5 Ways GE is charging up their tired batteries

Jeff Immelt spoke before the Detroit Economic Club yesterday and I got summary notes from Judith Ellis via Tom Peters web site. Here is some of what he said:
"Many bought into the idea that America could go from a technology-based, export-oriented powerhouse to a services-led, consumption-based economy — and somehow still expect to prosper. That idea was flat wrong."
"Recently my colleague Peter Loescher, the CEO of Siemens, extolled the importance of Germany as an exporting country. In my career, I have never heard an American CEO say that the United States should be leading in exports. Well, I am saying it today: This country ought to be, and we can be, not just the world’s leading market but a leading exporter as well. GE plans to lead this effort. We have restructured during the downturn, adjusting to the market realities. At the same time, we are increasing our investments. We plan to launch more new products during this downturn than at any time in our history. We will sell these products in every corner of the world. We are creating a better company coming out of this reset. Similarly, America needs a dramatic industrial renewal. We have to move forward on five fronts."
First: Increase investment in research and development.

"GE has never forgotten the importance of R&D. Each year, we put six percent of our industrial revenue back into technology — so much that more than half of the products we sell today didn’t even exist a decade ago. As a consequence, we are a huge exporter… GE’s R&D budget has not been cut. And that’s a course of action I’d recommend to every company that wants to get through the economic crisis even stronger than before."
Second: America should get busy addressing the two biggest global challenges — clean energy and affordable health care.

"There is no question whether there will be break throughs in these areas — just by who and when. The leader in these fields will dominate the global economy in the decades that come."
Third: We must make a serious commitment to manufacturing and exports.

"This is a national imperative. "We all know that the American consumer cannot lead our recovery. This economy must be driven by business investment and exports… America has to get back in that game … and it starts with a strong core of innovation."
Fourth: We should welcome the government as a catalyst for leadership and change.

"There’s a long history in this country of government spending that prepares the way for new industries that thrive for generations. Think of the NIH or NASA, and all the new innovations that came out of these programs — from computing to communications to health care. America has that kind of chance with unprecedented levels of new government investment. ... The key is making sure those hundreds of billions of dollars fall on the fertile ground of innovation, and not bureaucracy."
Fifth: It is possible for a global business leader to also be a good citizen.

"We must partner in our communities. Big business should work with smaller companies in our supply chain to help them compete globally. And we should partner with local governments to fix our education system. In the end, business leaders are accountable for the competitiveness of their own country. We must say so publicly. This will not hurt our ability to globalize. Rather, I think it will make other countries admire our business leaders more. We must end the impression that American CEOs are short-term speculators."

Fighting words from Immelt and interesting themes.

Here in Canada, our Government is certainly listening and asking what they can do to help business. Government can play a big role in driving markets and being the first customer of size. At least Jeff Immelt is an American leader taking all the criticism about the US and, as a result, doing something differently today. Lead on, Jeff.

An equation for valuation

Mary Bitti has a good article in The National Post. Read online.
Armada Data Corp. is a bright spot in the auto industry. With car sales down 15% to 20% in the past three months and GM and Chrysler continuing their downward slide, Mississauga, Ont.-based Armada Data is enjoying a 40% to 50% jump in sales and a doubling of market share, and it has plans to expand through acquisition.
In its 10th year, the company listed on the TSX Venture Exchange in Vancouver, gathers new car pricing data and sells the information directly to new car buyers via Car Cost Canada.
"We help consumers save money by giving them the information they need to negotiate a better price," says Paul Timoteo, president of Armada Data. "In these times, people are shopping around more. The more research they do, the more they see the value in our service. We've seen a huge spike in sales in the past six months."
Strong sales plus a debt-free balance sheet have placed Armada Data in shopping mode, and it is now looking at potential acquisitions. "When it comes to assessing value, I know what to look for," Mr. Timoteo says.
Namely: the company's ability to grow; its market share; its rate of growth; its history of profitability, current profitability and potential for future profitability; and its debt load. That's the financial side. Then there are the less tangible questions such as: How uniquely is it positioned in the marketplace? Who are its competitors? How does it compare to those competitors? What kind of marketing initiatives is it involved in? How do consumers and investors look at the company?
"If your company is profitable, typically the market says your company is worth anywhere from five to 10 times its annual profit," Mr. Timoteo says.
"That said, if we feel that merging a company with ours will disproportionately increase the value of our company, I may be prepared to pay more than it's theoretically worth because I know together we'll grow faster than either of us would have on our own."
That is why Jacoline Loewen of corporate finance firm Loewen & Partners and author of Money Magnet: How to Attract Investors to your Business, describes valuation as an art not a science. "It's expectations. How you sell yourself is huge," she says.
"It's about a lot more than money. Sales revenues give you enormous credibility but many companies get investment without any revenues. Angels will want to help because they like you and your business. At the end of the day you have to be able to stand by your valuation, build a case for the amount of time you've put in, the goodwill of your brand, your intellectual property," Ms. Loewen says.
How you choose to build that case may take different approaches says Steve Gedeon, professor of entrepreneurship at Ryerson University's Ted Rogers School of Management.
"There are essentially three reasons an entrepreneur would put a value on their business: To attract investment or if you are selling shares or selling the entire company; in the event of divorce or for estate-planning purposes; or if you want to offer employees stock options," he says.
"There are many different ways to go about placing a value on the business. The valuation method you choose is the starting point for negotiation. Ultimately, a company is only worth what someone is willing to pay for it."
Mr. Gedeon outlines three approaches to business valuation:
-Discounted cash flow, which is the net present value of all future profits of the company. "The trouble, of course, is nobody knows what the future will hold," Mr. Gedeon says.
-Similar company transaction, where basically, you adopt the known price someone was willing to pay for a company like yours.
-Replacement method, which pegs value at the cost to recreate the company.
When it comes to startups a rule of thumb applies: "Early stage businesses that don't have revenue will never be worth more than $2-million," Ms. Loewen says.
To build value, Mr. Gedeon, shares this rule of thumb: "The larger your profits and the more stable they are, the higher the valuation. How do you build stability? Diversify your client base and increase your differentiation in the market."
For Mr. Timoteo, the key to being profitable is simple: "Either increase revenue or lower your expenses. If you can do both you're in good shape."
The National Angel Capital Organizations' Best Practices Guide for Angel Groups and Investors ( angelinvestor.ca/Best_Practices.asp)has a detailed review of valuation methods.

Kevin O'Leary hates private equity

Kevin O’Leary says that he hates private equity – he threw out this comment on Twitter (I am enjoying his tweets). In actual fact, with Kevin's trademark honesty, he hits on the truth.
I can get Kevin’s pain.
Private equity investing ain't for most investors because most people only want to give their money out for a year, and then they want to get it back.

Private equity’s horizon is a far longer arc so there's your first hurdle.

Then investors used to public markets want to be passive investors, putting in money but nothing else. According to his Twitter tweets, Kevin wants to sit on his dock in Muskoka, sipping wine, deciding whether to BBQ ribs or not, and collecting interest on his investments.

Quite right, Kev...don't we all?
Private equity is not the usual asset class or public market vehicle you can pick up or drop overnight. It is for the long term. For investors like Kevin who likes to have his money come home to visit Daddy once in a while, private equity (with its five year investment horizon) is simply too long term.

Yes, I hear you saying that the returns on the initial lump investment will be larger than the public market returns, but private equity investors also put a great deal of effort into building the business too (not as much time for the wine sipping and BBQing). For investors who do not know how to do strategy with the company management team, or do not want to attend board meetings or pick up the phone and help sales – leave private equity alone. You will only get more burnt than Kevin O'Leary's BBQ ribs.
O’Leary’s right – private equity is hard. Funny thing though, I think Kevin would be a great private equity investor as owners would appreciate his candour, his rolodex, his big vision and his energy. Now, with all this talk about ribs, I'm going for lunch.

How far do you go to invest?

How far from your office should you go to invest in companies? Would you be only interested in twenty clicks of Toronto or will you look past the Southern Ontario iron curtain?
Financial gurus are bellowing that the next twenty years growth will be in BRIC countries. "You need to move on to richer, more verdant pastures!" How will this play out for private equity?
Where to find growth is a pressing question and it is a difficult challenge for small PE firms. How will these Canadian private equity experts invest? Will it be directly into Indian and Chinese companies? The more likely scenario is to invest in Canadian companies doing business with BRIC countries?
I do know that the equity partners within a few hours drive are more likely to consistently show up to the Board meetings, contribute and even drive the strategy, get people into the office on Mondays to drive the action and generally make themselves very useful.
If the PE firm can do all of that even if far away, then terrific.
Here's Carried Interest chatting about his investment in an Australian company and they challenges he is learning about - including the language. Turns out that even though they speak English, "S'tralian has to be translated a bit. Read more...

Do this with your family

Do you remember a particular tree from your summers past? Is there a tree your family gathers beneath and has shared history with you? Here's your chance to do something with your family this summer.

A province-wide program to identify trees across the province with stories was announced today by Trees Ontario. The Heritage Tree program celebrates those trees that have cultural or historical significance to the community or province.
Heritage Trees could be those around which a community has held an annual picnic for the past 100 years, the tree that was planted to commemorate a coronation or other important international event, a tree that was planted to celebrate the life of a soldier or one in an historically designated neighbourhood. The trees should be part of the fabric of that community.
Anyone can nominate a tree by registering on the Trees Ontario Heritage Tree web site (http://www.blogger.com/www.heritagetrees.on.ca). A nominated tree is evaluated by a Trees Ontario representative based on the following characteristics: its historical and cultural importance to local and broader community; rarity of species; prominence based on size and age; aesthetics and/or artistic peculiarity; and its physical conditions and expected longevity. The evaluation criteria can be found on the Heritage Tree web site.
If the tree meets the above criteria, it will be placed into the Heritage Trees online database. If identified as a Heritage Tree it will also be recognized with a certificate.
A Heritage Tree is usually more than 70 years old. What sets them apart is the important cultural and historical significance they represent. “If these trees could talk, they could provide an intriguing history lesson about the people and land around which they are rooted,” said Michael G. Scott, President and CEO, Trees Ontario. “For the communities and people that enjoy, celebrate and nurture these green giants, they are a source of pride, full of rich memories and stories that they can now share.”
The Ontario Urban Forest Council’s (OUFC) Heritage Tree Toolkit formed the basis for the Trees Ontario Heritage Tree program. “The toolkit was developed in response to the public’s interest in identifying heritage trees in the community,” said Jack Radecki, Executive Director, OUFC. “OUFC is thrilled to be working with Trees Ontario to launch the online provincial program.”
“We are pleased to be working with OUFC to extend their Heritage Tree Toolkit into a province-wide program available to the public,” Scott continued. “We look forward to receiving nominations from across the province and to reading wonderful stories about important trees in our province.”
Trees Ontario has already begun working with other agencies to identify some trees that could be nominated. These are currently under review by Trees Ontario representatives and include trees from Aylmer, Cataraqui, Collingwood, Prince Edward County and Toronto.
Another important aspect of this program is the opportunity to collect seeds from recognized, native Heritage Trees, thus ensuring that the tree’s seeds live on. Trees Ontario plans to work with local communities to locate and collect these seeds. Growing trees from native seeds is important as those species have adapted to the regional environment over thousands of years and are more likely to survive.
For more information on Trees Ontario and the Heritage Tree Program, visit http://www.blogger.com/www.heritagetrees.on.ca.

Jack Welch gets into videos.

Listening to business leaders is a great way to leap frog your own company, and the business podcasts on iTunes are one way to get access to the best business minds in the world.
One of my favourite podcasts is Jack and Suzy Welch, listed under BusinessWeek. Each week, Jack riffs about business, with Suzy pushing for clarification. It's a great listen. Jack is now starting his online university and all I can say, this is the new way of education.
Here is the next level of Jack and Suzy's show.
RT @jack_welch: Web show- It’s Everybody’s Business (with Microsoft) View it here. http://bit.ly/6dCCF

Those tasty green shoots turn out to be weeds

Worries about the economy are keeping market analysts up at night. I appreciated getting a good news story from Lynn Lewis at Scotia Mcleod, Toronto to help understand the situation.
Green shoots turn out to be weeds, says Ross McKitrick, Financial Post:
The four problems are: the diluted balance sheet of the U. S. Federal Reserve; Obama's deficit binge; the growing wave of "Option-ARM" mortgage resets in U. S. real estate; and the California state budget crisis. We need to watch how these issues develop over the summer to know whether a recovery later this year will be possible. Those green shoots could be weeds.

China will boost your bottom line

Guest Blogger this week is Dr. Michael Power, Strategist for Investec Bank, South Africa, who is on the left of the photograph. Dr. Power predicted the housing bubble popping to the exact month. I think he was so clear headed because he is not situated in North America and is not as biased by the driving wish to see economic growth return to the Western World. Here he talks about the need to be in the Chinese market. Private equity knows this but it is good to get reminded. Check out Dr. Power:

My forecast for the various parts of the global economy can be summarised as follows: the closer your economy is integrated to the Chinese economy, the more V-shaped your recovery is likely to be. The corollary of this is that the further away – broadly speaking, the more Western-oriented – your economy is from China, the more leaden-footed its recovery will be. That said, because of the base effects of Q4 ’08/Q1 ‘09, year-on-year GDP growth in Q4 ’09/Q1 ‘10 will show significant improvement in Western GDP growth patterns. But this uptick will flatter to deceive and thus be something of a false dawn: the balance of 2010 will show that the underlying GDP growth profile of the West will remain lacklustre and that the real recovery will have to wait for 2011 and beyond. In short, the West’s recovery letter will more likely be a ‘W’. How ironic yet appropriate that the Dubya era will sign off with a period of Dubya-shaped economic growth!
And, off in the far distance, there is a second debate coalescing along the lines of “Even if the US does have to endure a W-shaped recovery, just how robust will that final up-leg be?” The fear is that it might not be the incline of a steep hill but rather that of a gentle slope. Furthermore, the fear is that the new trend GDP growth rate it will gravitate towards will be materially lower than the old, pre-2008 level of 3.0% to 3.5%; 2.0% trend is the whispered number. If so, then perhaps the US (and most likely most of the West with it) is indeed turning Japanese.
You can reach Dr. Power at his email address - michael.power at investecmail.com

Building Canada - one business at a time

Here's an email that inspires me.

Dear Jacoline:
As previously indicated, here is proof of the value of your book. Cheers! Rolf Eichfuss.

(Rolf features in Money Magnet and he is tireless in his quest to help Canadian entrepreneurs.)

Hello Rolf,
I am will be returning your copy of "Money Magnet" to you tomorrow. I used temporary markers to highlight useful sections of the book. As you can see from the attached photos, I pretty much covered the whole book.

What the heck is an exit strategy?

Leading business owners use Exit Strategy to make better decisions for the long-term value of their enterprise.As a business owner, the long term legacy of your company should be a fairly important consideration. Yet, according to a Queens University SME study, an astonishing 82% of owners do not have an exit strategy. In other words, only 18% of CEOs have planned how to get out of their company with a cash payment. The others are doing what comes naturally – waiting until retirement creeps up or is forced.

The “exit” from the business does not have to be a sale either. A business owner has the choice of inviting in private equity investors to buy half the business, allowing them to take some chips off the table to invest in RIM or a cottage. Before involving investors, do think about what companies out there might like to buy your business and why. Otherwise, the lack of a solid exit strategy demonstrating how investors can recoup their initial investment can turn off potential suitors with cash.
From Wishful Thinking to Reality
I guess it is natural that entrepreneurs who tend to rely on the old hit-and-miss, fly by the seat-of-the-pants approach of dealing with other parts of business put off their exit strategy. Tragically, this means that all the blood, sweat and tears shed by the entrepreneur in her business could fade away into oblivion without much value. With a bit of decision making today, however, the smart entrepreneur can maximize the return for her hard work.
An Exit Date Forces Action
Close your office door, get out a pen and paper and write down the exact date and strategy of your exit, it may be 5 years or 10, and state if you would be selling to a competitor or having your daughter take over. The specific details and timing are not important – it is the psychological power of having a date and a rough plan that will wake you up to the fact that one day you need to exit your business. A written plan and potential exit date will assist your management team and advisors in a course of action.
Example:
With a long view to the finish line, a good tax accountant will be able to assist you with minimizing your taxes. Maybe you will not reach that dreamed level of the IPO, but you can be assured you will be further along in organizing for the best sale value.
Put the Focus on Talent
Identifying a destination date also deals with one of the most common problems of successful entrepreneurs - ensuring the company can operate without them. Too many business leaders cannot step away from the business without it falling apart, which only reduces the value of their company. This common trap of micromanaging squashes the development of management skills as human beings learn from making decisions and mistakes. With an exit date fixed, the gaps in talent will become obvious, encouraging owners to deal with issues sooner than later.
It is a common observation that children of entrepreneurs are often overshadowed by the owner/parent. If you are interested in passing your business to your children, the setting of an exit date would encourage an earlier transition.
Example:
An exit date delivers a clear path for the next generation, showing the opportunity, instead of a vague promise of “Someday all this will be yours…or your brother’s.” Once family members are let in on the timeframe, the dynamics will change rapidly and entrepreneurs may be surprised at who steps forward with an interest in taking over the reins. The second generation can trust that there is a role for them and begin to take more risks, learning from mistakes while the expertise of the founder is still easily accessible.
Link the Personal and the Business
When you own your own business, personal issues are closely linked to with the business and, for true success, you need to manage both. By sharing your vision for the business with your spouse and children, family members will get a better grasp of the legacy you want to create. They will become more accommodating about the amount of time you are devoting to work once they know your time frame to leave the business.
You can also get your personal life more co-ordinated. Perhaps it is time to buy that smaller home in the location your spouse always dreamed about and get the new life going. Too many owners sell their business and then experience a massive shock from loss of a huge part of their lives. (Spouses also suffer!)
Call your doctor and make the time to have your annual medical tests. This may seem an obvious statement that has nothing to do with exit strategy, but your health impacts on the business and you should catch problems early. Do your family a favour and keep informed about your health as it affects their life too.
Example:
Remember that bumps in the road can change plans in a dramatic way but, with an exit date set earlier, management can be the little bit more prepared. Being diagnosed with cancer can move your sell point or ‘access point’ from five years to three months. If you prepare for an exit within five years time, even as a simple exercise, you can reduce stress at a time when your family needs you the most.
Know your Role in your Business
Michael Gerber, author of The Entrepreneurial Myth, says too many entrepreneurs are looking down at their desk when they should be looking outwards for new opportunities. Your job as the owner is to work on the business, not in the business.
Ask yourself if you are one of those business owners who prefer to focus on building the profit and cash flow? Be warned - this is tactical. Instead, you should be overseeing the managers and not doing the work.
Push the Vision to Produce Results
Golfing with the girls or sailing at Muskoka can inspire flashes of brilliance on how to improve the value of your business. It is astonishing how many business owners tell potential buyers what would boost the worth of the business considerably, but have not executed these clever ideas themselves. Don’t wait for someone else to make money on your vision - do the activities now that you know will add value to the bottom line. When you have an exit date, you will be surprised at how it turns up the heat psychologically to get more done. Maybe you postpone a golf game or two, but in the time frame of your exit strategy, the pay-off will be very worthwhile.
Example:
If you are imagining an IPO in five years, you will see the tremendous growth required to achieve this goal. Perhaps you will look at other options such as merger, buy-out or franchising.
In summary, with short term vision, it is no wonder that many businesses struggle to get the recognition and financial backing they richly deserve. An exit strategy can make sure you do retire rich, and surely that is worth a little bit of effort now?
Jacoline Loewen is an experienced business advisor, lecturer and writer who raises capital for growth companies. Her latest book is Money Magnet, Attract Investors to Your Business.