Horse Racing and Skepticism

I recently read a sportswriter comment about why sportswriters in general wax eloquently about horse racing, especially this year when we have a Triple Crown winner. His answer included:

It’s because the horse can’t talk. Sportswriters don’t have to interview him. If the horse could talk and he was interviewed, he’d probably say he just wants to contribute, or go into some boring explanation of hoof technique.

Sports fans get frustrated by athletes and coaches giving the stock, cliché answers. It’s always for the team, I’m just one player, we gave 111%, or some other garbage. I’m guessing reporters really hope for an honest answer to slip into the interview.

But it’s not just athletes. It’s everybody in every field, and in their personal lives. Getting the real answer is tough.

  • Start with dating. How much truth is there on the first date or two?
  • What about job interviews?
  • Or what about asking a business owner why they’re selling?

It’s the latter that’s the all time leader in creating skepticism in a business buyer. Why sell a profitable business if you’re not dying or 83.7 years old? To pursue other interests is not a good answer, to most buyers. Neither is my spouse wants to travel, even if true.

I’ve learned from experience that the buyer skepticism is usually over-the-top. Owners do sell because they burned out, have other ideas, or simply need a change. People in management and executive positions change jobs every 3-5 years, why is it not okay if a business owner wants to do something different after 10-15-20 years?

My recommendation to sellers is to sit with a buyer and go into detail on your goals, aspirations, and future plans. It’s a lot better than a stock answer, which raises skepticism.

Pride in Ownership

Pride in ownership

I’ve noticed that owners of what I call micro-businesses, sales of $250-500,000, and even up to $1 million, take a lot more pride in what they’ve buil than owners whose companies have broken through and are doing $5, 10, 20 million or more.

Talk to owners of a micro-business and you will hear immense satisfaction in their voices about what they’ve done. They tell stories about how they help their customers and about the jobs they’ve created, which allow their employees to support their families.

I’m not saying owners of larger small-businesses aren’t proud. As I see regularly, when it comes time to sell, owners of larger firms are as attached to their “baby” as owners of micro-businesses. I just don’t see them as demonstrative about what they’ve done. They talk more about process, or products, or marketing than the intangibles.

I’m not sure why and don’t know if there needs to be a reason. At all levels founders and owners (and CEOs) should be proud of what they’ve accomplished. We know there are enough people not in business who don’t understand what it takes to build a company (many of these people work in government).

Bad News: You Have to Grow to Pay Your Debt

On May 4, 2015 a  Wall Street Journal article discussed the Japanese company Suntory and its 2014 acquisition of Jim Beam. One of the most interesting comments was:

“To help pay back debt amassed in the deal-one of the biggest-ever overseas transactions by a Japanese company-Suntory is trying to double global spirits sales by 2020. Hitting that goal won’t be easy. Suntory will have to outpace industrywide growth in its two biggest markets, the U.S. and Japan, and expand into new markets.”  

Wow!

The acquirer wants to or has to double sales in five years, in a competitive market, and exceed industry trends (a trend where whiskey is on the upswing, and which could change at any time) to cover their debt. My first three thoughts are:

  1. They paid too much.
  2. They leveraged the deal too highly.
  3. Where was the common sense?

This takes me back to what must be about 10 years ago when Seattle supermarket chain and institution Larry’s Market went under. I speculated in this newsletter that the probable cause was that dad had his sons overpay for the business, making the deal over-leveraged, and forcing disaster. My theory was confirmed when a banker friend responded and told me he looked at the deal but couldn’t justify the price and debt.

Let’s step back from the large corporate acquisitions (the Beam deal was $13.6 billion) and even the Private Equity deals (where Mergers & Acquisitions magazine regularly reports groups paying up to 14 times EBITDA). I’d like to concentrate on the traps buyers (and sellers) face in these areas in the small to mid-size buy-sell market.

  1. As I’ve written a couple times in the last six months, it’s awfully easy for buyers to pay way too much when there’s a (perceived) shortage of companies for sale, easy money, and parties who only think about the dollars today. The bottom line is, if like Suntory, you have to significantly grow the company to cover your debt, well, you paid too much.
  2. So who lends on deals like this? Nobody in my market! Banks have ratios, guidelines, and regulators. This means it’s non-bank money and I’m sure the interest rates are a lot higher than the 5% +/- rates on deals on small businesses. Is the risk worth it? We’ll find out, won’t we? I was just reading how Al’s Soups needs more capital because they don’t have enough cash (the store made famous by Seinfeld’s “Soup Nazi” episode). Sears was in the headlines because they are running out of cash as their turnaround is failing. It doesn’t always work out as per the young analyst’s spreadsheet.
  3. The above two paragraphs make my point about where was the common sense. It’s easy to say greed overcame common sense, but these are not stupid people making these deals. So maybe it’s ego, career advancement (nobody ever thinks it will fail and their career is shot), or over-optimism in the desire to impress shareholders.

The above is just financial. As the WSJ points out:

“At the same time, another challenge looms: meshing two vastly different corporate cultures inside its new global liquor subsidiary.”

Time for another “Wow!” In my small business deals the change in culture is usually the employees saying the buyer is a “breath of fresh air.” They welcome the opportunity to be listened too, be creative, and see career advancement.

Conclusion

If the deal seems too good to be true it probably is. Having to double sales in five years to cover debt payments means it pretty risky. Of course, in the above case it’s not the decision-makers personal money, as it is in the small business world.

Fraud or Just Marketing

In my world of small business buy-sell there are almost as many ways to inflate a business’s income as there are on Wall Street. Rarely is anything straightforward.

The most common technique is to adjust profit and call it “Seller Discretionary Income.” What this means is the owner’s salary, medical insurance, cell phone, car, travel, and more are added to profit because these items are “discretionary” not necessary. It’s even worse when the salaries are added back for multiple owners, all or whom are active in the business.

This actually goes way past what is done on Wall Street. Just imagine a public company’s annual report stating net income is before the CEO’s and/or other officer’s compensation.

My guess it’s something originally done to make lousy businesses look better. A naïve buyer will fall for this, which is why I ask if it’s fraud (to present a company’s income like). The bottom line is someone has to run the company and whether it’s the owner or a hired gun they deserve to be paid a fair market salary for that work. No legitimate business appraiser would ever do a valuation without including compensation for the work the owner does. Banks factor in a salary figure before they determine cash flow for debt coverage.

It is amaze filled with twists and turns plus traps, trapdoors, and quicksand (once sucked into this line of thinking it’s hard to escape).

“People who are trying to make this world worse re not taking the day off – why should I?” Bob Marley

Activity or Email?

A recent newsletter from Business Brokerage Press had an article applicable to all businesses. Its title was, “Are You Shaking Hands Or Hitting Send.”

The gist of the article was too many business brokers use the Internet to advertise businesses for sale, never meet the buyers, and therefore there was no relationship so it became nothing more than a transaction.

In my book Buying a Business That Makes You Rich I tell the following story:

Many years ago, at a professional group meeting, a crusty old salesman pulled me, a young marketing neophyte, aside and drew the following picture on a piece of paper.

.) (.

He asked me if I knew what the drawing was, I didn’t know so he told me that no matter what the circumstances, the best way to make a sale was to get belly-to-belly (the drawing represents two people standing belly-to-belly).

Fast forward many years, and meeting people one-on-one still is the best way to communicate and get the results you want, [no matter what your industry].

It’s not just business brokers who take the easy way out. Every industry is affected and I’m not sure if it’s bad training, fascination with technology, laziness, a combination, or something else.

This is why I keep an Excel spreadsheet open on my computer to record the meetings I have every week, by type.

“I prefer people who rock the boat to those who jump out.” Orson Welles

Take Charge of Your Life

Johnny Unitas was one of the all-time great NFL quarterbacks. In fact, many attribute the modern passing offense to what he did in the 1950’s and 1960’s. Prior to Unitas, passing in the NFL was primarily lofting the ball downfield and hoping your receiver got under it for a catch. Unitas started throwing shorter, pinpoint passes to receivers running down and out patterns, and more.

The above is the background. The point of this memo is to take charge (of your job, life, business, etc.). There’s an old story about when Don Shula became coach of the Baltimore Colts. Unitas always called his own plays and during one game Shula sent a play in to him. Unitas called time out, headed to the sideline and asked his coach if he’d like to play quarterback.

That’s taking charge. It was his game, his huddle, his offense, and his plays. No doubt about it.

Over my career I’ve heard many successful business people say if they’re right on half their decisions it’s a huge win. The important thing is to take charge and make those decisions.

In my day-to-day world the big decisions are, should I:

  1. Buy a business (or another one)?
  2. Sell my company?
  3. Start the planning process to exit (with style, grace, and more money)?

A recent transaction happened about a year too late (always good to sell a year before you need to) but not too late that the wheels starting falling off (the company’s operation). The buyer should have a goldmine; he’ll improve the operations, culture, and profitability. The seller got a nice check, but 50-75% less than he would have received a year ago.

Take charge and make decisions, before the opportunity passes you by.

“The most difficult thing is the decision to act; the rest is merely tenacity.” Amelia Earhart

Engaged or Slacking

A sports reporter was asked to ask himself the perfect question and answer it. He wrote, “What has football meant to me?”

His answer started with, “It’s meant everything to me. I don’t know what I would have done with my life without it. It’s given me purpose. It’s provided for my family and me.”

Now look at this from Gallup in 2014:

  • 72% of people aren’t happy with their jobs
  • 31.5% are engaged (enthusiastic and committed to their work and workplace)
  • 51% aren’t engaged
  • 17.5% are actively disengaged

It’s really a shame that more aren’t like the abovementioned sports reporter. Most of us have been at jobs where we’re not really happy, but it provides for the family. The key is to get out of the rut and take control of your life.

It may mean working for a different company, changing industries, or going into business for yourself (see my book Buying a Business that Makes You Rich). Reinventing yourself may seem scary but not being happy with what you’re doing is worse, without even discussing if someone is cheating their employer by not being engaged and productive.

There are conflicting statistics on whether entrepreneurship is up or down. At least in the Seattle area there seems to be a lot of startup activity and a vibrant buy-sell and M&A market. It’s people taking charge.

“Your character is your fate.” Maya Pilsetskaya

Prevailing Optimism Part II

On May 5 I attended an event hosted by BNY Mellon and the speaker was their Director of Investment Strategy, Jeff Mortimer. Jeff presented his “Wheel,” which in simple terms tracks economic cycles by where on the wheel we are in terms of time.

He stated the economy is now at 10:00, moving from worry to greed, with 12:00 being the peak. We’ve seen increasing profits, capital expenditures picking up and indications interest rates and inflation may rise. When it comes to the stock market he states we’re getting close to the time to sell, because soon all the novice investors will hit the market, meaning the market has peaked.

When it comes to my small world of small business buy-sell, he said if he was a business owner considering selling he would do so in the next year or so because multiples (of profit, the same as the price-earning ratio) are going to decline. (He thinks the peak will be sometime in 2017, which makes sense as things are always a bit unsteady after we change presidents.)

There has been a “feeling” in the M&A world that the proverbial “bubble” is going to deflate (not necessarily burst). To me, Mortimer’s study of the economic cycles over the last 50 years lends some credence to these thoughts.

Here’s the thought process of future business sellers.

  • Yes, I want to retire, need to retire, I’m burned out, etc.
  • The Great Recession, what recession?
  • Business is good, it will always be good.
  • I’ll just reap the profits for a few more years.
  • My business is special so buyers will pay a premium at any time.

Time to get back to reality. Now may be the best time to take action, unless you want to wait another 5-7 years for the cycle to return (and hope interest rates are still low).

“You should always leave the party 10 minutes before you actually do.” Gary Larson

Prevailing Optimism

The New York Times recently published a column that instead of increasing support for taxing the rich and giving it to the poor, “close to the opposite has happened.” The column went on to say conservatives feel this proves Americans understand lower taxes spur growth and liberals say our citizens have been hoodwinked.

Let me offer another explanation (and I didn’t make this up, it’s been around for some time). Many Americans can visualize themselves hitting the jackpot and being in a high tax bracket, a bracket they don’t want to be too high.
There’s a reason my book is titled Buying a Business That Makes You Rich and not “Safely Buy a Business,” or, “Protect Your Backside When Buying a Business,” or, “Business Buyers: Avoid Calamity.”

Nobody buys a business to keep it where it is. Every buyer uses terms like growth, scalability, and accelerate when discussing what they want to do. With growth comes more profits and becoming “rich.”

While we’re talking monetary riches it can also mean increased flexibility, independence, control and free time. The American Dream of being successful and doing it by owning a business is alive and well. As I wrote last week, just don’t over think it.

“You don’t lead by pointing and telling people someplace to go. You lead by going to that place and making a case.” Ken Kesey

A Great Partner is Worth More Than Money

What’s most important in a transaction, or just life in general? Is it money, legacy, what happens to others or something else?

The following story (i.e. case study) is about a potential buy-sell deal for a small business but it could easily be about getting a new job, securing a new customer or a personal relationship.

The business seller made it very clear – money was number three on the list of priorities. In a similar vein, I state money is not a factor until we get past the three most important elements to getting a deal done, which are:

  • Motivation
  • Relationship
  • Education

In this case the seller’s top concern was the employees. They’d been with the firm a long time, were loyal and were all homeowners in the community. In a one-hour meeting, this came up three times. The seller wanted the key people to have the assurance of a job for at least two years, the same benefit plan, and the same bonus program.

Second on the list were the customers. This company has a policy of a human answering the phone during business hours. The seller said, “I want the customers to receive the same high-touch service. This means “minimal phone tree” to get to a live person.” He also stated he would make sure the buying company’s employees were compatible with his customers (and employees).
He summed it up by saying, “This must be a good marriage.”

Finally, it was the money. It had to be a fair price. But a lower price with the employees and customers taken care of is a much better option than a higher price if the additional money meant uncertainty about the employees or customers.

So put yourself in this position. What’s really important?

  • If a business owner needs every last penny from the sale of their business to make the rest of their life, or at least their next great adventure, successful, perhaps they shouldn’t sell. Maybe they should grow the business because more profits mean a higher price and successful growth increases the price even more (you’ve proven it can grow).
  • Is it legacy? Does the owner want to drive by in 5-10 years and see “his” business’s name in glowing lights? (This is also ego.) This means selling to the “right” buyer, not just one with more money.
  • Could it truly be love for the people, both employees and customers? I once had an owner explain why she wouldn’t sell to a couple of her (specific) competitors by saying, “I will not have those competitors taking care of my customers.” Employees usually come before customers and often the key employees get an exiting bonus from the seller, job security (as per the story above), or are the key to the deal closing.

Job seekers want a company with the same values they have, not just a paycheck. Customers want a supplier that pays attention to them and those suppliers want customers who value their quality and service. In our personal lives, we hangout with people who have the same values and interests, often without too much thought about relative economic status.

Conclusion

Money is important, but a good fit is often better. Take a job for lower pay because the culture is so much better? Sure. Sell a business for less because it’s the right buyer? Yes (and the right buyer is the number one criteria all sellers should have). Life is too short to put money ahead of relationships, culture or doing the right thing.