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6MS Do you understand the meaning of Acquisition Rationale?
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Is there such a thing as Acquisition Rationale? Part 3
Are Acquisitions Rational?
How can you make sense of Acquisitions and where can you start if you want to devise an M&A Strategy?
In the first part of this series which you can find here, I introduced the idea that there are Six Key Factors which can be identified in rationalising Acquisition Strategy.
We looked at Ability to Execute and Financial Resources from the perspective of both the Acquiror and the Target companies.
In Part 2 of the Series which you can find here, I discussed the four factors of Intent from the perspective of the Acquiror.
In this Part 3, I shall look at these four factors from the perspective of the Target Company.
Is there such a thing as Acquisition Rationale? Part 2
Are Acquisitions Rational?
How can you make sense of Acquisitions and where can you start if you want to devise an M&A Strategy?
In the first part of this series which you can find here, I introduced the idea that there are Six key factors which can be identified in rationalising Acquisition Strategy. We looked at Ability to Execute and Financial Resources from the perspective of both the Acquiror and the Target companies.
Is there such a thing as Acquisition Rationale? Part 1
Are Acquisitions Rational?
How can you make sense of Acquisitions and where can you start if you want to devise an M&A Strategy?
In this blog post I will suggest that it is possible to set out a framework which you can use to establish and explain an acquisition rationale.
In this discussion we must start with the two protagonists – the Acquirors and the Target Companies. These are shown in the diagram below.
The Financial Times Asks an Expert!
I am very grateful to Jonathan Moules, the Enterprise Correspondent of the Financial Times, for asking me to contribute to the Entrepreneurship Section in the Money Supplement of the Saturday Edition of the paper.
Jonathan has written a piece on MixPixie – an online service which enables you to customise a CD which they then produce and send to the recipient of your choice. Jonathan explains how the business was set up by Buffie du Pon, Adam Goodyer and James Perkins as a result of a misdirected valentines present – a CD which was posted through Buffie’s letter box by mistake. You can find MixPixie’s site here.
The company’s challenge is how to scale its business in a market where sales of CDs are declining and today’s conventional wisdom is that music delivery is only competitive online. In my view one of the USPs of this is the Social aspect of the business – the concept that you choose some tracks and design a bespoke CD cover for someone important to you and share that music with MixPixie’s product.
I felt that MixPixie really needs to reinforce this aspect of their business as well as working hard to find scalable opportunities. Using my Six Minute Strategist Methodology, I have set out Six Suggestions which MixPixie might consider to help Scale their business, five of which made it into the Financial Times article.
A Free Smart Phone App– customers can log in, mix and order their CDs from their Smart Phone or Tablet. In order to make their product easier to access, MixPixie needs to have a “mobile” solution – an App optimised for both smart phone and tablet which would enable their customers to access their site and create a CD without having to go back to their desktop or laptop computer. This needs to be on all the main platforms: Apple’s iOS, Google’s Android and Microsoft. The App itself should be simple to use but should also incorporate some of the Social Media integration discussed below.
Work Directly with Musicians and Bands – a Service to promote back catalogues or “Special Mixes” for Festivals; the Bands own the rights already. While Bands are always promoting their latest recordings, MixPixie would enable Bands to produce limited edition releases of their back catalogue which could be sold at special events, such as Gigs or Festivals. If the Bands produced these in limited numbers and signed some of them, they would make great collectibles for their fans and offer MixPixie an entry to a new market. As the Bands already own the rights to the tracks, the project could be cost effective for both sides.
Corporate Customers – Companies are always looking for original ways to promote themselves to their clients and, in my view, a carefully selected mix of tracks at specific events could provide a very unique and appreciated gift. This could be volume business for MixPixie and once the relationship was initiated, the CD could either be remixed for each event or the order simply repeated.
Digital Download Bonus – While I appreciate the USP of MixPixie is the CD, the real value in my view is the personalisation of the gift. For a small additional fee, the customer could enable a digital download so that he/she could get a copy of the tracks. It may be that this counts as two licences and may therefore only be available to the person to whom the CD is being sent.
Social Sharing on MixPixie – Social Media was made for this. Music and Sharing. I would suggest that MixPixie have a one click enabling button so that you can share your music selection and occasion category on their site. When new customers come seeking music for their gift occasion, they will be able to see what other people have chosen in the past. This could be sortable by artist, songs and most popular selections to make it more useful. This should encourage other to use the service.
Pinterest – This new and highly visual network would be the perfect place to encourage customers to post their CD designs on Occasion based Boards on Pinterest.com. This does not necessarily need to include the personal messages but would encourage sharing and give customers ideas for gifts and designs. Pinterest is a highly viral site and this would also increase awareness of the service as each cover pinned can be linked back to MixPixie and encourage new customers to come over and find the site.
At present there is also a great SEO advantage to Pinterest. If you put a link in the description this gets full Google Juice back link benefit for the site. Pinterest is currently Page Rank 6. This is entirely white hat and as Pinterest becomes an increasingly important site in Google’s eyes, this benefit will only improve over time.
They have first mover advantage and need to capitalise on it.
Vinyl next please, Miss Pixie?
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Do you Understand Digital Marketing? Well now you can…
Understanding Digital Marketing – 2nd Edition - is the updated book by Damien Ryan and Calvin Jones that tells you all you need to know about Digital Marketing.
So if you don’t Understand Digital Marketing, you soon will!
I recently had the pleasure of attending Damien and Calvin’s book launch which was generously hosted by Google UK. My thanks to them for their generous hospitality in their extremely cool London offices in Victoria.
Damien is the Managing Partner of Mediaventura who have recently teamed up as an Appointed Representative with IAF Capital, of which I am a Partner, so it was doubly exciting to be at the launch with the whole team from IAF Capital and Mediaventura.
Apart from meeting some fascinating people from the world of Digital Marketing, we had the opportunity to hear some interesting comments on the future of Digital Marketing from Damien which you can listen to on the player below.
The sound quality may not be up to my usual standard as I was recording this with a handheld recorder from the back row, but I hope you find it listenable – a small price to pay to share Damien’s Digital Marketing insights.
I have embedded a link (affiliate) to Amazon to help you find the book, if like me you decide this has to be added to your required reading book list. I have downloaded the digital edition onto my iPad and you can find this in the Amazon Kindle Store as well.
Thank you for joining the Conversation and if you enjoy the book please share a link to this blog post widely, tweet it, like it on Google Plus and G+ it!
6MS Why Profit does not equal Cash
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6MS Six Simple Strategic Steps to the Profit Formula
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Six Simple Strategic Steps to Finding the Profit Formula Part 2
Do you want to take control of the Profit from your business?
In Part 1 of this blog post which you can find here, I explained how there were Six Key Variables which generate your business’s profit and if you turn the Profit and Loss Account on its head, you can begin to control the level of profit that your business generates and understand the Profit Formula.
Don’t forget that there is a FREE BONUS download – a Checklist to help you with the Profit Formula – which you can access by signing up for my email list at the end of this Blog Post
In this Part 2, I want to give you more specific information about how you can do this.
So what do we do now?
Understand your Gross Margin
Well, firstly as you know your gross margin, you know what level of addtional sales you need to cover each of these variables – its a single figure. If you reverse Engineer this you can calculate your Sales Gap to identify how much more sales you need to achieve to reach your target level of Profitability.
Of course, additional sales will increase your salary costs (if productivity remains the same) and your variable and tax costs. It is not a zero sum game.
Labour Costs
So now turn your attention to your Labour Costs. I am not advocating widespread redundancies – you do need to invest in your people to grow your businesss. There are two ways to improve this area; directly reduce costs or improve productivity.
However you should certainly review your entire employee base to see whether you are over staffed in some areas. However, I would also propose you take a more intelligent and proactive approach.
For staff who are client facing, directly billable or who can have a direct impact on the revenues of the business, greater productivity can lead to higher sales so you should be looking closely at how this can be achieved.
For back office staff, improvement can come through process improvements to enable them to achieve more or the same in a shorter amount of time. It amounts to the same thing. Of course this may need investement in training or technology but this would be a strategic outcome of this process and the investment would lead to a long term improvement in the business.
Fixed Costs
These are more difficult to change in the short term but you should certainly be looking carefully to see where you can make changes over the medium term to improve things in the long term. Take these on an item by item basis and challenge yourself to find ways to reduce these costs without having a negative impact on the business
Variable Costs
This is the area which is probably where there is the most to gain. I would strongly advocate a complete review of all your suppliers and internal policies to make sure that you are getting the best value for money.
Renegotiate better terms with existing suppliers. When contracts come up for renewal make sure that someone in your organisation (possibly you) shops around to make sure you get the best deal. Some of the biggest and easiest savings are to be found in your utilities bills.
Ensure that all the bills you pay from your suppliers are correct. You will be amazed how many have errors in them.
Look carefully at all your allowances and expenses to make sure that you have as tight a control over these.
A major area is Marketing. Of course this is an area which requires investment but you need to make sure that you are getting a measurable return on your investment. Don’t keep running advertisements or going to exhibitions simply because this was what you did last year. Make sure that this line of expense is earning you multiples of its cost in new sales.
Financing Costs
The basis on which your business is funded must contribute to the sustainable level of Profit. Too much debt and the interest costs will draw financial resources out of your business and reduce your ability to use this money to grow the business.
If you can grow your business without debt then you can devote all your financial resources to growth. After making sure you can pay your taxes (he waits for no man) building the financial strength of your business so that not only are you debt free but you have an element of cash reserve in your balance sheet should be a primary medium term goal.
Tax Costs
You make think that this is one area over which you have no control but this is not the case. The Taxman taketh away but he also gives. Your accountant or specialist tax adviser should be making sure that you are taking advantage of all the allowances to which your business is entitled and these will offset and reduce the tax you have to pay.
Many businesses do not do this – the tax codes in most countries are incredibly complex and difficult to understand. By all means pay Ceasar his coin, but do not pay him more than you are legally expected to.
A final word on Sales – Prices
One of the ways to improve your profitability of course is to increase your prices. In the current highly competitive economic environment this may appear to be easier said than done.
Review all your products and services and work out their true gross margin? Is there a disparity. In the Six Simple Strategic Steps Framwork, this is part of the Business Appreciation phase. When matched with an analysis of Sales you will soon identify which parts of your business are the most profitable and which lag in this regard.
Have a close look at what your Competitors are charging?
However a strategic appraisal of your pricing strategy may identify areas where your customers are going to be relatively insensitive to a change in prices.
You may be able to start charging (new customers at least) for services you currently provide for free.
Can you provide additional value added products or service which will have a relatively low marginal additional cost for you but high perceived value for your customers?
The Profit Formula - Putting it all together
Now that we have completed our analysis you can see how you can start to strategically design your business to be sustainably profitable.
Profit after Tax =
- Tax
- Financing Costs
- Variable Costs
- Fixed Costs
- Labour Costs
= Gross Margin
6. Cost of Sales
= Sales/Prices
You now have the Six Building Blocks to designing a profitable business. What are you waiting for?
FREE BONUS
In my previous post I promised you a FREE Bonus with this Podcast, all I ask is that you subscribe to my Mailing List so that I can get to know you better and help to share my content with you.
I have prepared a Six Simple Strategic Steps Profit Formula Check List to help get you started with your own Strategic Profit Planning.
In the tables I have left many headings blank so that you can insert your own variables. Alternatively, open a spreadsheet and copy the idea to create your own Strategic Profit Planning Tool. Good Luck I wish you Great Success.
Please sign up here. This will take you a download page from where you can access the check list.
To learn more about my Six Simple Strategic Steps to SME Success, contact me John Colley, the Six Minute Strategist at jbdcolley[at]aol.com. I will be running a seminar programme and you can hire me on a Consultancy basis to help you with your company.
Six Simple Strategic Steps to Finding the Profit Formula Part 1
Is Profit something that happens to you and your business or is it something over which you can take direct control?
I have made a short video introducing this topic which I suggest you view first.
FREE BONUS: there is a free Bonus download for you at the end of this BlogPost…
OK, lets get started with the Main Feature…
I think that most entrepreneurs think about Profit the wrong way. When you read a profit and loss statement, profit comes last after tax and seems in some way to be the result of all the activity above it. Profit therefore is something that happens to you and your business. It is the effect of all that activity and effort.
In these two posts, I want to show you the Six Simple Strategic Steps to finding the Profit Formula.
At the end of this Post, I will tell you how to get a FREE Bonus Checklist to help you with your business in return for subscribing to my mailing list.
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Tagged Business Plan, Corporate Strategy, Profit
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