Lots of good data about which types of institutions are lending how much to business.

Last month we attended The Conference Board’s two-day program on Job Growth and Intangibles: New Building Blocks for Jobs and Economic Growth: Intangible Assets as Sources of Increased Productivity and Enterprise Value.  The conference had two themes: policy (the government people) and strategy (the business people).

Fed Chief Ben Bernanke gave the opening address, speaking about intangibles, innovation and job growth.  Bernanke did not bang his shoe on the podium or make any hand gestures

while speaking about this, probably to avoid sending signals to the intangible stock market about his intentions.

He did use the phrase “intangible capital” four times in its proper context, and overall gave a forward looking presentation.  You can read highlights of the speech here.

Many attendees were interviewed during the rest of the conference with the one-to two-minutes posted on YouTube.  Here’s my interview.

People attended from all over the world, which is appropriate because Europe and Asia are far ahead of the US in recognizing the value of intangible capital.  The Brazilian development bank even has an intangible component in its credit ratings for long-term borrowers.  Again, though, the divide was between the government/academic community who want measures for investment and results on research and development and innovation and how to correlate this with job growth and economic growth.

Those of us involved in business recognize the value of government investment and academic research over the years and the job growth that has resulted. (Think of the innovation out of the Defense Department and MIT alone.)   But we are more interested in how this applies to individual companies.

In various forums, we were able to point out that the balance sheet is basically worthless in trying to understand a service company, knowledge-based company or technology company.  You must understand your own firm’s intangible capital to 1) manage it better to increase value and 2) tell the company’s story better to borrow funds, attract investors or get the right price from an acquirer.

Many people at the conference started to understand how investing in and measuring intangible capital can make a difference in individual companies, just as we business-types got some insight about the approaches by the policy types.

In the Great Recession that started in 2007, many firms used the downturn as a reason to cast out the lower echelon of their employees. That’s not to say that this wave of downsizing did not also get rid of some good producers; some talented employees who were let go in the name of survival. But many who were let go were deemed to be expendable, at least in the eyes of their employer.

While some cuts during the recession were so deep that the survivors became very overworked, many times we’ve seen that letting go of the under-performers actually has a positive impact on the remaining workers. Employees are not blind or stupid. They know who is pulling their weight and who is not.

For example, one of our clients let three under-performing, disruptive employees go after structured conversations with key internal stakeholders revealed the unhappiness the retention of these problem employees was causing. After the notices were given, the CEO/Owner gathered the remaining 25 employees together, explained why he took this action, and laid out a vision for the future.  The result was a much improved morale among the employees.

But the best outcome would have been to avoid this situation altogether. Don’t let your employees down – when the time comes to once again add staff do so with care. Remember that management sends a strong message about quality and expectations by constantly hiring the best.

What does this mean? Banks are back in business for larger deals. It’s easier for a bank to make one $10 million loan than ten $1 million loans.   You do one risk analysis, not ten.  The pricing is probably at a healthy spread (the federal government subsidy provided to banks of allowing it to invest its $5 billion in cash for a good spread in Treasuries will not always be there for Citizens.)

But it’s still tough to get a loan if you are in a SME (small or mid-size enterprise). A recent Wall Street Journal article notes a very small increase in credit approval for small business in 2010.  This is off seriously-reduced levels from 2009.  Some of this reflects lesser demand from businesses that laid off workers and cut way back on discretionary expenses.  It also reflects a drying up of M&A activity in the SME space.  Even in distressed situations, many owners just turned off the lights and closed up rather than trying to sell which might have required financing.

In 2011, the game is still the same.  Banks make a spread of 5 or 6% over the cost of funds when they make a loan. This is a small return for a loan that could carry considerable risk.  And because banks got hammered by lots of dicey real estate exposure and had a severe liquidity crisis leading many to take TARP money,  bankers have been reluctant to lend into the SME in the past two or three years.

So if you are an SME looking for financing in 2011, it will be challenging. But speaking as a 17-year veteran of commercial lending, I will tell you that there are a lot of things that you can do to increase your chances of getting what you want.

Creating the quiz actually turned out to be harder than you would think, but we finally have a simple (we hope) and free (for sure) tool that can be used to determine your level of proficiency with intangible capital.  The idea is to introduce you to the basics of what it takes to make the most of your intangible capital, improve the value of your business and tell a more complete story in order to raise debt or equity.

Why bother? Well, today 80% of the value of the average company is intangible. And it’s painfully clear that U.S. companies are not making most of their intangible capital. This means that they are sitting on a pool of valuable, but under-used, knowledge that could be put to work for future innovation.

If you are a C-level executive of a company, or if you’d like to be one but don’t know enough about intangible capital to get there, take this simple 22-question IC.IQ quiz. It’s actually fun and shouldn’t take more than 5 minutes. You can print out the results page after you have taken it and learn how well-prepared you, and your company, are to survive and (hopefully) thrive in the coming decade.

VIBCO has been manufacturing vibrators for nearly 50 years.  In today’s highly competitive environment of low cost labor overseas, VIBCO has found a way to thrive in its segment without moving production off shore.  A number of years ago, the company embraced lean manufacturing whole-heartedly, seeking operating efficiencies at every level of the company.  The passion for lean manufacturing starts with cigar-chewing, Army helmet-wearing Karl Wadensten, VIBCO Vibrators President (who looks like a slimmer Bill Parcells).  The passion extends to the employees assembling each industrial vibrator.  VIBCO welcomes other manufacturers, business students, government officials, and all who are interested to take plant tours and learn how lean manufacturing has permeated the operation.  Each employee on the plant floor speaks with genuine enthusiasm about lean as this change came from employee empowerment after employee training on lean tools and methodologies.

While everyone acknowledges that lean is a constant learning process and that progress can always be made, the results are impressive.  Even in the severe downturn of 2008 and 2009, VIBCO did not have to lay off any workers.  They have increased productivity and focused their whole thought process around the manufacture of these machines so much that Wadensten hosted a daily radio program (www.790business.com) to discuss lean with other lean experts.

Wadensten empowers his employees to speak up when they have an idea of how to make things better.  And they do it to provide better service.  Their goal is to manufacture and ship these industrial vibrators (say, for sand and salt spreaders in the winter or to construction sites year round) in two days.  Lead times were 3-4 weeks in the past and as a result of lean, lead times are now at 1-2 days — a significant differentiator from competition.   These are now built to order as opposed to building a run of 50 at a time and carrying them in inventory.  This means fewer parts to carry in inventory, less space needed for storage, better communications between workers.  Heck, even the mailroom re-organized and relocated to carry fewer boxes and now use color codes to better identify urgency and priorities.

Wadensten must be congratulated for this change.  Why? Employee empowerment is not automatic, even with lean.  Management must give up power in order for employees to be empowered.  This means that management must shift from the “command and control” management style to the coaching and facilitation management style.  It’s a challenge that not all management teams can make.  It is difficult for management to give up power just as it is difficult for employees to accept their new power.  The concepts of lean are very straightforward … it is the behavior change for both management and the employees that make the process a real challenge.

It does mean better cash flow and lower borrowing needs which leads to  lower interest expense and more funds to invest into the business.  Wadensten knows his advantage is in being nimble, providing great service to his customers with live answers to calls for product and delivery help, reaching out to educate with  better ideas to tackle problems in the field, and sharing experiences around best practicing.  This way, they don’t have to compete on price because they’re giving value.  By shipping in two days, VIBCO keeps the competition from China and Brazil at bay and keeps manufacturing  jobs in Rhode Island.

Make no mistake – this is hard work.  Every employee is challenged to perform better, constantly think about improvement.  But this bottom-up empowerment drives process and product innovation, making each worker a vital part of the company’s future.  Each VIBCO employee is asked to identify and correct the “8 Deadly Wastes”:  Overproduction, Waiting, Transport, Over-processing, Inventory, Motion, Defects, and Underutilization.

This company embodies so many of the values that we highlight in Intangible Capital:

• treating people, partners and shared knowledge as the core assets of an enterprise;
• using measurement for learning rather than just as a management weapon;
• beating “low cost” competitors by just being smarter.

It’s a recipe for the future of American business. One I hope you will join us in building, one company at a time.

Former owner and now family business advisor Scott Wakeman, told this joke at our first Owners Academy session at last month’s Exit Planning Exchange (XPX). At this event, owners were invited by XPX members to hear other business owners talk about their various experiences in owning, operating and exiting their own businesses.

Another former family business owner, and now investment banker Andy Crain, explained how his family was somewhat insular and less inclined than other companies to get good outside advice from a board of advisors. This is actually common with family businesses – to keep it ‘inside’ and figure it out without help from the ‘outside’.  Luckily, Andy isa smart guy and was able to lead the family business out of trouble, but some family businesses aren’t so lucky.

Maybe not everyone would find Scott’s joke to be that funny. But I think it proves the point that family business is such a unique and special entity. You can understand business, but that doesn’t mean you understand the first thing about a family business – so maybe it’s safer to consider this an inside joke. ]]> http://trekconsulting.com/2010/11/17/family-business-and-a-joke/feed/ 0 http://trekconsulting.com/2010/10/13/just-over-the-horizon/ http://trekconsulting.com/2010/10/13/just-over-the-horizon/#comments Wed, 13 Oct 2010 20:42:10 +0000 Michael Oleksak http://trekconsulting.com/?p=1079 I recently met with a former client who had travelled from Australia to visit his daughter at a local college. We reflected on the sale of his accounting software business back in 2006. Trek had helped him successfully demonstrate the value of the business to the buyers.  We also talked about the differences between 2006 (also known as ‘the good old days’ for middle market M&A) and today for selling one’s business.

For one thing, much less bank financing is available today because banks are much more averse to risk and borrowers know it. Other sources of funding are available, but they are more expensive – which then raises the hurdle to achieve a profitable deal. While there is lots of reported M&A activity these days, it’s mostly large corporate buyers writing a check for an acquisition without having to go to the banks for deal financing.  While this is fine, there is clearly a gap in middle market activity, unless the buyer (strategic or financial) is prepared to inject more cash/equity into the transaction.

But this will change, the market for middle market M&A will improve in the near future and offering prices will once again rise for quality companies.  So, for those companies who are a candidate for transfer, now is the time for owners to start thinking about it and preparing for it.  For those who successfully prepare, they too can sit back one day and reflect on their successful transfer.

Simply put, we don’t know the value of a company such as Hulu because of how we manage our business in the US. Currently, our accounting and taxation systems in the US encourage all investment in people, software, systems, marketing and other intangible assets to be expensed. However, these are the investments that are building the infrastructure of so many companies like Hulu. So while there has been much written about Hulu having never turned a profit, it is impossible for investors to see this true infrastructure because it has all been written off as quickly as it was built.