BLOG.REDHAWKASSOCIATES.COM

It's still out there

David Brown — Thu, 22 Mar 2012 00:06:08 GMT

That wishful thinking about tax rates (see Christine Romer, 3/18/12
NYT)...that reductions in marginal tax rates will more than pay for
themselves by stimulating revenues at a greater than dollar for dollar
rate. But actual studies, done with math, show that at most a reduction of
1% in the marginal rate (at the higher end) results in a 0.25% increase in
reported income.

So reductions in the marginal tax rate will increase the deficit and
national debt. That's the fact, Jack.

What do we do as Financial Advisors?

David Brown — Tue, 20 Mar 2012 17:23:14 GMT

A typical list of services for a Client:

n most engagements, Red Hawk will provide some or all of the following services:

(1) identifying or initiating potential restructuring
     transactions;
(2) reviewing and analyzing the Operating Company's assets and its
     operating and financial strategies;
(3) reviewing and analyzing the Company's business plans and
     financial projections;
(4) evaluating the Company's debt capacity in light of its
     projected cash flows and assisting in determining the
     appropriate capital structure for it;
(5) assisting the Company and its other professionals in
     reviewing the terms of any proposed restructuring
     transaction and in evaluating alternative proposals for a
     restructuring transaction;
(6) determining a range of values for the Company and any
     securities that it offers or proposes to offer in
     connection with a restructuring transaction;
(7) reviewing and analyzing any proposals the Company receives
     from third parties in connection with a restructuring
     transaction;
(8) providing advice to the Company with respect to, and
     attending, meetings of its Board of Directors, creditor
     groups, official constituencies and other interested
     parties; and
(9) participating in hearings and providing testimony with
     respect to the issues related to any proposed plan.

Valuing the Stimulus

David Brown — Mon, 27 Feb 2012 16:25:29 GMT

I think a good paper about valuing the economic stimulus passed in '09 and
ideas relevant to economic policy today in the US and Europe.

http://www.econ.berkeley.edu/~cromer/Written%20Version%20of%20Effects%20of%20Fiscal%20Policy.pdf

The author has a lot of negative baggage in some circles but the analysis
and exhibits seem solid. If demand has decreased, then it must be replaced
or the economy shrinks.

"Local software makers continue to add jobs"

David Brown — Wed, 22 Feb 2012 22:08:31 GMT

An article in 2/20/2012 *Crains Cleveland* reports that the number of
workers in local software companies has increased by 16% in the past year.
The title of the article was misleading, most of these firms are not
makers but consultants. However, the larger point is that this market is
growing well. I see consolidation increasing amongst software consultants
and marketing companies driven by the demands of large customers who want a
broad and deep array of services. Those customers do not want to have many
vendors but fewer vendors so that they can have simpler, more efficient
relationships and also have more leverage over a community of fewer
vendors.

My suggestion to many small firms is to prepare your company for sale, get
your capital structure in order, produce sound financial statements, have a
professional sales, marketing and senior management team and process. The
result will be maximum value for your business.

What rate do the Top 400 Earners Pay?

David Brown — Mon, 20 Feb 2012 22:03:48 GMT

Interesting data from the IRS. Comments later but: the problem I see is
that income from work is taxed at a much higher rate than that from
investments. There are many studies showing that the diminishing returns
from effort (work) quell effort, few (that I know of) showing that higher
marginal rates diminish investing.

Corporate Innovation: I favor Google's Approach Now

David Brown — Mon, 30 Jan 2012 15:39:20 GMT

The Yin and Yang of Corporate Innovation by Steve Lohr in The New York Times, (1/29/12) lays out the different innovation approaches used by Apple and Google. Partly because Apple sells hardware primarily, its approach is more top-down, measured and less customer-centric. The cost of failure to them of a new hardware product is significant. Steve Jobs was famously quoted as saying that "it's not the consumers' job to know what they want".

Google products are almost entirely software. Lohr says that it "speaks to the power of data driven decision making, on line experimentation and of networked communication". As a Google customer, I notice that there are always many "labs" developing products and beta versions of apps to try. Customers can decide to try or not with no promise by Google of successful implementation.

I think Google's model is more useful for corporate leaders to consider now since it is very different than most companies' approach which is still top-down. Be willing to throw a lot of stuff against the wall and be willing to test and change strategy frequently. The annual strategic plan is a joke now. Those plans are usually obsolete the day they are printed.

I'm reading now

David Brown — Tue, 17 Jan 2012 14:23:39 GMT

*King Lear* for book club.
*Agents of Innocence* by David Ignatius

Hooray!

David Brown — Tue, 10 Jan 2012 15:18:56 GMT

For the Crimson Tide winning the BCS. Great for Tuscaloosa.

Continuing the sports theme, too bad for the tough loss for the Hoyas of Georgetown on the court.

I'm Reading...

David Brown — Wed, 04 Jan 2012 22:44:03 GMT

Tom Peters (the coauthor of In Search of Excellence, etc.), my imaginary guru, says that you have to outread your competitors. As a coauthor myself of a business book, I am very aware that most business people don't read business books unless made to or out of desperation. Anyway, I am trying to read more and as much as I can (but always distracted by the latest game on TV). I figure if I note what I'm reading here it will spur me to read more and maybe interest readers of this blog. Here's what I'm reading now:

Shucked by Erin Byers Murray, about an oyster farm in Duxbury, MA (my hometown)
The Mind of the Strategist by Kenichi Ohmae, the art of Japanese business
SEO for Dummies, self explanatory

Too Esoteric? The Debt Settlement Process Summary

David Brown — Wed, 04 Jan 2012 22:31:48 GMT

I know this one pager on debt restructuring for businesses has a small target audience but a few people may benefit from it.

Debt Settlement Process

Turnaround and Restructuring Advice for Leaders and Advisors

David Brown — Wed, 04 Jan 2012 22:25:21 GMT

This article is my most detailed and gives you all the techniques and strategy needed to lead or advise on a business turnaround. A few years old, but still very good (I think).

Turnaround and Restructuring Advice for Leaders and Advisors

Improving Productivity and Value Through Better Sourcing

David Brown — Wed, 04 Jan 2012 22:18:47 GMT

Here are some ideas for business owners and managers here based on my firm’s unique (I believe) approach to sourcing:

Don’t start with the realities of a current manufacturing or service base (plants, vendors, equipment), instead start with what current and prospective customers want, and what your competitors are doing and drive your plan from there (separate short term need from long term goal)

For example, if a major customer is going to China and wants you as a vendor there, be careful and understand whether that customer can generate the type of return on investment you need to get to justify the investment

Determine what core strength you need to be able to beat your competition. For manyanufacturers in Ohio, that strength is not in manufacturing locally but is in service, design and management
Answer these questions like these about offshoring:

Are you lean at home (reduced direct labor)?
What’s the value of manufacturing near your customers?

There are many countries from which to source product. If you choose China, be sure to use an expert who can sort through with you which region to choose, which factories are good and ones to avoid and can scout, lead and spearhead this time consuming and expensive effort

The complexity and expense of outsourcing often results in savings being overestimated by 20% to 50%. However, for most business owners in our area outsourcing is not an option but a requirement for survival in this decade.

More thoughts on productivity

David Brown — Wed, 04 Jan 2012 21:49:51 GMT

A couple of years ago, I was part of an integrated team of outside consultants and internal leaders of a F20 financial services company tasked with reducing expenses, including payroll and support services, in their large call centers.

According to my notes: "Our small team, with the addition of two key people from our client, conducted dozens of interviews, visited every processing site and analyzed thousands of telephone calls from customers. As a result, we determined that the cost of poor quality in our client’s credit card customer service operations was 52% of the annual operating budget. The main symptom of poor quality was the inability to resolve customer issues at the point of first contact. For example, whenever our client’s marketing department would send a new promotion to card holders, the call centers would be flooded with calls from customers asking to have the offer better explained. A simple solution that would pay off in millions of dollars of savings was to be sure that the outbound communication was complete and understandable and that the call center operators, if called, were trained well enough to answer the questions posed."

The main result of the study was a renewed focus, using training and technology, on resolving customer issues the first time.

Improving productivity

David Brown — Wed, 04 Jan 2012 21:38:01 GMT

Really the focus of my work is to help business leaders improve the value of their businesses. I talk about and recommend many techniques. Most companies I run into pay attention to the productivity of their people and other assets. Sometimes, they need some new tools or approaches to better their competition (globally). I'm a big fan of the Toyota Production System, Six Sigma, Kaizen, amongst many others. I've attached a presentation I did a number of years ago about Kaizen that still might be helpful to some managers.

Kaizen of Manufacturing Cell Set Up

We are in a fight and how to win it...

David Brown — Wed, 04 Jan 2012 21:08:09 GMT

One of my initiatives this year is to reach out to more people and hear from them, their ideas and share mine. I've restarted my blog, as part of my firm's website, to open up communications and to interest people in my written and spoken ideas. As part of that effort, I thought it would be worthwhile, maybe, for readers to be able to read my older slides about the business and economic fight we are in and some of my ideas on how to win it. By the way, I'm working now on updating this base presentation and making it more interesting and timely. As with any content on this blog, you're welcome to use it, just attribute it to me.

We are in a fight and how to win it...

My approach to strategy

David Brown — Wed, 04 Jan 2012 20:54:12 GMT

My approach is to keep it simple, fact based, practical and implementable (by regular human beings not super consultants). In a graphic, here it is:

Issues Based Model

Selling your business in 2012

David Brown — Wed, 04 Jan 2012 16:37:32 GMT

Any other business decision pales in comparison with respect to importance.

The most successful sales are the result of your good planning taking into account major questions to answer including:

How does your company measure up on the three drivers (MPG) of value?:

Management
Performance
Growth

What are your (the shareholders) business, personal and estate goals?
What is the plan to maximize net value to shareholders (after taxes and expenses)?

Another tip, if you possibly can, be sure that the last 3 years financial statements are audited. That investment will be recovered in a higher selling price.

The process of an acquisition search in 2012 - important questions to answer

David Brown — Wed, 04 Jan 2012 16:08:31 GMT

As business leaders start the new year, many have thoughts of making acquisitions. Here are a few of my thoughts on questions that you should answer before moving ahead with a buy-side mandate:

How does making an acquisition fit into your firm's strategy? What problem are you trying to solve (i.e. slowing growth, limited market penetration) and how would acquiring another business resolve it?
What is your criteria for an acquisition? Size, market, location, technology, management team and other factors have to be determined so that the search process can succeed.
What transaction size is reasonable and how would a transaction be funded? You need to have a sense of market valuations of target firms then plan what transaction structure would be practical. By that I mean what amount of the price could be borrowed and what portion must be equity. In today's market, you must generally figure on equity of 40% or so. Before you commence on an active search, it is a good idea to talk with your financing sources and get their support for your effort.
How will you integrate the acquisition? The integration is the secret sauce and the art of a successful program. Most acquisitions do not meet the acquirers' goals, primarily due to failed integration programs.

Hopefully, the above questions will stimulate you and your team to develop and execute a successful plan. An acquisition can be the fastest and least expensive way to achieve a strategic goal.

Happy 2012!

David Brown — Tue, 03 Jan 2012 22:40:29 GMT

I wish for my readers an healthy and happy 2012. Let's prosper together.

Increase your firm's valuation in 2012

David Brown — Tue, 03 Jan 2012 22:23:16 GMT

As you, as a controlling shareholder of a firm, consider and prepare for its sale, assess it from a buyers point of view with a focus on these 3 points.

How strong is the management team?
What has been the firm's performance in the past 3 years? Has it improved? Was EBITDA less than 10% of sales in any one year? If so, what happened and have those problems been resolved?
What are the prospects for growth? Quantify them.

If your assessment is weak in any of these areas, address and resolve them, before taking the firm to market.