Step 1 - Take Command of your Business in 100 Days - The 80/20 CEO

Hello again, everyone. I'm Bill Canady. It's great to be with you again today. So, last time we talked about the 80/20 CEO and the first 100 days. On this one, we're going to talk about what is the first step, right? There's 4 steps that we go through in order to take command of the company and get it back on the rails. And you may remember, so step 1 was set a goal. Step 2 is determine the strategy that it takes to go achieve that goal. Step 3 is the structure that we'll need to organize the company around if we're gonna achieve the strategy. And the final one is the action that's gonna go take, putting it down on paper and the plans and hanging that out to the team. So today we're gonna cover step 1. I thought I would start with— With my book. And as you can see, I have got a lot of advertising going on here. So, hope you are having fun with it. I know I am. But I thought I would just read a little bit about step 1 on setting a goal. And then, I talk to you about how that works and what my experiences have been. Step 1, set the goal. A surprising number of people find these 3 words to be terrifying. Set a goal. Some are overwhelmed by the range of possibilities. And others are discouraged by the dearth of options. To me, I never sweat it, and you don't have to either. The thing I love about setting a goal is, particularly in private equity, in the world that I operate, is it's all tied back to the earnings. And we use one key metric, EBITDA, earnings before interest, taxes, and depreciation. You know, there's a lot of controversy around EBITDA. Is it a real number or not a real number? It's not cash earnings. But the fact remains, that is the number that in at least the private equity I've been with, that's the number that we focus around when we're buying and selling companies. And since if you're coming in as a CEO, you got that big job, that's the number you're going to be focused on. And one of the first things that I do is whatever the compensation plans, whatever the structures are around the organization, we try to get them all focused around EBITDA. So we're all absolutely tied to the same number. I'm talking about the management and bonus structures and things like that. Commissions and things and other things may be paid slightly different. So, you got the job, you showed up, it's your first big meeting you're going to have. I'd encourage it to be this one. Let me tell you how I did it, right? So, I get the team together and we go offsite, typically to some local hotel or a conference or whatever we can find. Nothing fancy. You know, remember you're new in this and you want to set a proper level. And also the fact that you are new probably speaks to the fact that business has been struggling and we're gonna need to turn the business around. So we want to start right out with having clarity with where we're going. So get all your team together, the folks that report to you, get them into a room. And the objective is one simple thing: pick a number that it's going to take To make this business successful. And by successful, remember in private equity, the goal is always to sell the business. We buy 'em, we fix 'em up, we get 'em aligned, we simplify them. Most importantly, we increase their earnings. As I have spoken in the past, maybe in past times, people could come in and just tear the company apart and get cash that way. But those days are over. Today, we gotta come in and absolutely increase the value. I'm blessed to be with a fantastic private equity firm And the overriding arch is we invest to grow the business both organically and organically. So, you got the whole team together, you're at the hotel, you're in some type of conference room. And for me, before I walk in there, I'm sitting down with my CFO, my chief financial officer, and we're going to walk through what we have available to us, right? And it's going to be really driven by 3 things. So, the first is, What is the number that we must get EBITDA or earnings to in order to take and have an exit price that everyone gets a reasonable return? And the returns can vary depending on your investors, what they're looking for. Typically, what's considered a good return is something 3 times multiple of invested cash or the money folks actually put in there. is considered a good return. 2's okay, 3's better, and if you get 4 or beyond, it's rockstar. Those are hard to get, make no mistakes about that. We'll talk about multiples on invested cash in a future video, but today we're going to talk about how we set that number. So we'll look at whatever it is that we've invested, and let's say for the sake of our argument, We've invested $100 million in equity, $100 million. And it's always easier to work with whole numbers that are simple. So, I'm going to pick $100 million. And we would like a very good return. So, we're shooting to get $300 million worth of return on that, right? That would be a typical piece that we're looking for. In addition to that, and this is also important, in some ways even more important, we're looking to do that quickly. We're going to take and have a plan that will put us somewhere generally between 3 years and 5 years. The average exit for a private equity company today is just a little bit beyond 6 years. That is lengthening with the financial crisis that the market's going through, higher interest rates and things like that. I would expect it to go out. Nonetheless, when we're coming in, that's what we're looking for and we're going to build a plan around it. Now, 2 things are important on that. So the first is, What is the shape of the business? How much debt do we have on it? How much do we have to go pay back? What does that look like? Second is, when we bought the company and we put equity in, in this case, we put $100 million in. Let's say that we also borrowed $100 million. So we've got 50% equity, 50% cash there that, that we're dealing with. How much above the debt that we took on, how much How much additional capacity do we have to go buy companies? So maybe we used $100 million of our capacity to pay the former owners. Did we have any additional capacity above those loans to pay the former owners? It's important that you have that. That's where you're going to get the money from. Typically, when the company is bought, the private equity firm or the partners or the investors, whoever that may be, Uh, is not looking to put more money in. They'll set the capital structure up, uh, with one, uh, the minimum amount of equity they think that it needs to support the business. And the second one is, uh, is enough debt that they can go out and buy that. So if you paid $100 million or you paid $200 million for it and you have $100 million in debt that went to it and $100 million in equity, uh, hopefully at the same time you've got additional debt capacity And typically in the form of a revolver loan or a DD, a direct draw term loan. And basically the way to think of those, they're kind of like a credit card and you're going to want to go out there, buy your companies with that capacity, whatever that is. And then that, that'll decide how much you can go buy. So you're sitting there, you looked at your balance sheet capacity, you have to go buy companies. That's going to determine how much you can buy if you want. To increase that, typically your company has to perform better. And the way that we do that is through organic sales, right? So we want the sales side to grow at the same time that during our ownership. So as we're walking in that meeting, we're going to have a couple of numbers already in our head. The first is what is our current earnings and how does that compare to where we want it to be? What is the debt capacity that we have in order to go buy additional companies? And the third piece of it is, what does good look like? What do we need to exit with to get a superior return, to get our capital times 3 back in somewhere around 3 to 5 years? So, myself and my CFO will sit down, work through those numbers. Now, here's the part of it, and here's the reason just my CFO and I can do it. It's irrefutable. What I mean by that is the numbers are what the numbers are. This has already been set once the ink is dried on the deal. Doesn't matter what comes next. That's the original piece. Now the business can perform better or worse, and that'll certainly have an influence on it. But you know going in what you need to get a return. Now you've got to take and figure out how to go go get that. So when you walk into your meeting. You should have that number in your head. And as the CEO, you want to get everyone in that room familiar with what number you're looking for. And this is really important. I can't stress this enough. It's one thing to know a number, but the folks have to feel, one, that they have clarity on what it is, and two, that it's actually possible to get there. If you're setting it at $100 million and you need to get it up to $200 million worth of earnings with it, based on the capacity you have and based on the market you're in will give you some type of information to how fast you can get there. You know, most of the markets I've worked in are what I call GDP markets, right? And that means it just grows with the economy. So if you've gotta grow 20 or 30%, but your business historically grows 3% or 2%, somewhere between 2 and 5, uh, then you got a big gap you gotta go bridge. Whatever it is going in there, you need to understand that, have command of your numbers, and lay out the case for your team. As you're in that room, it quickly becomes obvious exactly the folks in that room, what command they have of the business. Do they understand where it's at? Do they understand what the current situation is? I'll use my own personal examples. In the book, I mentioned a company called Phoenix. That's not the actual name of it, but those of you who've worked with me with it know exactly who it is. Absolutely fantastic company, wonderful people. But the company, which had been around since the '60s, was a diversified distributor and a light manufacturer of various industrial products, pumps and compressors and things like that. Wonderful products, wonderful people, but it was a typical GDP business. Uh, when you're supplying the infrastructure, uh, of this country, that typically goes up and down as infrastructure does. And what you hope to do is, is that no matter what the market is doing, you're doing better. So if the market's up 2% or 3%, you need to be up 4%, 5%, maybe even 10%. You need to have a good strategy of how you're going to go do that. So you're walking into the meeting, you know what your numbers are. We were coming in, we were sitting on about $70 million worth of earnings, right? EBITDA. And we needed to get to $200 million and we needed to get there as quick as possible. We walked in and we realized a couple of things. So the first was we had to go get $130 million worth of earnings. We were at $70, we wanted to go to $200, right? And we decided in that meeting that $30 million of that would be organic. Growth. So taking the current business we have and making it run better, plus taking the market growth. And the other $100 million would be acquisitions. So we'd have to go buy $100 million worth of businesses. And the interesting thing, I remember sitting in the room, it was quite funny. Our average deal historically of that business was between $1 and $2 million worth of EBITDA. And if you If you kind of did the math, that meant we were going to have to do between 50 and 100 deals. And we had laid it out that we'd go do it in 3 years. So it was 30 deals a year, you know, sitting there, sitting there, we knew that was kind of a tall reach. We'd probably be better off to take and go buy the bigger deals. But that was the history of it. And the idea of doing about 100 deals in 3 years. Seemed kind of far out there, but nonetheless, that's where we started. And then with the $30 million of organic earnings that we would need to go get, we kind of modeled it out and we knew a couple of things that we would need to grow this business right at about 9% at the time in order to achieve that. So, when we left the room, we had stacked hands on $200 million. That would give us the return we were looking for. We'd agreed to $100 million worth of acquisitions and $30 million worth of organic growth. Now, I'll short-circuit this by saying 3 years after that, we actually had achieved our goal, but we did not do 100 deals. We grew the business far more than the $30 million organically. And while we did a bunch of deals, you know, we increased our size. So, at the end of the day, We did get where we need to go. It was a wonderful, absolutely wonderful company. But nonetheless, the plans that you start with, you need to be prepared for this. Whatever it is needs to be adequate and maybe a little aspirational. For sure, ours was. But be prepared for them to change. And the reason why, everybody gets a vote, right? So, your business gets a vote, your customers get a vote, your competitors, the market, the economy, everything gets a vote on how it's going to do. Yeah. And I believe it was General Pershing who said, we all have wonderful plans right up until the moment that we meet the enemy. And that was for sure what we had, but it gave us a path. It got ourselves together and it focused us on what we had to do to get the business, one, to be ready to grow, and two, that in order to go do deals for us. So, it set us in a really good spot and we were pretty excited about that. We went into the meeting knowing what the number was. When we walked out of that meeting, we had agreed what the number was and everybody had ideas. Now, walking out of that meeting, we set the next stage, which was going to be, I believe it was about 45 days later. It was just where the calendar was and holidays and things like that. But for you and for all of us, you typically want to do the next phase in somewhere around 30 days. And the next phase, as you'll remember, is to set the strategy. So, on the next video I do, we'll talk about what we did to get the strategy from it. And I think you'll be excited about it. It was a really fun ride and the team did outstanding with it. So, listen, thank you so much for listening today. Looking forward to doing the next one. I'm Bill Canady, the author of The 80/20 CEO, and really look forward to chatting each and every one of you. A couple of things. So like the video if you can, subscribe to the channel, really appreciate that. And secondarily, if you want more information, go to my website, billcanady.com. You can see the spelling behind me there on the wall. And there's lots more information, talks about a lot of the journeys and the things we've done. So thank you all and have a great day.