Exits & Entrances
Does Your Company Have a Strategic Plan?

By Carter Freeman & Arthur Withrow, Janas Associates.
Reprinted with permission from LUBES-n-GREASES, ©2000
 

Drafting Your Plan A strategic plan is designed to determine which alternatives the business and its ownership pursue. The plan may be a verbal statement or a written document which codifies your goals and vision. It should include: Alternatives Inventory Ownership Goals Company Vision Growth Strategies Acquisition Strategies Exit Strategy The plan can be used to obtain financing, support a sale, and/or direct implementation of expansion through acquisition or existing operations. The ultimate purpose of a plan is to provide a lubricants business with a roadmap to the future.

Every lubricants industry owner faces a life-changing question every business day: "Where do I go from here?" All too frequently, the question is never addressed or lies unanswered. Whether the answer presents a threat or an opportunity depends upon the actions taken by ownership and management now - rather than later.

If this vital question remains dormant, the likely result is that ownership will eventually discover that its options are reduced, along with its financial rewards. Any answer, even an imperfect one, is better than ignoring the issue.

Market expansion will not cover up management's failure to institute a formal planning process. A strategy that provides for nimble movement in a dynamic market will serve those who undertake formal planning. Even more, in an industry such as lubricants that is not experiencing substantial market growth, planning is an absolute necessity.

The ingredients of future planning include:

• Alternatives Inventory.  Alternatives are both a blessing and a curse. They are wonderful to have, but what to do with them? The first step is to recognize them by preparing an inventory. Owners and managers then must evaluate their alternatives inventory in terms of their own goals and objectives. Frequently, owners and managers (who may be the same people) do not have compatible goals. Such differences must be rectified before they become contentious problems.
    

• Ownership Goals.  The ultimate result of identifying ownership goals will be greater enterprise value. This can be achieved through expanded customer loyalty, added employee participation in innovations, focused operations, and higher revenues and profits. As an example of achieving ownership goals, Janas Associates was engaged by a company with three owners, who were uncertain of their direction. After consulting with Janas, two owners decided to acquire the interest of the other and are embarking on a regional acquisition strategy.
    

• Company Vision.  The development of a company vision is best achieved by adopting the assumption that no limitations exist in the future. The possibilities will appear much greater by working backwards from a future dream rather than starting from today's brutal realities. The result will be a broader vision which will most likely result in an expanded future.
    

• Growth Strategies.  Assume that your business cannot remain static. Either your company grows or it shrinks. To ensure your company does not shrink, consider the following options:
   
  1) Keep doing what you're doing.
  2) Promote organic growth.
  3) Acquire competitors.
   
  If you're particularly well-managed, you can successfully combine 1, 2 and/or 3. Efficiently operated companies often should continue to keep doing what they're doing. Combined with plans to promote organic growth (internally generated business expansion), or acquire competitors, the result can be a powerful and profitable operation.
    
  As an example, Janas Associates helped a client reorganize its operating policies. Janas helped management structure an expansion strategy which resulted in a multi-million-dollar increase in sales and introduction of new products. We also recommended that several unproductive positions be eliminated, which saved $300,000 per year.
    

• Acquisition Strategy.  Acquiring other companies requires careful evaluation of managerial and financial abilities. Considerations include geographic parameters, size requirements and operating characteristics. You'll need to ascertain target acquisitions, determine financial capabilities, and engage an investment banker. Finally, you'll have to approach and pursue the acquisition, and bring the transaction to a close.

  As the preceding tasks suggest, a proactive acquisition policy requires a focused approach which is well orchestrated and professionally directed. In a proactive plan for acquisitions, target companies frequently are not actively for sale when they are initially contacted. The acquirer may not want to be identified during the initial contact stage, and so an intermediary may be useful. Janas Associates, for example, recently contacted a target company on behalf of a client and negotiated the details of an acquisition. These efforts resulted in a completed transaction and significant savings to the successful acquirer.
    

• Exit Strategy.  Every owner should have an exit strategy that can translate into the sale or the merger of the business. This strategy may be for immediate implementation or focused a number of years into the future. In the latter circumstance, the strategy should be dynamic rather than static. As the business, the industry environment and the overall economy evolve, so should the exit strategy.

  Janas Associates currently represents several lubricant manufacturers in sale and acquisition transactions. In one completed sale, Janas prepared a detailed sale package, identified several qualified buyers, and conducted an auction. The result was that the client, who had received a $24 million offer before Janas was hired, at closing realized more than double the original offer.

On a Roll

The current economic climate is particularly relevant to the lubricants industry. Base oil prices are high and some believe that supply will become a problem, particularly for smaller companies. Conversely, the national economy is strong and well-positioned companies are enjoying excellent profitability. These factors are occurring at a time when consolidation within the industry is being vigorously pursued.

Currently, roll-ups are being attempted by several well-financed companies. A "roll-up" is the acquisition of several companies in the same industry by another company or investment group. Two well-known lubricants industry roll-ups are those orchestrated by Castrol Inc. and Fuchs Petrolub AG.

Roll-up efforts now underway in the lubricants industry include plans to develop regional, national and international companies through acquisitions. These efforts involve companies engaged in the production of automotive, industrial and metalworking lubricants. At least one group aims to develop a national presence in all three product areas.

The history of our financial markets is replete with examples of roll-up companies that have realized dramatic increases in valuations when compared with the values of the individual companies prior to the combinations.

Realizing Value

Companies are generally valued on a multiple of Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). Janas Associates' experience in the lubricants industry is that sale multiples (EBITDA multipliers) are currently strong. The existence of companies in an acquisition mode, combined with a vibrant economy, tends to produce favorable prices for sellers. It is also possible for owner/managers who wish to remain active after a sale to retain an ownership interest. The result of a retained-ownership sale can include immediate financial realization, continuing salary, results-oriented bonuses, and another "bite-at-the-apple" if the combined company sells in the future.

Even retiring ownership, with representation that understands the possibilities, can experience a portion of future results if the synergies of combination actually occur. In one particular sale, Janas Associates negotiated an earn-out which has resulted in the sellers collecting several million dollars in the years subsequent to the sale.

To ensure that your own enterprise realizes the numerous opportunities and challenges that lie ahead, you should undertake the job of drawing your own roadmap. Determine your own financial and business destiny.

R. Carter Freeman is chairman and Arthur C. Withrow II is CEO of Janas Associates, which provides professional services to the lubricants industry, including mergers and acquisitions, corporate finance and management consulting. For information, the authors can be reached at Janas Associates, 225 S. Lake Ave., Suite 300, Pasadena, CA 91101-3009. Phone: (626) 570-8000. Fax: (626) 796-5210. Website: www janascorp.com