All posts by John Psarouthakis

drjohn11aDr. John Psarouthakis, Executive Editor of www.BusinessThinker.com, Distinguished Visiting Fellow at the Institute of Advanced Studies in the Humanities, University of Edinburgh, Scotland, publisher of www.GavdosPress.com and Founder and former CEO, JP Industries, Inc., a Fortune 500 industrial corporation

The Successful Business Acquisition Process –The Final two summaries: -step-#15-Closing the Deal and step-#16-After the Deal is closed

Closing the Deal

This chapter reviews the closing of the deal. The key aspect of this step is the preparation and signing of the purchase agreement and other documents needed for closing.

Beyond the legal requirements of having a purchase agreement, the preparation of the document itself is an important aspect of the due diligence process.  Because of the representations and warranties a seller is obligated to vouch for, frequently, problems surface during this period that you may not otherwise uncover.  For this reason, it is very important to begin work on the purchase agreement as soon as the letter of intent is signed and you begin formal due diligence.

The momentum of closing and emotions attached to it may vary substantially, depending upon the type of seller with which you are dealing.  With a divesture from a large corporation, you are less likely to deal with a fear of closing.  The company has strategic reasons for spinning off the particular division you are buying.  On the other hand, you may not have the closing momentum and urgency that builds when dealing with the private seller.

In addition to working out details of the purchase agreement during the due diligence process, you should concurrently work on the action plan for the days and weeks after closing.  Chapter 15 covers some of the key points to consider in developing such an action plan

After the Deal is closed

Once you close the deal, you need to be prepared to go in the very next morning to meet with your management team as well as your entire staff.  What you do in the first days and weeks will set the tone for your relationship with your employees for some time to come, possibly even the duration of your ownership.  Remember that the chief concerns of your employees and managers may be somewhat different than your own agenda. Employees will be concerned, first and foremost about their own job security and future with the company now that it is under new ownership. Management shares this concern, and may also have more narrow issues facing them in their own departments, that nevertheless they may feel requires immediate attention.  An easy model to follow includes a short initial introductory meeting with management, an all-employee meeting to include all management and non-management staff, and then a third more formal meeting with management.  These meetings will set in motion the planning to carry out the three objectives of the transition: addressing your key constituencies (employees, customers, suppliers and bankers), revision of the action plan, and implementation of significant changes outlined in the plan.  Other meetings will follow in the first days and weeks, but it is essential to try to fit these first three meetings into the first day if at all possible. Continue reading The Successful Business Acquisition Process –The Final two summaries: -step-#15-Closing the Deal and step-#16-After the Deal is closed

The Successful Business Acquisition Process – Step-#13-Financing the acquisition and step-#14-Your action plan

Financing the acquisition

Financing the acquisition requires thorough and careful planning.  You need to consider the different sources of funding accessible to you.  The amount required for purchasing the company may dictate the types of sources that you seek out.  Some combination of debt and equity is likely. Be wary of overextending yourself with too much debt. On the other hand, be careful to protect your immediate family by not taking too great a risk with your personal assets.  It should not be necessary to put your entire life’s savings up for collateral.  If the deal makes sound business sense,  if a bank or other lending institution starts making unreasonable demands, check out another bank, review your business plan, or try some other approach.  Lending institutions vary from the unscrupulous to the impeccably correct.  You need to be especially cautious with any lender that is likely to take your company away from you if you fall behind on a few payments.  Check out your sources, both equity and debt, as thoroughly as you check out the seller.  Are you dealing with honest individuals?  Have you reviewed the fine print for hidden commitments that might jeopardize your ownership?  The earlier you begin to develop your financing plan, the more likely you will be ready to close, when the purchase agreement is finally negotiated and signed.

Your action plan

You can easily get so caught up in the acquisition process itself that you delay proper planning of the takeover until after closing takes place. This would be a big mistake.  Successfully  executed acquisitions require months of planning prior to closing, to assure a smooth transition.  Much of the preliminary work overlaps with a properly done formal due diligence–extensive evaluation of the company and identification of potential problems.  The remaining work, some of which may be obvious and some of which might require more problem-solving creativity, involves identifying the necessary changes and improvements that should take place and an assignment of due dates, budgets and people responsible for carrying out these changes.  A simple format is to create a short one-page action plan for each topic, identifying the issue, the action required, who is responsible, and when it will occur, along with a budget and expected results.

The acquisition action plan may be the single most important thing you can do to assure the success of your new company.  It is viewed as an extremely critical component of the successful acquisitions.  The chief (principal) operating person must be involved in the process from the start.

“Better Makes Us Best”–The power of a simple idea

A friend glanced at the dust jacket of my book. Looking a little perplexed, he hesitated a bit before reading the title aloud. “Better Makes Us Best”… interesting he said and asked, “what does it mean?”

It was a pretty good question. I know you can’t be “better” and “best” simultaneously. One quality would seem to negate the other. So I suppose the title poses something of a riddle.

“Better Makes Us Best” was our company philosophy. It was a working slogan that appeared in our quarterly and annual reports. It’s been foremost on my mind since I founded J.P. Industries (JPI) many years ago. JPI became a Fortune 500 industrial corporation.

And this is what it means!

When we do our jobs a little better today than we did yesterday, together we grow and prosper and become the best we can be.

Now, this may sound too simplistic, if I neglect to tell you we use a few basic human tools to perform better and better each day. So, what more does this involve?

It is a commitment to setting goals.

It is a practice of sharing information and helping one another.

It is a habit of talking, listening, reacting and responding … without thinking about job titles, corporate ladders and boxes on an organization chart.

It is an atmosphere in which all employees are encouraged to feel positive about themselves and proud of their work.

And believe it or not … it works.

Certainly, we all want to be “the best” is part of our American culture to compete and win top honors whether in sports, academics, music, science, technology, manufacturing or anything else.

But reality sets in. Try as we might, we can’t be the best in a competitive field without practice … without a focused effort…. without getting in the habit of improving a little bit every day.

Very few of us can become the best golfer, father, mother, factory worker, accountant or any other profession at any given moment. We have a lot of competition from others who also want to be the best.

But with practice all of us can become better. And we can feel terrific about performing the very best we can, that’s been true of human nature from the beginning of time.

I’m sure many of you have heard of Demosthenes, the great Greek orator. He knew his thoughts could not become widely known until he could overcome a stuttering problem.

So that’s exactly what he did. He went to the sea coast alone and talked to the waves. He did this repeatedly.  It took some time, but Demosthenes made good, clear speech a habit. He even turned it into a profession,

Hard work and practice was the essence of our company’s philosophy, “Better Makes Us Best.” it’s nothing new. Applied with patience and encouragement, I believe it has everything to do with our company’s success.

The book contains several stories about winners … how they overcame adversity to succeed in their work. The book was first distributed to our 7,000 employees for free. So I imagine some of these stories were inspiring and motivating.

One story, though, has a different angle, like most of the others it’s a true story … one I heard from an industrial consultant. It’s my favorite and I’m going to share it with you now.

A man in southern Italy bought a hog farm. But he knew very little about the details of its daily operation.

He became very concerned when half of his piglets were dying the first few weeks after birth. If this continued, he feared, his farming business would be in jeopardy.

But it did continue. And the man was panic-stricken.

So he called in specialists who analyzed the feed, the soil, the air and water. Veterinarians took tissue samples. They found nothing to explain the problem.

But one day, an old farm hand walked into the owner’s office. He had overalls on and appeared uncomfortably nervous, even though he worked at the farm for several years. He wanted to tell the new owner something.

But he wasn’t used to talking directly with the man at the top, and he didn’t want to take the blame for what he had to reveal.

“It’s about those piglets,” he said, “the ones that are dying.  Well, I know why they’re dying. We used to move the piglets away from the sows at night. Then a few months ago, my boss told us not to bother doing that. Said they were orders from his boss. It didn’t make any sense to us/ the farm hand explained.

The owner was puzzled. “What’s that got to do with our problem?” he asked.

“Everything, said the old man.”At night, the sows roll over on the little fellows and they can’t get any air. They suffocate to death”.

With that, the owner solved the mystery of the dying piglets. And maybe he would have unraveled it sooner if two things hadn’t kept the farm hand coming forward.

One, he was afraid of violating what he felt were orders to stay away from the owner’s office. And two, he feared getting blamed for the problem,

When you stop to think about it, this story tells us what can go wrong in a setting that tends to discourage free flow of information.

One guy changes a system that is working well. Another guy worries about losing the farm, still another frets about losing his job. Meanwhile, innocent creatures lose their lives. It’s a bad scenario . . .  harmful and unproductive . . . because nobody is winning,

Sadly, the farm owner didn’t review all the possible explanations to his problem. That’s because he didn’t think to ask all the people who work for him. That bedeviled “chain of command” imposed a barrier that hindered progress.

Or maybe it was an attitude — a prevailing belief ~ that only an “expert” can solve a problem whose solution is not immediately apparent. After all, what could an old guy in bib overalls possibly know about dead piglets?  Well . . . we now know the answer to that.

The point is, Mr. Hog-farm owner almost lost it all because he was not in touch with the people who had much to gain from solving the problem. I refer to his own workers, all of his workers.

Every chief executive officer is responsible for the overall performance of the company he or she heads. But only in the last decade have American CEO’s made “quality circles” a productive part of that responsibility.

It’s a beginning … but it doesn’t go far enough to end the obstacles to free flow of information. Tradition dies very hard.

I’ll give you a couple of examples:

Frankly, I am utterly amazed at the titles of certain corporate programs that are designed to enhance workers’ attitudes.

Consider this one; “maximizing employee skill potential through systematic attainment of quantifiable and incremental periodic performance attainment levels.”

I didn’t start learning English until I was 20 years old and preparing for graduate studies at MIT.  But I’ll bet there are many others in who find the above program’s title just as troubling as I do.

Why not call it “getting more out of your job by having goals” and be done with it.  At least, it’s simple, direct and easy to understand.

I am also astonished by the thick manuals and elaborate video programs some companies use to explain their objectives. Some even hold workshops to show employees how to fill out forms to quantify those objectives.

Believe me, after reading manuals, watching videos, going to workshops and filling out forms, I know most workers at J.P. Industries would have lost their zest and enthusiasm.

In good conscience, I could not encourage workers to enjoy challenges and explore their capabilities while boring them with manuals and forms.

I could not ask them to be creative and resourceful while telling them only what management’s objectives are. That’s no fun. And it’s not fair employees should have their own objectives … within the framework of their jobs, of course.

Each and every worker is unique. Each one is able to contribute in a positive and productive way. In my book, I tell the worker to set goals … and not to get discouraged if performance falls short of those goals.

Just review them every day … and try to find ways to improve. If the goals are too ambitious or too lax, adjust them. In time, good performance becomes a habit.

Sometimes, I think this idea is so simple it just hasn’t caught on in our culture.  Meanwhile, government productivity experts anj1 scholars are busy analyzing theories and effects of this management technique versus that.

That’s fine, I suppose. We can never know enough about the dynamics of the workplace. One thing is certain, though: each and every worker needs to feel valued … and responsible … and important.

Setting and meeting goals worked very well at the company.  Employees know they get better by trying and performing better.  Better is as better does.  It’s a powerfully simple idea.

And the best part about this practice is that it doesn’t confine itself to the office or factory. This is what a manager at J.P. industries wrote to me:

“Better Makes Us Best” is a philosophy that I will not only use in my daily job, but in my personal life with my family. I believe that if children adopt this attitude of continuing their efforts and striving to be better, they will achieve their own personal best no matter what they are participating in.

Well put.  Here is a conscientious and dedicated person who has found a surge of new purpose by going back to the basics. Both people and companies need to have a healthy way of growing.

A few words now about communications … that I consider the lifeblood of any company.

Rapid change means we all have to know more things faster than ever before. Accuracy and promptness in sharing information is very important.

At J.P. Industries we made a distinction between sharing information and making decisions.

We encouraged all workers to ask questions of anyone in the organization. We appreciate curious minds. There’s no such thing as a dumb question.  Especially one that has a direct bearing on that person’s ability to get the job done. We know that good ideas come from all our employees.

My door was always open. And if I saw my top executives too often at headquarters, I know they were not doing their jobs. I wanted them out there in one of our 30 plants.

And while we freely and openly shared information, we discouraged our employees from making major decisions based on that information.

Our decision-making was formal and structured ~ the only thing that is, I might add. Still, it relied heavily on people at every level of the organization.  After all, one knows all the answers. Together, we move ahead smoothly,

In 1968 a witty book entitled Management & Machiavelli made headlines for weeks. The author, Anthony Jay, asserted that every business is a political organization. Therefore, Machiavelli’s 16th-century rules for princes and rulers fully applied to corporate executives.

This wasn’t entirely new and insightful. Peter Drucker was writing about the organization of power in business as early as 1950,

But “Machiavellianism” — the principle of grabbing power at whatever cost — has survived. I recently read about it in a fairly new college textbook on organizational behavior and management.

On various methods of getting and keeping power, the textbook refers to no fewer than 13 kinds of political games.

There are games to resist authority, games to counter resistance to authority.  Games to build power bases and to start organizational change.  Games to blow the whistle on a perceived injustice.

It all seems a terrible waste of valuable time and energy. Still, there are plenty of executives and managers who thrive on gamesmanship and politics, distracting them from the very reasons they’re in business. not the least of these reasons, of course, is to produce high-quality goods and services at competitive prices.

In the realm of politics, I happen to like what the late president Theodore Roosevelt said at the turn of the century. This is how he put it:

“The most practical kind of politics is the policy of decency”.

It’s the only policy.  Without it, J.P. industries could not have taken so many small struggling companies and turned them around.

Workers had to accept change, even though some resisted it.

They had to know we were all striving for the same things.

They had to understand that each and every job they performed was vitally important — to our customers, our shareholders, other workers … and most of all to themselves.

I do my best work when I set goals. That’s true of everybody. I have an enormous sense of accomplishment when I reach my goals. That’s true of everybody, too.

The constructive working environment nourishes personal growth and responsibility. Sharing knowledge and ideas is supremely important.

The corporate culture that rids itself of the usual reasons for fear – power games that build empires and change or eliminate jobs – commands respect and loyalty.  There is no substitute for productive enterprise.

The employee who sees opportunities – not obstacles – in the path of progress is psychologically healthy. What every company needs are positive thinkers and doers.

That’s what “better makes us best” has done for JPIndustries, Inc. It could do the same for yours.

The Successful Business Acquisition Process – Step-#12-Negotiating the deal

Perhaps too much has been written about elaborate or indirect negotiating techniques in business situations.  At least in the case of acquisitions, we espouse a direct, problem-solving oriented approach. This builds trust between buyer and seller and allows for resolution of key issues.

Thorough understanding of the seller’s motives and details about his or her company and industry will aid your negotiating ability.  You should thoroughly understand the prospective company, including the likely risks and potential problems you might encounter if you take over ownership.  Further, you should be able to present such concerns in a way that the seller will find believable and will be able to accept.

You may run into a seller whose perception of the company is too different from your own to resolve in negotiation or in some other way becomes unreasonable.  For this reason, it is always critical that you keep your lead flow going. This may necessitate having a cash reserve or going back to investors for more money so that you can investigate other leads.  Be cautious about holding all your “eggs” in one basket.  Keeping your leads flowing will also reduce the chance that you romanticize any one deal.  Also keep in mind that there are always other “fish in the sea”.  You want to guard against escalating commitment, the phenomenon that you become more strongly committed to the deal just because you have invested more time and money in it.  No deal is perfect, but if you really uncover a major concern, it is never too late to back out of a deal prior to closing.  It is better to lose $30,000 or even $100,000 than to pay $500,000 or more for a business that is headed for serious trouble.

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This articles is an overview of step 12  that is explained in further detail in “How to Acquire the Right Business” by John Psarouthakis and Lorraine Uhlaner; Published by Xlibris, 2009. This book covers the 15  key steps involved in the complex and demanding process of buying the right business. It includes the search, selection, evaluation, pricing, negotiation, closing and managing the start of an acquired business. Buy this book.

The Successful Business Acquisition Process – Steps #10– Letter of intent and formal due diligence & #11-Valuing and pricing the company

Letter of intent and formal due diligence

This chapter introduces some of the basic concepts of valuation of the company.  Although four basic approaches, the profitability method, the asset method, historic cash flow and discounted cash flow, are all described, the discounted cash flow method is considered the most accurate valuation of the company.  However, a comparison of values from different methods can provide useful insights, especially in the early stages of valuation of the business.

This chapter also points out the distinction between value and price.  The value is the worth of the company as will be operated by the buyer. The price is the amount you wish to pay for it.  The synergy you can realize from the sale, the motivation of the seller, and the projected growth of the industry, and the type of financing are just a few of the factors you might consider in negotiating the final price. Continue reading The Successful Business Acquisition Process – Steps #10– Letter of intent and formal due diligence & #11-Valuing and pricing the company

The Successful Business Acquisition Process – Step #9 – Preliminary due Diligence

This chapter reviewed the important step of preliminary due diligence that takes place once a confidentiality agreement is signed and you are satisfied that a lead meets your major criteria.  The preliminary due diligence has three important aspects, a meeting with the seller, one or two company visits and a preliminary review of documentation.  There are four key goals in the preliminary due diligence phase. They are: Continue reading The Successful Business Acquisition Process – Step #9 – Preliminary due Diligence

C. K. Prahalad – Guru on Strategy, Leadership and Competitiveness

(August 8, 1941 – April 16, 2010)

I had began, recently, to write an article on leadership when I was informed of the passing of my dear friend Professor C. K. Prahalad of the Ross School of Business, University of Michigan on April 16, 2010 at the age of 69.  I decided that this topic would be far better expressed by this outstanding thinker and educator himself.  See clip after the jump. Continue reading C. K. Prahalad – Guru on Strategy, Leadership and Competitiveness

Employment Growth

I am concerned about the factors that lead to employment growth, something that should be of vital interest to every person. Discussion about employment or business often focuses on the largest companies. I believe that we have not looked in depth at the relationship of company size to employment growth and value to the society as a whole. This relationship of size to value is an important one that is often distorted by mythology and misperceptions. Continue reading Employment Growth

Investing in Michigan Companies

Since the turn of the 21st century, Michigan manufacturers have struggled with a few key issues that have begun to change the shape of several industries that drive Michigan’s economy: 1) Increased competition from foreign countries where workers are paid lower wages; 2) increased competition from an influx of foreign competitors doing business in Michigan; 3) tremendous increases in raw material prices; and 4) inordinately high increases in basic costs necessary to run business, such as health care.  Many business owners have never experienced a multitude of issues such as these, and have found themselves either unable to effectively manage their companies during these trying times, or are unwilling to make the investments necessary in their business to remain competitive. Continue reading Investing in Michigan Companies

The Successful Business Acquisition Process – Step #8 – The Evaluation Process: an Overview

The evaluation process takes places in successive stages or filters as you progress more deeply into the deal.  At any point along the way that you feel uncomfortable with the deal, you should not go through with it. However, be aware that even in deals that go through, extensive problem-solving is often required in order to complete the deal. Continue reading The Successful Business Acquisition Process – Step #8 – The Evaluation Process: an Overview