Win-Win Deals: What it Really Means

In many industries, especially in the buy-sell world, the term “win-win deal’ is often thrown around. That said, most people want an, “I win more than you win” deal. Whether it’s a power play, ego, or the want of a higher commission, it happens, in all industries.

When you adhere to Rotary’s Four-Way Test including, “Is it fair to all concerned” you get messages like the one below.

We met several years ago when you were advising a client of yours on the potential acquisition of one of my businesses.

I was always impressed with your direction, demeanor, and fairness during this transaction.  One of our other businesses is in the early stages of evaluating an acquisition of a business that is not for sale and would like to talk to you about some guidance and the services you provide.  

A win-win deal is one where both sides are equally unhappy but realize it was fair to all concerned. Of course, everybody wants the best deal possible but in my world, the absolute best deal is usually a done deal, which is why my newsletter, events, and more are titled, “Getting the Deal Done.” Do this and you’ll increase your chances of having people on the other side want to do business with you.

Regulations and Micromanagement

Tom Douglas is perhaps Seattle’s most famous chef/restaurateur with 900 employees and 19 establishments, all within a 10-block radius of his original restaurant, the Dahlia Lounge. So, it was interesting when he told the Puget Sound Business Journal the Seattle City Council and the mayor don’t like business. He stated, “They are not thinking like businesspeople, and yet they want to run our businesses.”

He was referring to increased wage requirements (he supports higher wages but objects to different rules for different sized businesses), scheduling regulations, giving workers input on their schedules, sick pay rules, and more.

While it’s easy to say it’s regulations run amuck (it is), it’s a case of political micromanagement. Micromanagement is bad enough on its own but it’s bad when people with authority and smarts in one area (in this case getting elected and probably nothing else) think they know everything about every issue or situation (especially business).

It’s a good lesson for all businesses. People thrive when you let them fly or crash (pretty much) on their own. There’s a huge difference between being a mentor or coach and a dictator. If we assume Douglas is right (and he’s been pretty darn successful), then the politicians are hurting many small businesses.

I’ve told this story before (but it’s such a great example). A client’s actions were known to his employees as “drive-bys.” He would stand over someone, watch them, make a snarly, passive-aggressive comment, and walk away. No guidance, no input, and no encouragement. He’d find the 5% that wasn’t being done the way he wanted it done and ignore the 95% that was being done as it should be done (or better).

“Truth is, everybody is going to hurt you: You just gotta find the ones worth suffering for.” Bob Marley

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