Martinka Consulting

425-576-1814 john@johnmartinka.com

Serendipity Can Be Huge

Posted on by JohnM

It’s not just being in the right place at the right time, it’s capitalizing on it.

  • In 1925 New York Yankees first baseman Wally Pipp sat out a game with a headache and his substitute was Lou Gehrig, who went on to set a then-record by playing in 2,130 consecutive games.
  • In 1951 New York Giants outfielder Bobby Thompson hit “The shot heard ’round the world,” a pennant clinching home run. Three years later he was traded to the Milwaukee Braves, broke his ankle in spring training and was replaced by a young right fielder named Hank Aaron, who went on to hit more home runs than any other non-steroid-using player in baseball history.
  • In 2001 Tom Brady became the New England Patriots starting quarterback when Drew Bledsoe was injured. So far he has won three Super Bowls and two MVP awards.

It’s called making the most of the opportunity. We all have to do it whether it’s taking advantage of our education, grasping on to a mentor, realizing we’ve met the person we want to marry or anything else that can change our lives.

I’ll venture to guess that we all have numerous opportunities in our businesses and our lives. When we’re successful it’s because we’ve not only recognized them but taken advantage of them, to the fullest extent. It pays to be ready because we never know when opportunity will present itself.

“Be prepared.” The Boy Scouts Motto

When It’s Time To Cut Your Losses

Posted on by JohnM

The big sports news in Seattle last week was that the Seahawks traded their $20 million (plus three draft choices) mistake, i.e. Percy Harvin. Interestingly, last Thursday I attended a seminar on culture and one of the things the speaker said was that you can’t change your (bad) culture if you keep the same people.

So, the Seahawks had a cancer in their locker room and they got rid of him. I see three lessons here that we all can use.

  • Cut your losses. The team’s attitude was that they took a risk, it didn’t work out and they were willing to get rid of him. I can’t tell you how many people make an large investment in their business (or their team), realize it’s not working but continue to press on because, “we’ve got so much invested in this.” I had a client buy a great business because the owners expanded into another market, it didn’t work, but they wouldn’t cut their losses.
  • Get rid of the people causing the problem. Don’t worry if they’re extremely talented, have solid customer relationships, have a wealth of product knowledge or anything else. None of these things are going to matter if they tear about the company by causing others to leave or be unproductive.
  • Take action. Don’t stew about it, just do it and do it fast. And not just with people. It can be with ineffective marketing campaigns, a product line that doesn’t sell or even a bad customer. While facilitating a marketing strategy retreat for a client recently I told them, “The only thing worse than no customers is a bad customer.”

“I’m so fast that last night I turned off the light switch in my hotel room and was in bed before the room was dark.” Muhammad Ali

Know When To Cut Your Losses

Posted on by JohnM

The big sports news in Seattle last week was that the Seahawks traded their $20 million (plus three draft choices) mistake, i.e. Percy Harvin. Interestingly, last Thursday I attended a seminar on culture and one of the things the speaker said was that you can’t change your (bad) culture if you keep the same people.

So, the Seahawks had a cancer in their locker room and they got rid of him. I see three lessons here that we all can use.

Cut your losses. The team’s attitude was that they took a risk, it didn’t work out and they were willing to get rid of him. I can’t tell you how many people make an large investment in their business (or their team), realize it’s not working but continue to press on because, “we’ve got so much invested in this.” I had a client buy a great business because the owners expanded into another market, it didn’t work, but they wouldn’t cut their losses

Get rid of the people causing the problem. Don’t worry if they’re extremely talented, have solid customer relationships, have a wealth of product knowledge or anything else. None of these things are going to matter if they tear about the company by causing others to leave or be unproductive.

Take action. Don’t stew about it, just do it and do it fast. And not just with people. It can be with ineffective marketing campaigns, a product line that doesn’t sell or even a bad customer. While facilitating a marketing strategy retreat for a client recently I told them, “The only thing worse than no customers is a bad customer.”

“I’m so fast that last night I turned off the light switch in my hotel room and was in bed before the room was dark.” Muhammad Ali

 

 

 

Sports & Business – Strategy Win!

Posted on by JohnM

Non-baseball fans often say they don’t like the game because something’s not happening “all the time.” Baseball fans love the multi-levels of strategy. There’s a game strategy, inning situational strategies, which change if someone is on base or not, batter-by-batter strategies and even pitch-by-pitch strategies.

If you’re partial to the up and down of basketball or soccer, the down times between strategy implementation (the action) may seem slow. Of course in the NBA, the last two minutes of a game can take as long as the first half of an NFL game. And, BTW, football fans can’t complain about baseball’s slowness. In two different Wall Street Journal studies they found that baseball games have about 14 minutes of actual playing time per game while football has only 11 minutes.

Think about this in terms of your business. Are you constantly on the fly, making decisions by the seat-of-your-pants? Or do you take time to huddle with your team to decide courses of action? To you strategize on how to work with different customers or vendors and what skills are needed in your next hire?

There’s a good reason why there are huddles, time between pitches and timeouts.

“The most exhausting thing you can be is inauthentic.” Anne Morrow Lindbergh

Transaction Documentation Means Dollars

Posted on by JohnM

The following article is from “IN$IGHT” the Zachary Scott Spring 2014 newsletter. I thought it so valuable I asked them if I could send it out in one of my newsletters and post it on my blog. Therefore, the following is being sent with their permission.

 

Transaction Documentation Means Dollars

The finer points of the deal could add up to significant value for the seller

By Mark D. Working

Fighting hard to come to a conclusion on price and handing off the transaction to lawyers to “paper the deal” risks losing sight of the fact that transaction documentation is an integral part of the economic bargain. Virtually every agreement contains the same components, as illustrated in the adjacent diagram, but the details of the constituent components are unique to each deal. These fine points have important implications to the amount of value a seller receives and keeps.

READING THE AGREEMENT

Purchase agreements are inherently complicated. Defined terms, interconnected references, and schedules and exhibits make understanding the economic issues difficult if read from front to back. Follow the money. There are three critical economic components to each purchase and sale agreement: the transaction description, the promises and disclosures made by the seller (commonly referred to as representations and warranties), and the insurance policy (i.e. indemnification for broken promises)

Once the economic components are understood, the other important, but not economic, components, such as the procedures to get to a closing, conditions that must be met prior to the close, and the rules governing how the business will be managed during the interim period between an agreement and the transferring of funds and ownership, can be addressed.

TRANSACTION DESCRIPTION

This section provides the overall guidance as to what the parties are trying to accomplish. It defines what business assets will be purchased, which liabilities will be assumed, and the price that will be paid, as well as the timing of payments and currency (e.g., cash, securities, notes).

The form of transaction matters. The broad choice among a merger, purchase of stock, or purchase of assets is based on the objectives to be achieved, as structure can impact the need for third-party approvals, segregation of unknown or unwanted liabilities, and taxes.

These issues can complicate the choice because they can affect the economics of the parties differently depending on the specific circumstances of the buyer and seller.

For example, a stock transaction might be highly desirable to more easily transfer important contractual business relationships. The parties can still elect to treat the transaction as an asset sale for tax purposes (commonly referred to as a 338(h)(l0) election). Depending on the specific circumstances, this could either result in significant value that can accrue to the parties, or have devastating implications to the seller.

REPRESENTATIONS AND WARRANTIES

There are two purposes for a seller giving representations about the business, aiding the buyer in its due diligence and establishing a set of promises of condition that is the basis for allocating responsibility should actual conditions prove to be less than promised.

Supported by an integrated set of schedules, the representations provide an “official” disclosure of the state of the business, which assists the buyer to conduct due diligence.

Completeness matters because the clarity and accuracy of the scheduled data provides the buyer with comfort that the business is well managed. A company that has trouble documenting its assets, contracts, or some other aspect of the business, portrays an image of “seat-of-the-pants” leadership and can lead to more concern on the buyer’s part for protection against the unknown.

Representations also establish standards against which future claims by a buyer that it did not receive what was bargained for will be judged. While wanting to be positive about the company, representations can become the basis for a future claim of shortfall against that standard and be the responsibility of the seller.

The biggest fear of most buyers is the unknown. Therefore, when a seller is asked to state without exception that there are no other liabilities that will accrue to the buyer (as an example), the question of seller’s “knowledge” may become a point of contention. Although a seller might agree to a statement that is accurate “to the best of their knowledge,” the buyer might not take comfort in that standard and might require an independent standard such as the knowledge of a “prudent person, assuming appropriate investigations were conducted.”

Materiality poses another potential trap. Used throughout the agreement, its definition and application can be critical. Sellers generally fight for materiality exceptions to blanket statements, but embedded assumptions can be missed. A prominent example is granting the buyer a standard of compliance with GAAP. Whether audited or not, financial statements in their entirety can be GAAP compliant without individual accounts meeting the standard so long as the auditor determines there would be no material difference in interpretation of the statement in their entirety. Should the dispute be over a specific account, the seller can get caught.

INDEMNIFICATION

Buyers want assurance that they get what they bargained for, nothing more, and nothing less. The “bright line” concept is often used to establish where the seller’s responsibility ends and the buyer’s begins. What happened on the seller’s watch (before the transaction) is the seller’s problem, and what happens thereafter is for the buyer’s account. Seller indemnification obligations arise directly as a result of damages incurred by the buyer for infractions of the bright line.

A claim of damages creates the basis for seller liability. The agreement establishes a mini­ mum claim size, a minimum amount of claims that must occur before any seller obligation arises (deductible), total maximum claim liability, a period of time within which claims must be made, and whether, how much, and for how long an escrow might be needed as collateral for potential future claims. Since the buyer and seller often do not have the same perception of the risk of certain items, great pains are made to define various risks (e.g., taxes, environmental, employees, asset condition), and how each will be treated.

An example of where a disaster might arise is the case where an owner represents that the business being sold is an S-corporation and has no tax liability (as a result of its pass-through status). After closing, it is determined that the conversion to an S-corporation was not done properly and the IRS finds it to still be a C-corporation. As a result, all of the past profits of the business actually represent taxable income to the company and the past distributions made to the owner are recharacterized as dividends. The profits are taxable to the corporation and the buyer files an indemnification claim for damages as a result of the company’s obligations to the IRS.

Many possible surprises can occur after the deal closes. Better due diligence by both seller and buyer can reduce the number and nature of surprises.

NEGOTIATE A HOLISTIC DEAL THAT CONTAINS ALL ECONOMIC COMPONENTS.

The “deal” and the documentation should be treated as an integrated whole. Principals should make sure they have a qualified team of advisors to deal in advance with all issues that will arise during the process of negotiating and closing a business transaction. Financial advisors working hand-in-hand with the owner’s attorneys will greatly improve the overall result. We recommend considering all issues at one time, rather than in sequence, so that the ultimate objective, maximizing the after-tax proceeds after indemnification, remain clearly in focus.

Zachary Scott , www.zacharyscott.com, 206-224-7380

You Get What You Pay For

Posted on by JohnM

Many years ago a client told a prospective client that I was expensive but worth it. He also stated to me and others that it wasn’t the quantity of advice and counsel but the quality.

And that’s what it’s all about, isn’t it?

About 10 years ago my dad bought a new refrigerator. Because it was about $100 less he bought a Haier (Chinese company) and it burned out in 5-6 years. A pretty expensive $100.

I recently bought a new car and I did pretty much the usual when it came to a buying decision. I made an emotional decision on the style of vehicle (small SUV/Crossover) and the top few choices.

Then I let logic determine which one of the three I would buy, which was an Acura RDX and quality was one of the top criteria. Logic manifested itself in three areas:

  • Experience – we had previously owned an Acura, it was a great car and my wife loved it.
  • Reliability – Honda makes some of if not the best engines in the world and the cost of repairs in usually lower than on higher performance cars.
  • Cost – the price of the RDX was significantly lower than the other two, the biggest difference to me was a few “extras,” and those extras weren’t that important to us.

Beware of Uneducated Input

Posted on by JohnM

Consulting guru and advisor Alan Weiss constantly tells people not to pay attention to random, unsolicited feedback. This makes so much sense and yet most people will let someone’s uneducated comments influence their decisions.

Just think if sports coaches and managers did this. They’d be making decisions based on what idiots have to say. Some examples:

  1. At a recent Mariners game the guy next to me tried to show his knowledge by telling his friends, with a look of superiority (I’m smarter than the manager) on his face “We’re using our backup catcher as the DH. If our catcher gets hurt we lose the DH.” Okay, so when’s the last time anybody’s seen a catcher get hurt during a game. Pretty darn slim chance of that happening.
  2. At another game the M’s pitcher was having a tough time. Starting in the third inning fans started yelling, “Get him out of there.” Now when you’re down by about seven runs early in the game and have a weak-hitting team the manager’s attention probably turned to saving his bullpen for future games and letting his starter get some innings.
  3. Football has similar stories, especially compared to point two above. All fans think the goal of their team should be to win the Super Bowl (and it is the ultimate goal) the real goal is to make the playoffs. When the Seahawks won the Super Bowl this year they were just the second team in the last 10 years with home field advantage during the playoffs to win it all. Those other eight years, including a handful of wildcard teams, the goal of making the playoffs and be primed when there worked. The coaches coached for the long season.

The point of all this is to be careful about what you hear. It may be short-term thinking, uneducated insights or simply blowhards expanding hot air.

Times Change – Change With Them

Posted on by JohnM

One of the most recent innovations in major league baseball is the greatly expanded us of shifting the defensive players. This is the result of “big data.” Every at bat, every pitch is tracked in a computer. When teams find that hitters hit the ball to one side of the field a vast majority of the time they shift their fielders to better defense the hitter.

There are predicted to be over 14,000 shifts used this year (they are typically not used or not used as much with runners on base). This is nine times more than just three years ago.

So what are hitters doing to counteract this? Shifts are usually used against dead pull-hitters (they usually hit to side of the field from which they are batting) and those hitters are working on hitting the other way and bunting. Once enough of them change their habits the shifting will change again.

The analogy here is that business is very similar to sports. In this case, we have to constantly shift, shift back and shift again. What generated customers 40-50 years ago – hard nosed, high pressure, make ‘em hurt sales tactics – doesn’t work very well today.

There is so much information out there (think “The Internet”) that customers are often more educated on products than the salesperson (based on my research I actually told my car salesperson some things he didn’t know about the car I bought).

More than ever we have to be “on the top of our game.” My clients who want to buy a business have (supposedly) read my book. With my new book out I expect clients looking to prepare their business for sale will have read my book. Knowledge is power and we all have more knowledge than ever before.

For a lot more on this read Daniel Pink’s book To Sell Is Human.

“What trophy do you want on your mantle?” Marcy Massura, MSL Group

Business Buy-Sell and the Business’s Status – #3

Posted on by JohnM

To continue from the last two posts, here are my comments on situation number three.

  1. Losing money.
  2. Recent upward trend or reduction of expenses. Is it a spike or a trend?
  3. Long-term consistent growth with steady profits.

What could be better than situation three (we are not talking about investor grade, emerging businesses)?

I like to say (especially to business buyers with stars in their eyes) that, “turnarounds make headlines because they are rare.” On the opposite end of the spectrum businesses that are humming along are just about as rare.

If you’re the owner of one of these, congratulations. For business buyers it doesn’t get much better than this. As much as buyers say they want to see where they can value, show them a business as described above and they’ll get even more excited.

So what qualities does this type of business have? Here are five:

  1. Great people with depth of management, above average compensation (to attract better employees), and a good culture.
  2. Systems in place that increase productivity and can be implemented by numerous people (no dependency on one tech person, one machine operator, etc.).
  3. Speaking of dependencies, the day-to-day operations are not dependent on the owner. The owner can spend their time on strategy, vision, and solidifying customer relationships.
  4. Ecstatic customers that look to the company as a solution provider and partner. And of course there’s low customer concentration.
  5. Excellent financial systems, which lead to accurate financial statements and management reports that allow management to make intelligent decisions.

These five things present in a company make that company as rare as a successful turnaround and cause headlines to be written about them in business journals and magazines.

“What are the implications of this decision 10 minutes, 10 months, and 10 years from now?” Suzy Welch, (quoted in Inc. Magazine’s article titled, “35 Great Questions)

Business Buy-Sell and the Business’s Status – #2

Posted on by JohnM

Last post I wrote about the first of the three situations in which businesses can find themselves:

  1. Losing money.
  2. Recent upward trend or reduction of expenses. Is it a spike or a trend?
  3. Long-term consistent growth with steady profits.

Today we’ll look at number two. Realize that business owners are a wide and varied group. Some seek rocket ship growth, others like slow and steady and many reach a point in life where lifestyle becomes increasingly important and they “coast.” They do what it takes to maintain their income but aren’t taken to initiating new strategies or additional investment.

Then it becomes time to sell the business and they read and hear that growing companies are more attractive to buyers and generate a higher price so they take action. Here are three situations I’ve recently seen in regards to situation two and the buyer’s (typical) first questions.

  • Revenues are up but profits are down. Buyer: Are they creating a cost structure that will be tough to change? Is it more expensive to grow than they thought (and led me to believe)?
  • Revenues are up a little and the cost of goods sold is up a lot. Buyer: What the heck is happening, they’ve never had margins like this before? Can I sustain this? Is there any reason I should value the business based on what may be a short-term spike?
  • Overhead costs have declined including wages, equipment, and repairs and maintenance. Buyer: Are employees being worked too hard and I’ll need to hire more people? Why did they suddenly get to the point where capital expenditures are no longer necessary? Are things ready to breakdown (this is especially true of computers and software as almost all sellers stop upgrading when they decide to sell)?

Short term, band-aid type fixes don’t work. To truly raise the value of the company an owner needs to initiate long-term strategies, monitor them and record results (to prove what they did works).

“What counts that we are not counting?” Chip Conley, (quoted in Inc. Magazine’s article titled, “35 Great Questions)