Cashing In!
Douglas Group
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The Benefit of the Niche
Most
business owners begin with a vision. They may not frame it in their
mind as a "vision"; but nonetheless, they have one. At the core, the
vision begins with some void or weakness in the marketplace, which the
aspiring new owner thinks he can competitively fill with a new product
or service.
Rock
Sathre started a manufacturing company in a small rented garage. He
manufactured custom subassemblies for various customers. He made his
own tooling, designed to enhance production quality and to solve
special problems for his customers. He knew he could provide
competitive services, because he could solve certain types of
manufacturing problems that others couldn't. Industrial Custom Products
was formed.
Nancy
Friedman complained to her insurance agent about his horrible telephone
reception and service. At his request she came in a week later and
spent an hour telling his staff how to do a better job in responding to
customers on the phone. Results were so good that she then had several
follow-up calls from friends of his, asking her to do the same for
their companies. It didn't take long for her to say, "This is a need in
the marketplace which I can fill." Her company, Telephone Doctor, was
formed.
The
initial vision for a business is generally a focused concept for
filling a needed niche. Over time, this initial clarity of the
enterprise vision naturally changes and evolves. Opportunities come
along, which, although not the original focus of the business, seem to
offer short-term help to building revenue levels. The owner tells
himself he is "expanding" into other areas. The incidental new business
that happens along is happily folded in as increased revenue, without
much scrutiny as to its relative fit with the initial concept. Focus
becomes blurred.
These
are natural responses to normal patterns of growth and evolution.
Unfortunately, these "natural" patterns can be dangerous. Growth
without focus can be hazardous to your company's health.
Strategic
buyers - the ones who pay most dearly for the select enterprises that
they want - search for FOCUS. They want the niche player, who has
carved out a special spot where he is king.
So what is a "niche"? What does that actually mean in form and appearance?
For
the manufacturer it may mean that you are the only provider of a
patented technology or a "family" of patented technologies. For a
distributor it may mean that you are THE supplier of 70% of a narrow
given category of product in the
United States. For a service company it may mean that you have a solid
reputation as the best provider of a single service. For a retailer it
may mean you have the most complete stock of a particular well-defined
product category. It may be a focus on customers whom you understand,
an extended service capability that perfectly fills a need, or an
element of quality that you alone have perfected.
Aristotle
Onassis said that the secret of all business is to know something that
nobody else knows. The advantage is what gives you focus. When
buyers see it, they want it. Your margins of profit are higher than
others because of your niche position. Your competition will have far
greater trouble displacing you. You have the momentum of success in one
focused area, which is likely to build naturally upon itself and
multiply, in continuation of a solid trend line.
In the entire world of attributes that add value to businesses, there is no one element as important as FOCUS.
"Put all of your eggs in one basket - then watch the basket," said Mark Twain.
We
represented the owner of a plastics manufacturing company who was eager
to sell his business and who was very excited about his niche. He
informed me that he had not only one, but TWO niches! Even better than
one! His company was a leading manufacturer of every plastic part
imaginable for the snowmobile industry, from fenders to dash panels to
mirror trim. They had the best clients in the world in this segment,
and they proudly worked to know more than anyone in the world about
snowmobile production issues, market demand, and even timing for their
customers' production needs.
At
the same time, the company was also fast becoming one of the top
producers of anti-static packaging in the United States. These two
markets accounted for around 80% of the company's business while the
other 20% was somewhat ad hoc. Ad hoc in this case did not mean
unimportant. The company cared meticulously for all of its customers,
and had many special little pet products. As a result, profits were
great, customer relationships were excellent, and we were thrilled to
take this fine company to market.
We
researched and probed and carefully screened to identify the "best"
prospective buyers. Packaging concerns were paying great prices for
acquisitions. Our client sold anti-static packaging products to the
computer and telecommunications giants, and the major players in this
market were cool and polished developers of the mega-sized customer
account. They recognized promising value in our client, particularly in
one clever design and in its niche development of budding antistatic
solutions. Thus they found the company very interesting. However, when
viewed in total, one after another concluded that it was not quite a
natural fit. "We love the anti-static packaging niche these people have
carved out, and it could be a great complement to our other product
offerings. But... is that a snowmobile fender?"
The
recreational vehicle types were a hardier, more free-wheeling crowd,
with great appreciation for our client's understanding of their
customers. "These guys really know their stuff. Look at these ingenious
handguards that won't break, even at one hundred degrees below! But...
what in the world are those anti-static people doing? Production people
wearing hairnets and booties seem a little outside of our range."
The
two business segments could not be split apart, because they shared too
many people, too much capital equipment base, and all of their space.
The company was still great and commanded a good price, but if either
one of the segments alone had represented a vast share of the business,
the company would probably have brought at least 25% more.
Is there risk in focus? Sure. But it creates power and life and targeted drive, which is usually worth the risk.
As
one of my Texan clients once put it, "If you're gonna be great, you
gotta figure out where you're goin', and you gotta commit. There's
nothin' in the middle of the road but yellow stripes and dead
armadillos."
Written by Deborah
Douglas, Managing Director of the Douglas Group, a St.
Louis-based private investment banking firm which represents sellers of
middle-market companies. Ms. Douglas is also author of "Cashing In,"
(2004). For more information, contact her at ddouglas@douglasgroup.net or call 314-991-5150.
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