Identifying Best Fit with Your Firm

U.S. PE funds can provide a compelling financial offer while also bringing relevant industry experience. As business owners, an investor that is able to gain a firm grasp of your business concept quickly is advantageous. Otherwise, the investor can be a costly drain on your time.

In selecting a best-fit investor, your needs as a business owner must be aligned with the investor you select. There are a wide variety of PE funds, tailored to a variety of business owner’s needs. Will the PE fund add identifiable value?

A lot of PE funds simply supply the capital injection and remain a passive investor for the term of the investment. Others are much more focused in providing a team effort with management to kick-start the growth plan.  If applicable, a PE fund can also assist with U.S. expansion.

I encourage business owners to ask for the track record of PE funds. Canadian companies should opt-out or avoid being the test case for a fund’s first Canadian investment. “What is the fund’s track record in Canada?” Call up the list of CEOs the PE fund has worked with in the past. They can shed light on the relationship and experience.

Evaluate the fund’s total strategy and investing style for compatibility. There is a huge diversity in the U.S. realm of PE funds. Funds typically vary in size of investment, industry focus, preferred stage of investment company, ownership of investment, and board participation to name a few. PE funds invest in late stage growth where products already exist and there is a revenue stream. Large investments can be up to $100 million USD in equity or as small as $10 to 15 million USD. With their equity stake, some funds may prefer a control or minority ownership position.

Typically PE funds reside on the board of the investee company as either active or passive board members. Active is good, but not undermining management, which often can be a slippery slope. The degree of diversity of investment professionals is also important as business owners should be looking for board members who provide expertise in a wide range of business areas. Maturity of the fund is also imperative as the stage of the fund’s life will dictate the timeline of investment. 

Chinese Stock market down 22%

We had a very busy week in Ontario. There was a 5.0 earthquake, with the epicenter 61 km north of Ottawa. The earthquake could be felt from Montreal to Toronto. A tornado touched down in Midland and now we are enduring the G20 Summit Lockdown in Toronto. I saw Goodluck, the Nigerian leader, get into his limo and spoke to Kola, one of the Nigerian guards. They have been enjoying the warm weather and are impressed with how clean and quiet Toronto seems. The streets are empty and it seems like a scene from Zombies in the City.

While this was happening around us, the markets were also enduring a very rough week pulling the returns for the month and the year back into negative territory. Year-to-date the S&P TSX Composite is down -.65%, the S&P 500 is down -3.77% and the Dow Jones is down -2.92%. What you may not know is that the Chinese stock market is down -22% year-to-date and other international indices are also in negative territory. The markets are currently in a trading range and we have gone back to touch the 50-day and 200-day moving averages. With more and more economic indicators coming in below expectations even the most ardent commodity bull has to step back and assess at least the near-and intermediate-term landscape. 

Private equity is awash with cash - for now. In two years time, the tides will have receded though. For business owners, entrepreneurs and CEOs, now is the time to look seriously at private equity partners. There is no market mood to affect your valuation of your business and you get experts putting their thinking caps on to build your business. Right now, we all need all the help we can get.

Jacoline Loewen, expert in private equity and family business and author of Money Magnet: Attracting Investors to Your Business which is now a text book at Ivey Business School.

If you’re following Steve Jobs’ advice, you must know the risks to growing

A business owner was happily engrossed by his business and making a great deal of money. Inspired by a speech by Apple founder, Steve Jobs, however, his dream became to grow the company more. This CEO knew that he had the drive but worried about putting so much of his personal money at stake. He could not afford to take the risk, but nor could he go to the public markets at that stage. To help his company evolve, the CEO sold 75% of the company’s shares to private equity partners. They helped build up the staff, create systems, and identify acquisitions. Ironically, his 25% share ownership ended up giving him more financial return than if he had kept 100% to himself. How incredibly satisfying when the difficult course turns out also to be the best! Of course, if you’re following Steve Jobs’ advice you must know the risks to growing. One additional point—Jobs may have lost his spot at Apple for a decade but he says the company made it through that period due to the private equity financial partners in place.

Risk is relative. A medical device company wanted to launch a new product. As the owner knew it would cost $5M to bring to market, he weighed the risks. “Right now, I’m profitable. If all goes well, the product will grow my $10M company to $30M, with a cash flow of $1M. If it does not go well, I’m in the hole for $5M and it will take me five years to break even and get back to where I am now.”

Pass!

But private equity partners will be lured to the possibility of growth. They catch a glimpse of the big fish in the dark water and appreciate the gleam of its scales; they will pick up the harpoon and take on the struggle, bleeding from holding the line, facing unbelievable adversity to bring home the fish others can only admire from the shoreline. That medical device company’s CEO settled on admitting to the conservative nature of his personal and financial goals. “I built this business in my garage and now it has to fly without just me. Let’s get in partners and share the risk.” He got enough cash off the table to cover his retirement and compensate for all the hungry years, but he was still able to stay around to enjoy the new growth with the partners who brought valuable new skills—vision, contacts, and patient capital through the storm.

How to Take Advantage of American Capital Flooding into Canada

In terms of American private capital investors, the U.S. based industry is broadly comparable around the world. The typical private equity structure is 2/20, which means that the fund is structured as a 10 year partnership. The committed capital is provided by an institutional investor such as the Harvard Endowment. The fund managers draw down a 2% fee (used to keep the lights on) and are expected to obtain a 20+% gain over the threshold. In light of the Great Recession, the fee structure has been under much debate.

U.S. funds are able to leverage their U.S. industry experience to help Canadian companies expand their business footprint and help launch them into a market close to home before tackling the worldwide stage. Through an American fund’s U.S. pedigree, a fund can leverage their experience in the American markets to pick out the consumer market nuances and help Canadian businesses expand south of the border.

Many Canadians currently reside in the U.S. as professionals in the private equity industry. With Canadians on the inside of the U.S. based PE funds, there is a natural orientation to help out fellow Canadians and their companies by bringing capital to Canada. However, business owners beware; funds in Boston or Chicago are probably more likely to invest than funds in Houston and cultural fit is a factor that cannot be overlooked. 

What Do Canadian Entrepreneurs Have to Offer?

When the flow of credit to companies dried during the credit crisis, large companies cut expenditures in their Research & Development budgets and hoarded cash. Now that the general economic outlook has eased and companies are starved for innovation, business owners and management are now looking at ways of obtaining growth.

Canada possesses a legacy of strong returns and successful deals. Also, boasting the largest announced leverage buyout of our time.

As Canadians, we live in what is often called the “Great White North”.  Our neighbours to the South and the rest of the world have a common perception that there is less competition in Canada. This is a commonly accepted truth for private equity funds as the U.S. has a greater number of funds with larger capital base. However, there is currently no known analytics verifying the perceived lower level of competition.

Currently, Canadians can also boast about the strength of the Canadian economy. No banking system is fundamentally as sound as ours. Our education system and clusters of innovation across the country provide us with a talented and high calibre workforce. Our legal framework is also well developed to facilitate the growth in private equity. And with the continual “Brain Drain” to the U.S., we have Canadians working on both sides of the border.

As an added bonus, Canadian investments are not counted in “foreign” concentration limits for PE funds. Typically, in a PE fund’s investment mandate, the Limited Partner (“LP”) list restrictions in the types, size, risk level, etc. of investments. Such restriction may include the amount that a fund can commit to one investment opportunity (not >25% of entire fund capital) or foreign investments (not >25% of capital committed overseas). The advantage for Canadian companies is that North America is not treated as “foreign”. 

Private equity--Use it or Lose it

Use it or lose it. That is the choice faced by some buyout firms sitting on piles of capital they have raised but not invested. The firms are unlikely to give it up without a fight. That was the message I heard while visiting Boston last week and speaking with a large number of private equity firms. They definitely are stressing about finding good companies as the American market is over-served and seen to be saturated. The funds had been counting on Europe but now that is a big muddle. Australia is too far and the time distance burns out the teams. So that leaves Canada. 

The Wall Street journal's JOHN JANNARONE  explains the increased pressure in private equity investing which is good news for Canadian business owners.

A fund-raising arms race last decade was followed by a sharp slowdown in investments, leading levels of dry powder to surge. Such undeployed capital stood at a record $280 billion among U.S.-focused buyout firms at the end of 2009, according to research firm Preqin.

The catch is that firms generally agree to invest capital within five years or return it to investors. For some, the deadline is fast approaching. U.S.-focused buyout funds have $51 billion that must be used before the end of 2011, Preqin says. Another $213 billion needs to be invested by 2015.

Raising new money isn't that easy anymore. So, the worry is that firms will lower the bar on the quality of investments to ensure existing funds are put to work. One risk is that firms begin to chase after deals and overpay. 

Why Private Capital?

One of our clients was a Canadian domestic company with large margins and a solid customer base of Canadian banks was looking to enter the public markets.  This would have been a nightmare. The public market option is typically not ideally suited for mid-market companies, often lacking liquidity as investors lose interest after the initial public offering.

In addition to the high initial costs of an IPO, business owners must pay annual fees for audited financial statements and supply quarterly reports to their shareholders. There is often the conflict of interest in meeting short-term expectations with long-term growth plans. The initial sacrifice of payout to the investor should be rewarded with later value from the realized growth potential of the firm.

Furthermore, the lack of privacy of confidential information, once a company goes public, may decrease a company’s competitive edge as margins are disclosed to competitors, suppliers and customers, among other strategic information.

Private capital has the flexibility to meet a wide range of business owner needs, while providing privacy of confidential information and a long term outlook in realizing growth potential. A PE fund provides strong financial expertise to complement the management team. With no short-term external reporting requirements, management is able to better focus their capital on growth opportunities that add value to existing shareholders. PE funds assist in improving business operations through efficiency or by supplying expertise in exploring new markets for growth.

PE funds are also able to leverage their existing relationships with banks and lawyers to provide the business owner with access to a broader base of financing options than they had before. American private capital investors in particular are able to use their relationships with banks and lawyers south of the border to support investment opportunities in Canada. This provides a much larger pool for Canadian business owner’s to dip their toes in and Canadian business owners are no longer restricted to the kiddie side of the pool.

In amidst all the talk of PE funds building equity value, let me  emind the business owner that there is a lot of hype around adding value and that there is often the need to cut through all the clutter. Some PE funds are able to add tangible value to building the business through growth, others are more focused on cost cutting, and others are all about the hype.

It is also important to consider the decision making process as PE financing entails the addition of a partner. It is important to retain the rapid decision making that exists prior to the PE fund investor while incorporating the additional expertise of the board members.

An example of a “Homerun” investment for the Monitor Clipper Partners entailed a small Canadian investment in 2004. The founder owned 70% of a truly amazing business model and wanted to diversify holdings. The fund was able to dissuade the owner from listing on the public markets for the reasons listed above. Instead the individual sold half of his equity position to private equity investors, effectively taking money off the table. With the injection of working and growth capital, the business growth rate was accelerated. The 35% ownership structure and additional capital to turbo charge growth and expand the business footprint into the U.S., grew to become 75% of what the initial business value was, upon exit, three years later. For Monitor Clipper, this was their highest IRR on a three year investment and a Canadian investment to boot!

What Do Private Capital Investors Look for?

The private equity industry really got going in the 1970s when, Kohlberg Kravis & Roberts (“KKR”), one of the present day PE titans, was founded. The industry has flourished in goods times while being hit hard during the Great Recession. The fundamental framework though has always remained the same regardless of whether the economy was at the peak or trough of the business cycle. The criteria for evaluating investment opportunities are uniform globally.

The international criteria for what constitutes an attractive investment consist of solid industry characteristics, meaningful competitive differentiation, strong management with equity ownership, and business growth potential. PE fund investors look for a compelling reason to invest and love growth stories where the business owner is looking for capital to excel the current growth of their business.

Strong management with a meaningful equity stake in the business is a crucial criterion for investors. Often, if an existing owner is looking for a complete exit, this is a sign of worry for the investing party. PE funds like to create partnerships and can help owner managed or family businesses acquire ownership if they don’t have it initially. Funds can help take some cash off the table initially but with the continued presence of management and a capital injection from the investor, grow the equity stake remaining into a larger pie.

The alignment of growth plans between investors and business owners needs exist for the growth phase for the business to bear fruit. The due diligence process prior to investment from both parties ensures there is a strong alignment initially.

 Increasingly, entrepreneurs and business owners are competing on a global platform. Like companies, private equity funds are becoming more multinational. The Harvard Endowment invests capital in locally based Canadian private equity funds such as Torquest and Birch Hill Equity Partners. Private equity is an alternative asset class that allows institutional and high net worth investors exposure to a different risk-return scenario. Some mid-market and virtually all large cap funds are multi-national and as funds follow the attractive returns, increasingly they are moving to Asia.

Some PE funds are quite diverse in national or ethnic origin of personnel. You’ll be hard pressed to find many native New Yorkers working on Wall Street these days as Jacoline Loewen, author of Money Magnet can attest to. Broad similarities among private equity firms are evident around the world. The big differences lie in a firm’s strategy and culture and their ability to operate effectively internationally -- the litmus test for U.S. funds. 

You can't be for jobs and against business

Business has taken a beating and capitalism questioned this past two years. Common sense is beginning to flow back into the media as journalists hear from business owners that they might as well sell their companies and get a union job. 
Our business owners need to know they are appreciated and that their service to business, usually at the cost of family time, is recognized. Private equity takes on these same risks as the owner, putting at risk their own capital, unlike a bank. Private equity is also getting a beating as the American tax laws change to show that their risk taking will not be seen as equal to the business owner.
With the increasingly negative rhetoric about business, I was pleased to read Thomas Friedman's article on the best gift to a graduate -- a start up. Of course, encouraging start ups requires many elements of the business environment to work together. Above all, the knowledge by society that founding and running a business takes enormous effort is the most critical. Otherwise, taxing those who make jobs will push their incentives down. 
Here's Thomas Friedman:

We owe our young people something better — and the solution is not that complicated, although it is amazing how little it is discussed in the Washington policy debates. We need three things: start-ups, start-ups and more start-ups. 

Good jobs — in bulk — don’t come from government. They come from risk-takers starting businesses —  businesses that make people’s lives healthier, more productive, more comfortable or more entertained, with services and products that can be sold around the world. You can’t be for jobs and against business.

 I asked two of the best people on this subject, Robert Litan, vice president of research and policy at the Kauffman Foundation, which specializes in innovation, and Curtis Carlson, the chief executive of SRI International, the Silicon Valley-based innovation specialists.

Carlson said he would begin by creating a cabinet position exclusively for promoting innovation and competitiveness to ensure that America remains “the world’s new company formation leader.” “Secretary Newco” would be focused on pushing through initiatives — including lower corporate taxes for start-ups, reducing costly regulations (like Sarbanes-Oxley reporting for new companies), and expanding tax breaks for research and development to make it cheaper and faster to start new firms. We need to unleash millions of entrepreneurs.

Litan said he’d staple a green card to the diploma of every foreign student who graduates from a U.S. university and push for a new meaningful entrepreneurs visa (the current one, the EB-5, requires $1 million of capital that few foreign entrepreneurs have). It would grant temporary residence to any foreigner who comes here to establish a company and permanent residency if that company generates a certain level of new full-time jobs and revenues. One of the best moves we could make, adds Litan, would be a long-term budget deal that would address the looming Social Security/Medicare payouts for baby boomers. Proving to the bond market that we have our long-term fiscal house in order would keep long-term interest rates low and thereby “encourage private investment more than any tax cut.”

Nevertheless, I’d also cut the capital gains tax for any profit-making venture start-up from 15 percent to 1 percent. I want our best minds to be able to make a killing from starting new companies rather than going to Wall Street and making a killing by betting against existing companies. I’d also impose a carbon tax and balance that with a cut in payroll taxes and corporate taxes. Let’s tax what we don’t want and encourage what we do.

Why I Use Other People's Money says Michael Lee-Chin

“Do you know a wealthy person? Hold their image in your mind and I will show how there are a few golden principles to how they grew their wealth,” said Michael Lee-Chin, one of Canada’s billionaires at Airsprint Jet’s client reception. Michael shared that there are rules to getting rich and that he would bet that this person of wealth you were imagining, used these rules. He challenged that the answer would be "yes" to his five questions. So here are Michael’s five questions which are the golden rules to growing wealth:

1. Did this person of wealth own their business and a few other businesses they knew very well?
2. Did they know these businesses were in a good long-term industry?
3. Did they own these businesses for a significant time?
4. Did they manage the tax implications?
5. Did they use other people’s money to grow their businesses?

Question number five is the most critical – how to use other people’s money to grow your own wealth.  It is also the most challenging for business owners.
To think about using other people’s money and then to grow the business is talking higher risk than many owners can handle. Rather than investigate further, they throw up road blocks. First is an initial gag reflex to sharing control and decision making power, which comes with using other people’s money. 

There is fear of inviting in financial experts who are weasels and who may steal the business. 

Then there is satisfaction with how the business runs today; the owner may not feel a pressing need.  Most owners meet their level of revenues that they can manage, and they stop there. Why risk any of their personal money to grow? Rather take it out and buy property, stocks and other --frankly--lower return investments.
Michael Lee-Chin would remind you that the time for opportunity is when everyone is afraid – like right now. He also talks about how some level of success invites complacency. Michael says that the the winners learn how to other people’s money – private equity--and understand their road blocks. these are often fears. Understand these fears. 

Decide if you really want to create wealth. If you own a business and you want to become wealthier, learn how to use other people’s money – private equity money. 

Lee-Chin learnt this in 1979 when he came across a copy of John Train’s 1980 book The Money Masters—and was exposed for the first time to the buy-and-hold value philosophy of investing guru Warren Buffett, the chairman and CEO of Berkshire Hathaway Inc. “All of a sudden I was twigged on to an investing strategy that made sense to me,” says Michael. He borrowed money to purchase $500,000 of Mackenzie Financial stock. After four years, this stock appreciated seven-fold, and Michael used the profits to own his own business, a small Ontario-based investment firm called AIC Limited. At that time, Advantage Investment Counsel had assets under management of just $800,000. Within 20 years, AIC grew from less than $1 million and – at its business peak – posted more than $15 billion in assets under management. In September 2009, it was purchased by Manulife. At all stages of the business growth, Michael used other people's money and is now on Canada's Billionaire's list. As Michael ended his talk, his helicopter out on Airsprint's runway began to crank up, and then he was gone but he left behind a great deal of energy in that room of business owners.

Jacoline Loewen, expert in private equity and author of Money Magnet: How to Attract Other People's Money to Your Business.

And why bother with values?

Values are just behaviors – specific, nitty-gritty, and so descriptive they leave little to the imagination. People must be able to use them as marching orders because they are the how of the mission, the means to the end -- winning.
In contrast to the creation of a mission, everyone in a company should have something to say about values. Yes, that can be a messy undertaking. That’s OK. In a small enterprise, everyone can be involved in debating them in all kinds of meetings. In a larger organization, it’s a lot tougher. But you can use company-wide meetings, training sessions, and the like, for as much personal discussion as possible, and the intranet for broader input.
Getting more participation really makes a difference, giving you more insights and more ideas, and at the end of the process, most importantly, much more extensive buy-in.
The actual process of creating values, incidentally, has to be iterative. The executive team may come up with a first version, but it should be just that, a first version. Such a document should go out to be poked and probed by people all over an organization, over and over again. And the executive team has to go out of their way to be sure they’ve created an atmosphere where people feel it is their obligation to contribute.
Now if you’re in a company where speaking up gets you whacked, this method of developing values just isn’t going to work. I understand that, and as long as you stay, you’re going to have to live with that generic plaque in the front hall.
But if you’re at a company that does welcome debate – and many do -- shame on you if you don’t contribute to the process. If you want values and behaviors that you understand and can live yourself, you have to make the case for them.
Read more at Jack and Suzy Welch.

One question when doing your Mission - How are you going to win in this game?

Business owners needing to push their people more in a shared direction look to the Mission statement. Yet, when I am working with companies, I meet many owners who believe the Mission is a description only, not an aspirational dream. They also stick to the safe words and descriptions - "we find world class solutions for our customers." So what? That is what everyone is doing. If your Mission is the same as any business in your industry, tear it up and start again with your senior team. Make sure you put in a financial goal too.
I have followed Jack Welch's principles of strategy for twenty years and I think his definition of the Mission is the best I have seen. By the way, good Private equity firms  know how to use the Mission statement. Make sure you ask about their expertise in using them.
Jack Welch believes that: 

An effective mission statement basically answers one question: How do we intend to win in this business? 

It does not answer: What did we used to be good at in the good old days? Nor does it answer: How can we describe our business so that no particular unit or division or senior executive gets pissed off? Instead, the question “How do we intend to win in this business?” is defining. It requires companies to make choices about people, investments, and other resources, and prevents them from falling into the common mission trap of asserting they will be all things to all people at all times. The question forces companies to delineate their strengths and weaknesses and assess where they can profitably play in the competitive landscape. 

Yes, profitably – that’s the key. Even Ben & Jerry’s, the crunchy-granola, hippy, save-the-world ice cream company based in Vermont, has “profitable growth and increased value for stakeholders” as one of the elements of its three-part mission statement because its executives know that without financial success, all the social goals in the world don’t have a chance.Now, that’s not saying a mission shouldn’t be bold or aspirational. Ben & Jerry’s, for instance, wants to sell “all-natural and euphoric concoctions” and “improve the quality of life locally, nationally and internationally.” That kind of language is great in that it absolutely has the power to excite people and motivate them to stretch.
At the end of the day, effective mission statements balance the possible and the impossible. They give people a clear sense of the direction to profitability and the inspiration to feel they are part of something big and important.
Read more of Jack Welch's views and Suzie Welch.

Succession when your son is 50 plus is too tough

Succession, which has never been easy for families, is getting tougher. Today, greater longevity means many patriarchs stay in power much longer, forcing a whole generation of family members into other pursuits. 

“Kids” these days don’t want to wait until they’re 50 plus to take charge. By that time, they have usually found their own passion or are weakened by waiting in the wings, so to speak.

This is an enormous threat to the ability of the company to survive and thrive when the next generation do finally pick up the reins. Cracks in the family happiness are often showing too. There is nothing sadder than seeing a family where Dad has not given a clear line of succession and worked hard to pass over the real decision making and leadership before son or daughter reaches middle age.

At the same time, too many patriarchs adhere to the age-old practice of passing the reins to progeny, regardless of talent. That tradition brought acceptable odds of success in less competitive eras. One way to allow the next generation to remain in the business is to bring in 30% private equity partners who understand how to accommodate family business dynamics but make sure there is an excellent COO to run the show. I have seen some talented managers work well within the family business environment, respecting the family business ownership structure as well as drawing on the private equity skills.

Jacoliine Loewen, family business expert recommends:

Every Family's Business: 12 Common Sense Questions to Protect Your Wealth

Family businesses emphasize wealth preservation, not growth

Family businesses are a major part of the Canadian economy and being in one myself, I can see the strength of the more resilient culture. Employees may feel more of a sense of belonging and human connection more than working for a professionally run corporation. These are reasons that family businesses, in these troubled times, have been better performers. These are also the reasons private equity treasures family businesses above all other types of business ownership.

I have been working with family business owners over the past decade and I have come to see a big threat looming in their future which, if left ignored, will impact on the future of the Canadian economy.

My  major concern is that I notice the main goal for family businesses is to preserve wealth, over accumulation. In other words, the family business is less likely to invest in new projects for the sake of growth.

“Why would I risk our own money to grow? If it is not successful, I am out of pocket,” is the typical comment. Quite understandable, but in this new environment, that sort of thinking will be the ruin of the family business.

I am not the only one has picked up this pressing crisis. Jack and Suzy Welch also write about this increasing crack in the foundation of the family business which will threaten their survival.  Jack Welch says,

“That protect-the-assets approach often worked in simpler times, but it could prove devastating in a global environment where risk-taking and growth are essential to survival.”

There is direct action for family business owners to counter this global economy threat to the family business and I usually ask these question: Would you like to have the world's best business minds apply their ideas to the business? Would you like to grow into new geographic regions but without using your own cash? Would you like to reduce your growth risk by having experts who have already worked in those regions?

Private equity brings these valuable skills to the Board room table, and far more. To have Board advisors who are global and who bring a third of the money to the business, it is a winning path to growth of wealth. 

I strongly encourage family business to bring in private equity partners who sit at Board level, but do not get involved in the day-to-day operations. This extra investment will allow the family to take money out to invest in other companies which diversifies their own wealth while also addressing their reluctance to invest in the risk of growth. 

Jacoline Loewen, expert in family business and private equity, author of Money Magnet, now used as a text book for Ivey Business Schools' MBA program.

How to get your hotshot people boosting revenues

Private equity wants to know how to get a business bringing in revenues.

The first place I look is to see if the business leader wants control. The Mission statement can give the rough map of the path forward, but it also relinquishes control to the managers, something that often grates with baby boomer leaders who are used to commanding all. It is confusing, infuriating, and to some leaders weak, to reduce control, and just like the interpretation of motherhood, leaders may not want to accept alternative interpretations of what the Mission means.

I have observed, though, that most women leaders are able to accept that they cannot control their people. Women leaders are exciting when they roll out strategy with their teams because they tend to nurture an openness, leading to that first spark: Permission to have intellectual and emotional curiosity about how to enhance the business. Canada’s school system can struggle to develop this curiosity – my grandfather said members of one union teaching all of our children could perhaps be a little one-sided in their views – and I fear for our future work force if universities think that preventing raging debate in public means that the ideas also stop. That is one of the ways leaders have the illusion they are in control, as we witnessed recently with University of Ottawa’s debacle over Ann Coulter, an American Conservative pundit. The result is I am now curious about her books.

As leaders of businesses or universities, I think once we own up that we cannot control every action, and that luck and timing play a large role, we can improve our odds of success.

Here’s the catch: We desperately need to believe that we are in control of events. Only high self-esteem and a sense of responsibility for results boosts us from bed on cold mornings. With a detailed, language-rich Mission Statement, a leader can improve this sense of control for her team so that they feel personal accountability. They can get that spidey-tingle that there is work to be done, let’s do it.

If a leader’s attitude is that the Mission is to help guide those people brimming with enthusiasm to get out into the real world and take a few punches, fantastic. Without those experiences, management stagnates. Your hotshot people want to take on more in their interpretation of essential work, to try their ideas and leadership style to make it happen or not. Managers can get moving on their own initiative, fit into the company’s deep marketing “groove,” while developing the gumption to be able to change drastically when that groove proves to be a rut.

We are all very aware that today’s star product is quickly tomorrow’s Tiger Woods.

Having colleagues who are running counter to your views and not under your exact control is the only thing that ensures organizational adaptation and survival. Most long-term companies look quite different over decades and there is usually a leader who encouraged their people to take risks while following that North star and dumping the boat every now and then.

Read full article Post.

LOST turned out to be a helluva long job interview

For LOST fans, here is a interesting perspective on job interviews. It's by Robyn Greenspan, Editor-in-Chief, ExecuNet and you can reach him to comment at Robyn.Greenspan@execunet.com:
So, in the end, LOST turned out to be a helluva long job interview. For those who didn't spend the last six years alternately fascinated and frustrated by the series, I'll translate it into corporate language:
Like many good leaders, Jacob, knowing his tenure was coming to a close, had a succession plan. Well in advance of retirement, he started filling his talent pipeline and selected his top potential replacements. Due to the "unavailability" of some of his recruits at the last stages of the interview, very few candidates made it to the final slate.
The position came with tremendous responsibility and Jacob elected the candidates undergo an arduous series of situational interviews to assess their skills and qualifications. Plane crashes, death, destruction, explosions, polar bears, time travel, electromagnetism, good Locke/bad Locke, and a smoke monster — all to determine who was most qualified for the role of island caretaker.
An interview is an opportunity for candidates to evaluate if the role is a good fit for them too, and of those remaining — Jack, Hurley and Sawyer — two seem less certain they want the position. So Jack selects himself as Jacob's replacement, and when he inquires about the length of his employment contract, Jacob tells Jack he must do the job as long as he can.
Instead of a handshake, Jack drinks from Jacob's cup, and immediately begins onboarding into his new role by accompanying the evil John Locke on a business trip into a cave. But Jack is among the 12 percent that ExecuNet-surveyed recruiters report don't complete their first year in a new job and during a hostile takeover, he learns this role was only for a turnaround specialist on an interim assignment.
Before his exit interview, Jack expediently manages the institutional knowledge transfer to Hurley, who, with his servant leadership qualities, turns out is better suited for the longer term role.


Written by Robyn Greenspan
Editor-in-Chief
ExecuNet
Robyn.Greenspan@execunet.com
twitter.com/RobynGreenspan
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Where is the economy - fiscal issues, union salaries, union pensions

Here is a recommended reading list from Mish's Global Economic Blog. Read more. Mish is a self taught economic commentator and his blog has made more sense to me than most over the past three year ride. 
Any business owner needs to understand the true state of the American economy, not the one that politicians are trying to sell to the media and public. It will affect all of us over the next ten years.
The US economy is going to be weak for a decade thanks in part to refusal of politicians to address fiscal issues, union salaries, and union pensions now. Mish's book choice explains why in practical and readable terms.

• Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics by Henry Hazlit
• Economics for Real People by Gene Callahan
• What Has Government Done to Our Money? and The Case for a 100 Percent Gold Dollar by Murray N. Rothbard

Private Equity in Sell Mode

Well, business owners cannot moan that they were not warned that their opportunity to sell their business at a good price is rapidly declining. If you own a business in Canada, and particularly if your revenues are below $20M, you are going to have a far harder time selling your company. There is still time to get in Private Equity Partners who will buy 30% and let you stay on to grow the business with them and sell your remainder share five years down the road.

"For the first time in 16 years, private equity funds are selling more companies than they are buying," reports Andrew Willis, Globe and Mail. Here's what else Willis had to say: 

News on Monday that Cerberus Capital is selling a health care company in its portfolio, Talecris Biotherapeutics, to Spain’s Grifols marked something of a turning point for the private equity sector. According to data from Thomson Reuters, the $4-billion (U.S.) sale meant that for the first time since 1994, global mergers & acquisitions involving a private equity seller outweigh takeovers involving private equity buyers.Funds have sold $67.1-billion of companies, year-to-date, and done $64.2-billion worth of takeovers. Overall, the volume of deals involving private equity funds is soaring, largely due to a recovering in credit markets over the past year - loans fuel leveraged buyouts. Year-to-date 2010, Thomson Reuters found activity involving financial sponsors as sellers was up 132 per cent, while sell-side activity is up 174 per cent. M&A activity involving a private equity fund accounted for 13 per cent of the total value of worldwide M&A so far this year, up from 6 per cent of deals during the same period in 2009, according to Thomson Reuters. 

What does this mean for business owners? It is similar to the housing market, investors are selling off properties and this pulls down the price of housing in the neighborhood. Same for businesses. The last eight glory years of getting great multiples are over.

However, I was in Boston this past week and American Private Equity firms are very keen to buy into Canadian firms and willing to invest in equity partnerships of 35% upwards. They would be exciting partners for Canadian owners and are very similar in culture - polite. 

If you are a Canadian business owner with a company with revenues over $20,000 revenues, now is your chance.

Jacoline Loewen, expert in private equity, author of Money Magnet: Attract Investors to Your Business.

The Role of Institutional Development in the Prevalence and Value of Family Firms

It was a surprise to me the number of family firms in Canada, but this not unusual.

Family firms dominate economic activity in most countries, and are significantly different from other companies in their behavior, structural characteristics, and performance. But what explains the significant variation in the prevalence and value of family firms around the world? 

The two leading explanations are 

1. legal investor protection and 
2. institutional development.

Cross-country studies are unable to rule out the alternative explanation that cultural norms are what account for these differences. In contrast, China provides an excellent laboratory for addressing this question because it offers great variation in institutional efficiency across regions, yet the country as a whole shares cultural and social norms together with a common legal and regulatory framework. In this paper, HBS professor Belén Villalonga and coauthors study ownership data from a sample of nearly 1,500 publicly listed firms on the Chinese stock market. They conclude that institutional development plays a critical role in the prevalence and value of family firms, and that the differences observed across regions are not attributable to cultural factors. Key concepts include:

• Family firms do not inhibit growth and development, as is sometimes argued. This seems clear due to the relatively higher prevalence of family firms even in regions with high institutional efficiency.
• The effects of family, ownership, control, and management in China are remarkable similar to those found by professor Villalonga in her earlier research based on U.S. data. Namely, family ownership is positively related to value, family control in excess of ownership is negatively related to value, and family management, when exercised by the firm's founders as is primarily the case in China, is positively related to value. However, in China these effects are largely driven by the low institutional efficiency regions. In the high efficiency regions, none of these effects are significant.
• These findings are particularly relevant for China as it continues its transition from a central planning system to a market economy.
• On average, family firms are significantly smaller, younger, and less capital-intensive than non-family firms. Yet they exhibit significantly lower systematic risk, and they are not significantly different from non-family firms in their growth and leverage.

Read in Full at Harvard Business Review;

Published:June 23, 2010
Paper Released:May 2010
Authors:Raphael Amit, Yuan Ding, Belén Villalonga, and Hua Zhang

Every Family's Business: 12 Common Sense Questions to Protect Your Wealth

Surprise - Government stimulus can reduce private sector spending

If you are wondering if your tax dollars can re-build the economy, I recommend reading more about this fascinating study by HBS which confirms that government spending skews opportunities for private businesses.  I like it when we can separate out the social rhetoric and see the economic factors clearly, particularly with well-meaning government interventions. Central planning has been shown to be far less effective in the many political forms it has tried over the past century.  If you are running your own business and having to meet payroll, you will already be aware of these findings even thought the researcher, Joshua Coval, was surprised.

Executive Summary:

New research from Harvard Business School suggests that federal spending in states appears to cause local businesses to cut back rather than grow. Read the full article here - A conversation with Joshua Coval.
Key concepts include:

• The average state experiences a 40 to 50 percent increase in earmark spending if its senator becomes chair of one of the top-three congressional committees. In the House, the average is around 20 percent.
• For broader measures of spending, such as discretionary state-level federal transfers, the increase from being represented by a powerful senator is around 10 percent.
• In the year that follows a congressman's ascendancy, the average firm in his state cuts back capital expenditures by roughly 15 percent.
• There is some evidence that firms scale back their employment and experience a decline in sales growth.

Robin Hood Should Have Been in Private Equity

I saw Robin Hood this long weekend. It is a truly, extraordinarily bad film: long, boring and yet, at times, preposterously silly. The low point came towards the end, when a bloodied, chainmailed Robin lept out of the English Channel, and gave a dramatic, slow motion roar. The whole audience burst out laughing. But it’s a real shame the film is so terrible, because it actually has quite a positive message about hard working people keeping the results of their work. This is the not the Robin Hood conjured up by those Dalton McGuinty tax advocates, who think confiscating bank and business profits will solve all the world’s problems. This Robin makes speeches about liberty, battles King John’s tax collectors, and even tries to force the King to sign an early version of Magna Carta. If the film hadn’t been so utterly charmless, I’d have been cheering him on. Robin could have been a private equity partner to Maid Marion, helping her seed her farm while thinking bigger about the long term view.

This version of the Robin Hood story made me think of Jean Baptiste Colbert’s famous quote: “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing”. King John, plainly, failed to master that art. Yet modern governments have become very good at it, taking up to half of what people earn without triggering a revolt, or even any serious resistance. The reason is that people today often pay their taxes without realizing it. Most is simply withheld by their employers (hopefully they get a slip seeing what was taken), while much of the rest is passed on to the taxman by retailers with GST and HST. I suspect a lot more people would be advocating low taxes if they had to actually reach into their pockets and pay them directly with cash. In this spirit, perhaps it is time for tax withholding to go. Private equity is increasingly coming under pressure in the USA to have their income from investments into companies taxed as a business owner, not as a capital investment. That is a whole other blog.

"Should Lady Gaga have most of her wealth taken from her and redistributed to artists who did not sell five top chart hitters last year?" Eeer...that seems awfully unfair and why prop up those who have not created their own market? Conrad Black used this example to talk about taxes in his column in The National Post. Worth reading. Go to NP.

Uncertainty created by government involvement.

I watched the movie 1984 which was filmed in 1984 by, interestingly enough, Richard Bransom. Virgin's movie company, Virgin Films, does a good job interpreting the dense book 1984, and had the soundtrack by stars on the Virgin Records list. Very interesting as the movie tries to capture the human psychological results when the big government gets so involved in the market and day-to-day life of its citizens. You can see a few of Richard Bransom's personal bug bears, but it is well worth watching to remind ourselves of how 1948 looked to those who had suffered through the rise of a government like Hitler's, and why other countries and people accepted Nazis for so long.
We are experiencing a rise in how much the government gets involved in the economy again, and I listen to many earnest 27 years olds who fervently believe their government work is critical. A recent study by the rational and dispassionate Harvard Business School shows that this belief, just like 1984's O'Brian's belief, is dangerously misguided. In fact, this Harvard study shows that government spending shuts down private sector activity.
I have certainly seen that government funding of NGOs and not-for-profits sucks up talented engineers and marketing people while the public sector struggles to find such skills.
Find the full article here.
Here is the researcher's comments on their insights which they did not even mean to study:

Q: Although you didn't intend to answer this question with the research, what does your team suspect are some of the causes that could explain why companies retrench when federal dollars come into their neighborhoods?

A: Some of the dollars directly supplant private-sector activity—they literally undertake projects the private sector was planning to do on its own. The Tennessee Valley Authority of 1933 is perhaps the most famous example of this.

Other dollars appear to indirectly crowd out private firms by hiring away employees and the like. For instance, our effects are strongest when unemployment is low and capacity utilization is high. But we suspect that a third and potentially quite strong effect is the uncertainty that is created by government involvement.

Q: These findings present something of a dilemma for public policymakers who believe that federal spending can stimulate private economic development. How would you suggest they approach the problem that federal dollars may actually cause private-sector retrenchment?

A: Our findings suggest that they should revisit their belief that federal spending can stimulate private economic development. It is important to note that our research ignores all costs associated with paying for the spending such as higher taxes or increased borrowing. From the perspective of the target state, the funds are essentially free, but clearly at the national level someone has to pay for stimulus spending. And in the absence of a positive private-sector response, it seems even more difficult to justify federal spending than otherwise.

Christopher J. Malloy is an assistant professor in the Finance unit at Harvard Business School.

• More Working Knowledge from Christopher J. Malloy
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  About the author of the HBR article

  Sean Silverthorne is the editor-in-chief of HBS Working Knowledge.