership transfer and divestitures. An increased number of SME owners will be looking for efficient exit strategies that will provide for a legacy of continued growth and employment; an MBO is one such option. Owners and management will be well advised to seek out the advise of a trusted and competent M&A intermediary when moving forward with an MBO strategy. D. Paul Graham is President of Graham Financial Corporation.
For many small to medium sized companies, there may be limitations on the
resources of time or key employees needed to develop growth strategies, let
alone the time to execute and measure the success of strategic plans.
Graham Financial Corporation provides outsourced corporate development,
M&A, financial advisory, and restructuring services for our clients. ã2002
Graham Financial Corporation, All Rights Reserved. ===============================================================
Cold calling is easily the least popular and glorious part of the business development process. However, it is often the hard work spent cold calling that determines the success of a new business campaign. A good analogy for the importance of cold calling can be found on the football field. In football, the offensive and defensive lines never receive the glory and accolades of the skill-positioned members of the their team. However, without their hard work in the trenches, the team wouldn't be able to score touchdowns, prevent the other team from scoring or, more importantly, win any football games. Much like offensive and defensive linemen, cold calling will never be awarded any game balls following a successful new business campaign. When you think about the new clients you recently added, you'll never reminisce about how well your initial contact phone call went. However, without that successful first contact you never would've scheduled that first appointment or been given the opportunity to make a pitch for their business. In this article, I will teach you how to prepare for your cold calling. I will provide tips on how to go about making your calls, as well as how to handle the inevitable rejection that you'll encounter. And, hopefully, I'll help you become a little more comfortable and successful in a key task of growing any business. Cold Call Warm-Up: Advance Preparation. Before beginning any cold calling, I highly recommended that you do some upfront preparation. This preparation will help make your cold calls a little warmer--lukewarm calls, if you will. We all know that a lukewarm reception from a current client is the kiss of death. However, having lukewarm initial prospect phone calls is the best you can hope for. The first step of preparation is to determine who the decision maker is at each of your targeted companies. You'll need to do this over the phone, contacting each company and asking who makes the decision regarding hiring outside creative services (or whatever you're calling for). Make it clear that you don't wish to speak to this person right now, but that you just want to know who to contact when sending information. Most administrative personnel are discouraged from connecting you to your targeted party, but they'll gladly give you a name and title to get you off the phone. Next you'll need to send the decision maker a mailing. At the minimum this should include a professional business letter. This letter should be very direct, telling the person what you can do for him or her and finishing by saying that you'll be calling next week to discuss matters further and/or schedule an appointment. In addition to this business letter you could also include a company brochure (if you have one), a partial client list, some testimonial letters or anything else to help make your case. (I don't recommend sending samples at this stage, as it is more likely to end up in the trash, if the person didn't request them.) The more memorable this package is, the more chance you'll have of the person taking your call. Some creative firms send elaborate dimensional items to catch their prospects' attention. These can be effective but also add to the cost of the campaign. Finally, you'll need to prepare a script of what you'll be saying on the call. It should detail how you'll be introducing yourself and where you're hoping to take the conversation. The script is only to be used as a quick guide and should not be followed verbatim. The last thing you want to sound like on your phone call is robotic or unfriendly. However, you also never want to run out of something to say. Making
The Calls: Helpful Hints. Now that you're ready to begin your cold calling you might be wondering when would be the best time to make these calls. I believe the best times are early in the morning and late afternoon. Early morning is when I've had the most success--and the earlier the better. Many top executives arrive at work at 8 a.m. or earlier to catch up on paperwork, answer e-mails, etc. The executive's assistant probably won't be in yet, so he or she will be more likely to answer the phone. Plus, frequently that person will be impressed that someone else has a similar work ethic. An important guideline for these calls is to be positive but not pushy. Very rarely in the first conversation with a prospect will he or she be willing to meet with you or even give you much time. However, you at least want to make a positive impression and schedule a follow-up phone call at a time amenable to them. If they sound too busy or in a bad mood, ask if this is a bad time. If they respond yes, ask when would be a better time to reach them. They'll normally appreciate that you respect their time and will be more willing to speak with you when you call back. During these phone calls you
want to probe for as much information as possible. Take detailed notes on
everything they say. This information could be about the work you're trying to
acquire from them or it could be about completely unrelated issues. The next
time you speak to that prospect, refer to your notes. If for some reason, the
person forgot your earlier conversation (it happens all the time), you'll have
some ammunition for credibility. Conversations about unrelated issues help break down a person's natural barriers and start the all-important rapport-building process. No doubt, while making these calls, you'll deal with a lot of rejection. "Sorry, we're not interested.". Some people can even get downright nasty. "Stop bothering me!" The best advice I can give regarding this type of rejection is don't take it personally. There are a lot of very unhappy people out there. People have bad days (or even bad years); just know that you didn't do anything wrong and that you were just trying to help them. And if this is any solace, you really don't want a miserable new client anyway. Imagine the headaches you'd have to deal with working with somebody like that on a regular basis. Just shrug your shoulders, don't dwell on it and make your next call. Tracking Your Progress. Another way to handle rejection better is to maintain statistics of your calls. When cold calling, keep a chart in front of you on which you record: Each number you dial; Eventually, you'll have statistics that represent your cold calling efforts. For example, I know that on average every 2 times I dial I get someone on the phone, every 3 times I get someone on the phone it's the decision maker and for every 5 decision makers I speak to I make an appointment. Therefore, for every 30 phone calls I make I have a new appointment. If I know that 1 out of every 3 appointments yields a new client, then for every 90-phone calls I make, I have a new client. Schedule 100 phone calls a month and you'll have 13 new clients this year. This actually makes rejection more tolerable, since each rejection is one step closer to a new client. Additionally, you can set goals for yourself, watching your own improvement. Also, you can measure which mailings have more success than others. Like anything else in life, the more calls you make the better your statistics will get. One last point I want to make is how important consistency is in successful cold calling. I recommend you schedule a set time every day to make your calls. No matter what comes up, hold to that time. (Trust me, there's always something you'd rather be doing.) Also, if a prospect tells you to call them tomorrow afternoon, three weeks from Monday or the third Wednesday after the next leap year, make sure you do just that. Schedule the time and make the call. You'll impress the prospect by being punctual and improve your chances for success. Doug Fox has over 9 years of corporate marketing and sales experience. He is currently the Director of Sales & Marketing for Sundberg & Associates, a visual communications firm based in New York City. During his four-year tenure, revenues have increased over 100% and the staff has almost doubled. His personal sales effort has brought on 33 new clients and over $1.5 million in revenue. ===============================================================
The linguistics of business is a language of acronyms. For a fresh look at some new twists to old short-forms take a quick read of these.
=============================================================== To Advertise in Leveraged Capital: If you are interested in advertising in Leveraged Capital, email us at: ads@GrahamFinancial.com and we will contact you. Feel free to forward a copy of Leveraged Capital to clients and associates. It is free to subscribe by clicking on this link: Click Here For Your Free Subscription To Leveraged Capital. =============================================================== To Unsubscribe from Leveraged Capital: If you wish to removed from our mailing list, send an email to us at: ezine@GrahamFinancial.com with the word "Unsubscribe" in the subject field. © 2002 Graham Financial Corporation, All Rights Reserved. |
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