Insights of a Maverick Investment Banker_Sample

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INSIGHTS OF A MAVERICK INVESTMENT BANKER Over time, most companies reach the stage where the founders cannot anymore efficiently keep all critical functions in hand. At this point, they should document their functions and spin off jobs for which affordably paid employees can be trained. This move will feel costly and inefficient initially, but it is the only way to free up the founders, so that they can focus on more valuable growth opportunities. A one-man consulting firm with limited overhead will almost always make a higher margin on labor, but it is a professional practice not a business. The Bootstrap Trap Many successful entrepreneurs start with no or minimal capital. Some due to lack of financing, others to manage risk. Better to double up as experience grows, than go bankrupt before the business finds its path to success and scalability. The flip side of risk-management is slow growth, and while the founder avoids debt and dilution, competitors may develop faster and overtake the leader in the market. In many industries the leader makes most of the profit, so it’s not fun being an alsorun. There is an inflection point at which the founders may consider bringing on board an investor to fund the acceleration and the rollout of their, by then proven, business model. The other danger of bootstrapping is that it can kill the momentum of the company. When sales or profitability start to flatten, investor interest falls off dramatically. The entrepreneur’s confidence could also falter, causing burnout instead of the exhilaration that is critical to their success. The key to partnering is keeping control of the business trough continual initiatives and by balancing risk and performance. 20
SEVEN PITFALLS TO AVOID WHEN BUILDING FOR SALE Top Line Focus The fast growth of the early years will not last forever. At some point the business will exhaust its profitable niche and will be forced to enter markets on the fringe of its core competence, where growth will come at the expense of eroding margins. The founder is often the engine of value creation, so it is unavoidable that profit margins fall as his impact is becoming spread thinner in a growing company, over time. Scaling helps reduce proportionate expenses, but corporatization often alienates people and attracts slackers. It takes the focus and ruthless discipline of Jack Welch to constantly weed out subpar performers. The top line is often easy to grow at the expense of profitability by taking on marginal projects. Your company must avoid commodity terrain by shifting attention to R&D, innovation and marketing. It will have to say no to marginal customers and opportunities, and constantly fine-tune, even shift, its offering to stay in a differentiated and valuable market position. Buyer Becoming Boss The difference between a business and an outsourced provider is independence. It means serving multiple masters, none of which can blackmail you into giving up your profits or strategy. Interdependence sounds nice, but rarely works in practice, as customers will loath to expose themselves to the performance risk of a single contractor and therefore will seek to keep multiple providers in play. Independence costs focus and performance and profits in the short term. However, when sales are concentrated with one or a handful of customers, the business faces the risks of exposure to the loss of key clients, weak position in price negotiations, and when a buyer dictates terms, the inability to develop proprietary products. 21
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