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Strategizing deals that build 'a national economy'; PART ONE

Tribal due diligence in business deals

WASHINGTON - After a rousing call for "a national economy for Indian
country" from Mark Macarro, chairman of the Pechanga Band of Luiseno
Mission Indians, Chuck Johnson of Johnson Strategy Group gave NIBA-goers a
detailed blueprint for a strategy to get tribes moving in that direction.

With tribal self-determination more up in the air than ever following the
Nov. 2 elections, Johnson's remarks seem even more timely than when he
delivered them at the National Indian Business Association Annual
Conference and Trade Show in September.

In this first article in a series drawn from Johnson's presentation, he
compares tribal economic development planning with an investment portfolio,
contrasts that approach with isolated entrepreneurial initiatives, points
out that big-picture economic planning and a due diligence process for
business deals are the keys to accessing the vast capital available in the
private sector equity investment market, and asks a series of questions
that amount to a survey of preparedness for tribal economic development
planning:

The overriding theme we're gonna talk about is that economic planning is
like a portfolio [of investments] if you think about how tribes are
building. I remember when I first got into tribal planning in the late 70s.
I remember the old BIA loan guarantee and the business grant program. And
those tribal 'portfolios' were very small businesses, you know,
single-person entrepreneurs the BIA would fund.

And in the last 20 or 30 years this 'portfolio' has grown to embrace not
only tribal businesses but tribal joint ventures outside the reservation
land base, and all the way to the global economy... I'm going to try to
walk you through what I think tribes can do to create a crosswalk between
their national sense of sovereignty and planning for their governmental
operations, and the more detailed operational enterprise planning that goes
into building businesses. So that's why I use that kind of a portfolio
concept.

I'm going to talk about how to build that bridge, and the way you build the
bridge is through tribal due diligence. And let me re-emphasize one other
point: There is more money in America and the world than there are business
deals. There is more money for Indian country than there are entrepreneurs.
The issue is not having enough money. There's more venture capital. We
[Johnson Strategy Group Inc.] were commissioned by Treasury [Department]
four years ago to do a study of why is it that the private equity markets
aren't migrating to Indian country? And we actually did a model comparing
Indian country to a nation's economy. And we came up with a calculation
which was confirmed by the Treasury economists. This is 2000. There is
right now a $10 billion gap between the equity markets and current tribal
businesses. That means that if the private equity markets understood tribes
as a working economy, and also those [current tribal] businesses, there
would right now be a flow of $10 billion [in equity investments].

The reason that flow is not happening ... is because people just don't know
... Most of the investors do not know, are not familiar with, and aren't
necessarily comfortable with, investing in Indian country. And part of that
is their fault through ignorance, and part of that is tribes' fault for not
developing internal capacity and systems to get the word out. So I'm going
to talk about some of these systems issues and what tribes should go
through. I first want to ask a couple of questions.

How many tribes have adopted economic development plans, which basically is
adopted by the tribal legislature? This says, 'This is where we want to be
in the next five or 10 years, and this is our vision of where we oughta
be.'

Second, how many of these plans are tied to a broader tribal strategic plan
that covers everything the tribe does? For example I'm working with one
tribe right now that has a huge list, a laundry list, of capital
improvement needs. Water, sewer facilities, court facilities, police
facilities, cultural centers. How many tribal enterprise plans are tied to
tribal capital plans so you know how to stage retained earnings investment
in tribal infrastructure?

Third, how many enterprises are separated from tribal government? Where
you've got separate enterprise boards of directors that are combination not
only tribal officials, but also industry officials?

How many have assessed the impact of tribal businesses and government
operations on the local and regional economy? ... I would suggest that's
not just a factor for urban area tribes, but also most rural tribes are one
of the most significant economic players in rural areas because they're
major employers, they're major buyers of goods and services. And so they
have considerable leverage even in remote rural areas because of the size
of their operation and how many they employ, and how much they buy. So
there's leverage even in small rural communities in terms of amassing the
whole amount of capital that flows through the tribe out into the local
economy.

By the way, another question, how many of you know in a single unified
spreadsheet all the financial inputs and outputs of the tribe? Where all
the money is coming in, and where all the money is going? It's very simple.
There's very simple ways to do that, so you can put together your
investments, IIM [Individual Indian Money] accounts, the retained earnings
of your businesses, government grants and contracts, everything into one
spreadsheet.

How many of you know, there's not only money flowing through the tribe, but
how many of you know how money flows through the local economy? There are
models you can buy right now - every county in the United States, there's a
thing called IMPLAN ... every county in the United States has a database on
how money flows. Too often tribes go after businesses without understanding
what are the growth businesses, and the dying businesses in their local
economy. I'm going to suggest something later about that.

How many of you invest outside the tribal reservation setting? Where you're
basically taking your earnings or your leverage and saying, I don't have to
necessarily be within the boundaries of my reservation, I can go find deals
and investments and return [on earnings] outside my tribal setting.

How many of you know and use a checklist that should go into the business
and financial planning? How many of your staff know about how to assess
prospects - and I'll talk about this in due diligence.

Last question: How do we screen deals via some due diligence process? I
would suggest, and I'm going to make some kind of interesting challenges,
that the tribal council and the tribal chairman should be the last to see
the deal, not the first. And when they see it they should have a complete
package that outlines the business plan, an evaluation by your team, a
rating and a pro forma [financial statement including assumed sums and the assumptions that underlie them] for five years of the business, and a
[financial] structure of the deal before it gets to the tribal council. And
I would suggest you can do that internally.

(In part two: The "dirty dozen" questions of tribal due diligence.)