It’s Always the People; Whether Operating, Buying, or Selling a Business

On Tuesday, August 16, 2016 the Wall Street Journal had a major article titled, “The Company Town That Chocolate Built.” It’s all about Hershey, PA at 14,500 population town where the Hershey companies employ about 12,500 people (many don’t live in Hershey).
Mondelez (formally Kraft Foods) made an unsolicited offer for Hershey and the locals are upset. They fear big changes, the loss of jobs, plants closing, etc. Especially because when Mondelez bought Cadbury they promised not to close a local (British) factory but then closed it after the acquisition.
On August 15 the WSJ had another article in which one of the subjects said he left his job after his boss downplayed his angst over firing people by saying, “It’s no big deal.” Big companies have a reputation for not caring about people but actually it’s the employees of big companies who care more about their career who make lousy decisions and say stupid things, like in this paragraph.
So now we get to small businesses. In the last week I’ve talked with three people about how business sellers almost always want to sell to someone who will take care of their people. The employees first and then the customers. Almost everybody in my industry has a story or two about how a business seller sold to someone for less money because of the relationship. It’s why I stress the relationship to both buyers and sellers.
Most owners value their people. All buyers value their people. Good employers want to enable their people and help them grow.
No matter what type of business, the people are the primary asset. Even robotic and computer controlled machines need a person to program them. As one business buyer said to his seller, “You may think I’m buying your company but I’m really buying your people.”
“I would never buy from or sell to someone I don’t like.” [Former client, business buyer and seller] Jim Bernard

Surprise! Not Always Good

During our annual summer visit to Bozeman, Montana we had just hiked a canyon, and were relaxing with a beer and dinner on a brewery’s patio. Across the street was the fairgrounds, where it was the “Bozeman Stampede” Rodeo.
We weren’t there long when a helicopter flew overhead hauling a huge American flag. As it finished its circle of the fairgrounds all of a sudden there were half a dozen loud, explosions. Fireworks with nothing decorative, just noise.
Everybody on the patio jumped and our dogs, and the other dogs, freaked out. They were scared and needed to go to the car for five minutes to settle down from the shock of the surprise noise.
Most people don’t like surprises either, unless it’s something like a surprise party. Just like most people don’t like change. They’ll keep doing a job they hate, keep an unproductive or disruptive employee too long, etc.
Nobody likes the change of business ownership, especially when it’s a complete surprise. It’s one of the touchy subjects in any transaction. What’s the buyer like? Will things change (for the worse)? Will my pay go down?
The issue always is, when does the seller tell the employees? I’ve seen them do it too early, and the employees react like my dogs – freak out (and look for another job). I’ve seen it done after the deal closed and the employees get upset with the seller because he didn’t trust them to tell them prior to closing (and now the buyer has to deal with the culture change from this).
A few hints, a little forewarning, and bringing key people into the loop early go a long way to helping keep people happy, maintaining the culture, and reducing the shock of a surprise.
“To learn who rules over you, simply find out who you are not allowed to criticize.” Voltaire

Don’t Forget These Things

When visiting my mother-in-law, we stayed at the Intercontinental Hotel. As we went to put things in the safe it wouldn’t open. It was locked. So engineering came, opened it, found some things, asked us if the things were ours, they weren’t, and took them away.
Those things were a designer purse and a passport holder, with a passport and other items in it.
I’ve forgotten things. A book on a plane, my phone on the seat of a cab, etc. However, I knew within minutes what I did. But who forgets this stuff?
There’s a very small chance, maybe 1%, a personal catastrophe hit and the lady vacated the room quickly, forgetting about the safe. More likely it’s someone too busy (this is a popular business hotel), doing too much in too short a time, and she simply forgot she had things in the safe.
Things like this happen in business too, when we get so busy we forget important things. Like customer relations, employee satisfaction, supplier loyalty, etc. Here’s what I mean.
  • Many years ago my good client Keith Jackson with Industrial Revolution gave me such a great line I wrote it down and use all the time. When discussing marketing he said to me, “It’s amazing what happens when you actually pick up the phone and call your customers.” His business seller was coasting and just taking orders. Taking orders until the customers felt neglected and left, right?
  • We all know people like the person in this example (I won’t name the company out of respect). A top salesperson left because he felt the owner didn’t value his work. The owner did value him, his efforts, and results, he just didn’t show it. So the employee went bye-bye.
  • A past client got stung twice by the same lack of concentration with his suppliers. He lost his top supplier, a firm upon which he was overly dependent, as it was over 66% of his business. He nearly went under (I worked with him after his banker brought me in), got a new product line, built up the business, and voila, the same thing happened. He got so busy he forgot his history and had another supplier dependency. The supplier left, his business went off the cliff, and it was back to the beginning.
Nothing new here; take care of (your) people and they will take care of you. Forget about them and soon you’ll be without them.
“Memory is the way we keep telling ourselves our stories, and telling other people a somewhat different version of our stories.” Alice Munro

“Surprise” Economy

Here’s an excerpt from the article:
Citi’s Surprise Index measures economic data relative to expectations. If reports are surprising to the upside, that means indicators such as employment, housing and inflation, are coming in higher than expected and the index is rising. A declining index suggests more data points are falling short.
 
Citi’s index had been in negative territory for much of the past 18 months. Perhaps not coincidentally, U.S. stocks were stuck in a fairly narrow trading range for much of that time.
Now compare this to all the economic doomsayers (definitely not in Seattle or the Bay Area). This index is at its highest point in 1.5 years, which surprises me because we’re in an election year, a very contentious election year.
For those of us in Seattle the Surprise Index results are not a surprise. My clients and other business owners have had a hard time finding good people. Heck, even in the small town where our cabin is there are “help wanted” signs everywhere and a friend told me “it’s hard to find good employees around here.”
So how does that tie into your business or mine? In mine optimism means more people willing to take the leap of faith to buy a company or to sell their company. Yes, buyers worry if they think they are buying at a peak, but an index like this should alleviate some of their fears (nothing will alleviate every fear a buyer has, which is the way it should be, healthy skepticism).
Sellers always wonder if they’re selling too soon, but should realize if the future economy is strong there is less chance their buyer will have problems. My advice to them is do what it takes to get your business ready for sale so you don’t miss the rising tide (see my book, If They Can Sell Pet Rocks Why Can’t You Sell Your Business (For What You Want)?).
“There are very few monsters who warrant the fear we have of them.” Andre Gide

How Not to Run a Company

Want to run your company the wrong way? Do nothing more than emulate the major political parties. They sure seem to have a lock on ineptness, goofiness, and disputes. Here are five examples comparing political parties to businesses.
Strategy – or should I say the lack of strategy – must be discussed. Both parties seem to go the direction of the most current wind (this is not new, it’s been going on for years). They can never figure out if the goal is to appeal to their base, usually a minority within each party that is loud and pushy, or appeal to the swing voters. So they do a little bit of both often leaving the election to the quality of the advertisements.
Continually changing direction will put you out of business.  Of course, if your strategy keeps changing you really don’t have a competitive advantage to exploit, because it’s always changing. When you confuse your customers they will do nothing, or go somewhere else.
Advice: have a strategy that exploits your competitive advantage and continually implement it. When it comes time to exit you’ll be glad you did because growth is one of the key elements a buyer wants in a business.
Culture – the tail sure wags the dog in national politics, doesn’t it? Candidates push the party platforms objectives, not that too many people besides the extreme loyalists pay too much attention to it. But candidates push each other. Look at the Democrats this year. Clinton said no to free college tuition until Sanders made his run. Then she switched saying there should be free public university tuition.
Try this in your business someday. Every time an employee has an idea change direction. Then see what happens when two employees have different ideas on the same subject. You can’t do both and if you have a habit of trying to appease everybody just watch the culture disintegrate when you pick one or the other.
Advice: create a culture of free flowing ideas but make sure there are no expectations.
Undermining and deception– political candidates have a way of being prime examples for “pay attention to what I say not what I do.” This is another trait that’s been going on for years. How many times do politicians promise everything to everybody, not deliver, and most voters (those who’ve been around awhile) know enough to realize it’s just blabber?
In business it’s the owner who has separate rules for herself, her family members, and favorite employees. It’s one of the reasons delegating can be tricky. If not careful people will think it’s favoritism not delegation.
Where this really is an issue is with the financial statements. Too many owners play games with their financial statements, all as part of the never-ending quest to reduce taxes. Some of their tactics are illegal, for example,the blending the personal and business checkbooks.  Some are just stupid. So many times I’ve heard owners say they bought a (not really needed) new truck or new machine because “I needed the write-off to reduce my taxes.” Realize if it’s not needed, even if the government pays 33% of it, you are still out 100% of the cash.
Advice: set a good example, be consistent, and have your financial statements be an accurate representation of the business and its potential. Buyers like this and banks love it.
Short cycles – politics run on extremely short cycles, every two to four years there is the potential for major change. This is almost as bad as Wall Street being enamored with quarterly performance, much less the challenge of short-term bonuses versus long-term results.
Most small businesses don’t have these issues but they do have an issue that sometimes presents a challenge when selling the business. This issue is the lease. The bank and the buyer will want a lease, with options, at least as long as the term of the loan. Disaster strikes if the business has a, very expensive, move in the middle of the payoff period. Yet most business owners don’t think of this as they do their day-to-day tasks.
Advice: Plan for the long term and run the business for the long term. It will pay off as you’ll have a growth plan, up-to-date equipment, happy employees, and more.
Dependencies – political parties have huge and ever-changing dependencies and it’s called the candidate. In a presidential year it’s the presidential candidate. And a lot of what happens is based on the candidate’s personal philosophy and preferences.
Look at the Republican convention. It surprised me when the Trump people had a gay speaker, used the term LGBTQ, and mentioned eliminating the gender pay gap. Not exactly in line with the party platform, is it?
You know where this is going when it comes to a business. Get rid of your dependencies, especially if one of them is the owner. Reduce customer concentration, get rid of employee bottlenecks, and owners, please realize less is more when it comes to your involvement in operations.
Advice: it’s pretty obvious, reduce any dependencies your business has, especially if it’s you the owner, and the sooner the better.

Grow or Die

We made eight new friends at our cabin this summer. And just like people, the more favors you offer the more loyal your friends are. In this case a few pieces of bread everyday brings great loyalty in return.

 

  

 

But since this is a business newsletter there needs to be a business point about this. And it’s this:
You have to continually be growing your customer base, referral sources, and general awareness about your company and its value proposition.
There’s an old premise, “If your business isn’t growing it’s stagnant, if it’s stagnant it’s declining, and a declining business doesn’t have long to last.”
  • I look at my business and see this newsletters distribution list has grown by 35% over the last two to three years.
  • My referral base grows monthly.
  • My annual client breakfast invitation list seems to grow by six to 10 people a year (buy-sell clients, coaching clients, and consulting clients).
What are the numbers for your business? Are there new customers every year or is it just more business with the same old group? Are you prepared if some customers change ownership (and suppliers –  you), move, or go out of business?
Often this comes down to:

Are your salespeople order takers or business development people?

The more problems they know how to solve the more business they will develop.
“Opportunity is missed by most people because it is dressed in overalls and looks like work.” Thomas Edison

Fear of the Unknown

We walked into a nice Sheraton Hotel with our dogs (all Starwood Hotels allow dogs) and our Lab got scared, turned around, and headed back to the entry way. As we entered it was a nice white marble floor, there then was a very shiny black marble section, followed by more light marble.
The sea of dark spooked him. Someone said maybe he thinks it’s water (he has no fear of water, he’s a Lab). To him, it just looked different, it was something unknown, and the fear of the unknown took over. *
After trying a few times to cajole him to move forward I simply started running with him, we crossed the black flooring, he didn’t get swallowed into it, and from then on he was fine.
In my world of business buying, selling, and preparing a company for sale the fear of the unknown is the number one reason that holds back people from taking the actions they know they want to take.
  • If I sell my business, what will I do (will I have to be with my spouse 24/7)?
  • Will I have enough money for my next great adventure in life (retirement, another business, etc.)?
  • How much work will it take to get my business to be worth what I want it to be worth?
  • What if the seller isn’t telling me everything about the business (and they wouldn’t withhold something good now, would they?)?
The trick is to turn an unknown into a known, or at least an 80-90% known, there’s always some risk, which is why in my books I say buyers and sellers are making a leap of faith and they want it to be off a chair not the roof.
You do this by research, diligence, and using experts. My clients don’t want to be experts on business buying and selling, they want to get it done and move on. Just like their customers don’t want to be experts on the products they buy from my clients, they just want it to do what it’s supposed to do.
“What is the point of being alive if you don’t try to do something remarkable?” John Green
* He also avoids metal grating whether it be on a sidewalk, steps, etc. We all have our phobias, even dogs.

You Must Connect Visually

Let’s go back in time and discuss sports history and electronics. For about 100 years baseball was the “National Pastime” while the other sports were side attractions. The NFL took a backseat to college football for many decades. College football was football.
Then a few things happened. The NFL’s 1958 championship game, the first ever to go to overtime, is still called, “The Greatest Game Ever Played” (including from Total Football: The Official Encyclopedia of the National Football League). Then came the Ice Bowl in 1967 (-15° and getting colder with an average -48° wind chill) and the 1969 Super Bowl (1968 season) for which Joe Namath “guaranteed” a win for the AFL’s Jets.
Something else happened during the last half of the 1960’s; color television made its mark on the American public. Baseball was a radio game and all sports on TV looked the same in black and white. When color TV hit, baseball looked the same, white for home team, gray for the visitors. But football jumped out on the screen with bright greens, blues, reds, yellows, etc.
Now it’s no question, the NFL is the premier sport and maybe the best marketing organization in the world. They’ve made an event out of college kids running around in spandex! If you can put a logo on it, you can buy it with your teams colors and logo.
We are visual people. What kind of visual impression are you making in your marketplace? Is it attractive like the NFL or blah like old-time baseball (baseball has changed, now teams have more colors and uniform combinations than one would think possible)? Is your website blah or does it jump out? What about written materials? I received a one-flyer from someone recently and it looked like it was done on a typewriter, other than a red headline.
I get a lot of positive comments regarding my book covers (look to the right) because they’re bold, colorful and attractive (thank you graphic designers). There’s a lot of noise in today’s world. You can’t slip into the background and still get noticed. It’s not just what you say, it’s what you show and as per the quote below, you need to connect with your customers.
“Creativity is just connecting things.” Steve Jobs

Bad Boss = Bad Owner = Bad Seller

I don’t even have to open the plethora of business publications on my table to know there will be articles about management style, bad bosses, and teamwork. It’s a given. One reason being some people think the title “boss” means they have to boss everybody around rather than work “with them.”
Over my years of working in, owning, and advising small businesses I have learned business owners can be the best, most accommodating, and caring bosses one could ever have. And then there are those who make the worst corporate, middle-management boss seem like a loving puppy.
So let’s look at some traits and factors and how being a bad boss, owner, and business seller are tightly tied together. And realize there are a ton of great owners, but like the newspapers, it’s the nasty stuff that sells.
  • “A raise? They should feel fortunate to have a job.” That statement, or anything similar, tells you a lot about the company’s culture, i.e. its culture sucks. You’ll find a place filled with people going through the motions because the pain of going out and finding a new job (or not finding one) is greater than the pain of the current situation. One can just imagine the talk over Friday post-work beers.
  • One of the things I’ve learned to look at when analyzing a small business is the pension contribution. If the pension contribution is 90% to the owner and 10% to the employees I know the seller’s emphasis will be on how high the price will be, not on the future success of the company, or the buyer. It’s called greed.
  • Another item I’ve learned to look at is asset replacement or should I say the lack of asset replacement. Sure profits were high the last few years. But everything is wearing out. My favorite example is the owner who was too cheap to buy a new printer. His accounting staff waited and waited for reports to print. The buyer got a new printer, wasted time was reduced, and I’m guessing based on the pay rate for accounting people it paid for itself in a week or so.
  • An essay like this one wouldn’t be complete without mentioning one of my favorites, “Sure I lie to the IRS but I’d never lie to you.” Recently I was referred to a small contractor, too small for me to work with. When I asked about his sales and income he shared whenever people pay in cash they get an unnumbered invoice, hmmm. As regular readers of this newsletter know, I believe it’s just as dishonest when owners blend their personal and business checkbooks. It tends to also tie into some of the above topics because they don’t give raises or replace equipment because they’re so busy taking out every last penny personally.
  • Tied to the last point is the topic of benefits. I will state I am not a fan of the current system but it is what it is. I believe there’s a moral obligation, with today’s system, to provide medical insurance when a company gets beyond startup phase and is profitable. I’m reviewing information on a 60-employee  plus company with no benefits and asking myself if we should adjust profits for the cost of benefits or the cost of the federal penalty. It’s even funnier when the cost of benefits is “added back” to profits because the benefits are discretionary (the same logic often applies to annual bonuses that haven’t been missed in a decade). Every business buyer lives for the day they can take over a company and tell the company’s most important asset (the people) they are taking something away* -:)
  • Another big one, which tied directly to the value of the company, is when the owner makes him or herself the most important cog in the operations. It’s called a dependency and buyers, bankers, and appraisers watch out for this. The lack of delegating takes it toll on the culture, “nobody can do it as well as me and I let them know it,” and is a huge red flag to buyers, especially if they don’t have the same skills. It also leads one to think the staff isn’t all that qualified (to help grow the business).
  • Finally, when it comes to buy-sell deals the secretive owner is to be feared. If everything is so good why not have an “open kimono” policy? After all, full disclosure will raise the price of the business. Similar to this, and I seem to see or hear about one of these every year, is the owner who won’t sign the purchase and sale agreement with a representations and warranties clause (the buyer and especially the seller guarantee everything they have told each other is true and correct with most of this information attached to the contract). I always wonder what they’re afraid of? It can’t be good.
Conclusion
Whether you’re an employee in a large corporation or a small business you know what it’s like to have a bad boss. It carries forward to being a bad owner, with priorities on the money they make versus growing and nurturing the business. Finally, these people make lousy sellers and tough to work with as an intermediary, banker, lawyer, and especially as a buyer.
* This is sarcasm and I write this footnote because my proofreader questioned why I wrote it the way I did.

Improve Your Culture; Don’t Stiff Your Best People

On a recent Delta flight I had the best flight attendant ever. Her name is Kimberly and she was entertaining, funny, and very service oriented.
I think it was when I gave her a recognition card for great service we got the subject of awards and recognition. She told us she’s consistently ranked in top top 1% of flight attendants but this year didn’t get to go to the awards event.
She went based on 2013 service, they combined 2014 and 2015, she qualified again, and they told her she wasn’t going because she went in 2014 (for 2013) and they wanted other employees to experience the event.
Really, you let the “B” team attend and get the award because the “A” team already experienced it? Royals and Mets, forget about the World Series in 2016. Broncos and Panthers, no Super Bowl in 2017. you played in those games last year so others get a chance!
Some middle manager thought this would be “fair.” That middle manager has no people skills. What would your employees do if you told them they weren’t going to get the bonus they earned because they had a bonus last year, and someone who didn’t perform would get it in their stead?
Some people are driven by money, some awards, and some peer recognition (some all three and more). When you take away the reward you are discouraging people from doing their best. They’re thinking, why should I (try so hard to help your company)?
This is a culture issue and I see it with owners whose ego has them believing, “My people should be glad they have a job. They don’t deserve anything more.” It’s a reason there are well-paid consultants who help fix culture issues (it increases profits) and why most business buyers are seen as a “Breath of Fresh Air” by the employees.
“Lighthouses don’t go running all over an island looking for boats to save; they just stand there shining.” Anne Lamott