Millennial & Middle Market Businesses

By Dennis Kebrdle, Chikol Managing Partner

I was reflecting on the last time I had an opportunity to share some thoughts with my colleagues in the corporate distress practice, and we noted companies undergoing generational ownership transition.

We highlighted the impact of “tribal knowledge” that had been missed in a number of those acquisitions. In keeping with this view, this time we’re talking about the next generation of team members these groups of owners have to deal with—the Millennials!

We’re not talking about the ownership, but the members of their teams containing this educated gang, joining the company as staff members.

Over the many years working in this business, we have witnessed the following:

Early on, a lot of activity was in helping companies operationally dealing with the 12%+/- cost of money that was historically typical.

At some point, work transitioned to private equity (PE) firms buying into the middle market -dealing with the loss of the core “tribal knowledge” that was the soul of ownership and getting the firms back on the profit trail to enhance enterprise value.

Since the crash of 2008-12, work has often been with companies that weren’t sold in the PE boom but rather those being passed on to the next generation.

Now, new owners, both private and PE, are struggling to find committed staff. Not only did the previous ownership generation get older, but so too have the sergeants needed to run these companies. New owners are building their teams for the next 20+ years and having more than a tough time.

These are companies that the family sold or passed down, and the new owners took over and attempted to continue management in a familiar fashion. Preservation of the company’s “tribal knowledge” was helpful, but the transition between generations (meaning millennials) appears tougher than had been expected.

The challenge is now how to build a bigger tomorrow while preserving the historic culture that allowed the success to continue over so many years. Working with the next generation to plan the next 20 years while getting the current owners to go along with the changes (all while not appearing heavy- handed) is a challenge for all turnaround and profit-improvement consultants.

These dynamics require evolutionary operational plans that entail more than the trusty 13-week cash flow and refinancing to bridge the next year or so. It instead requires looking at the situation as if you are the buyer of the business.

This is a return to the work we all performed before the financial crisis that “pulled up” PE/Mezzanine middle market activity. What surprises us this time is that work is being generated through lenders rather than interested ownership.

When borrowed money cost more than 3-5%, debt levels mattered more. Today, it is harder to access debt due to total dependence by lenders on cash flow. Cash flow has always been the lifeblood of leveraged deals, but the balance sheet counted more in the past. These family companies usually have a strong balance sheet but need cash flow improvement. It’s the 1990’s again!

The best players in these situations are those in which the next generation has spent time at something other than the family business. Preferably, members of the family have spent 3-10 years at a large company, gained reporting skills and operational viewpoints different than their family’s business. These new owners/managers have recognized that motivating and getting improved production from the millennial group takes a different tack than in Uncle Tony’s day.

New staffers also have different types of motivation and have to be treated in a manner perhaps unheard of or intolerable just 20 years ago. Managers willing to make these changes stand to win where others fail. We need millennial staffers who show up and focus on the targets set by this group of owners. Our experience tells us that real success can be achieved with a couple of approaches in both factory management and internal processing operations.

There are drivers that motivate millennials and benefit the employer. Here are a couple that we highlight:

More time off—4-10-hour day workweeks with periodic overtime to increase income on a consistent basis. This also helps companies with seasonal sales. In retail, having the best staff there for customers is beneficial and has the impact of reduced benefit costs per hour.

Immediate measurement of performance & self-reporting the results—visible to everyone. Self-proclamation using white marker boards with color indication of performance—blue-good; green-incentive; red-bad tracked every hour and tied to the planned rates. Management by “walking around” rather than filling out reports or “looking over my shoulder” is preferred. Management can provide immediate encouragement, personally tied to actual results. By tracking hourly targets, management controls “bites,” providing for continuous improvement.

Immediate reward for improved performance—personal recognition & monetary reward—a combination of individually measured incentive plans and group profit sharing. We’ve helped bring back piece rate compensation for the individual and shared profits for the team in some cases. This allows for reduced base wage rates, which has a positive impact on the cost of overtime. We are promoting incentive plans that are tied to the lowest-paid person in the plant or company, with the staff compensation driven from that baseline. This illustrate for staffers that the entire staff is in it together.

Integrate technology into the sales process & production planning—this proves that the company will be acting in ways the younger staff sees the world, using technology as a core requirement in their world.

We are having success with established management that enjoy the constant interaction and incentives culture. They accept the 4-10-hour day approach, as it adds at least 2.5% of capacity (one fewer day of breaks and other time wasters that average 1.1 hours/day); our corporate incentive plans, where the management bonus is tied to what the floor sweeper earns; and an approach to sales where one blends online marketing and account management.

Our operational teams, most of whose members have owned their own businesses, are enjoying this group of engagements. It will be refreshing to again see manufacturing, distribution and service businesses grow and create wealth in our markets.