Price Fixing 101

I was having lunch the other day at one of the trendy downtown hotel/restaurants. I was alone, sitting at the bar. A young man, probably born between 1965 and 1984, came in and asked to see the manager. The manager appeared. The two young men talked for a couple of minutes. I wasn’t intentionally eavesdropping, but I did overhear that the Xer who requested to see the manager was representing another trendy downtown hotel/restaurant.

The manager, also probably born between 1965 and 1984, brought the bartender into the conversation and finished by saying something like “give him all the information he wants.”

Next, the bartender, probably born after 1985, starts poking the touch screen on a near-by cash register. The Xer from the competing hotel was working from a list and asking the prices charged by drink by the trendy downtown hotel/restaurant. Grey Goose? $11.00. Check. Johnny Walker Red? $9.00. Check. Glenlivet? $13.00. Check. And on and on and on they went until they ran through the entire drink list of the trendy hotel/restaurant. Check.

The 111th Congress was still seated at the time, but I doubt it repealed the Sherman Act of 1890. This was horizontal price fixing, right there in front of my Caesar Salad. Simply exchanging prices with or without intent could have been a criminal offense if the exchange of pricing information affected the prices these two competitors set. Will the Xer manager who authorized the exchange, receive pricing feedback from his trendy downtown hotel/restaurant competitor? Check.

Generation X has been maligned for everything from an inability to consume enough to an arrogance that comes naturally to really smart, highly educated people. But somewhere behind these Xers was another trendy hotel/restaurant manager – a Boomer…who should have known better.

Rule of thumb. It is okay to talk to your competitors. Glean as much competitive information as you are able. But never talk about prices.

Why Buy a $2 Million House

Economist, Brian Beaulieu, spoke to a combined meeting of my three TEC groups recently. The title of his presentation was "Recovery: 2011 and Beyond." Beaulieu attracts a fair amount of attention within the TEC community, in light of his accurate prediction that a significant recession would befall us in 2008. He started telling TEC groups about the impending problem in 2003. He also advised our members what they should be doing about it in advance.

With certain caveats, Beaulieu's presentation was much more optimistic. 2011 will be a good year. 2012 and 2013, as well. 2014 could be another problem. But it was the "what to do about it" part that was the most interesting.

Brian Beaulieu is predicting inflation. Long term, steady and prolonged - 5 to 6% range inflation. Others are now becoming increasingly concerned about the prospects of inflation. Beaulieu has been talking about it for several years. Okay. What to do about it?

Beaulieu advised our TEC members that now was the time to buy assets, productive assets and real property. He told members to borrow money at the current remarkably low (by historical standards) rates. He said to lock in as much long term money as possible.

He told our TEC members "Borrow as much money as you can now. Borrow so much money that you can't sleep at night. Then, borrow more - enough so your spouse can't sleep either."

One of my members who heard Beaulieu a couple of years earlier had been keeping track of a $2 million property that was in foreclosure. The day after the Beaulieu session, my member's real estate broker called him to say the property was going up for auction at a sheriff's sale the following morning.

There were two bidders at the sheriff's auction. The other guy dropped out after the opening bid. Much to his surprise... and the amazement of his wife…my member bought the property at a totally ridiculous discount from the original asking price.

Was Beaulieu right in his inflation forecast? Only time will tell. In the meantime, my member and his wife should have many sleepless nights in their new home. Good for them.

If you are interested in a complimentary CD of Beaulieu's complete presentation with the balance of his forecast from "Recovery: 2011 and Beyond," please let me know. One Hint: How much gold would you have to own to keep you awake at night?

Dog Story

Do you know how they train hunting dogs these days? A TEC member told me the story the other day. It involves “technology.”

Well, it also involves humans….and that is where the story gets interesting.

My TEC member is an avid outdoors man and dog trainer. He uses a shock collar to assist him in the training process. A shock collar of this nature is capable, if necessary, of blasting the dog with 20,000 volts of electricity. A police issued stun gun carries 50,000 volts. You get the idea. My member has been trained extensively in training dogs and the proper use of the collar.

My TEC member tells me that some people are untrained or just plain stupid when it comes to the use of the collar. He can tell the dogs that have been mis-trained just by watching them. The dog will walk slower, with its head hung low between its shoulders. Mis-trained dogs can be very aggressive, when given the opportunity. They tend to develop all sorts of exotic diseases. They die prematurely.

My member said his dogs actually like it when he attaches the collar. The well trained dog knows it is going to go outside and hunt…run around, chase birds, have some fun.

My member told me the story because, over the past two years of a business downturn, he had the feeling of a mis-trained hunting dog with a shock collar. He did not know from where the next economic/financial/regulatory shock was coming. But he was pretty sure that the repeated blasts without warning were taking their toll on him mentally and physically. Cumulative stress is a killer.

TEC Resource Specialist James Newton has suggested the following prescription relative to relieving long term, cumulative stress.

- Eat better. Healthy food. No sugar. Simply stated…eat real food.

- Exercise very regularly. Like 6 out of 7 days a week.

- Clean up the “ankle bitters.” Finish that nagging project.

- Recreate. Newton pronounced it “re-create.” Have some fun.

- Take a vacation.

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On October 13th The Wall Street Journal promoted a similar approach to dealing with the effects of long term stress in an article titled “Slumping at Work? What Would Jack Do.” The Jack, in this case, was Nicklaus. Much of the article had to do with relaxation and positive visualization.

Business leaders in today’s environment may not be able to remove the shock collar entirely. There will always be weird things that happen in a highly competitive, increasingly regulated marketplace. Leaders can, however, mitigate the adverse effects of long term stress exposure. Indeed, they owe it to the people they lead. Take action. Relax.

The Blindside

At the request of a TEC member, I met recently with a former business owner. Dave, the former owner, had run a successful business for nearly 30 years. He was now a former owner because he was “blindsided” over the last two.

Dave’s company was forced into bankruptcy after a series of bad decisions. One or two of these decisions might not have been fatal. A string of poor decisions, however, ended with tremendous personal loss in terms of the number of lives affected. These poor choices would have been caught by an astute mentor, a trusted advisor, an advisory board or a TEC group. Someone needed to cover Dave’s blindside like Joe Theismann needed a Michael Oher.

As the story played out, the series of some of the questionable decisions looked like this…

- Dave decided to expand aggressively heading into the downturn in the business cycle. TEC members had been advised by TEC Resource Specialists such as Brian Beaulieu to plan on a recession in 2007. The macro-economic outlook was clear, according to economist Beaulieu, three years in advance of the actual recession. TEC members prepared in advance.

- Not only did Dave take on substantial debt to finance the ill-timed expansion, he added significant fixed costs that were difficult to shed when the downturn became apparent. The balance sheet was now leveraged for the first time in years and the company was hemorrhaging cash, when hording cash was the order of the day. Once again, TEC members were being advised of the exact opposite strategy heading into the recession.

- Dave decided to change banks. Typically not the end of the world. But in this case, the change in lenders appears to have been made without appropriate due diligence. Perhaps the regulators became more inquisistive. But when sales and profits began to deteriorate, the new bank grew increasingly nervous…and aggressive.

- The new bank told Dave it would be better if he would agree to a personal loan guarantee for the preciously unsecured debt arrangement. Dave eventually agreed, even though he had significant personal assets available at the time. No TEC group on the planet would have allowed this to happen. Ever.

The end of the business story is the bank called the loan, liquidated the business and took substantially all of Dave’s personal assets to cover the personal loan guarantee. The end of the personal story is that after running a nice successful business for almost three decades, Dave was left with, quite literally, nothing. Furthermore, this basically good (business) man ended up dazed, confused and embarrassed. And it didn't have to be.

If you are running a business, the question is…”Who has your blindside?”

Retreat or Attack?

At a recent TEC meeting, a Resource Specialist from California suggested members dial back on their BHAGs to reflect the poor economic environment. Our speaker reasoned that scaling back the Big Hairy Audacious Goal was a first step to a more realistic assessment of vision, mission and strategy to account for certain “new economy” realities. He figured people in the organization needed to be reassured with sometime more "doable."

The TEC group pushed back. Pushed back on our West Coast friend rather hard, actually. Our members had scaled back in advance of the downturn in the business cycle – some as far back as 2007. They cleaned up their balance sheets, reducing debt and accumulating cash. Most members were making more money with less revenue, thanks to aggressive cost reduction programs that were in place heading into 2008 and reaping benefits through 2010.

Now, the TEC group reasoned, was the time to recalibrate on the upside, taking advantage of their relative strength vis-à-vis competition and potential new market and product opportunities. Now was the time to attack.

Let’s just let the poor schlemiel who had just limped through the downturn and exhausted his cash resources play defense now – or just go away, they agreed. This TEC group knew it was time to re-emphasize the strategic planning process. They had become “operationally excellence” oriented over the past few years. It was now time to shift to a higher gear with new strategy in light of the new playing field. It was time to attack.

Moreover, the members of this TEC group agreed that the people in the organization needed to know that the leadership of the company had a plan…to grow. It was time for leaders to lead.

SWOT Wisconsin

One of my TEC members – a manufacturing company headquartered in a suburb north of Milwaukee – initiated their annual business planning process recently. The eventual expected outcomes of the planning process will be the establishment of a new annual operating plan for 2011, with a significant recalibration of their longer term strategic plan.

As a long time TEC member, the CEO typically engages his management team in a no-nonsense version of SWOT analysis during the initial phases of the process. Classic SWOT analysis generally includes an evaluation of 1) Strengths – internal, company oriented; 2) Weaknesses – internal again, unique to the organization; 3) Opportunities – external, “out there” someplace usually focusing on changes or the new normal; 4) Threats – external, “out there,” change orientation.

A new item surfaced on the opportunities list and survived the culling process. The team determined that known competitors in California and Michigan would be at a distinct, long term disadvantage due to overzealous regulations and out of proportion tax increases on businesses and owners. More money spent on compliance and more money paid to state and local governments begets less money for capital expenditures, less cash for growth and less profit for owners. Subsequent phases of the planning process will determine how to attack their relatively wounded competitors.

Unfortunately, when the team considered threats, the same people were forced to include Wisconsin’s gratuitous regulatory environment and high tax climate as significant external “new normal” problems. They reasoned that known competitors in Indiana and Texas were probably targeting them just as they were targeting market share advances against companies in California and Michigan. Phase two for this managment team will be to identify alternatives for mitigating this emerging external threat.

This type of planning is going on now in companies around the world. One can only wonder how many competitors will be targeting Wisconsin companies because it is increasingly more difficult to do business, make money and keep it here.

Manager Or Coach?

I was talking with a TEC member the other day during our regular One On One. My member was feeling more inadequate than normal. CEOs are like that sometimes. He stated he really wasn’t a very good manager. He was trained as an engineer and liked engineering very much. This managing stuff was very difficult for him. He wasn’t trained in it, wasn’t good at it and didn’t expect much in terms of improved performance as a result.

We talked about the role of managers. Among other position objectives, managers are required to organize the work, staff the organization and train the workers. While CEOs are generally more interested in the “leadership component” of being the Chief Executive, managing necessarily comes into the equation. This did not help my member get over his current disenchantment with his job.

Fortunately, his TEC group participated in a presentation by Resource Specialist Jim Cederna at a recent TEC meeting. Jim brings a wealth of business knowledge and some extremely practical management tools to TEC members who work with him based on his years of running substantial companies – most of them in troubled situations when he arrived.

One of the most interesting tools in Jim’s toolbox is a simple process that replaces the dreaded performance evaluation. It puts the manager in the role of coach, rather than boss. It allows the employee to set their own performance plan based on his or her understanding of what success looks like. It provides feedback to the worker. The process minimizes the need to “manage” people. No defensiveness. No hard feelings. No stress. Just coaching.

The analogy is a good one. Great coaches expect high performance, but only to the level expected by the athlete themselves. Great coaches know when to give their player a pat on the back and when to give them a kick in the butt. Coaches never take the field. All work must necessarily be done through others. Micro-managing is not possible. Effective delegation is mandatory.

My TEC member felt better about being a coach. He experienced great coaches in his earlier years as an athlete. He agreed to take some of the Jim Cederna tools and put them into practice in his company. My member felt certain his "management results" will be significantly better based on his new coaching frame of reference.

What do you think? Would you rather manage people or be a great coach? If you would like more information on the Jim Cederna coaching process, please contact me at dennis@globenational.com.

How Is Your Vision?

A TEC member was struggling with the concept of vision recently. He wasn’t clear on the differences between vision, mission, core values and purpose. Further, he’d seen enough flowery mission statements hanging in lobbies at vendor and customer locations that didn’t seem to be worth the plaque they were inscribed on. He brought his dilemma to his TEC group.

Does the organization really need a vision statement? How do you go about getting and articulating a vision? What makes a vision statement effective? What are the differences between vision and mission?

As it sometime occurs, several members of his TEC group were grappling with similar questions. The group challenged our inquiring member to do some research and come back to the group to share what he had learned. Some members agreed to provide resource materials that might assist in the research.

Here is what our member learned about vision.

- Vision is what the organization wants to become at some future point in time.

- It is a BHAG. A Big Hairy Audacious Goal.

- For example, TEC – The Executive Committee’s vision might be
“TEC is the dominant CEO think tank in the world.”

He also learned that mission is different than vision. Mission defines the outcomes that the organization intends for the customer. It is a “filter” to manage the business more effectively. TEC – The Executive Committee’s well understood mission is to “increase the effectiveness and enhance the lives of CEOs.” We see it played out with hundreds of TEC chairs and thousands of members with every interaction. CEOs helping each other become better CEOs and better people.

Our member reported back to his TEC group at the next TEC meeting. His work in progress vision statement…"To become one of the most respected, exciting and recognized electronics manufacturing companies in North America."

The company’s mission…."To delight customers and contribute to their success."

Not bad for a CEO who was somewhat skeptical and confused before embarking on the exercise. He accomplished the vision and mission statements with the help of his senior leadership team. No “buy in” necessary. Everyone contributed and now understands what they are about. Next step in the process: alignment. But without clear vision, alignment of the balance of the organization would not be possible. How is your vision?

Life Balance

I returned from a week’s vacation today. Relaxed, recharged and relatively ready to go back to work. We spent the week on Silver Lake in Wautoma, Wisconsin. After taking the time off, I wonder why we don’t do more of it.

We all know taking time off is healthy, both personally and professionally. The evidence is more than adequate that time away from work is good for you and good for your business. The research is also clear that CEOs are the worst offenders when it comes to “down time.”

While on vacation I had the opportunity to play golf with a TEC member who has a beautiful home on Silver Lake. He and his wife use it regularly, mostly on summer weekends. My CEO TEC member was playing relatively well through about the first 13 holes. Then, his cell phone rang. He answered it. Handled some business…it was Friday afternoon, after all. Then, he went to the tee box to hit his Big Bertha on 14.

The CEO hit his tee shot into the woods. His recovery shot hit a tree on its way out. He hit a worm burner on his third whack at it. Eventually, made eight on a relatively easy par 5.

I wondered how well the CEO might have played had that cell phone call not come in. I wondered how much of a distraction the little electronic device contributed to the sense of frustration he felt after seeing a nice round of golf turn to dog do. I wondered about work-life balance and how we’re all caught up in it, in one way or another.

One final TEC principle about CEO time off. If you take your spouse, it is a vacation. If you take your kids, it’s a trip. Vacations or trips, take the time. It is good for you and your business.

Leveraged Buyouts by the Book

One of many types of management transfer deal structures is the leveraged buyout (LBO). From the book Private Capital Markets by Robert T. Slee, leveraged buyouts typically use a relatively small amount of equity in the deal’s capital structure. LBOs rely on some equity by management and layers of bank and mezzanine debt to make the acquisition.

An LBO is designed to maximize the leverage of the management’s equity contribution, which is sometimes only 10% of the total capital required. Management teams negotiate simultaneously with both secured and unsecured lenders. A seller note is usually the last piece of the structure to be determined because most sellers will not voluntarily finance a meaningful part of the structure, as they are in a second or third security position. The seller financed part of the deal is essentially assuming equity level risk while receiving only debt returns.

Sellers who finance deals may want to protect themselves by financing less than 50% of the transaction; requiring the buyer to obtain life insurance naming the seller as beneficiary for the amount of the loan; making sure the buyer has adequate bank financing for operations; receiving a personal guarantee from the buyer; limiting the note to 60 months; and making sure the agreements among other lenders allow for continued payments on the seller note, unless a major covenant is tripped.

An LBO structure that is too highly leveraged may fail with unexpected losses or cash shortages. Management’s performance after the transaction is key. Managements structure deal terms to defer payments with such instruments as interest only loans for an initial period of time. They also negotiate preferred payment terms with vendors and attempt to speed up payments from customers.

In an LBO, managements trade additional deal risk for an increased equity interest, allowing managers to obtain control of the company with very little of their own money.

Are You Hanging With The Wrong People?

Is the drumbeat of negativity blaring from local media these days influencing decision making by corporate leadership? Are we missing opportunities to hire good people and invest in future business growth because we are hanging out with the wrong people? We seem to be getting our advice from “entertainers” who would be hard pressed to tell you the difference between a double dip recession and two trips to Dairy Queen. How can CEOs counter the negativity regarding the economy?

One suggestion would be to turn off the local TV news and eliminate talk radio from your macro-economic diet. Replace the talking heads and talking radios with some good old fashioned Positive Mental Attitude gurus. With a little low technology help Earl Nightingale, Norman Vincent Peale and Napoleon Hill could easily replace Sykes, Belling and Beck.

Or, start hanging around with TEC members like Frank Romano, president of HAR MAR Development Corp. Frank bought the old Lake Park golf course in Germantown a few years ago, with the vision for improving the golf facilities and developing the property. After a slow start, condos to west of the golf course – now named Blackstone Creek – are being built by a third party and starting to sell. And now Frank has preliminary drawings for a new club house with a serious banquet facility.

Oh yes, there are also plans for a health club and a spa, a bank, a restaurant or two, higher end retail stores, some real nice office and professional buildings overlooking the golf course and an apartment or two situated around the first tee. The village of Germantown could have a very cool chunk of green space right on the corner of the property for their farmer’s markets and other local events.

If you would prefer to hang with guys like Frank, give him a call at 262-573-3124 or send him an e-mail at fromano2471@aol.com. He is interested in hanging around with a few people who might share his vision and passion for the future of his Mequon Road property.

As Zig Ziglar was fond of saying, "business is neither good or bad out there." Then, pointing to his own head, he noted, "business is only good or bad up here."

Local School Board Model - Broken

The July 1st issue of North Shore Now included a report that the Fox Point Bayside School District School Board voted in favor of a budget that increased spending by $2.2 million. An astonishing increase of 14% in the face of declining enrollment. While most people outside of government have learned it is fiscally prudent to figure out how to live within one’s means, the School Board is off spending other people’s money as if the people serving on the Board had lost all common sense. And we thought MPS was out of control.

It is becoming clear that the model of local school boards with local control and taxing authority is broken. The School Board is beholding to the powerful and well financed teacher’s union. The Board responded to the voting parents in the district with kids in the schools, garnering more subsidies for about 900 students. (In the interest of full disclosure, I had three children benefit from the largess of previous Boards). Unfortunately, no one is representing the interests of the taxpayer.

While the local school board model is broken, it will take a long time to replace it with something that works for all constituencies. In the meantime, the alternative is to restrict their access to money. The Taxpayer Bill of Rights has been effective in this regard in states like Colorado, even though the entrenched special educational interests continue to peck away at it. It is time to reign in tax and spending machines like the Fox Point Bayside School District. It is time to reconsider TABOR

The New Normal - Tax Increases on Business

As states of all shapes and sizes scramble for more tax revenue, TEC 44 member, Dan Chaudoir, president of Central File Marketing, ran into the long arm of the tax collector in, of all states, Texas. Central File has a one person sales office located in Dallas.

First, Dan learned that because they had an office there the company was required to pay a “franchise fee” of $3500 per year to do business in Texas. And, they wanted two years worth of fees to go away.

Then, the state came after him for sales taxes on all sales shipped to customers in Texas from their production facility in Wisconsin. They didn’t just want two years worth of back taxes to go away this time. They wanted all nine years that the one man Dallas sales office had been in existence. Central File was able to settle for an amount that did not put them on the brink of a negative Z Factor Score. But it was not insignificant.

The point here is, if a “business friendly” state like Texas can become this aggressive with small out-of-state companies like Central File, imagine what the really desperate states will be like. For more on this “heads up” relative to state revenue collectors reaching into the pockets of Wisconsin companies, please contact Dan Chaudoir at dan@centralfileinc.com.

Emotional Job Security

The downturn in the economy left many employees dazed, confused and mistrusting of management. With the economy working its way out of the recession, how can business leaders repair the damage done and rebuild a healthy, productive work environment? In short, how do we address the basic emotional job-security needs of our workers?

Several years ago, when a company I co-owned was dealing with some difficult labor-management issues, our attorney suggested a little book called Discipline or Disaster: Management’s Only Choice. The book outlined four principles that served us well then and apply now at every level of employment.

First, tell your people what is expected of them in terms of job performance. This rule goes well beyond the gobblygook of the classic position description. Force yourself to ask, in clear terms, do my employees know exactly what they are expected to do on the job? Metrics help.

Next, advise your people whether or not their job performance is meeting expectations. This is not the annual performance evaluation. This is direct, personal, regular, face-to-face feedback. While managers tend to avoid these potential confrontations, employees actually welcome the accountability. They want to know where they stand.

Treat all employees fairly and impartially. People know when one person is held accountable and another is given a pass. They also know that something is wrong with the system.

Finally, base your judgments on facts rather than opinions. Metrics help here, as well. But application of the principle still requires management judgment – judgment based on facts, not opinions.

As companies begin to hire once again, your best workers – those who may have been staying in a less than ideal situation out of fear – will have other options. Companies that meet the emotional job-security needs of their people will have a significant competitive advantage.

Where Do Losses Come From?

I hate losing money. I hate it when TEC members lose money. It is even worse when reasonably bright CEOs come up clueless on where the money comes from to absorb such losses. After two years of consecutive losses, I actually had one CEO explain away the problem as “paper losses.” The ensuing conversation went something like this.

TEC Chair: Where do losses come from?

CEO: Well, our expenses exceeded our income.

TEC Chair: Okay, where does the money come from to cover these losses?

CEO: We drew down our line of credit to fund the loss. We also let some payments to our suppliers drag out.

TEC Chair: Do you intend to repay the bank? And, by the way, it would be fraud if you didn’t intend to pay them back.

CEO: Well, of course, we intend to pay the bank back. And, we’ll get our suppliers caught up as soon as we are able.

TEC Chair: So, what you’re telling me is the money that was lost is not coming from the bank or hapless suppliers. They are going to get even. So where does the money come from to pay for losses?

CEO: I guess at the end of the day, it comes from the shareholders of the corporation. You know, shareholder’s equity.

TEC Chair: Who are the shareholders of the company?

CEO: My wife and I own the company.

TEC Chair: So you are telling me the money literally came out of your pocket? Out of your wife’s checking account? Out of your kids’ college education fund? Out of your own retirement account?

CEO: Well, yes, I guess so.

TEC Chair: There is no other source. The money came out of your pocket. And, it is gone - forever. It’s not an investment, unless the loss was caused by significant depreciation charges. The money that paid for the loss is not coming back. Ever. It is forever “lost.”

CEO: I hate losses.

ABOUT Dennis J. Ellmaurer

ABOUT Dennis J. Ellmaurer

Dennis Ellmaurer is a management consultant working primarily as a TEC chairman, leading three CEO mastermind groups in southeastern Wisconsin. In addition to his work with TEC – The Executive Committee, Dennis does executive coaching and is president of Globe National Corporation, an advisory and consulting firm assisting owners of small businesses with Exit Strategies and Succession Planning.

Dennis has over 25 years of management experience. He started his career in business-to-business marketing and sales with a division of the $1.5 billion Reliance Electric Company. He moved to Valuation Research Corporation - an appraisal firm specializing in Mergers and Acquisitions, becoming Vice President of Business Development. In 1982, Dennis became president of a small manufacturing firm with a proprietary product line and strong distribution channel. The company evolved into a marketing and new product development concern. The firm grew aggressively, eventually selling the assets of the business to a division of Mattel Inc.

Dennis majored in Marketing and Finance, earning a Bachelor of Business Administration from the University of Wisconsin – Milwaukee. He is a past Chairman of the Legislative Committee of the Metropolitan Milwaukee Association of Commerce. Dennis serves on the advisory board of Central File, Inc.

Dennis is a member of the Vintage Sports Car Drivers Association and enjoys driving a ‘69 Corvette on sunny weekends. His direct telephone number is 414-271-5780. He may also be contacted through TEC – The Executive Committee at 800-236-9832 or via e-mail at dennis@globenational.com.