It’s Counter-Intuitive – Buy the Company and Lower Prices

The news has been filled with stories about Amazon buying Whole Foods, what might happen, and what did happen. I liked the pictures in the Wall Street Journal showing the price of bananas before and after the deal closed.

Amazon did something counter-intuitive, they lowered prices (supposedly on about 100 regular items, like bananas). One of my favorite stories of how a buyer fixed a company is about when he raised prices about 25%, because he knew the company was severely under market (and no customers left or even complained).

Most new owners look for fat to trim and there’s often a lot there. It’s just like all the storage areas in our homes. After years and years, we suddenly realize we can’t navigate through the attic or closets because there’s just so much stuff. A lot of businesses build up expenses and don’t notice if there are duplicate services, what they have is overpriced, etc.

Amazon’s strategy will no doubt work. They’ll get people in the stores because now they’re competitive on the things we always buy (the Seattle Times just did a comparison on prices for common and not-so-common items between Whole Foods and other stores). Once their people will buy other things because it’s easier and cheaper to pay a little more versus traveling somewhere else to save 43¢ per pound.

The best strategy is to get a customer because if you do what you’re supposed to do you’ll keep them. And, all the studies I’ve seen say it’s 6-10 times more expensive to get a new customer versus doing more business with an existing customer.

“We will not make the same old mistakes. WE will make our own.” Henry Kissinger

Let’s have fun (my wife’s motto)

On September 20, I’ll be again volunteering to teach my class, “Dynamically Growing a Consulting Business” at the local SBA/SCORE office. It’s always an opportunity to remind myself the things I’m recommending to the students are the things I should be always doing myself, especially to enjoy what you’re doing.

Last week in a newsletter from Alan Weiss he wrote how he always asks coaching clients, “Are you having fun?” And, how many of them don’t like that because they think if you’re hard-charging up the corporate ladder or running your business it’s work not fun.

But it better be fun. On page one of my book, Buying A Business That Makes You Rich, I cover the top nine reasons people in audiences give me on why they want to be in business for themselves (whether it’s buy, start, or get a franchise). Then I tell them the number one reason should be to have FUN, which is mentioned maybe 2% of the time.

When business is good, it’s always more fun. When there are challenges they are at least your challenges and you control how to deal with them. But being in control doesn’t mean you are by yourself on the decision-making island.

As the video below covers, you do better with an advisory board or board of directors (or a business coach). Being in business can be lonely, that’s why there are scores of roundtable groups, coaches, and advisory boards. Use the one most appropriate for you.

“No matter how dirty your past is, your future is still spotless.” Drake

The Murky Ground

A recent business section in the Wall Street Journal had the front page, top headline of, “Google Pays Up for Fake Traffic.” There are refunds going to marketing firms for ‘bot’ fraud, when ads ran on fake websites.

We all see stuff like this every day. Not advertising clicks, but the misleading information put out by many. My daughter is in the midst of a job search and tells me all the time about misleading job descriptions. She’s come to appreciate how most companies now do the first interview by telephone because she can eliminate them without taking hours to commute and meet in-person.

In the small to mid-sized business buy-sell world misleading information is common. It’s rare to see a company for sale that is not the “industry leader,” provides the “best service,” has “no serious competition,” or is not the “premier” firm in their industry.

Then we get to the numbers and boy do things get murky. First, small business accounting is nowhere close to GAAP accounting (generally accepted accounting principles). It’s more like creative accounting with misclassified accounts, no pattern of what goes into cost of goods sold, etc. Comparing margins to industry norms is virtually useless.

Then we get to all the efforts to make a business look better than it really is. I’ve written on this before (see my website for an article and video on, “AAA – not to the rescue,” about adjustments, assumptions, and add-backs to manipulate the real profit of a firm). It sometimes makes me laugh to see how few expenses some owners claim are really needed to run the business. During one recent analysis I said, “If the seller keeps this up we’ll find the business can run with no expense.”

“The hardest thing to understand in the world is the income tax.” Albert Einstein

Go to http://www.martinkaconsulting.com/media/podcasts/ for an audio version of this memo.

Would You Buy a Business Sight Unseen

In June of 2017 the Wall Street Journal had an article titled, “Buying A House Sight Unseen Is Easier Than Ever.” The opening sentence is, “It takes a confident buyer—and a trusted real-estate agent—to purchase property without a first-hand visit. Agents are increasingly walking clients through properties via FaceTime, Skype or WhatsApp, or even making custom videos.”

I like the part about being a “confident buyer.” Well, you sure better be! I understand the concept of a blind date, but a blind house purchase? What about blinding doing the following?

Job – Would you hire someone “sight unseen?” Probably not, especially in these days of background checks, drug tests, and regulations making it harder than ever to get rid of someone. Plus, an employer wants to check out the applicants’ attitude. A job seeker wouldn’t, or shouldn’t, take a job under the same conditions. For three reasons:

  • The relationship with the boss needs to be established.
  • They’ll want to know the culture of the business or the department.
  • If they’re good, and confident, they’ll want to present themselves, in-person.

Customer/client securing – We’re not talking a retail environment here, we’re talking B2B, especially where there’s an ongoing relationship. It’s a lot easier to pre-screen out potential trouble than fire a customer or client later. Believe me, a bad prospect makes for an even worse client. If there’s no trust you don’t want them (and vice versa).

Business buy-sell – The last thing an owner (seller) wants is to have someone come in and destroy their business, ruin their employees lives, etc. If an owner doesn’t relate to the buyer she can’t expect him to relate to her customers, employees, and vendors.

A buyer not only wants to have a warm-fuzzy feeling when with the owner but he wants to meet the key employees and talk with the customers (at the proper time and in the proper way). He wants to get a feel for the company’s culture, see the operation, see how the facility is maintained (i.e. does it look like an inviting place to work or does the interior look like it needs to be pressure washed?).

Banks do a site visit before making an acquisition loan so why wouldn’t a buyer (and a seller)? In fact, why wouldn’t a job applicant and employer want a visit or an advisor want to establish a great relationship?

 

Protecting (Someone’s) Turf

While on a trip this summer I was listening to the radio and heard a feature story about a new firefighting plane. It seems a company in California has outfitted, and got FAA approval, for a 747 to carry and disburse fire retardant. And not just drop it but spray it so it doesn’t destroy trees, equipment, or people.

Only one hitch, the US Forest Service won’t let them use the 747s (to help fight fires). In an interview, the owner of the firm couldn’t understand why. He also said the Forest Service put out an RFP for new planes and put in specific size criteria so this firm couldn’t bid.

Last Friday at my Rotary meeting our speaker talked about teamwork, turf battles, and similar. It sure appears this is a good-sized turf battle (and I know there’s two sides to every story). It’s why there’s so many companies able to thrive because they know how to get people to work better together.

I see it not just between employees but between owners and employees. The all-controlling owner, i.e. the control-freak, micro-manager, creates a culture where people stay simply because they don’t want to go through the hassle of a job search (and because the devil you know may be better than devil you don’t know).

It’s why when someone buys a business they are often the, “Breath of fresh air” the company needs. And since at least half of the buyers I meet say they’re good at team building, it’s a great way to get some instant improvement.

The lesson for business owners is to not wait for a buyer but to create your own breath of fresh air, increase productivity, and see the value increase also.

“A jackass can kick down a barn, but it takes a carpenter to build one.” Sam Rayburn

 

When You Think You’ve Had a Bad Day; Or, The Best Laid Plans….

Take a look at this video of a Jimmy Fund (a Boston based charity supporting the Jimmy Fund Clinic for pediatric cancer) former patient throwing out the first pitch at a Boston Red Sox game. It’s funny if you’re not the recipient.

https://www.youtube.com/watch?v=bq-nwZmuLBY

Things don’t always go as planned, do they? In fact, they rarely go as planned, and sometimes that’s not-so-good and other times it’s great. That’s why plans have to be flexible. I’ve given my talk, “Lessons from Unusual Places” dozens of times. The story is about how we took my dad, age 80, to Europe for the first time. After the first full day in London we realized he couldn’t keep up with our plan, so we adapted it (so he could take a nap every afternoon).

The same in life, business, and the buying or selling of a business. We are constantly thrown “curveballs” like the one in the video. It’s like one of the stories in my book If They Can Sell Pet Rocks Why Can’t You Sell Your Business (For What You Want)?) about a lady who blended her business and personal checkbooks in order to write-off every personal expense she could. When a medical emergency hit, she had to sell and sell quickly. She admitted the taxes she saved via scamming the IRS was nowhere close to the amount of the reduced price she received.

  • Have a plan for your business, it’s growth, and realize opportunities will popup where you least expect them.
  • Business buyers, know what you want, realize finding a company is sales, it’s like finding customers, and keep working your plan.
  • Business sellers, take some time before you decide to sell to make your business as attractive as possible to buyers. It will pay off handsomely.

“It’s good to be idealistic. But be prepared to be misunderstood.” Mark Zuckerberg

The Cost of a Startup

Seattle Magazine did an analysis of the costs of opening a 2,000-square foot restaurant and the total costs ranged from $671,000 to $856,000, with, as you’d expect, about 90% of the costs for architects, construction, furniture, fixtures, and equipment. The remainder of the costs were the first week’s labor, food, beverages, etc.

Sounds similar to other industries. Want to open a machine shop, you’ll spend a lot of money on equipment. To become a distributor, you have to have inventory. Service businesses require equipment, parts, and (perhaps) vehicles.

The above is one reason I have a business helping clients buy and sell companies. Unless you have an idea for something new, bold, and exciting (I think all people starting a restaurant think that’s exactly what they have) why not buy an existing business? As long as you put the adjectives, mature, profitable, and fairly priced in front of the word business.

Buyers do more than get a profitable platform with customers, employees, and cash flow. They help the seller move on to their next great adventure in life. Or, as I like to say, when sellers do it right, they exit with style, grace, and more money plus maintain their legacy by selling to the right buyer.

But it doesn’t have to be an individual buying a company, it can be another company and that’s why I have a new book almost finished on the topic of Growth by Acquisition. A company can diversify their product offerings, expand their geographic footprint, take a competitor out of the market, or a combination of the preceding and my other 16 reasons why to consider growing by acquisition (Chapter Two).

“A first-rate soup is more creative than a second-rate painting.” Abraham Maslow

Deceit

It’s a game, a deceitful game. According to a July 7, 2017 Wall Street Journal article, television networks play a game to disguise possible poor ratings. Here’s an excerpt from the article:

“In a game largely sanctioned by TV-ratings firm Nielsen, television networks try to hide their shows’ poor performances on any given night by forgetting how to spell.

That explains the appearance of “NBC Nitely News,” which apparently aired on the Friday of Memorial Day weekend, when a lot of people were away from their TVs.”

It appears all networks do this and have no problem justifying it. But they’re not the only ones playing games. I see or hear about things like this all the time.

  • People I know in the job market find a lot of misleading job descriptions. And to be fair, we know there are a lot of embellished resumes out there.
  • In the small-business buy-sell world there are a lot of misleading games. Using middle-market or public company price-earnings ratios when valuing a small business (or when trying to get a listing) is one.* Trying to convince a buyer owner salary is the same as profit so it appears there are higher profits is another, and much more common.

I’m sure you see or hear of things like this all the time whether it’s pricing in a store or the advertised deal that seems “too good to be true.” You really have to be careful of what you’re being told.

* For those into numbers, according to the PeerComps database, which is small-business buy-sell deals financed by SBA loans, the average price-earnings ratio (the multiple of earnings) is about four, with a coefficient of variation of just over 25%. This means small-businesses typically sell for three to five times EBITDA (earnings before interest, taxes, depreciation, and amortization). Other databases show middle-market firms sell for 6.5-7.0 times EBITDA (I don’t have info on the variance). For reference, at this time the PE ratio for S&P 500 companies averages about 25 and for major bank stocks it’s about 15.

“The practice of deception is not particularly exacting, it is a facility most of can acquire.”  John le Carre