The Art of The Deal Today

“Leveling the playing field to attract investments to your community”

 

In today’s global economy money flows to any place where it has a reasonable chance of gaining an opportunity to increase and/or maintain investor yield expectations for profits and dividends.  Most folks know that some of the barriers to the free flow of capital are political instability, monetary market uncertainty and government regulations that restrict capitalism and/or create an unhealthy economic business climate.

 

Economic developers have little if any control over political instability yet they need to understand how certain competitors in the global market do have some very uncomfortable issues along those lines.  Of the major markets today that are hot growth markets with vast potential the political instability card has become a lesser issue, but it is still very present in countries such as China, Taiwan, Korea, India, Russia and a few others.

 

If you couple the current skyrocketing cost of energy and production of facilities inside these markets even their cheap labor makes them suspect to place all of an investors proverbial eggs in one global basket.  It is for this reason that I stated in my current book, “Who Moved My Smoke Stack?”  that the U.S., Canada, and European markets will enjoy a resurgence of economic investment and growth.  With the decreasing value recently of the U.S. dollar coupled with energy costs it is making U.S. inward investment a real reality again in the new advanced and highly automated industrial production market.  Being close to markets is essential and paramount to both cost savings and political security to protect the delivery of goods into those markets.  As such you will see that new global investors are placing new facilities inside each market and creating niche production in close proximity to each consumer and capital market.

 

For Economic Developers and community leaders this means there is a refreshing new opportunity to rethink our current local proposition to new investors and attempt to attract our fair share of such new inward investments.

 

There is much that can be done at the local level and the state level to address making a community and state business climate attractive to global investors and even those already within our communities and states that may be considering such investments.

 

Today investors (shareholders, company owners, and corporate executives) look to new investments that can offer enhanced access to new markets at the lowest possible cost and with the least risk to interrupting their current profit streams.  They are constantly vigilant about the risk of eroding shareholder profits and dividends based on an ill-based strategy that either consumed more resources and raised over-all costs therefore to their current operations or did not produce enough sustainable short-term and long-term profits that offset the calculated risk.  The key concept here is that most companies today that are playing in the global economy are in fact calculating their risks to their current cash flow.  The other fear for publicly traded companies is of course that such investments might devalue the stock value and thus place shareholder returns in jeopardy and if you are the leadership executive team place your job on the line.

 

Due to these perceived and very real risk environments corporate executives are more often now asking their site location consultants and internal executive team assigned to such decisions to run the formulas for such risks and convince them first internally that locales can address their fears.  These new methodologies are commonly referred to as “Warranted Investment Models.”

 

Warranted Investment models are used in most industries from hospitality, entertainment, retail, to advanced manufacturing and logistical projects. The understanding of how to address these warranted investment models as an economic developer and a community, regional and/or state leader is critical to being successful in negotiating business attraction and even business retention and expansion deals today.

 

Warranted investment models commonly look at the following factors:

 

1.) The over-all market assessment for what profit driven benefits the project will have for locating in this specific geographic location. Will this location further enhance the revenue model in a positive manner or just meet the current projections or in a worse case scenario is there some significant risk that it will fall short of revenue projections?

2.) What is the amount of expected investor internal rate of return (IRR) that is expected to support this project and can this be achieved and why?

3.) What is the expected cash flow from operations once achieved that this project will create in both the EBITA and net to investors (ROI) that can be expected from this investment and is it justified?

4.) What new diversification of the current market share does this project bring to the company and does it represent an appealing long-term interest for the investment to be made?

5.) Is the current political and business climate one that is beneficial to the long-term best interests of the company?

6.) Does the local community provide meaningful and definitive benefits that will translate to enhanced revenues and reduction of risk and lower operating costs for the project and the company over-all?

7.) Is the state and/or province supportive of the local effort and does this add additional yield to the equation and if so how is it defined in the business model and how is it explained to the investors?

8.) What are the local infrastructure issues and are they going to be ready for our project to just hook up and move on our current projected timeline? Are there any possible delays in gaining proper and advanced infrastructure to support our needs today and tomorrow?

9.) Does the site meet all expectations with regard to soils, flood plain and wetlands mitigation, brownfield and environmental concerns and traffic analysis?

 

Now that you understand that all these factors are thus calculated and included into a revised business plan spread sheet that will identify how the proposed project within a specific market will indeed impact the company goals and objectives, economic developers can create a more robust plan of addressing these concerns.

 

Today the cutting edge economic developers understand that creating cookie cutter solutions or one size fits all proposals will just not cut it.

 

In deed economic developers have to first and foremost prove they understand the typical risk environment and that they can lead their public officials through the process of specifically creating tools that will support the warranted investment models of investors.

 

Site location consultants today understand they must look first for the willingness to address these type issues and approaches and not just ask for cash incentives to throw at potential deals. In the end no amount of cash incentives will stave off a poor investment decision into the wrong market. In the end, site location advisors seek to find a threshold public equity or stake in the project of approximately 15% to 25%. This does mean that communities are more and more being asked to share in the risk of such investments along with the company.

 

Today there is a ton of media hype about corporate welfare and union supported false doctrine being fanned in the communities across the globe about Good Jobs. This has created great peril to site location decisions, it is a true test of skills and discipline to create new projects that meet both public and private sector needs. I refer to this as a balanced “Deal Equilibrium.” The use of a step-by step or staged approval process is critical to keep all parties engaged and on realistic terms of their expectations and respective roles in a deal. I use a “four-step process” from initial identification of markets to the final selection and preliminary development agreement to close a deal. It makes transactions much clearer, justifiable and accountable for both public and private sector parties.

 

Economic Developers in many cases are looking at their strategic opportunities in niche markets and building an initial warranted investment case for their locales and then bringing that specifically to potential investors for their consideration. This approach works well because most companies are looking for low risk ways to increase their markets. Site location firms such as my own are working now with communities to prepare their best opportunities for potential investor consideration. Since site location firms are approached often to ask, “Do you have any really great markets our firm should consider?” It just makes sense to have a collection of such highly progressive communities in your relationship base.

 

In the end, understanding that today it is about truly public-private partnerships to achieve both public ROI expectations through what I refer to as “performance based economic development incentives” and community outcomes as well as meeting investor ROI and IRR expectations that drives the Art of the Deal Today.