Ignore the Balance Sheet at Your Own Risk

A number of years ago I worked with an investment group. The president was a very experienced and very good operator but somewhat new to the deal process. He told me something that’s stuck with me when he said how as an operator he was concerned with the profit and loss statement but as a deal person he found an appreciation for the balance sheet and its importance.

The balance sheet tends to get overlooked by many businesspeople, sellers, and buyers, which is a shame. The balance sheet is filled with information, some of which is:

  • How does the company manage its cash flow and what level of working capital is needed?
  • Does the company replace assets regularly?
  • Is the owner bleeding the company of cash for personal use?
  • How is inventory managed?
  • Are they using proper accounting techniques (easily noticeable when there’s work in process, they take deposits for future work, issue gift cards, etc.)?

I often look at the balance sheet before the income statement to see the above or more. Unfortunately, too many people just look at the bottom line, more get fascinated by EBITDA (and ignore capital expenditures), others believe what they see when it’s “adjusted” EBITDA (one recently included the salaries for three owners, all who are leaving the company when it sells).

In my industry too often buy-sell professionals ignore the balance sheet, and working capital (buying the job of owning a deli – no need for working capital, buying more sophisticated business – the deal should include normal working capital). I don’t know why. It could be a lack of understanding, it could be “if we don’t mention it then it will go away,” or perhaps there’s worry it opens up too many questions about the business and its current and future state.

Caution Ahead: Construction Related Business are Swamping the Market

Fact 1: In my 20+ years as an intermediary I have never seen so many construction related businesses on the market. This includes building materials, flooring, hardware distributors, window coverings, and specialty subcontractors.

Fact 2: In 2006 every bit of research done by anybody showed at least five years of solid commercial construction in the Puget Sound area.

Fact 3: We all know what happened in 2008.

Buyers and bankers need to be careful. I don’t mean avoid the construction industry but don’t let anybody convince you the valuation should be anywhere near what it would be for manufacturing, distribution, or service.

I’m working on one deal now for a $15 million revenue construction products distributor and the price is 3X profit. The seller recognizes it’s a market at a peak.

Construction is cyclical, very cyclical, and is economy centric. And, obviously, very hot right now. If I was looking at anything construction related I would want to see financial statements for the last 10 years. You’ll see the ups and downs. The good ones will survive, but they don’t have acquisition debt payments.

Why Malls Ban Teenagers and Your Business

I heard an interesting tidbit on the radio recently. The story was how many shopping malls are banning teenagers who are at the mall without a parent or guardian. The kicker was these malls showed an increase in sales after initiating this policy.

The next thing I did was Google this and found numerous stories on this subject, going back to 2006. In these days of easily transmitted fake news it made sense to verify the story (just like buyers and sellers verify information during due diligence).

As we start 2017 it’s good policy to do like these malls, and that is:

Know who you want to do business with (and don’t do business with those who don’t meet your criteria).

Using Pareto’s Principle as a guideline, 20% of your customers will cause 80% of your grief. And I’m sure the 20% on the other end of the spectrum provide 80% of your joy (and maybe even profit).

No matter what your business you can easily target customers by:

  • Size (buying power) – For example, Porsche dealers aren’t going to do direct mail in low income neighborhoods. I’m not going to market to $50 million companies because I don’t have the people or processes to work in that market (just like I stay away from micro businesses, where the owner is the business).
  • Location – some of us can have national or international customers. Others reach the service stress point if the customers are more than an hour away.
  • Personality – as in personal relationships and buy-sell deals, being able to relate to customers goes a long way towards turning the 80-20 rule to the 95-5 rule. If you get along the chances of problems are minimized.

Know who you want to do business with, and don’t deviate from it.

“Beware of all enterprises that require new clothes.” Henry David Thoreau

Getting the Deal Done Recap

In November 2016 we* held our ninth annual Getting the Deal Done Breakfast Conference at the Bellevue Club. Our special guest speaker was Robbie Bach, author of Xbox Revisited: A Guide for Corporate and Civic Renewal, and the title of this talk was Thinking Outside the Xbox.

Robbie’s talk focused on the “Three Ps,” Purpose, Principles, and Priorities (for more on this please see his website, www.robbiebach.com). He headings for each of the Ps are:

  • So what is Purpose and why is it so important?
  • If purpose is the foundation for a strategy, principles are the frame of the house that create the shape and scope of the endeavor.
  • With a solid foundation and support structure provided by purpose and principles, an organization or leader can establish a set of priorities that define the layout of the rest of the strategy building.

For our case study we deviated from our pattern of analyzing a deal and discussed the behind the scenes things that make or break deals. We did no analysis of the financial statements, instead concentrating on important non-financial factors, with focus on how we address them using the purpose, principles, and priorities framework. Our discussion topics were:

  • Culture – Kit, Marc and I gave insights and examples about how culture affects a buy-sell deal. Marc, having bought/merged a couple CPA practices into his firm, had some real-life examples about how important culture is.
  • Financial statements (not the numbers but how to best use them) – Marc discussed the importance of consistency and accuracy in financial statements. He also covered how he uses them, what he looks for, etc.
  • Due diligence – John O’Dore’s comments had to do with the ethical considerations of diligence and how the 3 P framework can be a great guide, for both buyers and sellers.
  • Deal terms and structure – the focus here, from Kit and Marc, was how the deal has to make long-term sense, for both sides. Short term success is great, but over the long haul that success can’t be a spike, it has to be a trend.
  • Non-financial factors (mainly customers and employees) – while customers were mentioned the concentration of Kit and Greg’s comments were on employees. Not just how important they are to any business (as I like to say, buyers aren’t buying a company they’re buying the people). The hiring of people, terms of employment, and pitfalls to avoid in this area were the highlights.
  • Human Resources – Greg talked about the importance of retention agreements and how they affect the culture. Employees want their jobs and stability!
  • Transition – the importance of having a plan (not just wing it starting the day after closing) was stressed by John O, Greg, and me. John’s comments dealt primarily with the role of the owner while Greg and I covered the overall need to do it right.

Judging from the verbal and written comments about the format it was a hit. Those in the room who know deals understand how important the above topics. The others got a lesson in deal practicality, and a free breakfast.

Plan to attend in 2017, it will be well worth your time.

* Event sponsors are John O’Dore, now with OneAccord Captial, Greg Russell, PRK Law, Marc Hutchinson, Bashey, Hutchinson & Walter CPAs, Kit Gerwels, Columbia Bank, and me.

 

Making a Sale in 2017

I was looking through a folder of articles I’ve cut from papers and magazines (and printed from online sites) and noticed some on selling. Not as in selling a business but selling your product or service.

It’s inevitable whenever I’m working with a business owner client the subject ends up on sales (often combined with marketing). It’s finding prospective clients, approaching them, finding out what their problems are, and offering a solution.

Too many people equate sales with 1960’s and 1970’s hard sell techniques dramatized by used car lots, carpet stores, etc. Books listing 173 closes for all situations are history, they’re dead.

Sales is relationship based and in the holiday season, the ultimate relationship season with friends and family, a good way to prepare for the start of 2017 is to get your marketing and sales plans implemented (marketing makes people aware of you, sales is what you do to determine if you can add value).

  • Who can you help?
  • What will you do for them?
  • Why are they better off with you than without you?
  • How will they know the difference?

 

A December 2, 2016 Wall Street Journal article was titled, “Car Sales Roll Along; Aided by Discounts.*” The gist of the article was sales are up over the same month a year earlier and the average discount was 11%, versus 9.4% in 2015.

This reminded me of a story I tell in a couple of my talks. It’s about a past (and dearly departed) friend and associate, Jerry. To put it mildly, Jerry was financially incompetent. As I recall his only financial acumen was because of his experience as a business owner. He knew cash flow. Or should we say he knew short-term cash flow.

He watched his cash flow like a hawk. If he got to the last half of a month and it looked like his monthly income would be short, well, he’d go and make a deal (I should mention his prior business was in retail, he was a wheeler-dealer).

Prospective clients were offered a lower, introductory fee to hire him now versus later, even if later was only a couple weeks. Now when it came time to renew his services he would ask for the original fee, the client would say, “No, I’ll pay the same as before,” and he was in a loop of working for much less than the value he provided. Concentrating on the month-to-month hurt him.

There’s an old saying in business, “We can offer you two of the following, quality, service, and price but it’s impossible to give you all three.” You grow by leveraging your competitive advantage and that advantage can’t be price (in the long-term). It costs more money to provide quality products and services.

As we head into another new year, my advice to all of you is to not be like Jerry (or the car industry). Create a sustainable business by charging a fair price for fantastic service and a great product.

“When someone asks you, ‘A penny for your thoughts,’ and you put your two cents in, what happens to the other penny?” George Carlin

* The online article is titled, “Auto Makers’ November Sales on Track for Record – Black Friday deals and deep discounts drew shoppers

 

Useful Technology

The compendium of technology. On one end one of the young tech writers for the Wall Street Journal always writes about how she wants an app for everything. Order this, order that, do the other thing. She grew up with technology and, I’m guessing, prefers this over personal interaction and relationships.

I, on the other hand, like technology that can help me, not just to use for the sake of using it. Uber is a great example. It’s fast, reasonable, reliable, and a much better experience than your typical taxi. Especially when going to or from a major airport like in New York, Seattle, etc.

But what about behind the scenes stuff? A few months ago we bought an electronic device from Costco. The device has some issues, it needs to be sent back, they need a copy of the receipt, and who knows where the thermal paper receipt ended up.

So, on my next trip to Costco I go to the membership desk, they scan my card, find the purchase, and print off the receipt. Efficiency and really good customer service. Technology that isn’t just cute, as in, “Device, order flowers for my wife” without knowing if you’re getting a great arrangement or something you could have got from the grocery store.

All businesses use technology. The question is, how are you using technology to benefit your company, your employees, and especially your customers? The easier you make it for them to buy from you the more sales you’ll have.

In my case, I populate my website and blog with a lot of information (mobile friendly site too!). If my prospective clients are like me they’ll think, “If he gives me this much value for free just think how much I’ll get if I hire him.”a

“If a man harbors any sort of far, it makes him landlord to a ghost.”

 

Everything is Local

The little things around us have a big impact.

What triggered this train of thought was two things.

On November 4 710ESPN sports announcer Danny O’Neil spoke to my Rotary Club. He mentioned how sports can bring a community together. Most issues, including politics, are put on the back-burner when we’re all cheering for our team.

Last year our local weekly paper, The Kirkland Reporter, had a front-page picture of the mayor and county council person cutting a ribbon to open a new ballot drop off box (we have 100% voting by mail or drop off in Washington, no day-of at the polls).

The latter reminded me of all my Rotary trips to Antigua where they will do a ribbon cutting, ceremony, grand opening of any and everything. Filled with a lot of speeches, of course. They celebrate the little things, together.

I know we have issues in this country, many people are poor, suffering, etc. But no matter what the politicians say to exaggerate things, life is pretty good when the majority of people have the time and energy to follow sports, entertainment, have small ceremonies, and similar. It’s a lot better than dodging bombs and bullets, living under authoritarian dictators, or face daily, severe, lack-of-food circumstances.

“November always seemed to me the Norway of the year.” Emily Dickinson

Negative Endorsements

With the election just past (yeah!) it made me realize we vote for a lot of things on which we really shouldn’t be voting. Judges are my top example. Who follows judge races? Who tracks their history, knowledge, opinions, etc.?

So, my first step is the voter pamphlet. I’ll glance at who they are, their background, etc. Then I look to see who’s endorsing them. If the endorsements are from people or groups I don’t like, the candidate doesn’t get my vote.

I’ve always wondered how this plays out in business (and life). We really don’t know how endorsements from someone held in negative regard helps or hurts us. I remember when I was starting in this business someone wrote a scathing newsletter about my friend Ted Leverette. The upside was someone called him, hired him and said something like, “I’ve met the author. If that person thinks this way about you I’m sure you’re a great resource.”

In other areas of negative reinforcement:

Business buyers – I tell them to first eliminate what they don’t want, which is usually restaurants, retails, and franchises. The easiest way to shorten the playing field.

Business sellers – Many will not want to sell to entities that just want to flip the business in five years. They want a buyer who will preserve their legacy. So any history of buying and then soon selling will cause them to flee.

Customers – We learn how to eliminate bad customers even though occasionally a bad one sneaks through. Experience teaches us the only thing worse than no customer is a bad customer.

 

“Get your facts first, then you can distort them as you please.” Mark Twain

 

Business Buyers and Sellers Have Prisons to Escape

The following picture is in my book If They Can Sell Pet Rocks Why Can’t You Sell Your Business (For What You Want)? It shows how after awhile someone’s business can become a prison (and they need to plan so they can exit with style, grace, and more money).

 

This next picture, or one like it, should be in my book Buying A Business That Makes You Rich next to the above picture.* Why? Because these buildings are also prisons. They trap the people who commute daily and then do the same old same old thing every day for decades.

 

Some of these people should be taking the initiative and getting control of their life. This means make the leap of faith and become a business owner. And buying a business is the best way to do this, and the easiest to finance.
We’re living in an interesting time (although all times are interesting in one way or another). As in my article, ” Making a Splash,” there’s a plethora of businesses hitting the market as the baby boomer generation is large, entrepreneurial, and aging. And many of these are profitable companies (and of course many aren’t and some have the proverbial lipstick on a pig).
For someone stuck in their urban or suburban jungle what more could they ask for but a solid supply of businesses, an active market, and low interest rates?
So what does it take to be a qualified buyer, in addition to the willingness to make the leap of faith?
  • Management skills so you can manage people, processes, money, and systems.
  • Enough capital to make your down payment (in today’s market, for an individual or small business owner, it’s 10-15% of the price and/or about 2-3 times the salary the buyer is used to receiving.
  • A good personality, so you can relate to the seller and his or her employees, customers, etc.
“What to know what God thinks of money? Look at the people he gave it to.” Dorothy Parker