Given the amount of capital he figured he'd be able to borrow, Broderick fully expected to be engineering a turnaround if he bought a company -- or created one from assets he bought. (He eventually formed SteelWorks after acquiring the assets of two companies.) To measure the magnitude of the challenge he'd be taking on, he included among the criteria existing relationships with customers/vendors (after all, "we would have to convince them to stay with us," he notes), quality of personnel at target (at the companies whose assets he ended up buying, "the people were weak"), and available personnel to bring to target. "It was important that I have key people I could bring in," he says. "I knew I could get my key management people from the lumber company back if I could get this deal done." That's because he knew that those people -- his chief financial officer, his VP of operations, and his VP of sales and marketing (who also happened to be his brother) -- would be reasonably comfortable with any company that got a high score on his list of criteria. Among those considerations, a key one was the basic nature of the company: Was it high, medium, or low tech? "We wanted to get into a low-tech product that had good margins, because the learning curve would be too long if we were making computer chips or fiber-optic cable or software," he says.
He wanted low tech but not slow growth. So he also considered where the target is in the business cycle (start-up, emerging, mature, or in decline) as well as the state of the overall industry. Was it declining or growing or growing fast? "Everybody thought this one was mature, but we thought it was just emerging," he says.
2. Competition
Of course, a growing industry is bound to attract others. In his second category of criteria, Competition, Broderick evaluated his rivals from three perspectives. Profile of competitors focused his thinking on whether "there were a number of very strong independent operators who would be very hard to unseat." His conclusion: there weren't. Nor was there too much mom-and-pop competition in the industry, which he considered a plus. "In lumber the small wholesalers were tough to compete with because all they had to do was make a living," he recalls. And given the size of the niche, which he estimated at around $40 million, large vendors weren't likely to cut out distributors like SteelWorks. The one remaining question in this section -- Will vendors go direct to consumers? -- was designed to address a phenomenon he'd had to fight in the wholesale-lumber trade.
3. Financial
The 11 items that made up Broderick's next category, Financial, enabled him to make a fairly straightforward diagnosis of the venture's fiscal health: Margins, is target profitable?, Float (how fast would he have to pay vendors, as compared with the terms he'd have to extend to customers?), seasonality, industry stability (cyclicality), cost of target (cash versus terms), size of target, control considerations (minority shareholders?), minimum rate of return on investment, cash flow (how much can be taken out of the business while still keeping it viable and prosperous and the banks happy?), and exit-ability.
4. Potential
Potential, his next category, helped him assess how he might grow the business. The three items in this section included growth potential (existing customer base versus total market), efficiency of target (cost-cutting potential), and computerization of target (room for improvement in hardware and software). "If anything, we underestimated the growth potential, the margin potential, and the efficiency potential" of his business, concedes Broderick. "But going into this, you couldn't make the kinds of projections that we've turned out to deliver and be taken seriously by anyone."
5. General
Broderick's research, however incomplete, was taken seriously by his fellow CEOs. He knew because he included adviser opinions among his three criteria in a section labeled General. The others? Personal experience/expertise and gut feel. "Right from the start, this felt like something I could be excited about and successful at," he says. After pausing, he adds, "But I like to think that didn't influence how I filled out the criteria."
Please e-mail your comments to editors@inc.com.
THE START-UP ISSUE
Part 1: Your Way
The Rationalist: The Death of Gut Instinct
The Copycat: The Next Starbucks
The Spin-Off: Hiding in Plain Sight
The Soloist: Balancing Act
The Idealist: Into the Frying Pan
The Zealot: Mission Critical
The Pro: The Rules
The Accidental Entrepreneur: Field of Dreams
Part 2: Anatomy Update -- Big Plans
Part 3: The Start-Up Diaries -- Year One
