Truth, Beauty, Happiness, Shareholder Value

******************************************************************************
Many years ago (in my Strategy Consultant guise) I was sitting in a business meeting debating the strategic priorities for our client’s business.  In an attempt to provide some over-arching clarity to the somewhat rambling debate the lead consultant asserted;


"Well, I think we can all agree that Shareholder Value Creation is the most important thing”.

My good friend Justin’s response was to grin and propose the following;

“Truth, Beauty, Happiness, Shareholder Value: rank in order of importance”

*****************************************************************************

Now … I think that far from being the facetious statement it superficially appears to be, Justin rather eloquently (as befits his status as an All Souls Fellow) highlighted how easily we lose perspective in our day-to-day lives.

Many of you reading this blog will be similar to me, will have a tendency to bury yourself within the latest project and to place a ridiculous level of importance on work/business issues that - with a little perspective - can be seen to be just inconsequential frothy nonsense compared to the really important things in life like … well, like Truth, Beauty and Happiness.

Let me dwell for a moment on 'Happiness' and paraphrase one of our great modern philosophers;

“Whether it is your children, your business or your garden, happiness comes from sowing seeds, nurturing them and watching them grow.”

OK, so this particular modern philosopher was actually Ken Dodd during a radio interview; but his point is well made (and to be fair, he knows a thing or two about ‘Happiness', pointing out as he did that it is "the greatest gift that I possess").

Maybe more obviously appropriate to the (sometimes tenuous) ‘business’ rationale for this blog is Steve Jobs’ famous Stanford Commencement Speech.  I like his challenge to look yourself in the mirror every morning and ask yourself if you will enjoy your day ahead (how often can you answer that positively?) and his assertion that “we are all naked” and really have nothing (professionally) to lose.  [Of course his recent decision to step down from his post at Apple for heath reasons makes this speech all the more poignant.]

So what? Well for me personally it is true that some Happiness is to be found through business success (through ‘Shareholder Value Creation’ if you will) as I suspect it is for most with an entrepreneurial bent ; but Happiness is the goal, not business success.  So I'm consciously taking the time and effort to make sure that I enjoy the journey and not just the hoped for destination, to make sure that in the drive to ‘succeed’ I don’t lose sight of the more important things in life.
   

To stop trying to live life quickly and start succeeding to live life slowly.

To gain Perspective.

The Apprentice

I haven't watched The Apprentice for years, but last night they had a biscuit related task: as followers of my occasional biscuit blog will know, this is a subject close to my heart. So I watched it.  Well putain de merde (pardon my French) but this is an awful piece of broadcasting.

It's long been accepted that Big Brother and its reality-TV bastard off-spring are the modern day equivalent of the circus freak show, encouraging us all to laugh at the clinically confused.  Well I think the Apprentice is actually worse. Worse because it is held up by the BBC as a triumph of satisfying their 'educate & inform' objectives as well as being 'entertaining' in a notoriously difficult area to address, that of business.

Now don't get me wrong; it is entertaining (in a 'shout at the TV and laugh at the lack of self-awareness of these idiots' kind of a way) but educating and informing about life in business?  As Lord Sugar should say : 'Oh Fuck Off' (excuse my English).

Frankly 'Hole in The Wall' or 'Wipeout' (ridiculous competitions designed to make as laugh at the fools competing) are as representative of the struggles in real-life business as The Apprentice.  Actually no, they are better that the Apprentice; at least they have no illusions as to what they are.  The 'point the finger of blame' process that ends every programme is truly cringe-inducing; is this how we want to 'educate' aspiring entrepreneurs as to the realities of business life?  Do we want people to believe that to succeed in business you need to be good at bull-shit selling techniques and back-stabbing politics?  Do we think the more irritating candidates are kept in because His Sugariness thinks they are good candidates or because they make good TV?  Has a task ever involved understanding the economics of competition or being able to assemble a sensible business plan?  Does boiling the complexities of business down to a head-to-head win/lose scenario every weak help people to understand what it takes to succeed?

OK, rant over.

I'm sorry, but letting these people loose on biscuits was a step too far.

Bikes, Businesses and Gearing

Whilst probably baffling some of you with numbers, this post does explain why my twitter name is @kevverage.

I took my single-speed bike out for a spin last night (a bike with no gears for those non-cyclists among you) and as I laboured up one of the steeper climbs I got to thinking about gearing. Well, I actually got to thinking about why I would be so dumb as to choose to ride a bike with no gears; but once I was able to think about something other than breathing my thoughts turned to business.

Now gearing (or leverage) in business is a wonderful concept and perfectly analogous with the gearing most people are familiar with on a bike. There are broadly speaking two types of gearing that are normally referred to in business: Financial and Operational. I will focus here on Financial gearing and save Operational gearing for another day.

Financial gearing basically refers to the relative amount of debt on a business i.e. the level of debt versus the level of equity (or money put in by the shareholders).

A High level of debt, like a high gear on a bike, allows you to travel faster (it can also provide 'leveraged' shareholder returns, but we will come back to that). The debt gives you the cash to fund expansion, invest in working capital, expand store portfolios, make capital investments etc. When you have a following wind and a downhill slope ahead of you, having high levels of debt are great and you can fly along. Of course - like being in the big ring on a bike - when you hit a headwind or an uphill slope you will want to change gear; this is a lot easier on a bike than with a business (maybe analogous to the pre-derailleur days when riders would have to remove their back wheel and replace it the other way round to get 'the other' gear). The interest payments required to service this debt (the debt that helps you steam along when the going is easy) can bring down the business when you hit hard times. If the profit levels drop below those required to pay the interest - like struggling to turn the pedals when stuck in too high a gear - the business may grind to a halt and you face that horrible moment when you have to 'step off'.

I mentioned 'leveraged' shareholder returns; these are the main reason why businesses (and Private Equity investors) are so keen on debt and high gearing.  The simplest illustration involves buying a business (although the numbers work equally well for existing investors reinvesting in a business) so let me illustrate with a company being bought for £10m, generating £9m of cash over 5 years and then being sold for £15m (this is of course a highly attractive scenario however you finance it);

1. The company is bought using £1m of equity (money from investors for the shares in the business) and £9m of debt.  The debt is repaid using the cash generated over 5 years.  Allow me to finesse interest payments here for simplicity and say that over the 5 years the interest payments are £2m and paid directly by the investors. So when sold the investors get £15m return for their £1m+£2m = £3m investment or a £15m/£3m = 5x return
   
2. The company is bought using £10m of equity and no debt.  The shareholders therefore receive all of the £9m generated + the £15m proceeds of the sale = £24m return for their £10m investment or a £24m/£10m = 2.4x return

Now there are subtleties around interest payments, the timing of cash-flows and the discounted present value of cash that mean scenario 2. is actually slightly better than this illustration (the £8m generated by the business is received sooner than the £15m) ... but hopefully you can see by the magnitude of the numbers that scenario 1. at 5x is far more attractive than scenario 2. at 2.4x  Of course scenario 2. generates a greater absolute amount of return for the investors so you would only choose scenario 1. if you had something else to do with the spare £9m -- I think we can assume we would.


Back to our bike gearing analogy -- what happens in scenario 1 is that the 'gearing' allows a small amount of equity (a small degree of pedal turn) to buy a big business (to make a greater number of wheel revolutions).  Great as long as you don't hit tough times where - as described above - servicing the debt (turning the big ring) can bring you to a halt and make your return zero.

As an aside here, if you are a Private Equity player with a portfolio of businesses you can afford to risk a few grinding to a halt because of too much gearing given the exceptional returns you make when high gearing works. As an entrepreneur with your eggs in one basket, your view of the appropriate risk/return trade-off is likely to be somewhat more conservative. This quite rational but fundamental difference between PE investors and Entrepreneurs has created an awful lot of wealth for PE professionals and a fair amount of frustration for entrepreneurs over the last 15 years or so -- particularly when banks were so keen to provide debt to PE companies but loath to offer similar support to independent business.  But my rant on banks will need to wait until another post.

So why does this explain @kevverage?

The terms 'gearing' and 'leverage' are often used interchangeably. The debt is the 'handle', the equity the 'bit under the business' (the fulcrum just sits where debt changes to equity along the lever, which is why I don't like this analogy as much as the gearing one).  In my early consulting days leverage was talked about *a lot* and resulted in such phrases as 'leverage some beverage'  or - slightly more bizarrely - 'could you leverage me the salt?'.  It is but a small step from there to Kevverage ...

If You Don't Ask ....

A simple message today:  "If you don't ask, you don't get".

Today's message is so blindingly obvious that those of you not involved in controlling a business will think it is ridiculous to even say this; but I suspect others will likely think "Of course we should ... why don't we?"

And the staggering insight is *drum-roll* ...


Renegotiate all your key supplier contracts at least annually.


Now before shrugging and getting on with your day, test for a moment if you actually do.

When did you last competitively tender your courier contracts, email service providers, cleaning contractors, office supplies, packaging suppliers, Utilities, Insurance, security, IT support, merchant services provider, payment gateway?  If you have not tested the market you will be wasting money.

Have you had all of your key goods suppliers in to renegotiate supplier terms: settlement and over-rider discounts, payment days, scale discounts?

In my previous consulting life one of the simplest "products" we ever sold was a 'non-people cost' cost review.  Just the process of telling suppliers it was happening and inviting them in would would lead to them turning up with offers of improved terms.

So make sure this basic discipline is in place -- it normally isn't.

Training Entrepreneurs?

Today's post is a question.

Tomorrow I am speaking to the Henley Business School MBA class on entrepreneurship; can entrepreneurs be trained (groomed?) and what do you think would be most useful for them to hear?

Tweet me @kevverage, comment below or email me with your views.

Be lucky

My mate Chris (@vcmoulin) has an approach to cycling that I admire, partly because he can fair spin the pedals but mainly because he has a refreshingly laid-back approach to the whole affair. Before setting out for a long ride recently - having studied the skies and perused weather forecasts - I was unsure if I should carry a waterproof so I asked Chris what his plan was. "Stay lucky" he responded with a shrug, patting his empty rear pockets and smiling broadly.

Which brings me to the role of luck in business. It's clearly important in many walks of life: Napolean said "Give me lucky generals" and most successful entrepreneurs will admit to the role good luck has played at some point in their journey.

But is this just a bland observation? Do we sit back and passively wait to "get lucky"?

Arnold Palmer said "the more I practice the luckier I get" -- being lucky can in part be about an attitude of mind. We should never rely on luck for success, but we can make sure we engineer situations where we at least give ourselves the chance to "get lucky". So strike a bold pose and put yourself out there; be willing to take some chances and remain "in the game" even after a run of bad luck; have the patience, persistence and belief to wait for a lucky break -- and critically retain the awareness to recognise it and make the most of it when it happens (and don't mistake good luck for strategic brilliance on your part).

Having said all that ... if in doubt, always carry a waterproof. Chris got soaked; the man's a bloody idiot.

;o)

Playing the Long Game

If you think "playing the long game" means hoofing the ball forward to the big front-man then, well then frankly I despair; get to the back of the class *serious teacher face*.

I am a great believer in "playing the long game" in business though. In essence this can mean many things: being patient, taking some chances, doing some things that feel right even though you can't see the obvious benefit, being willing to make long term investments, sacrificing short-term profit for long term brand building, etc.

But today (as our banking switch from HBoS to HSBC was completed) I was reminded of a particular aspect of "playing the long game" that always gives me disproportionate pleasure when it bears fruit. I believe in "doing right" by people in business as much as in life and and when I feel slighted or taken advantage of I confess I do bear a grudge, often comforting myself by muttering under my breath that "it's a long game" and believing that retribution will come, eventually.

I won't air too much laundry in public here but suffice to say I enjoyed the call to my 'relationship manager' at HBoS when we informed them we were switching. She seemed genuinely surprised, despite our last meeting ending with me pointing out that they "couldn't be less helpful if they tried" and ushering from the building whilst muttering under my breath ...

I don't think I am alone in this. If you hear Richard Branson speaking you will often hear him name-checking Coutts for nearly bankrupting him by withdrawing his overdraft (with no notice) in Virgin Atlantic's early days.  I like to think that when Coutts broke the news he muttered under his breath "It's a long game" ... and now delights in publicly bad-mouthing them at every opportunity.  Another famous Branson example  is when he was turned away from the Rooftop Gardens nightclub in Knightsbridge for wearing jeans ... and within a year he returned and bought the nightclub.

We won't all get to serve revenge as sweetly or dramatically as Sir Richard ... but playing the long game and remembering that revenge is a dish best served cold can help us all through some of the darker hours.

When Profit isn't Profit

Yesterday's post generated some interesting responses, mostly positive but some questioning why I would air such thoughts in a public forum. It might help explain the rules of engagement I decided on when I set myself the challenge of writing one of these posts a day:

• Be disciplined with the amount of time I spend writing each post (I try for under 30 mins)
• Be open and honest (it saves a lot of time in business and life)
• Avoid being too self-censorious around what I was revealing
• Not worry too much about how my thoughts might be received

Hopefully by conforming to theses rules I will manage to generate one of these a day and (although quality and style will inevitably vary) maybe from time-to-time I will  "inform, educate and entertain" (if those Reithian objectives are good enough for the BBC, they're good enough for me).

****

The topic of  "When Profit Isn't Profit" is one I expect I will return today but today's "Top Tips" are specific and simple (and aimed mainly at new businesses that have to invest in stock)

1. You won't know how much profit you are making until you have turned your stock.
2. Discount Deep, Discount Early

If these are statements of the obvious to you there is no need to read on; otherwise ...

As covered to some extent in my Amazing Balancing Act post (and you likely understand already), when you spend money on stock it goes on your balance sheet but doesn't touch your Profit & Loss (P&L); it affects your P&L as and when you sell it.  This means if your stock is unsaleable at your expected sales price, *when* you come to sell it you will generate far less profit than you have on the freely selling stock that generate your early sales. Typically this means in the first 12 - 18 months businesses over-estimate their true profitability because they have stock that has not fully turned (i.e. items that have never sold-through and been re-bought); only when these items are sold (the stock is 'turned') do you see the true profitability of the business.  Of course you would expect to get better at knowing what to buy and therefore improve your profitability over time, but most businesses inevitably have some material level of 'failed' stock.

As a related point there is another mantra which is often heard in our offices: "Discount Deep, Discount Early".  In effect this means if mistakes have been made on stock purchases (they inevitably will from time-to-time) then recognise it and deal with it by moving the stock on.  As a crude rule of thumb we reckon that pretty much anything will sell at half-price --- better to go straight to 50% off and move the stock on so you clear stock space, generate some sales buzz and don't kid yourself that you are making more money than you really are.

What Motivates Us: A Deeply Personal Perspective

Further to yesterday’s post I succeeded - despite my puritanical streak and cynical outlook – to enjoy myself greatly at the Richard Branson / Sunday Times Fast Track 100 dinner last night.  The speakers included ‘Sir Richard’ himself of course but also a selection of highly successful entrepreneurs and - as a wild-card -  a NASA astronaut who had returned to our planet just a week ago (a line he heroically resisted using).

Listening to the speeches (where a common theme was ‘what has driven me’) and chatting with some of the wide variety of entrepreneurial types there I got to thinking about what makes a good entrepreneur and what motivates them.

Kev’s Theory of Entrepreneurial Motivation

My tentative conclusion is hardly controversial but runs as follows:  Successful entrepreneurs cover a wide variety of personality types, a range of different management styles, have differing degrees of financial ambition, pursue alternative business philosophies and range from highly intuitive/creative individuals to devoutly analytical and rational ones … but they all have something in common: they have something to prove.

Examples on show last night included (at least in my analysis) people motivated by personal academic failings, by trying to emerge from under an older sibling’s shadow,  by seeking parental approval or by the peer pressure of others’ apparent successes.

Now, for the record, I wouldn’t yet count myself as a successful entrepreneur, rather one who is striving to be a success (which may in itself tell you something about my personality type); but I feel it is only fair in the spirit of this blog to test my hypothesis on myself.  Here we enter the ‘deeply personal’ territory. I suspect I have saved a potential fortune on psychotherapist fees by always being pretty open about this stuff but if you are embarrassed by others’ revelatory back-stories, look away now.

My Back-Story

At its most fundamental I suspect my motivation is to seek the (unobtainable) approval of absent (or non-existent) father figures.

I never knew my biological father (or ‘DNA donor’ to steal Lance Armstrong’s rather apposite phrase) who I think left when I was a 2 year old.  I then had a step-father (and step-brother, who stole my first name as it happens but that is another story) for 8 years, neither of whom I saw again after my Mum ‘walked us out’ of that situation.  My next step-father was around for 8 years or so before suffering a rather dramatic break-down as that relationship ended; I haven’t seen him since. Then my Mum settled with a clinically insane paranoid schizophrenic (it’s a long story), but by that stage there was no pretence of this one being a father figure as I was off to University anyway.

This all led to a rather peripatetic lifestyle and some ‘interesting’ living arrangements – I think 16 abodes (including house-boats, caravans, a tent) by the time I was 12 – which in itself I am sure has influenced my outlook in later life; but let’s focus on the ‘father figure’ question which I suspect is the core motivator for me.

I’m a father of two and - although divorced now (go figure) – I strive hard to be a good Dad to them.  I find it unfathomable that my biological father and both my step-fathers failed ever to properly engage or bond with me. They all seemed to simply strike me from their lives when their relationship with my Mum ended (as, to be fair, I guess I did them … although how much say I had in that is a moot point).  Now maybe the fault lies with them, maybe with my Mum … but I guess somewhere deep down I must wonder whether it was my fault. What was (is?) wrong with me that none of these men seemed to want to be my Dad?

We each have our own motivations in life but I’m a great believer that most driven people are at their core insecure, desperately trying to prove something, desperately seeking approval.  In my case (as in most I suspect) it is a proof that can of course never be achieved.  Hopefully at least the energy and drive that comes from this insecurity ultimately leads to something positive.

The ultimate achievement may be to realise that in fact there is no need to prove anything, no need to seek external approval or validation. The hope must be that with that realisation comes the ability to relax, have fun and simply enjoy life for what it is.

Loneliness and Vanity

I'm writing this post whilst travelling to Oxford for the Sunday Times Fast Track 100 dinner (as both the companies I am involved with - M8 Group Ltd and Endura Ltd - qualified this year) and I've realised I'm in the process of breaking one of my golden rules.

Entrepreneurial life can be lonely and at times frankly quite tedious. Don't get me wrong, I love what I do but sometimes I yearn for the variety and intellectual stimulation that comes from interacting with other like-minded people and businesses in other sectors.  The risk of course is that one gets drawn into spending time doing things that address that itch for social interaction and intellectual stimulation at the expensive of the day job.

So I have a personal rule: to avoid ego-massaging events and self-publicising competitions. More often than not the motivation for getting involved in these is simply to feed one's own vanity and search for interest rather than to really help the business.  In fact, these events can in themselves be described as Time Thieves (see earlier post).

Back in 2002 M8 Group acquired the assets of two *very* bust .com boom businesses: Greenfingers and ThinkNatural.  Buying assets from receivers is an interesting topic in itself but one specific incident sticks in my mind in relation to this topic.  We had 24 hours to clear the assets out of the head offices of these businesses  and one of the tasks was trawling through the shelves of documents to see if there was anything worth taking with us. At the time I was struck by the acres of trade-press cuttings (none of which would have been seen by a prospective customer of the business) and the  impressive shelf of plaques and industry awards we had to wade through to try and find anthing of value.  You have to wonder how much effort was spent on pursuing these vanity based affirmations of how great the businesses were whilst the businesses slowly (well, rapidly actually) ran into the ground (burning over £20m in the process).

I'm sure I'll have fun tonight and hopefully meet some interesting people; but I will have a nagging worry that attending this event is the first sign that I'm allowing loneliness and vanity o affect my judgement.