Know your Product

After an initial time speaking with the management of a target company to understand what their ideas and objectives are, I begin looking at the product, service or technology. I usually have been able to verify, through supplied documentation, that product exists and fills some need in the market. Before I look at the product in detail I talk with both operations and technical management. I am looking to understand what their perception of the product is and where they see the product in the market.

I also want to create an outline of how and why the business has changed, what was the original idea and what the process was to modify or fine tune the business over time. Finally, from this discussion I want to know what they feel are the business’ strengths and weakness. I then take a close look at the product and its characteristics to determine how close the unprofessional user would evaluate the product in its current form.

The choices of the company are often dictated by these perceptions, as are their expectations for growth and valuation of their venture. This step is extremely important. I have found that management’s vision changes as they gain greater knowledge of their addressable market and the perceived capabilities of their product. This is not necessarily a good thing.

One of the first projects I verified in Dallas was a fresh pasta manufacturer. The primary competitor was not a similar product since it sold primarily dried pasta and had a small production of fresh pasta that it sold into existing clients. The company I was looking at had been through a couple of ownership changes and was currently going through a generational transition, from father to son-in-law. The son-in-law, an Ivy League graduate, decided to ramp up production and attempt to take advantage of economies of scale. To do this he picked up numerous OEM contracts and also supplied several school districts. To get the new contracts he had to reduce prices.

Consequently to pay the bills he had to cut costs and began reducing both the quality of the flour and the type and amount of eggs used. Slowly his most profitable portion of the business, the retail sales with a trusted name, began losing market share. As the brand name product lost share so did the demand for the OEM contracts. He now had a company that was slightly profitable that was now losing money on a regular basis.

He was convinced that with additional funding he could revamp the production facilities with more efficient systems and return to profitability but I had to return a negative evaluation of the company. He did not understand what he was selling. He thought that Fresh Pasta was simply a marketing ploy and that the clients would never understand the difference.

If he had protected the company’s main product and brand name we could have found a way either to finance or purchase the company. In the current condition our evaluation was that the investment necessary to rebuild the brand would no longer allow us to have the desired return in a five year period. The company later that year liquidated.

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