Good Management Is Key to Unlocking Investors’ Vaults
What is professional management, and why is it important to the search for outside capital?
As described in this space last week, Job One for Nora Rojas and her brothers, Sergio, Carlos and Juan Pablo Rojo--who dream of turning their three-outlet chain of Mexican restaurants, Taco Ready, into a franchise company modeled after the In-N-Out burger chain--is to turn themselves into professional managers.
The four young people stand a good chance of succeeding because they already understand the importance of the task.
Ask many entrepreneurs to identify the most important element in success, however, and you don’t get “professional management” for an answer. Instead, people who dream of starting their own businesses think they need a dynamite product or service first and foremost.
And when they look for outside investors, they get a big surprise. Investors don’t put their capital at risk without professional management in place, no matter how exciting the product or service.
Indeed, investors choose good managers with humdrum products over humdrum managers with dynamite products any day of the week, and it doesn’t matter whether you’re talking about start-up or established businesses. Good management is simply paramount, and if it’s not already in place, outside investors get it there before they start writing checks.
“Raising outside capital is a long and arduous process, and many people fail in the effort,” says Arthur E. Levine, president of Levine Leichtman Capital Partners Inc., a 14-year-old private investment firm headquartered in Beverly Hills.
Levine Leichtman invests in mid-sized growth companies generating revenues of $20 million or more, usually with a mix of minority-position equity investments and subordinated debt. The firm has $452 million in institutional capital under management, including funds from the California Public Employees’ Retirement System, the New York State Common Retirement Fund, the Los Angeles County Employees Retirement Assn.
“Our investors trust us with their capital,” Levine says, “and they demand that we find the best opportunities. We want professional management because we need good stewards for our money. Good managers are absolutely critical, and we spend a lot of time making ourselves as sure as we can be that the people who run companies in which we invest are professionals.”
Among other things, this means that the business must have a team, not an individual, in control of operations, Levine says. The team must include an entrepreneurial chief executive with a clear vision of the company’s future backed up by competent operations and systems managers plus a chief financial officer who can support internal decision-making and translate the company’s business activities into financial statements understandable to outsiders.
The members of the team must be mature and thoroughly seasoned, Levine adds, to limit risk.
“When you’re young, you have ambition and unbridled optimism going for you,” Levine says. “But to outside investors like us, this often means risk. When you’re mature, you have a sense of the limits of your own abilities and you limit the risks of your business by putting people in place around you who complement your own strengths and shore up your weaknesses.
“In the real world, we find that the entrepreneur who comes up with the idea for a business often has the capacity to generate only marginal profit. It takes a professional management team specializing in every field of the company’s operations to maximize profit.”
The lesson Levine draws is important to any business owner who wants to attract outside capital--for example, Nora Rojas and her brothers. Like many other business owners in Southern California, the four run their restaurants by tried-and-true, but not necessarily professional, methods that would not pass muster in front of outside investors.
But they are determined to succeed, and their attorney, David Pisarra of Santa Monica-based Pisarra & Grist, thinks they stand a good chance.
“They realize that their target market has hit a holding pattern,” he says, “and that means lost growth.
“They need to learn every detail of their business, and they have to learn to delegate so they can free themselves of work that should be done by others, such as filling the salt and pepper shakers and making sure they have enough tortillas for heavy times.”
In short, they must run their business in a way that allows people on the outside--starting with the investors whose backing they will need to grow--to see how it operates, Pisarra says. And although it’s a tall order to make the transition, he expects to see them succeed.
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Juan Hovey can be reached at (805) 492-7909 or at jhovey@gte.net.
