Can an Expense Be Profit?

Last month a friend referred me to a business owner wanting to sell his company. His primary motivation was he’s burned out and the driving force for the burn out is 2015 was not a good year financially. Sales were down from 2014 and expenses were up. His balance sheet is a mess. But this is not the point of the story.
The point is he did some reading, probably online, and had his P&L all marked up with notations on all the expenses that “really aren’t expenses but are profit.” It included the usual suspects like his salary, his wife’s salary, benefits, car (used to make sales calls), etc.
One that struck me is something I see every so often and it’s marketing expense. He figured because a $30,000 marketing campaign didn’t work it really wasn’t an expense but should be considered profit. A number of years ago I spent $5-7,000 on Google Adwords and similar from Bing and Yahoo. Not one call; lots of voyeurs. And the last time I looked, that money wasn’t on my bottom line, it was Google’s (and others) bank account.
The flipside is if the marketing campaign had worked would this owner take away the revenue and profit it generated? Growing a business is not easy. Congratulations to those who do it. It takes time, money, and skill. Marketing strategies have to be tried and you have to realize they won’t all work.
If you don’t try a few how will you know what does, and will, work?
“Half the money I spend on advertising is wasted; the trouble is I don’t know which half.” John Wanamaker

Your Family Business Transition Will Fail

An article I’m writing for a trade magazine starts with, “Your family business transition will fail! That’s not just my opinion, the numbers say so.”
And it’s true, according to The Kiplinger Letter, Business Know-How, Family Business Institute (FBI), BusinessWeek, and more. The statistics are:
  • Only 12-15% of businesses transfer to the third generation
  • 30% of businesses survive to the second generation
  • 65% of transitions to the second-generation fail
  • 90% of transitions to the third-generation fail
According to the FBI, 88% of business owners think a family member will take over their business. And the FBI is the source of the statistic above saying 30% make it to the second generation.

Recently the Wall Street Journal had a column on this topic and from that column and other sources I’d like to discuss the following points.

If you’re going to transition to family you have to:
  • Make sure they are ready. Do they have the skills? Don’t be like one 80 plus-year-old owner I met who told me his almost 50-year-old son, “wasn’t mature enough yet” to run the business.  The same son who drove all of their sales.
  • Are you ready? There are too many instances of mom or dad not willing to give up control (it’s still “their business”).
Really want some fun? Have multiple (future) owners involved! This is often a sure sign of disaster, or at least a disagreement.
  • Have an agreement. Let’s say it’s your business pre-nuptial. Get all the issues on the table and memorialized in writing.
  • The most important issue is “who’s in charge.” A tough one but it has to be dealt with.
  • Consider buying out family members who aren’t interested in being involved with the business. Don’t have them hanging around pestering about a distribution when the operators want to reinvest for growth.
  • The above is important and can be summarized with the word, “Conflict,” because there will be some.
One client situation has multiple family members with shares. The story has it the non-active owners don’t trust, aren’t happy with, and make life difficult for the active owners because dad couldn’t let go (see above). Dad wanted things done the way he always did them and when that didn’t happen he told the other family members not to trust or respect the operators. This went on for decades and never ended.

Realize a family transition may not be best. The kids have different interests and goals. Ask yourself if transitioning the business will create more family issues than it’s worth (again, see above). Perhaps it’s best to take the money now by selling to a good operator who will grow the business and preserve the legacy.

This whole issue reminds me of a long article I read a few years ago about the conflicts that arise when there’s a family cabin passing to the next generation. Those who love the outdoors want it, those who don’t say sell it. Some want it fancy while others want it rustic. Repairs and maintenance are affordable to some but not others. As with a cabin, maybe the best answer is to sell it, distribute the money, and move on.

Conclusion

There are three things a business with the possibility of a family transition must do.

1.    Plan it by getting all involved well in advance.

2.    Make the tough decisions now.

3.    Get the proper advice from a transition and/or buy-sell advisor, attorney, and accountant.

Who Would You Like As a Referral Partner?

On Saturday, January 9, 2016 the front page of the Seattle Times had a banner about Ken Griffey Jr.’s election to the baseball hall of fame main story while picture and main story was about the Seahawks playoff game, and the fact star running back Marshawn Lynch decided not to play on Sunday.

These stories were even more prominent on the front page of the sports section. As always over the last 6-8 weeks the Lynch story mentioned he did his injury rehab away from the team, in Oakland. And that as of Friday morning coach Pete Carroll was saying Lynch would play on Sunday.

What struck me was the difference between these two prominent athletes. Griffey was (and is) nicknamed The Kid because when playing a kids game he always appeared to be letting his inner kid show. He smiled, interacted with fans and reporters, and just came across as someone very appreciate he was able to earn a great income playing a game, i.e. having tons of fun.

All while avoiding the steroid scandals prevalent during his time. In fact, if you saw the video of him getting the hall of fame call or heard his interviews about being elected with a record percentage of votes, you realized how humbled he was by it.

Isn’t that the kind of person you want working with you or for you? Isn’t this the type of person to whom you’d like to refer business (and get referrals from)?

Plan, Innovate, Lead, and Grow

Recently I hosted my annual client breakfast with guest speak Robbie Bach (www.robbiebach.com). Robbie was a top executive at Microsoft and is the author of Xbox Revisited, A Game Plan for Corporate and Civic Renewal.
I won’t steal Robbie’s thunder (buy the book, all proceeds go to charity) but will provide a short summary. FYI, he and a business partner are also the owners of Manini’s , a gluten free pasta manufacturer.

I’ll break his talk into three sections.

First, think strategy first by following the three P’s: Purpose, Principles, and Priorities. He stated you should be able to state your purpose in one sentence, your principles are your roadmap for success, and your priorities allow you to achieve your purpose.
Don’t have more than five priorities as you won’t get more than five done, and the top three are always the most important. Simplicity is the key; people get simplicity! And be able to say no, especially to prospective customers who don’t fit your model.
Second, innovation and there are three components, B-X-T.
  1. Business decisions can create innovation. Ask what you are doing and how you’re selling it. Apple upended the music business by selling 99-cent songs.
  2. EXperience – ask how you can change the customer’s experience.
  3. Technology – who can provide the technology for you? You don’t have to do it yourself.

Third, leadership – determine what you are really good at and surround yourself with people who fill your weaknesses. Above all, leadership requires grit so you can persevere through challenges. Leadership also means stepping back and asking (yourself and your team), “If we dreamed, what would we do differently?” Then do two or three of your dreams.

“People who are wrapped up in themselves make small packages.” Benjamin Franklin

Why Not Do What You Like (or Love)?

Recently I saw a long-time friend and one of the first things he said to me was, “I’ve become the person I never liked.” You see, many years ago he left the private engineering sector for a high-level government agency job (he didn’t like the business development part of being a partner in a firm).

He now goes to work everyday bored, fed up with the bureaucracy, and wondering if he should have made a change a few years ago.

Boy do I see a lot of that in my business. Business owners who love their business, don’t want to put the effort in to grow it, don’t know if they want to sell, and who are coasting. So nothing happens. It’s stagnant. But they remember it from when they worked harder and it was growing at a fast clip.

Management and executive level people change jobs on a regular basis. I’ve seen statistics saying it’s anywhere from every three to seven years. Business owners are the same type of person (as an executive), they just own the business, so it’s not as easy to pick up and leave.

At some time, no matter what the owners age, it makes sense to accelerate the pace, show growth, and go on to the next great adventure in life (they should read my book If They Can Sell Pet Rocks Why Can’t You Sell Your Business (For What You Want)?).

For those execs who change jobs every so often, maybe it’s time to consider taking control and owning a business (as described in my other book, Buying a Business That Makes You Rich).

Life is too short to trudge through it being someone you hated a couple decades ago.

“Courage is what it takes to stand up and speak; courage is also what it takes to sit down and listen.” Winston Churchill  

You Have a Good Business So Get Over It

Pete Higgins at 2nd Avenue Partners, a Venture Capital (VC) firm, has told me a few times the toughest thing about his business is telling people, “you have a good business, it’s just not a VC business.”

In other words, you’re not going to get funding because VC’s need to believe there’s a good chance the company they fund will take off, i.e. have hockey stick growth. But, it’s still a good business, which can grow, make a profit, create jobs, add value, etc.

I can think of many small business owners who read the headlines and dreamed of massive amounts of funding, only to find out what they had was a nice profitable business.

It comes down to goals and expectations. And most importantly, knowing what the other party wants.

A business buyer wants a business that is “scalable.” So when a seller tells them they’re coasting, how everybody works at a relaxed pace, or similar, the first reaction is, “the culture here is conducive to growth (and hard work).”

And owners, if you are thinking of selling, know what buyers want. While I have a long list of things (see my book If They Can Sell Pet Rocks Why Can’t You Sell Your Business (For What You Want)?), be sure:

Your financial systems are solid and the statements accurate;

Be able to show a growth plan, not just use the word potential;

Get rid of your major dependencies, the top one often being you, the seller. Take a month long vacation. If things are in good shape when you return, your company’s value just went up.

You have a good business. That’s great because there are a lot of crappy businesses out there. Be proud of it.

“The truth stalks us like bad credit.” (Journalist) Ta-Nehisi Coates

Beware of Incomplete Information

Time goes fast. Years whiz by, quarters, months, and weeks come around too soon.
At the end of December a client got an email from his CPA that said, “It looks like the company lost $100,000 in October.” She deciphered this by looking at the third quarter P&L and an October 23 balance sheet.
My first comment was, “I’ll bet it has something to do with a mid-month statement.” Sure enough, the company’s job system and accounting system only sync at the end of the month so the drop in net income, as per the mid-month balance sheet, was fiction.
I’ve always had a cautionary view of short-term statements of any kind. Watch out for:
  1. When someone gives me a year-to-date P&L and emphasizes the good or the bad, compared to the most recent full-year, I always ask for similar statements for prior years. There’s a little thing called seasonality.
  2. I get a kick out of owners who tell me business is good because there’s been a lot of orders “this week.” Usually they say that because the rest of year has been mediocre at best.
  3. Even sales pipelines have to be compared to other years as many companies order at the end of year (to use up budget) or at the beginning of year (to use their budget before it gets slashed).
  4. Projections of what a company will do over the next year based on one or two months. As in, “We made $100,000 in June and July so the next year will show $1.2 million in profit and we’ll base the price of the company on $1.2 million.” Of course, June and July are typically spikes not trends.
  5. To be fair to business sellers I’ll relay the following. The buyer made an offer, it didn’t fly, came back months later with a lower offer because during those months the annual run-rate was lower than the prior months. The seller made the point the company always had 9-10 okay months and always had 2-3 months with large orders, which is why they were growing at 10% or more per year for the last five years.
Warning: don’t make long-term decisions based on short-term information.
“Nobody wants to read about a good-looking happy person. ” Carrie Fisher

It’s All About Results

One of the TV shows I enjoy watching is Restaurant Impossible (another is Bar Rescue). On Restaurant Impossible they go into a failing restaurant and redo the:
  • Menu
  • Facility
  • Owner’s (and staffs’) attitude
The thing I really like about it is the focus on results. It’s all about turning a money losing business into a profitable venture while at the same time repairing damaged family relationships.

A good marketing person will tell you, it’s not about features, it’s about benefits. So in this case, it’s not about activity it’s about results. Examples from the small business world include:

  • You don’t have a device with the latest titanium flange, you have a device that will save 23% on energy costs.
  • Customers don’t want their taxes done for the lowest fee, they want them done so they pay the lowest amount of tax (legally) and not get flagged by the IRS.
  • My clients don’t care as much about my methodology as they do about avoiding a bad deal and getting a good, sustainable, deal.

Too often we get caught up in the features of what we do. The focus should be on the results (benefits) our customers get. Understanding why they keep coming back and/or referring others to us gives us insight into what the real benefits are (versus what we perceive them to be).

“The more original a discovery, the more obvious it seems afterwards.” Arthur Koestler

Football As a Microcosm of Life

In December, and besides holiday parties, shopping, and other festivities for a lot of people this means assessment, planning, and goals.

Some of the most successful people I’ve known are goal driven. Other very successful people simply do “their thing” as they know if they do what they are supposed to do success will follow.

Football teams (professional), all have the same three goals.

  1. All teams, and especially their fans, will tell you the ultimate goal is to win the Super Bowl.
  2. But before you can win the Super Bowl you have to make the playoffs (goal number two).
  3. And every coach will say to make the playoffs the team has to do the little things. Do what they’re taught, do them consistently, and do them correctly (goal number three and the one the players and coaches can control).

The football season is four months but only 16 games. Baseball, basketball, and hockey are six months long but have 5-10 times more games. There’s a lot more room for error when you play 80-160 games.

These latter sports are like our year; we can recover from a small mistake. Every football game is like a customer relationship. Blow one game and it could mean playoffs or no playoffs, a game at home versus all games on the road. Blow an important customer relationship and it could make the difference between a bonus or no bonus, profit or loss, keeping or losing your job.

My points are:

  • If you’re a goal-setting person, you need to do the things you’re supposed to do, on a daily, weekly, or monthly basis, so you can achieve your goals.
  • If you’re not a goal-setting person, you need to do the things you’re supposed to do, on a daily, weekly, or monthly basis, to achieve success.
  • Pay attention to the details and the big picture will come into view.

Planning a Run vs. Planning Your Exit

We were in Bozeman, MT for a few days last summer and it coincided with the 20-mile long Bridger Ridge Run. We found out this when hiking the College M, a trail from a small park to the “M,” a letter M about 100 feet long made out of white rocks, about 1,000 feet up a hill, and viewable for miles.
As we started our hike the final runners were coming in, along with event staff sweeping the run. The run itself is an A-B event with 6,500 feet of elevation gain, 9,500 feet of elevation loss, and with most of the run along a ridge over 1.5 miles above sea level (Bozeman is about 5,000 feet above sea level).
One of the sweepers told me it takes two months of work to get all the stops setup, with water, food, first aid supplies, etc. Given the terrain, it means each trip with supplies is anywhere from about four to 20 miles round trip. I can see why it takes two months (given it’s all volunteers).
I’m not a big fan of Tony Robbins*, but all this planning reminded me of something he says, “Most people spend more time planning their vacation than planning their lives.” Or, in my business world, more time than planning their business and especially more than planning their exit.
Too many business owners wake up one day and decide it’s time to sell. Are they maximizing profit? No. Do they have a solid management team? No. Are they coasting along with no growth strategy? Yes! (Do they think any of these things should affect the price? Of course not.)
This is why I wrote If They Can Sell Pet Rocks Why Can’t You Sell Your Business (For What You Want)?
Put in as much time planning your exit, and implementing the plan, than you spend planning your vacations for just one year and you will dramatically increase your chances of exiting with style, grace, and more money. It’s that simple.
* As I said, I’m not a big fan of Tony Robbins, or any of the rah-rah motivational types. However, they can have some good points. Another of Mr. Robbins’ points is, “People won’t change if they think the pain of change is greater than the pain of not changing.” This applies to personal things like relationships, weight loss, etc. and business things like hiring or firing someone, implementing an exit plan, and more.
“It is impossible to live without failing at something, unless you live so cautiously that you might as well not have lived at all.” J.K. Rowling