Management By Dumpster Diving

ManagementByDumpsterDivingI met with a middle market company last week.  It was owned by two charming brothers who had grown it over 20 years into a successful $30 million manufacturing business.  We were discussing preparing the company for outside investment.   If you ever listen to the NPR radio show Car Talk hosted by the venerable, Peabody-Award winning Tappit Brothers, Click and Clack, you have an idea of the type of guys who owned this business and how much fun I had talking to them.

While touring the facilities, one of the owners was talking about their differing management styles and said his brother practiced what he called ‘Management By Dumpster Diving’.  Each morning, he would tour the facilities and each time he passed a dumpster or waste can, he would poke his head in to see what was there.  It was a 24-7 operation, so this was his primary way of determining the waste and efficiency of the operation the night before.  The dumpster diving brother claimed he learned a lot of interesting information about his company and employees over the years.  The other brother claimed he was preparing for a future life on the streets!

This highlights what I love about entrepreneurs and why they need to make changes when they bring in outside investors.  Entrepreneurs are there everyday, doing whatever they need to do to grow the business, taking risks, getting dirty if necessary, inventing their own methods and solutions that fit their unique business and personal management style.  Private equity groups are not going to go dumpster diving to determine the previous day’s waste.  Larger companies with offsite ownership need systems and policies in place to measure and report KPI’s such as raw material usage analysis and production efficiency.  It’s not necessarily better or worse than the dumpster diving approach.  It’s just a good example of how a management process that works for a company at a particular stage of it’s development will not work as effectively as it grows and the ownership structure changes.

As an interim CFO for companies like this, I can help identify the necessary changes and implement them, before or after the change in ownership.  Please contact me directly if I can help your company or private equity group in this capacity.  For 7 tips on being successful as an interim CFO at private equity portfolio companies, click here.  And feel free to share any interesting management techniques you’ve come across and post them in the comments below or tweet them to me @middlemarketCFO with hashtag #ManagementByDumpsterDiving.

New section 336(e) regulations could simplify #PEG investments

On May 10, 2013 the SEC and IRS passed final regulations under section 336(e) that provide basis step-up opportunities for non-corporate acquirers.  The new regulations provide an opportunity for a Private Equity Fund (PE) to acquire a target and receive a basis step-up and tax shield, without creating a purchasing corporation or otherwise restructuring the target prior to the acquisition. Further, a PE now has the flexibility to restructure the target such that the ongoing activity is conducted through an LLC taxed as a partnership, which would allow the fund to pass on a full basis step-up upon exit and eliminate future corporate taxation on the target’s activities. In addition, the new regulations may provide the ability to separate multiple businesses post-acquisition in a much more tax-efficient manner than previously existed, thereby allowing a PE to better align its investments.

The full article from McGladrey can be found here.

Seven tips for interim CFO’s of PEG portfolio companies; Part 1 of 7

This is part one of a seven-part series of tips for interim CFO’s at companies in the portfolio’s of private equity groups.  These tips are intended for financial professionals who already have the skills and experience to be a successful CFO at a typical mid-market company.  They specifically address the differences between being a CFO at a typical mid-market company and being an interim CFO at a growth-oriented mid-market company in the portfolio of private equity group.

Tip #1:  Be an ambassador

Think of yourself as the U.S. ambassador to a foreign country where the PEG is in the role of the U.S. government and the company is a developing nation.  The citizens of this country (aka the company’s employees) will think of you initially as an imperialist American pig or, in other words, an extension of the PEG.  You need to convince them you have dual citizenship.

  • They will be a little nervous and they have good reason to be.  They know some of them will lose their jobs or will be reporting to someone new.  They need to understand that it is also a tremendous opportunity for career advancement.  Communicate the following points:
    • The company will be growing rapidly and careers can grow with it.
    • Key employees who make the cut and demonstrate the ability to make a difference often get equity participation or other financial incentives.
    • PEG groups are very well connected to lots of great opportunities and reward good people, even if they leave the company, provided they exit on good terms.
  • They will be defensive.  Don’t ask them why they did something the way they did.  They probably did it that way because it seemed like the best idea at the time.  Instead, pitch alternatives to them and let them know how much you appreciate their input.
  • They will be eager to learn.  Teach.  People are highly motivated when they are learning new skills every day.  Share what you know.  You are there for a short time and your direct impact is limited, but if you leave your knowledge and experience in the hands of the key employees you leave behind, you can have an unlimited impact.
  • Help them understand the differences between a PEG portfolio company and a typical founder-owned business, which is discussed on this website and will be further explained in steps 3-5 of this series.