I’m very pleased to hear that global branding guy Kevin Roberts has joined the board of Telecom NZ.  Telecom has struggled to build a positive customer franchise since it was corporatised in the mid 80s. Of course Telecom hasn’t helped itself with its perceived industry game playing, and it should have gone for GSM a long time ago (if it had, Vodafone wouldn’t have much of the business market in NZ). But let’s be honest, Telecom also suffers because everyone always hates the incumbent (as they do in Australia and Britain). Look at how Telstra and Vodafone are seen as challenger brands in NZ when they are both much bigger players internationally,  with few better and many worse customer experiences overall.

I actually have a lot of  respect for much of the people and capability in Telecom.  If  that potential can be unleashed to create a valued and warm relationship with  customers (and I’m not talking about cute ad campaigns with animals and children), you’d be hard pressed to find someone as knowledgeable as Kevin Roberts to help steer them.  Global CEO of Saatchi & Saatchi, hugely enthusiastic about everything, and author of much-acclaimed marketing book “Lovemarks,” Kevin is a very smart appointment.  I await developments with interest.

Disclosure: I have financial interests in all 3 major telecommunications players in the NZ market, I have had business relationships with all of them, I am or associated with a customer of all of them, and I advised Telecom on strategy and change in its early years.

One of the questions to consider when you’re thinking of selling a mid-size business is “Should you sell gradually or all at once?” There are many reasons to not sell all in one go; eg.:

• Your buyers insist you keep some skin in the game as proof that the business is as good as you claim (eg. if you are going down the IPO route and there are no other current shareholders staying on).
• Your buyers can’t afford to buy it all yet.
• You want to start selling but you think there’s more upside you want to share in.
• You want to share in some of the gains that your buyers will bring  to the business.
• You’re not ready to give up control yet.
• You want to keep a stake in the business you built.

Of course there are also many reasons to sell it all at one time; for example:

• Clean transfer of control.
• Easier integration into the buyer’s other businesses.
• Maximising price (100% control usually is worth more proportionally).
• Minimising administrative hassle for you and the buyer.
• Minimising ongoing exposure to the future performance and risk of the business.
• You need the money for another opportunity.
• You just want out.

You might find you have few options.  Some buyers may insist on 100% sale, others may insist you keep some level of investment.  The point of the question is to explore your motivations, to make you aware of the possibilities, and as always to identify any issues or opportunities to improve the ease of sale and value of the business.

“Keep thy shop and it will keep thee.” That’s a quote from Benjamin Franklin, used by Warren Buffett in his foreword to a small book entitled ‘The Ten Commandments for Business Failure‘, to describe the management philosophy of the book’s author, Don Keough, the former president of Coca-Cola. Keough led Coke through a fantastic period of growth and shareholder value creation, but this book isn’t about how to succeed in business.  Rather, as the title implies, it’s about how not to succeed:

1. Quit taking risks
2. Be inflexible
3. Isolate yourself
4. Assume infallibility
5. Play the game close to the foul line
6. Don’t take time to think
7. Put all your faith in experts and outside consultants
8. Love your bureaucracy
9. Send mixed messages
10. Be afraid of the future
11. Lose your passion for work - for life.

Yes there is an eleventh commandment, just like the more familiar “Don’t get caught”. Keough uses it to advocate the power of emotion:

• Make an emotional connection with your customers
• Make an emotional connection with your brands
• Make an emotional connection with your people
• Make an emotional connection with your dreams.

I’ve written before about the power of Not, and the power of emotion, so I felt a great deal of resonance with Keough’s messages.  Although there’s not a lot new in this book, that doesn’t make it any less worthwhile reading.  Keough comes from the same Omaha town as Buffett, and has a similar down to earth style, which means the book is an easy read, full of pithy phrases and observations for people to draw upon in their own speeches and presentations.   I rather expect Don Keough is set to become one of those people who’ll be long quoted and much quoted.

In my previous question in this series on planning for the sale of private businesses, we explored the types of buyer who could be interested in acquiring your business.  Now we need to get down to exactly who would want to buy it and why; and equally importantly who should, but doesn’t, and why not?

This is about understanding what could motivate a buyer.   If it’s a trade buyer, then you are likely to have a very good idea of who  they are and what drives them. If it’s financial buyers you’re targeting, you may know some specific possibilities, or more likely you’ll be working with a broker who should. The point is that in identifying specific potential buyers, and why they are likely or not to be interested in your business, you can uncover ways to develop your attractiveness, and to design your sales campaign.

For example, when we prepared to sell advanced antenna manufacturer Deltec, we had several potential buyers in mind, who would want our technology. We initiated an IP suit against the smallest competitor infringing our IP, and made sure all the significant players knew about it. We also stopped development of products which were struggling to keep up, since no-one would want them. And we refined our production processes for transfer offshore, which would make post-acquisition integration easy.

In particular, we identified one company as our prime target acquirer: financially strong, acquisitive, very interested in intellectual property rights, and wanting to substantially expand its range and share of our product and geographic markets. We opened our US sales office in their home town (also the home of our largest channel partner globally, and theirs). For months before we put out feelers about a potential sale, those guys kept hearing our name from their home market customers. So when we were ready to go to market, with valuable IP, a strong market position in our chosen niche, and a clean, easily assimilated business, they were hot to acquire us, and did, even though the tech market was in meltdown at the time.

The New York Times has published a fascinating interactive graphic on class, income and attitudes to personal advancement in the USA.  Click on this link to try it out.  Of course class is notoriously difficult to define today (unlike 19th century Britain, where you were either noble upper class, blue collar labouring working class, or white collar professional/managerial/academic/entrepreneurial middle class).  The NYT uses education, occupation. income and  wealth. Some titbits:

• CEOs are not as prestigious as they might like (although the definition is extremely vague by comparison to say a judge).
• Approximately 80% of respondents think it’s possible to start out poor, work hard and end up rich (up from 40% in 1983).
• The income mobility of households over a 10 year period is very high, and generally positive

I wonder what the equivalent graphics would be for UK, Australian, New Zealand or Canada?  Or France, Brazil, China or Finland?  I suspect there’s less self-belief and support for personal success in much of the rest of the world.

Earlier this year, I wrote about the pros and cons of external investors, in the context of firms seeking expansion capital, but only touched briefly on exit options.  In my series on planning for the sale of private businesses, we’ve now reached the point where we need to think about the types of buyers you might approach.  Note that I’ve used the phrase “type of buyer.” You might well have a specific potential buyer in mind, but let’s first spend a little time being more general in our thinking.  There may be a class of buyer which you hadn’t considered. Let’s think of some possibilities:

Trade buyers

• Your immediate competitors
• Potential competitors in other geographic or vertical markets, who might want your markets, products, processes, people or sources of supply
• Players in related product markets who might want to add your speciality to their portfolio
• Any of your suppliers who might want to move further down the value stream
• Any of your customers, distributors, service partners,  etc. who might want to move further up the value stream
• Family working in the business
• Staff (management buy-out)
• Smart individuals in your industry that are looking or the chance to run their own business  (management buy-in)

Financial buyers

• Private equity firms
• Investment companies
• Wealthy individuals and families
• Consortia of the above
• The general public; ie. investors in listed or unlisted shares (via a share float)

Some of these buyer types are mutually exclusive.  You would not normally pursue a share float while at the same time offering the business for sale to  a potential 100% acquirer.  Even with a straight sale, it’s usual to narrow down the field to keep the sale process both confidential and manageable.  For example, smaller highly specialised technology businesses are usually sold to trade buyers because they can derive the most value from them while financial investors are unlikely to be attracted (but not always).  It’s like any sales process; define your target market: which types of buyer are likely to place the highest value on your business. You save time and expense by not targeting  unlikely buyers.

NB. I have distinguished private equity firms from investment companies.  PE players tend to be shorter term owners, often in association with MBOs and MBIs, or in their own right where they see potential for further break-up or consolidation.  Investment firms are more typically long term owners, although sometimes in assocation with MBOs and MBIs.

PS. I’ve made an assumption here that you are selling.  Some people want to gift their business (or a large part of it) to staff, family or charity.  Angus Tait and Roy McKenzie in New Zealand, and John Lewis in Britain are classic examples.  I would be foolish to try to come up with a general approach for those situations.  Each is unique and requires a unique solution.

Some days you can only shake your head in disbelief, and Friday was no exception. Despite the ubiquity of computer-driven presentations,  I’ve lost count of the times I’ve seen a meeting delayed while a projector or TV was brought in by a technician, connected and the presentation software eventually made to work. When I can be bothered to ask why there isn’t a permanent setup, I invariably get some permutation of the following:

1. We can’t justify the cost of having one in every meeting room, or
2. The room doesn’t get used enough to justify the expense, or
3. This doesn’t cost us anything, because the technician is already on the payroll, or
4. We don’t have the budget.

To which I respond with more questions:

1. What’s the fully loaded cost of the technician moving this stuff around?
2. Why have you got an idle meeting room and how much is it costing you?
3. What are you spending on other technicians doing tasks that this technician could be doing, and are there any projects you can’t do because you don’t have the budget?
4. What about the cost of the wasted time of all the people in the room?

Presentation technology is cheap, folks.  If (and that’s a big if) you can justify having a permanent meeting room, you can justify having it properly equipped.

On a broader front, I don’t like marginal costing on anything permanent, especially support facilities.  It’s self-deluding. Adding any task, facility or person to an organisation has a cost way beyond the immediate outgoings.  Management and administrative overheads go up, flexibility is lost. Many organisations scrimp on investment in value-adding people. processes and facilities while wasting a lot of money and time on non-value adding stuff.  Penny-wise, pound-foolish.

Roger Boyd has posted a long comment on my recent  piece on Fonterra.  Knowing that many readers don’t necessarily take the time to read most comments, I have taken the liberty of giving Roger’s comment a post all to itself:

Whilst Fonterra’s success is in part fortuitous, it would be naive to think that it was not in many ways engineered (80%). What they say & do, what they make & don’t make has an absolutely massive impact on the world demand & supply situation & in turn price & returns. Something most of NZ can’t comprehend.

Fonterra’s consumer business alone was +2.0 Billion US$ plus last time I saw the figures. It has the largest Osteoporosis focused milk brand in the WORLD according to New Nutrition & it is a sophisticated player that is being held up by others outside NZ as a leading light on how to market functional food & beverage. Those figures would make it easily one of the biggest FMCG’s businesses alone if not the biggest in NZ. Yes it sells commodities as well, but to say that the best approach is to abandon selling commodities in reference to Fonterra just requires a response of “get your head out of the sand” at least to shock you into a bit of “understand before your spurt”. Sadly, most of NZ is ignorant when it comes to Fonterra & I wish that would change (hence the note).

The only area that Fonterra is not excelling in is raising more capital to take advantage of more opportunities. Many brands & business could have been brought & sucked up around the globe if it had had the capital to do so. In that aspect the critics are correct & it’s a situation that they are trying to address by listing, but the farmers (short mindedly so won’t have a bar of it…yet).

But if you contrast the state of NZ lamb business & farmers, which last time I checked was a mess (a product experiencing all the same fundamental growth factors for protein) or Australia’s dairy export situation (that Fonterra & others are largely taking over) you will see that NZ Diary Board, to Fonterra cooperative to eventual listing (at least in part) is the smart & sensible way to evolve a business from what (let’s face it) is a small, small country.

As for why they aren’t declaring details I doubt they care. The only reason they release those types of figures is to keep the farmers chest pumped up and the positivity running as those farmers are a hard bunch to manage at the best of times, are best kept happy & they run things at club Fonterra.

I don’t share the view that NZ should necessarily diversify. I would challenge that what we in fact need is focus & to manage the risk inside that focus, by doing exactly what Fonterra (for example) is doing, buying companies in Uruguay, Brazil, Europe, Asia as it has done for years. (This is not “as best we can” approach, which implies some notion of struggle, it is a strong systematic sensible management of risk with no struggle at all in fact).

You can’t be the best in the world at everything & I don’t think NZ should try or we will fail or get pretty average at everything. As key industries evolve we can evolve the way we participate in them (e.g. some of our farmers are service & knowledge providers to farms in Brazil & not so much farmers any more), but we don’t necessarily have to focus on a different industry & diversify the portfolio. This is something Taiwan struggled with but is now doing as well. It’s no longer “made in Taiwan” (though the smog still reaches there) but they run a massive amount of the knowledge & technology going into China (58 Billion last check).

Of course Nokia is glamorous for most, but then again Finland is under snow 24/7 for most of the year so they have a bit of time to play around on computers coming up with cool gadgets. We all have different circumstances that make us better at some things than others, a good thing that we should celebrate not worry about, it’s given us the All Blacks after all.

As for successive NZ governments “trying” to stimulate other industries. The only thing they have stimulated is the brain drain. In part that will always happen anyway, we are born to explore it seems. But within this context the government needs to get past physical NZ & think of knowledge NZ. 1 Million kiwis live overseas. You don’t have to bring them back to benefit from them (get past the physical it’s not worth the effort & you may not get them back…actually you won’t). You have to ensure they have vested advantages in being part of business, knowledge, network & social NZ though & generally speaking the government is doing nothing apart from romancing those 1 million with memories of the NZ lifestyle (which get’s us in the heart but not in the pocket & lifestyle is always about what’s in the pocket & your attitude not about where you live). They throw in things about how easy it is to set up business in NZ as well & how we are not as corrupt as “them” (know one cares).

Slightly disjointed rant for a Fri evening. No harm but definite awakening intended. Back to work. Yes I am an expat kiwi (15 years) & no I don’t work for Fonterra’s PR department, though after that they should probably employ me.

Economics writer Chris Dillow has made some thought-provoking comments on rationality:

… irrational beliefs can serve useful functions. Few people would embark upon risky ventures such as starting their own business, developing new products, or writing books unless they were irrationally over-confident of their chances of success.  And religious  belief is correlated with greater happiness, more law-abiding behaviour and support (pdf) for markets.

Dillow suggests two contrasting forms of rationality:

1. Belief rationality, which says our beliefs should be proportioned to the evidence. This tells us not to believe in God, and that the odds of being a successful innovator are small.
2. Instrumental rationality, which says we should act so as to maximize our chosen ends.

In some cases, though, desirable goals - wealth, happiness, liberty in Matthew’s example - can be pursued best by abandoning belief rationality.  In this context, atheists such as Richard Dawkins can speak at cross-purposes with believers. When Dawkins says: “believe in evolution, not God”, he’s advocating belief rationality. When his interlocuters reply: “but my community believes in God” they are (implicitly) advancing a form of instrumental rationality; they think they would lose good things when they lose their faith.

I disagree with the idea that the chances of success are small, if you are a skilled and experienced innovator/leader/entrepreneur.  However, putting that to one side, Dillow got me thinking about how we try to persuade people to buy whatever it is we’re promoting, be that an idea, a product, a change initiative, or an investment proposal.  We go through the whole features, advantages and benefits routine, assuming that the other person shares our mode of rationality, but perhaps we should question that and explore first what is the other person’s mode of rationality.

Continuing our series of questions on planning for the sale of private businesses, we now turn our attention to you, the owner.  For some private businesses, the owner is also the chief sales rep, chief designer, chief buyer, etc., or some combination of these roles.  If the business can’t work without you, why would anyone buy it from you?

Few owners stay on for ever after a sale, so if your business is dependent on you, you need to think about building up capabilities in your people to do those things you do, before you put it on the market.

Your role as chief executive of the business is a different issue. Some buyers like acquiring businesses with salaried general management in place. Some buyers may want to appoint their own CEO/managing director/general manager (possibly one of your people, one of theirs or someone new). It’s hard to predict, but worth thinking about.

By the way. despite having made yourself unnecessary, a buyer may still insist that you stay on after a sale for possibly several years, maybe running the business, maybe not, and often with some bonus or “earn-out” payment, to make sure that the business continues to be successful.

Back in Wellington. First task on arrival: pop into Click Suite (just round the corner) to say hi, and time it perfectly for cake and coffee. Go for a big walk in the rain to shake out the cobwebs. Too tired to eat. Crash at 7.30pm. Wide awake at 3am. First order of business today: prepare for a 3 hour TEC board audit committee meeting at 9. Oh joy!

Update: Actually, it was quite an interesting meeting.

I’m sitting in the Air NZ lounge at Los Angeles, having just arrived from London.  Because I’m changing from flight NZ1 to NZ5, I’ve had to collect my bags, go through US customs and border protection, check my bags back in, spend 3 minutes in the US  while I walk outside, ride an elevator, and back in through security to international departures.

Americans are genuinely fearful of another terrorist attack, so I understand why they impose this regime on visitors, even if I don’t like it.  NZers travelling to and from London are very used to this, but many chose to via Asia to save the hassle.

Three years ago at the US pre-clearance airport border post in Vancouver Canada, everyone was treated extremely rudely and disdainfully.  However, the US customs and border patrol officers are very much friendlier these days, so while it’s a chore going through this palaver, at least you no longer feel like you’re being treated as a probable terrorist.

Let’s hope things continue to improve.

I was in Bristol yesterday (Thursday) and spent the afternoon visiting the SS Great Britain, designed by my hero Isambard Kingdom Brunel and launched in 1843. Brunel conceived his ships as extensions of his Great Western Railway, linking London to Bristol and on to New York.  His second ship, the Great Britain, was revolutionary in its size, its construction strength and materials, its engine, its screw propeller, its adjustable sails and masts, its rudder and even its iron lifeboats.

Just take the propeller, for example.  Brunel originally designed the ship as a sailing vessel, with steam-driven side paddles for propulsion in unfavourable winds.  However, when he saw an experimental screw-driven river launch, he immediately recognised its superior power and steering abilities. He explored and tested various design alternatives, and redesigned his ship and its engine to use this new technology, never before used on a large vessel.  Brunel’s design was so good that modern screw propellers are only a few percent more efficient. Unfortunately Victorian materials couldn’t cope with the power it generated, so after a few voyages, a slightly less efficient design had to be adopted - an experience familiar even to modern mechanical and materials engineers!

The story of the ship’s long life is as fascinating as its conception, progressing from being the world’s first modern passenger liner, to emigrant ship (33 years on the Britain-Australia run), cargo windjammer, and finally floating warehouse, only to be scuttled in the Falklands in 1937 (for safe-keeping), before being re-floated 33 years later and returned to her birthplace in Bristol, where she has been partially restored to become one of Britain’s top tourist attractions (UK Museum of the Year 2006 and English Large Tourist Attraction of the Year 2007).

Great design often embodies big objectives and bold innovations. And like much truly great design, the Great Britain is also beautiful. Whether you’re fascinated by history, technology, design, ships or just looking for an interesting day out in Britain, take the opportunity to visit the SS Great Britain. You won’t be disappointed.

French journalist and author Guy Sorman has written an essay in praise of free market capitalism, in the City Journal under the somewhat inapposite title “Economics does not lie.” He attributes most of the explosive progress of recent decades to a shift away from well-intentioned but woolly regulation towards increasingly free markets.

Sorman expounds ten key economics teachings that underpin modern capitalism:

1. The market economy is the most efficient of all economic systems.
2. Free trade helps economic development.
3. Good institutions help development.
4. The best measure of a good economy is its growth.
5. Creative destruction is the engine of economic growth.
6. Monetary stability, too, is necessary for growth; inflation is always harmful.
7. Unemployment among unskilled workers is largely determined by how much labor costs.
8. While the welfare state is necessary in some form, it isn’t always effective.
9. The creation of complex financial markets has brought about economic progress.
10. Competition is usually desirable.

While admitting to capitalism’s flaws, Sorman implies that its very nature requires such flaws to drive the continuous innovations which improve humanity’s lot. The answer to those flaws is good institutions, such as laws, taxes and regulations applied judiciously and fairly.  However he cautioned against the oft-seen tendency of governments to regulate for everything:

After all, the state is no more rational than the individual, and its actions can have enormously destructive consequences.

This leads to Sorman’s closing remarks:

To help the losers in the free market, government shouldn’t back away from either free trade or creative destruction and start subsidizing doomed and obsolete activities, a protectionist course that guarantees only economic decline. Instead, it should help the losers change jobs more easily by improving educational opportunities and by facilitating new investment, which creates more employment. An essential task of democratic governments and opinion makers when confronting economic cycles and political pressure is to secure and protect the system that has served humanity so well, and not to change it for the worse on the pretext of its imperfection.

Still, this lesson is doubtless one of the hardest to translate into language that public opinion will accept. The best of all possible economic systems is indeed imperfect. Whatever the truths uncovered by economic science, the free market is finally only the reflection of human nature, itself hardly perfectible.

Those of more socialist tendency will find some of Sorman’s generalisations too much to swallow, but despite his uncritical praise for capitalism and its companion economics, he sums up free market capitalism reasonably well.

August is the silly season in Britain.  Anyone with children is likely to be on summer vacation, and the rest tend to get on with other stuff as well, which means appointments and meetings are difficult to arrange (although it’s still a long way short of Australia and NZ in the 5 summer weeks starting at Christmas, when business seems to completely shut up).

News-wise, this year seems to have a little more going on.  The government is in trouble, and there are rumours about leadership coups.  The credit crunch, house price collapse, inflation and other economic woes continue to generate headlines.  There is even some merger and acquisition activity being finished off. But all in all, there’s not a lot happening.  Sounds like time for a trip to NZ.  I’m there from Tuesday next week, if anyone wants to catch up.

Last week, The Times published a list of ten investments that produced the most spectacular returns (for UK share market investors):

1. Nickel miner Poseidon
2. Warren Buffett’s investment vehicle Berkshire Hathaway
3. Software giant Microsoft
4. ICT equipment maker Cisco Systems
5. Accounting software specialist Sage Group
6. Retailer Next
7. Mobile phone maker Nokia
8. Private equity investment trust Gresham House
9. Mining investment trust BlackRock
10. Internet search provider Google.

Some of these have been more fleeting (eg. Poseidon), others more sustained (like BH). The ranking methodology appears somewhat simplistic (no time factor, risk weighting or recognition of dividends) so the top 10 list should be taken with a very large pinch of salt. No doubt some “investment advisers” will claim they have prescience (or luck) in stock-picking and market timing, and cite these stocks as proof of the rich pickings to be made.

Still, I doubt that anyone who bought in early to these stocks and got out at the top will be worrying.

Continuing our series of questions to help you plan the sale of your business, what I’d like to ask you next is “Who are your key people, customers, suppliers and partners; and are you vulnerable to their departure?”

Is there anyone who is vital to the business because of their knowledge, relationships, etc? What about you?  Or key sales people, or engineers, or a buyer, say?  I’d probably avoid tying a key employee into an unusual special contract.  That’s for the buyer to offer if they so choose.  A special deal may even lower the business value. But can and should you build up other people to share the work and spread the risk?

One tricky issue I’ve seen in 2 otherwise very good businesses I’ve considered buying is religion: staff who are all members of a particular religious sect, and likely to leave en masse if the buyer isn’t also in the sect (and likely set up in competition).  I didn’t buy those businesses, and politely suggested to the owners that they needed to fix the problem if they couldn’t arrange a management buy-out.

In business-to-business relationships, being heavily dependent on just one or two customers, suppliers or channel partners can definitely make your business harder to sell (having said that, good franchises are not so much of an issue). I was offered a business once based on a single brand of imported clothing, with nothing to protect the business from the supplier cutting off supply or setting up in competition.  I turned it down, and a year later, the supplier did both, effectively wiping the business out overnight.  I was also offered a business which rented heavy machinery to infrastructure firms, but 90% of its business was with one customer, and no firm contracts.  It ended up being sold to a competitor for break-up value (even less than book asset value).

Good contracts can improve the business appeal, and poor contracts can lessen it. Sometimes there’s nothing you can do about the problem, and you then have to figure out for whom it’s least likely to be a problem.