Martinka Consulting

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The Economy – Mixed Signals

Posted on by JohnM

Pick up any publication and you’ll see headlines about the European financial markets collapsing, our stock markets moving like a yo-yo, companies like Kodak in a panic sale of assets and companies like Boeing and Amazon.com reporting record sales.

Erratic is the word I’ve been using for months now. It’s not just that it’s good and bad over time, it’s that it’s good and bad at the same time. Sometimes for the same business. I’ve seen more good businesses in the last few months than I saw in the year prior. That doesn’t mean every business is close to healthy, it means certain segments (those I’ve been referred to or my clients are interested in) are doing fine.

This erratic economic behavior  means we all have to pay more attention to the details, become more visible and fight for any business we have the opportunity to secure. As a banker told me earlier this year after I asked if my client’s deal was important to him, “Every deal [loan] is important because there aren’t that many out there.”

Growth, Buyouts and Cash

Posted on by JohnM

I’m in the middle of two internal buyouts. In both cases the companies are in a growth mode, 20-25% over the last year and projecting 15-20% in 2012. Both are profitable companies and both have cash flow issues.

It is not uncommon for growing companies to have the same or greater cash flow issues as slow growing or flat companies. It takes cash to grow. In fact, growth sucks cash. You pay your people every week or two and customers may pay you in 50 days. As you grow, inventory requirements increase, equipment needs to be purchased and people must be added before you have 100% capacity for them (or you have to pay overtime to current employees).

The value of a company is what it is (based on generally accepted methodologies). The price and especially the terms of any transaction are what is important. In both of these cases the payment schedule the seller wants will cripple growth. In one case, the terms could hurt the company if there is no growth and any kind of hiccup with payments, orders or shipping.

The structure of a deal is more important than anything.

Small Business can Learn from Big Business

Posted on by JohnM

The October 7, 2011 Wall Street Journal’s Marketplace section’s headline was: “Apple’s Game Plan: Avoiding Culture Shock” and dealt with Apple’s decade-long succession plan for the late Steve Jobs. Now Apple is a huge, public company and yet a lot of what they did is what family business business owners should do regarding exit and succession planning.

What I gleaned from this article was that Apple:

  1. Hired the right people
  2. Delegated and gave responsibility (Tim Cook’s revamping their manufacturing operations is a perfect example)
  3. Promoted from within
  4. Created their Top 100 executives
  5. Started Apple University to motivate people and maintain their culture

The company survives its people

Businesses often survive the owner. Too many owners think of themselves as invincible and ignore the fact that there will be an end to their time at the company. It’s when they have a heart attack, their spouse gets diagnosed with stage four cancer or the company starts declining that they decide to sell and by then it’s a buyers best case scenario.

Learn from Apple and plan for your future. You have a culture, and if you’re profitable that means it most likely is a culture a buyer would like to have. Not only is it not expensive to create and implement an exit plan, but the investment in the plan is more than recouped via a higher selling price as well as more profit and more free time along the journey.

Three tips for a more profitable exit

  1. I just finished a book on exiting and selling a business. Much of it sounded like what I say, particularly the section that encouraged business owners to take three to five years to prepare the company and themselves. The author even gave my top reason for this and it’s because buyers and banks will ask for three to five years of financial statements and tax returns. Taking time to prepare allows you to show the results of your efforts on the bottom line.
  2. This book also encouraged business owners, as I have for years, to have good financial systems, accurate financial statements and to “eliminate marginal perks.” It’s this area that gives the most consternation to buyers, banks and advisors. The owner whom doesn’t pay attention to the financial statements and/or treats the business as an extension of their personal checkbook often shortchanges themselves when the business is sold. Treat the business like a business; as if you are trying to win the contest for having the most profit.
  3. Take a direct tip from Apple by delegating and reducing any dependency on you, the owner. This may mean growing the business so you have the capacity to hire management. BusinessWeek recently published an article that said flexibility and freedom ranked higher than financial gain for many business owners and many small business employees. I hear from owners constantly that they don’t want to grow the business (yet they want to sell it for a price based on what it would be if it had grown). Get over it and grow the business. The larger the business, the more profit and the higher the multiple of profit it can sell for. Your exit will be faster, smoother, at a higher price and with more cash at closing.

The Importance of SBA Loans

Posted on by JohnM

October 25, 2011

The Puget Sound Business Journal reported in September that the area credit unions have asked the SBA for the right to make more SBA guaranteed loans (from 12% to 27% of assets). They claim that a raised loan limit can create up to 150,000 jobs nationally.

Whether it’s credit unions or banks, in a climate of caution, SBA loans have made a huge difference. In a tight regulatory environment it’s allowed banks to make the loans politicians have chided them for not making.

Bankers tell me, and this is not unique to just the banking industry, that there are so few deals out there that every deal is important (I just heard the same thing from an East Coast M&A advisor). When every deal is important, caution abounds and there is extreme trepidation about the future economy, having a loan guarantee for the majority of the loan makes it much easier for the bank to lend.

Perhaps one of the bankers reading this can confirm the following. I read this summer that the SBA loan guarantee program is one of the few government programs that does not run at a deficit. The loan fees that the borrower pays cover the costs of the program (these fees are really an insurance premium to cover the loans that go bad).

Even though SBA does not loan money directly to small business owners, we play an important role for people who want to finance or grow their business. When you apply for a SBA-backed loan at your local bank or credit union, you are asking SBA to provide a guarantee that you will repay your loan as promised. SBA website

Quantity or Quality?

Posted on by JohnM

October 18, 2011

At the end of September Allstate announced that they were changing their commission structure and thinning their ranks (Wall Street Journal, September 27, 2011). This after years of what seemed like a goal of having more locations than Subway.

I could have told you this was coming. During a project for a client looking to buy an independent insurance agency (if you know of an independent agency looking for a buyer or working partner let me know) I have talked to a lot of Allstate agents looking to get out. It was the same old story; volume too low, costs too high and a company restriction on selling (the agency) to other Allstate agents (the latter policy since changed).

Over saturation is not just an Allstate phenomenon and not a good business strategy. It’s much better to hire the best, train them well and let them be successful. Putting people, no matter how talented, in a position to fail makes no sense.

People work for small businesses because there is a much better chance they’ll be treated like a person, not a number. People work for large companies for perceived stability (don’t think of Washington Mutual or Kodak), better pay and benefits. There are trade-offs to both and for some people the corporate situation drives them to own (buy) their own business and be in control. What many Allstate agents thought they were getting.

Businesses often forget about the culture, and ultimately, they suffer for it because you can’t deliver good service from unhappy employees. Tony Hsieh

What you See his What you Get – The 2011-15 economy

Posted on by JohnM

October 11, 201 

The cover story of the September 21, 2011 Wall Street Journal was titled, “Home Forecast Calls for Pain.” The main point made in the article was that the next four years will be slow growth in the housing marketing and for the economy. The housing situation, meaning bank owned properties, has slowed construction, weighing down the rest of the economy.

Two years ago SunTrust Bank published a study stating that 60% of business owners were delaying the exit from their business for two years, on average, due to the Great Recession. Many of them were probably expecting the economy to be turned around by now. I know I expected 2011 to be the year when things improved.

It appears stagnation is the new norm. Anybody holding expecting things to quickly get better is probably losing their grip6. Some advice:

  1. Business sellers, don’t expect a better transaction market and higher prices soon.
  2. Business buyers, if you really want to own a business, why wait? This is the market of the future.
  3. Business owners, if you’ve been waiting for your business to rise with the economic tide, it’s going to be a long wait. If you want to grow, you’re going to have to be proactive and invest in your company.

“The housing market needs the economy to add jobs, but the economy isn’t able to rely on the job boost housing normally provides in a recovery. We’re in uncharted territory.” The Wall Street Journal

Getting the Deal Done Conference Summary

Posted on by JohnM

We Need Some Stability

November 1, 2011

The Getting the Deal Done Breakfast Conference October 27, 2011 (sponsors listed below) was a roaring success with very positive feedback. Our special guest speaker was Christian Schiller with Cascadia Capital, the largest investment-banking firm in Washington. Christian’s comments were insightful and one comment in particular resonated with me.

Christian stated that 2012 should be a good year for middle market M&A and one of the major reasons is the uncertainty of what will happen with the election with tax law changes and other regulatory changes. He felt, however, that a good 2012 would be at the expense of the two to three following years as people accelerate their (M&A) activity to avoid the uncertainty.

Two weeks prior, one of my “Partner” On-Call Network associates, Jeff Smith in Indianapolis, called me to discuss an acquisition that a client of his is involved with. His client is concerned about budgeting for increasing health care costs and Obamacare. This is the kind of regulatory uncertainty Christian mentioned and that small business owners face. Will costs increase even more dramatically than they have? Will there be fines if businesses don’t contribute enough for employees medical insurance?

The October 29, 2011 Wall Street Journal had two interesting pieces related to this. First, one of their editorials discussed that the favorable view of the Affordable Care Act (Obamacare) is dropping, sharply. The numbers now suggest that it is not just partisans against this regulation; there must be independents and Democrats  also concerned about the burden this puts on employers (48% of Democrats are now not in favor).

In her weekly column, Peggy Noonan wrote, “…they [Occupy Wall Street protestors] seem as incapable of seeing government as part of the problem as Republicans seem of seeing business as part of the problem.” In other words, those of us reading this, at my event and just “doing business” every day are caught in the middle of disagreements between partisans (most of whom are simply looking to be reelected) and we simply want to know what the playing field will be before we make investments and take action.

Getting the Deal Done sponsors:

Greg Russell, Peterson Russell Kelly law firm

Marc Hutchinson, Bashey, Hutchinson & Walter CPA firm

Bill Barclay and Kit Gerwels, Columbia Bank

John Martinka, “Partner” On-Call Network

“It seems to me that the laws of the land are now so poorly written that almost no one knows what they mean. That is a government bureaucrat’s delight!” R. Emmett Tyree  

Are you Simply Shadow Dancing?

Posted on by JohnM

October 4, 2011

I didn’t get it after watching the group Silhouettes perform on America’s Got Talent (I was, however, the only one in my family to correctly pick the winner from the four semi-finalists). All (the) Silhouettes seemed to do was dance behind a screen and make shadow impressions.

Maybe the pragmatic side of me took over and I thought about how many things in life and business are like shadow dancing. From Ponzi schemes to business opportunities; things that don’t offer any benefit or value. Is it realistic to make a low investment, work part-time and get a six-figure income?

Or maybe it’s that I’ve heard too many small business owners who struggle for years tell me if only they had a little more money. (The cynical side of me says if they had another $250,000 it means they can stay in business another year or so.)

All of us need to look at what we’re providing and realize it takes hard work, smart work and value proposition that benefits the customer to such an extent that the product or service they are getting from us is worth more to them than the money they are paying for our product or service (a win-win deal).

“When I was young, I observed that nine out of ten things I did were failures.  So I did ten times more work.”  George Bernard Shaw

Watch Your Debt

Posted on by JohnM

The Wall Street Journal recently had an article about how many midsize chain restaurants are struggling. The interesting commonality was that food costs were up for all restaurants and the ones that were affected most were those with too much debt.

Debt can be a great tool; as long as the borrower watches the amount of debt, what it’s used for and has adequate debt coverage ratios (which should usually be higher than the ratio required by the lender). Being over leveraged  can work great as long as there is constant sales growth and expenses are kept in line. As in the article, when costs go up and revenue is flat (at best) the debt becomes a burden and affects operations.

When working with business buyers and sellers I encourage them to start out with a baseline of a a 2:1 debt coverage ratio. It’s fine to go lower and the larger the deal the further down the ratio can go. But get it down below 1.5:1 and trouble is on the horizon. In other words, watch your debt.