“If you don’t go to somebody’s funeral, chances are, they won’t come to yours.”

—Yogi Berra

Sounds pretty morbid, but it’s the truth. As Yogi Berra so eloquently put it, relationships require a quid pro quo. In a previous blog I had challenged the reader to begin to think about relationship building as “farming” rather than “hunting” in order to become a value added resource and turn their contacts into relationships. Contrary to popular belief, relationship building is not about give and take, it is about giving. Develop, nurture, and cultivate your relationships if you would like to see them grow and bear fruit. To succeed in today’s collaborative, client-driven, networked economy, companies must take advantage of the strength of their business relationships which leads us back to the most fundamental aspect of business, something our country was built on: Capital…Social Capital that is.

Social capital is, in fact, very similar to its monetary sibling. It, too, is accumulated by an individual or a business and used, or is available for use, in the production of wealth; however, unlike its sibling, it is not depleted by use, but in fact depleted by non-use. Put more simply, social capital is created through the sharing of resources with personal and professional networks. These resources could include ideas, knowledge, information, opportunities, contacts and, of course, referrals. The more resources you bring to the table, the greater your social capital.

Social capital is built by design, not chance. According to Wayne Baker, author of Achieving Success Through Social Capital, “Studies show that lucky people increase their chances of being in the right place at the right time by building a ‘spider web structure’ of relationships that catch information.” Furthermore, according to Baker, “Success is social; all the ingredients of success that we customarily think of as individual-talent, intelligence, education, effort and luck-are intertwined with networks.”

Thus, networking is instrumental in building social capital. Networking is more than showing up, shaking hands and being witty at a cocktail party. Networking is sharing information in a proactive or reactive way without expecting anything in return. It’s about building long-lasting connections with other professionals strongly rooted in a bond or connection developed over time. It’s being genuine and authentic, building trust and relationships, and seeing how you can help others. Networking is also about following through and connecting the dots. For example, two years ago I had lunch with a Partner at a local CPA firm. During our conversation I had articulated our investment interest in niche manufacturers of engineered materials (thermoplastics, technical ceramics, and high-performance composites). He quickly explained he had a client fitting this description albeit they were not currently looking for a financial partner. A few weeks ago (more than two years later) he gave me a call and mentioned his client was thinking about a recapitalization and without hesitation or an expectation of something in return, he thought of MCM. A week later we met with this gentleman as he introduced us to the owners of the business. While it is not a fit for us, we offered our advice and connected him to someone we thought could be a strong potential buyer or partner.

Barriers to initiate and begin to develop relationships have come crashing down. Technology alone has made it much easier to communicate with your suspects, prospects, existing customers, and referral sources. However, this also means it is easier for competitors to gain access to your network, thus continuing to maintain good relationships with clients is vital. To maintain good relationships and trust, it takes a plan and ongoing strategies for success. As your network or ‘spider web structure’ continues to grow you may find it difficult to maintain regular communication and see your social capital depleting. Leverage technology to build and maintain your social capital. Augment face to face interactions with virtual ones, (but be careful not to displace them), send a text message, make introductions through LinkedIn and Facebook, re-tweet an interesting article, refer to another group in an email blast, or ahem, like and comment on a blog. Whether they’re partners, investors, employees or the community as a whole, enhancing daily business relations can unlock many great opportunities for a company, especially in terms of accelerating growth, building value, entering new markets, and pooling expertise.

In short, social capital measures the degree of influence which we have through our networks. It’s crucial to success in business. Successful businesses understand the value of building their social capital as well as their products. As you invest your time in developing your social capital, know that you are, in fact, also increasing your financial capital.

For more information on our Microcap buyout fund and investment principles, contact us today.

As a CEO, wouldn’t it be nice to be able to instantly access sales margin information to better forecast next month’s profitability, determine whether you should run a sale on certain items to hit year-end sales figures or instantly see how your new sales representative is performing in Louisville… all while you may be half way around the world visiting one of your manufacturing facilities? The answers may be found through a little bit of measuring.

Business analytics refers to the skills, technologies, applications and practices for continuous iterative exploration and investigation of past business performance to gain insight and drive business planning. Business analytics focuses on developing new insights and understanding of business performance based on data and statistical methods. Instant access to data and information via the Internet combined with a host of new software platforms built by the likes of SAP and Microsoft is rapidly advancing the use of business sales and purchasing analytics. This practice of analyzing historical data from different sources and summarizing the data into useful knowledge can be used to increase revenue, cuts costs, or both. Currently, two of MCM Capital’s portfolio companies (ESSCO and StyleCraft) are leveraging enormous quantities of data they have amassed over the past decade to compete on analytics in incredibly compelling ways. While a CEO must justify the cost of implementing a business analytics program, it took just a few weeks for the CEO of ESSCO to realize the benefits of its new business analytics program.

ESSCO distributes over 10,000 repair parts and accessories for floor care equipment to independent dealers, floor care online retailers and discount retailers. Since MCM acquired the business in 2005, we have encouraged management to begin utilizing the available technology to grow the business. The Company has embraced technology to implement an e-marketing strategy, operate a national network of distribution centers boasting 98% on time delivery rates, and offers its 5,000 customers one of the only fully-functional e-commerce websites in the industry.

However, it was only a year ago that ESSCO implemented a sales analytics solution having revolutionized the management team’s ability to more effectively manage its sales force, inventory and vendor relationships.  In its most simplest form, ESSCO’s business analytics platform is taking data already available to its IT department and makes the information more widely available to the entire management team, simple to access via the internet and gives them the abilibty to produce results on a real-time basis. Vizion Solutions, a Cleveland based company, has enabled ESSCO to completely decentralize the means by which it can parse data from its IT function to the entire ESSCO executive team.   According to the Director of IT, “no longer does the VP of Sales have to request a report from the IT Department on the monthly productivity of salespeople. Rather, reports only being generated by the IT department 6 months ago can now be generated on a real time basis by the department manager needing the required information.” The “Dashboard” module graphically breaks down daily, weekly, monthly sales numbers, customer and product profitability and allows management to compare sales and margin information to budget and prior year numbers. Since the implementation of this program, management is now able to: (1) stem a sudden, and unexpected, decline in a customer’s ordering pattern due to a competitor’s attempt to drop prices to buy business; (2) adjust prices upward/downward for any of its 12,000+ SKU’s based on competitive dynamics or a desire to move certain inventory; (3) measure the increase in sales due to short term pricing and promotion efforts; and (4) monitor the effectiveness of a recently hired salesperson.

Business analytics can answer questions like why is this happening, what if these trends continue, and what will happen next. Maintaining a business analytics program can empower management teams to meet their goals by providing them with accurate and trustworthy information; helping them define, plan, and align performance goals and metrics; enable them to respond instantly to competitive dynamics as they unfold; and learn from best practices, adapt, and continuously improve over time. Is it time for your business to be measured?

For more information on our Microcap buyout fund and investment principles, contact us today.

Driving into to work this morning, I was listening to CNBC’s Squawk Box which, on this particular morning, featured a well-respected financial advisor providing his long term insights on the economy and equity markets. To summarize, he projects tepid GDP growth for the next several years and by extension, believes this will correlate with modest equity market performance. Whether his insights prove prescient or not, it prompted me to consider the favorable dynamics of smaller companies making up the Microcap LBO market, MCM’s target market for the last 20 years.

We define the Microcap LBO market as companies with enterprise values of $15-$50 million, typically generating revenues of $15-$75 million and EBITDA of $2.5-$8 million. As one might intuitively expect the population of companies falling into this category are far greater than the number of larger companies as indicated by the following chart:

Number of Companies by Employment

Source: US Census Bureau 2008

In addition to the greater number of investment opportunities, generally purchase price multiples are lower reflecting the law of supply and demand. The aforementioned are attractive attributes; however, our fondness for the Microcap market has more to do with the opportunity small companies afford us to positively affect revenue and earnings. Typically, it is relatively easier to achieve the same percentage growth rate of a smaller company than in a larger company (authors’ note: this rule apparently does not apply to Apple). Further, in a Microcap company small changes in personnel and or tactics can profoundly impact earnings. For example, we purchased Dexmet, a $2.5M EBITDA company in August, 2006 which at the time of acquisition derived over 80% of its revenues from the lithium polymer battery market. We introduced a new CEO with a mandate to invest in new product and business development initiatives. The Company has since doubled EBITDA and serves a significantly more diverse customer base with battery applications representing only 40% of total revenues.

Of course, the ability to materially impact earnings can be both a blessing and a curse, hence portfolio management rule Number One within MCM is “Do no harm”. This rather simplistic adage speaks to our approach of gaining an intimate understanding of a newly acquired portfolio company’s strengths, weaknesses, market dynamics, etc. before advocating for changes. For example, in performing due diligence on MicroGroup, a former portfolio company acquired in 2001, I underestimated the talents and value added of the Company’s COO, who lacked the polish one usually associates with C-Level executives. This was particularly worrisome given the fact the CEO, although creative, was quite eccentric (“just call me Crazy Bill”), and thus she had more authority and impact than a typical COO. However, over the first year and thankfully throughout our ownership, I came to admire her New England common sense, passion for the company and ability to lead. In no small part, she was responsible for creating a culture which embraced lean manufacturing principals embodied in the Company’s motto of “Do it Right, Do it Fast”. The company truly excelled at providing best in class fulfillment of complex machined miniature medical device components and assemblies, often turning an order around in days as opposed to the weeks typical of their competitors.

Conventional wisdom suggests Microcap companies, relative to larger organizations, are more fragile presenting a smaller margin for error and, as a gross generalization, I would agree. However, our experience has been contrary to conventional wisdom. From 1998 through 2011, we have led 15 LBOs of Microcap companies, eight of which are current holdings. During this period we have not realized a loss on any single LBO investment and have only one small “mark to market” loss on an existing portfolio company. I believe our positive experience investing in the Microcap market is attributable to sound investment strategies enhanced by a strong Board of Operating Partners, coupled with almost 20 years of working with entrepreneurs and Microcap sizes companies. We remain bullish on the Microcap LBO market and fervently hope it remains under-served by the broader private equity community.

For more information on our Microcap buyout fund and investment principles, contact us today.

I have become a bit fatigued with the stream of bad economic news (European debt crisis, fiscal deficits, blah, blah, blah) seemingly taking permanent residence in the Wall Street Journal. Consequently, I am choosing to start this macro-economic perspective with a little bit of sunshine by reminding ourselves the commercial climate isn’t all that bad. For example, quarterly earnings, as measured by the S&P 500, have steadily improved since the dark days of Q1 2009 as detailed below.

Although corporate America has vigilantly controlled cost to drive earnings, it is important to note revenues have been growing as well as detailed below:

I am pleased to report the above charts are reflective of our portfolio companies, many of which are achieving strong, if not record profitability.

Unfortunately, there seems to be a disconnect between company earnings and the labor market, which has not materially improved (not including seasonal hires for the Holidays) from its nadir in October 2009. The U.S. unemployment rate is hovering around 9%, as detailed in the graph below, essentially unchanged for the past several months.

I believe the productivity gains made during the recession are playing a substantive role in damping the need to add employees. Although the impact of productivity gains on manufacturing employment appears to be more extreme this cycle, it is consistent with prior recessions, a topic I blogged about (Globalization Shapes US Manufacturing) this past April. In our opinion, the weak labor market, coupled with an annualized 3.9% increase in the seasonally unadjusted CPI, will continue to stress the consumer and temper domestic economic growth.

For more information on our small cap buyout fund and investment principles, contact us today.

MCM Announces Acquisition of Zinkan Enterprises

CLEVELAND, OHIO – MCM Capital Partners (“MCM”), is pleased to announce its investment to fund the majority recapitalization of Zinkan Enterprises Inc., a manufacturer and value added distributor of specialty chemicals serving mining, industrial and commercial customers.  Senior financing was provided by Key Bank.

Founded in 1982, Zinkan, headquartered in Twinsburg, Ohio, is the premier provider of proprietary formulations used in mining, general industrial water treatment and wastewater applications.  Zinkan’s current product line includes airborne particulate control chemicals, flocculants, frothers, freeze conditioners, defoamers, pond treatment products, pH control products, cooling tower biocides and descaling chemicals.

“We are excited to partner with Zinkan Enterprises, an industry leader in water treatment and mining chemicals, which fits extremely well with our investment focus on niche manufacturers of highly value added engineered products operating in segments, likely to grow faster than GDP,” said Mark Mansour, Managing Partner, MCM Capital Partners.

MCM has appointed Harry Shimp, one of MCM’s Senior Operating Partners, as Chief Executive Officer.  Mr. Shimp has been involved with the firm for over 15 years, most recently as CEO of Dexmet, an MCM II portfolio company. “Jim Zinkan, along with his son Brian and the rest of the team have done a great job in positioning Zinkan as the “go to” supplier in their field.  We intend to build on that foundation and adopt a strategy to drive aggressive growth.”

Incumbent management will continue to play a key role in driving the company’s growth.  “With the additional financial and management strength of MCM, Zinkan and all its people can continue our strong growth both in the USA and globally,” stated founder Jim Zinkan.

For more information on our private equity firm and investment principles, contact us today.