Book Club #14: The Goal, by Eliyahu Goldratt and Jeff Cox

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goalAsk most business school students and they will often nod their heads in recognition when you mention The Goal. 

It’s been a mainstay of business school curriculums for decades and despite the fact that it was published in 1984, it still retains relevance today.  

Firstly, unlike the overwhelming majority of business books, it’s a novel. Secondly, it’s written by a physicist.

The novel angle may be obvious to most – the story can help move the reading along – but a physicist?  Why?  Simple: the big idea at the heart of The Goal is the Theory of Constraints, which interests scientists plenty.

The Theory of Constraints

In any system, be it comprised of machines or humans, limits will be reached due to constraints. There’s almost always at least one constraint in a system, and by identifying constraints and restructuring processes around them, systems will necessarily become more efficient.

Understanding bottlenecks – constraints – in a system is vital for manufacturing and distribution businesses, hence it’s no surprise that The Goal is one of three required reading books Amazon’s Jeff Bezos gives to his top executives.

The Problem

Our protagonist, Alex Rogo, is a manager at UniCo who finally gets a transfer back to his (small) hometown. What he wasn’t prepared for was the fact that the factory is facing challenges and may get closed down unless he can turn things around in the next three months.  

Specifically, shipments are always late and the production backlog is growing, but inventories also keep growing. It doesn’t seem possible to ship on time with good quality at a reasonable cost.

The Professor

Alex manages to bump into his old college professor who listens to Alex’s story and begins asking questions to help him dive down to the root of the problems.  

As Alex and his team chase down the complicated answers to these difficult questions, they find the true problems all around the factory and begin solving them.  

As they do this, “the goal” keeps changing, from focusing on cost-effective purchasing, to hiring the right team, to the latest technology, to finally, making more money. The refinement of all the other issues necessarily led to more profits, as the factory began to run like a machine itself.

You don’t need an Annual Meeting to go over systems and processes. You start by asking the most basic of questions – where are we experiencing pain in our processes – either internally or externally?  

By seeking the true answers to those challenging and uncomfortable questions (which are not often immediately visible), you can start making the changes necessary to make your business hum – which will make your staff, clients, and of course, you, happier.

Know Your Broker: Ron Kleier

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In this occasional series, we will share profiles of our team here at Apex so you can get to know the men and women that make us best qualified to help you buy or sell a business.

Ron KleierWhile it’s true that Ron has only been in the industry for 3 years, he brings over 45 years of experience buying and selling businesses on his own behalf.  

Those experiences inform the way he works with buyers and sellers because he can say he’s been in both positions many times.

Ron lives on 16 acres of wooded property in Wellsville, Kansas, about 45 minutes southwest of Kansas City and 15 minutes from Gardner, where he first got his start in a family-owned and operated grocery store.

He was managing the produce department by the age of 11 and closing the store by 13. He knew the business inside out and so it was no surprise that, after helping his parents expand the business, he bought it from them when he was in his mid-30s.  

He took over when the business was doing $25M in annual revenue and, through selling the smaller stores and doing strategic acquisitions, he grew the business to $100M in revenue.  

The grocery business wasn’t enough to satisfy Ron’s entrepreneurial drive, so he and his wife Sandra went on to grow a sunscreen business 1500% in sales over a 10-year period before selling that company as well.

He eventually got into business brokering but found that as a sole owner-operator in the space, he simply didn’t have access to the same resources and expertise that a firm like Apex did. He joined us and hasn’t looked back since.

Ron knows, having participated in many business transactions (he has owned, operated, and sold more than 40 businesses), that buying or selling a business is a life-changing event.  He has a real passion to help goal-oriented individuals realize their dreams.  He enjoys connecting with them deeply on a personal level not just to build trust, but to know how to structure deals and the process for the best outcome.  

“I know how much anxiety can come from these events and, as a broker, I want my clients to see my number and hope that I’m calling with good news.”

Case Study #14: Even When You’re Early, You Can Sell

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you can sellIn 2006 when Claude Theoret began building elements of the company which would later become Nexalogy, the term “big data” didn’t even exist. It was just called data mining.  

Today we’re familiar with the term and easily recognize big players like Amazon, Facebook, and Netflix not only using big data to improve their own businesses, but selling portions of that data in the marketplace.

Big data is growing and is only poised to get bigger.

But, like MySpace, which predated Facebook but was later wiped out by it, it’s often true that “Pioneers get slaughtered and settlers prosper.”

Claude and his team were probably caught somewhere in the middle.

His company analyzed big data within various market segments to help companies identify and mitigate hidden or previously unnoticed risks.

He also had to do a great deal of customer education in 2010-2014 when he was growing his company, as there was still a great deal of ignorance among his potential and actual clients about how big data worked or could be utilized.

Why sell?

There were a number of factors working against Claude.  

  • He needed cash to grow the company, but his ask for VCs was too small. He wanted $1.6M but most VCs cut minimum checks of $5M, which was far more than he needed and would have diluted his ownership beyond his comfort level.
  • He didn’t have enough secondary services to sell his clients after the initial projects, another aspect that would have excited VCs.
  • U.S. VCs (Claude’s company was based in Canada) required a move to a major hub like NYC or Austin, and with a young family, that was a no-go for him.

After a number of presentations, Claude realized that VC money wouldn’t happen, and that acquisition would be their best path forward.

But by this time his burn rate had taken the company to a tough place financially. His wife helped saved the business by draining her retirement account to bridge the company until a government grant came through. 

How to value?

Companies in this space now often sell for anywhere between 4-8 times topline revenue. At the time that Claude decided to sell in 2015, his company was doing $1.7M in revenue, nearly double the revenue from the year before.  

They hired a firm to put together a dynamic financial model that not only included financial statements updated in real-time, but projections for how the company could perform across various growth rates.  

It also included plans to deploy the now-abandoned-raise of $1.6M. He hired an M&A firm and soon Datametrix AI Limited expressed serious interest.  

So serious, in fact, that the negotiators canceled their flights back after an initial visit, and went to a nearby hotel to hammer out the LOI details with Claude.  

Reflections

While it’s true that firms like Claude’s now sell for much much more than he sold for, it was a combination of factors that led to a successful exit. He had help from both his wife and his government in bridging through a tough period.  

He engaged with a serious buyer and knew the number he wanted. But most importantly, he was running a revenue-generating business that just needed a bit of help – somewhere north of angel investing and somewhere just south of VC money.  

Being proactive with getting acquired was the difference between banking $5.7M in cash and stock (distributed 50/50 – the stock has more than doubled since the acquisition), which he eventually did, and being another startup carcass left on the side of the road.