Working with a client often leads as to question the best way to add value. In 2020 really is the answer do more of the same and continue to improve the quality. Companies generally have limited capital, limited expertise plus the need to grow and improve the returns. Projects RH is given the opportunity to see a number of companies at work through its involvement in advisory boards as well as assisting companies on their journey to raising money. The first thing a company needs to do, and this will change, is work out what business it is and wants to be in. A strategic review is fundamental before you to look at M&A and divestments. 

The Strategic review – first thing

At Projects RH we often get phone call from either the founder, chairman or from the CFO saying do you have time for a cup of coffee (increasingly a virtual coffee)? There is generally a recognition within the organisation that there is an opportunity, or an opportunity must be found as a team is getting a little either jaded or stale.

The first question we ask is not only, is it a good idea but also, does it fit in with the agreed strategy? Earlier this year we had the CEO of a food company telephone us and say she has found a wine business for sale. Within five minutes she had talked herself out of the idea when I asked the following questions:

• Why is it for sale?
• How profitable is it?
• How much does it cost?
• Are there any synergies with the existing business?
• Do any of the team have management experience in the industry?

Strategic reviews commonly occur also at the time when we work with our clients to update their business plans to raise money because one of my favourite questions is always not only, what are you planning to do next year but also, where will you be in three years’ time. I am not alone in asking the question as shareholders boards and founders are looking for opportunities. Markets and industries are moving so fast, and disruptors are entering them increasingly, that we constantly need to be asking ourselves questions you do in a SWOT analysis. Having determined what are our strengths, weaknesses, opportunities and threats is important that we asked what are we going to do about each.

We need to be looking for the disruptors and the black swan events remembering that not only are they a threat but they are an opportunity.

At the time of writing, we are adjusting to working in the Covid world. For many it is frightening and for most, well at least of our clients, it is a wonderful opportunity. As we are driving and flying less, the skies are clearer. Many of our clients are reaching for the stars and you only have to grab one star and you are on your way.

Our experience is, more people are travelling less they are working harder and spending much more time on Zoom from home than they ever expected. Nevertheless, our clients seem to be finding increasing opportunities in new technologies and simply doing what they do, in a smarter way.

When?

For our clients, strategic review tends to proceed an event. We encourage each of our clients to have an ongoing business plan and at least monthly review against it. We encourage them if they do not have an advisory board or a board, to at least present their accounts to us on a monthly basis and write us a monthly report on where they are against their plan. To raise money from anyone but family and friends, businesses needs a plan. Most of our clients are looking for funds on an ongoing basis so they tend to need to be good communicators. They need to have not only the business plan, an information memorandum, a financial model and a presentation but they need the video clip showing where they are at.

In large company land, businesses tend to prepare a business plan with a rolling year agenda which is reviewed and confirmed by the board annually. To be fair, it is common for each business unit to have to report against the business plan and against last year not only for the month but only year-to-date basis. That was good for big companies 20 years ago but the world has changed dramatically since then, and we ask our clients, many of whom are small and nimble, to review what they are doing every three months. We need to move out of our comfort zones and, for me, working with our clients’ quarterly review of their world seems appropriate.

Clearly, if there is a breakthrough in technology or a change in the market, we need to address this immediately. Generally, three months see sustaining trends. One can only imagine the board reports being received in April, 2020, following negative settlements on oil futures contracts in the United States and oil trading at less than $20 a barrel, on the impact of oil pricing in the boardrooms of ExxonMobil, BP, Total etc.; with their best-case and worst-case models having not forecast the black swan event. No doubt wise heads said this is unsustainable, however, it has led to massive impairment of assets and impacted therefore on accounting profits. These same impairments have been accepted by Woodside, Santos and others.

The “arepas” story

In Australia, when Covid 19 hit, and the Australian government quickly announced “JobSeeker” and “JobKeeper” upgrades. One group left out of the equation were foreign students who had not worked to any organisation for 12 months or more. Under their visas most foreign students are allowed a budget to work 20 hours a week. One enterprising Colombian student started selling home-made South American style corn bread called arepa. Initially he did everything: ordered the raw materials, prepared, cooked, packed and delivered. He did the online (FaceBook / Twitter) marketing, website and payments system.

The price is about 10 times what you would pay in Colombia and about 20% cheaper than the imported variety, but it is home-delivered and has never been frozen. He quickly gathered a small team and now the arepas arrive by motorbike in a cool box, shrink-wrapped. He had a need, he saw the opportunity, took the risk, worked like crazy, applied the smarts and has developed a nice small business in the matter of a couple of weeks.

Many of our founders have stories which sound remarkably like the arepas story. What is more important is they are open to being like our chef, marketing supremo, online order manager and delivery man.

The three opportunities

Our clients are generally open-minded to change. Generally, they love their life and what they do, and they wake up every day energised. In a strategic review, having done the swot analysis, you generally get to the point where you say to the client you either have to grow, change or exit.

Divesting

To my surprise, many are happy to exit from what I have thought to be the sole purpose of their life. They are open to an early payday and leaving sufficient on the table for the next party to continue with their idea. Most already have the next gem of an idea of what they want to do, so selling and making again and/or receiving a revenue stream which will enable them to do what they want to do next is seen as an outcome which needs to be canvassed. They do appreciate the value of their having had a successful first company.

• Merging

Equally, acquiring another business which matches to what they are doing either upstream or downstream of where they are or giving them wrong horizontal expansion is attractive. If it is horizontal, we are seeing a desire to go into larger markets so take a smart idea from Australia to Asia, Europe and the United States. We are working with one tech company who plans to go to the United States in one year and the following year to Europe. We think they´ll do it successfully as a CEO has worked in US in the industry also at the CEO level.

Merging is often seen as an equally good idea; our clients tend to want to merge with the company with a better balance sheet than there is which will enable them to grow the business faster.

Several of our clients see themselves almost as human incubators ready to sell or transfer their idea and for someone else to make it substantial. They do not fear selling it to private equity and themselves being dismissed. Their view is they will be paid and will come back with the next idea.

Merging or establishing a local joint-venture or even license to allow others to fund the business or take it into new markets, is often seen as a welcome idea.

Our clients are not wallflowers and they are willing to accept some level of criticism and welcome the opportunity to monetise what they have done. We have learnt over the last few years to say what we think and provide them with the opportunities we see for them. They will quickly, politely but clearly tell us if they are interested or not.

• Acquisition

In going into a new market, the textbook example was 1) your point local agent, 2) go into a joint venture, 3) acquire the joint venture partner and 4) then run the business as a foreign operation from head office. This method of 20 years ago has been consigned to history,

Today, most of our clients who want to acquire a business in a new country, would enter a market through online sales and then look to establish a local presence by acquiring a competitor. The purpose of having a local office would be compliance but also to receive the feedback about modifications to the product to meet local requirements. In many industries it is also necessary to have a local presence to accept complaints and to meet registration provisions necessary to sell the product in the country. Today, you can quickly do an internet search or commission business broker to find you the company you need.

A second motivation for an acquisition, particularly in the technical space, is someone has a technology you want or could improve the one you have. Effectively it is buying a patent, often a large organisation will buy a small tech company to incorporate what it does into its larger package offer. You will often hear promoters say they hope Alphabet or Microsoft will buy them out.

Conclusion

Constantly exploring the market and the opportunities is the duty of management and the role of directors to review. In investment markets, a company must be seeking to focus on improving its return on capital on the opportunities for the business to grow long-term. In the post Covid-19 world the long-term will consist of an ever-changing array of short-terms where boards, advisory boards and management are constantly looking for the new opportunities which include acquisitions, mergers and divestments. It is always important to remember that all have a duty to get the best outcome for the investors. Of course, this includes accepting the right offer for the company itself.

Paul Raftery, CEO, Projects RH – 25 July, 2020

Projects RH works with its clients, and our strategic partners, to introduce potential investors or lenders to exciting projects and opportunities. Projects RH’s core business is we link projects with money. Our work extends across national borders because we seek for our client’s investors who will assist with the business as well as invest. We work to ensure our clients receive warm introductions to potential investors and lenders.