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.

Avoid Overthinking

In my (business) world I run into a lot of overthinking. Smart people who make things complicated trying to add perfection versus simplicity. People who dream up wild scenarios of what might be happening instead of asking a question. And those who imagine all the things going wrong, or which might go wrong, in a business that hasn’t had those things happen in a decade.

This has nothing to do with exit planning or the buy-sell world. I believe it’s everywhere and has been for a long time. Where do you think the acronym KISS (keep it simple stupid) came from? From people trying to make every decision or action comparable to a Rube Goldberg contraption.

This seems to go in waves and I’ve experienced a lot of it recently. Maybe because it’s pollen season. J More than likely it’s anxiousness. For example, a client called to discuss a possible business acquisition, one he really likes. By the end of the call I had to tell him to calm down, slow down and just wait (until he can ask his questions).

He was on both sides of it. On one side his imagination was running wild about calamities and on the other he wanted to push it forward fast because he likes the business model so much. He was so mixed up I finally said to enjoy the weekend (this was a Friday afternoon), and we’ll get some answers next week.

Ask direct questions, think about how simple something can be done, and get it done.

“Nothing in life is to be feared; it is only to be understood.” Marie Curie

Bad Business Practices (Again)

I’ll write this without giving any examples from airlines, cable companies or cell service providers.

In the same week the first two items happened and the third is an ongoing issue (especially in the Seattle area).

  1. My executive suite operator (Regus) informed me I could only book meeting rooms in even-hour increments as their system can’t handle half-hour blocks (so I can’t book a 90 minute time block). They want to round everything up to the next hour, which from their point of view makes sense for clients who pay by the hour. But really? With today’s technology the system can’t handle this?
  2. I then got a call from a credit agency as a client gave my name as a reference when they applied for an American Express card. I was pointedly asked if I took Amex and if I charged more to take it. A business is using the wrong system if they pay more for different cards (and are being penny wise & dollar foolish). Between PayPal and Square I can take any type of card and my costs are over 1/3 less than when I used the bank (for only Visa and MC).
  3. Kirkland has Park Place Mall and it’s an old joke that the name is an oxymoron as there is limited parking at Park Place. The same thing is going on in ” Juanita Village,” down the road from us. They keep filling every foot of open dirt with building without any more parking. We have actually gone there to eat and left the complex (to go somewhere else) because there was no parking (this has been in the news because there is also no employee parking). Maybe not a bad practice by the business, more of a bad practice by the developer.

Bottom line, don’t make it hard for people to do business with you.

“Bad taste is simply saying the truth before it should be said.” Mel Brooks

All Aspects (of a business) Are Important

This past Sunday my Rotary Club had our big fundraising event, the Bellevue 5K & 10K “All in for Autism” run and walk. There are some insights and lessons from an event like this that are applicable to our everyday lives and businesses.

  • You can never do too much marketing. You have to start early, be constant and be consistent. There is a lot of “noise” in today’s world and it takes incessant messaging to be heard.
  • A smooth running operation is something for which to be joyful. This is our fifth year in our current location in downtown Bellevue. Our team is on top of everything, which meant the most exciting thing that happened was a car being towed out of the race village amidst all the tents (the tow truck driver sure knew what he was doing).
  • You have to ask. Nobody will do anything if you don’t ask. I personally got three sponsors for the event by picking up the phone and asking. I have a potential (major) sponsor for next year by simply making a couple calls and asking. People don’t buy if you don’t ask, so ask!
  • Partnerships can be great and we’ve partnered with what I think will truly be a win-win cause, autism. When you’re not close to something you’re not fully aware of its impact. I’m not aware of any autism in my family. Yes, I have friends with autism in their families and as I become more aware of the symptoms I know a high school friend’s brother had it. There are a “ton” of autism groups, from major programs like (our sponsor and beneficiary) Children’s Hospital to small, community parental support groups. When you get a good partnership, both sides need to exploit it.

So, next year when I ask if you’ll run or walk in this event, I hope you’ll say yes. :-)

 

Collaboration not Confrontation

Think of the following situations:

  • Union negotiations are intense and the parties often can’t stand each other.
  • Pro sports are extremely competitive and tempers often flare.
  • Apple vs. Samsung vs. Google vs. Microsoft
  • Democrats vs. Republicans

But small to mid-sized business buy-sell can’t be confrontational or there won’t be a deal. The buyer and seller have to live with each other for months or even years. The buyer has to work with the management and other employees and if they know the buyer and seller are fighting guess whose side they’ll take (it’s not the buyer’s)?

Buy-sell deals have to feature collaboration. The parties have to like each other and the advisors have to work together to make sure things so smoothly. There is give and take, not everybody gets what they wish and hope for (a super-high price all in cash or a rock-bottom price with almost no down payment.)

The deals that go the fastest and the smoothest are those where all the parties understand a successful deal is the only goal that really matters. It doesn’t help to win a bunch of little battles if you lose the war, which you may lose if you drive the other side crazy with nagging requests (always wanting a little more).

Unrealistic Expectations – Part II – Gotcha!

In February I wrote about business sellers’ unrealistic expectations when it comes to what they think their business is worth. In the past I’ve written about how low interest rates and bank using the SBA guarantee program and its low down payment requirements plus a 10-year amortization have caused buyers to pay more for businesses than they would have years ago (because their payments are the same or less).

Now for the “gotcha.” As with just about everything, it’s about moderation. And this applies to any type of deal, not just the sale of a business, where terms influence the price.

Let’s say that the historical (benchmark) standard for the pricing of a business of a certain size and in a certain industry is four times pre-tax profit. But because interest rates are around 5%, down payments can be lower, and the buyer can amortize an SBA guaranteed loan over 10 years, he pays 5.3 times profit.

For a business with $1 million of net pre-tax income it means:

Previous scenario:

  • Pre-tax profit – $1 million
  • Price – $4 million
  • Annual debt service – $725,000 (at 5%)
  • Debt coverage ratio – 1.35:1 (above required minimums but way too low*)

Current scenario:

  • Pre-tax profit – $1 million
  • Price – $5.3f million
  • Annual debt service – $585,000
  • Debt coverage ratio – 1.71:1 (a very healthy ratio)

So what the catch you ask? The seller got a higher price so she was more motivated to do a deal, the buyer has improved cash flow to grow the business and improve operations, and isn’t that what it’s all about.

First, the buyer will pay a lot more in interest, as there’s both a higher price and a longer term. Then, what if the business has some hiccups in the early years and with super-tight leverage the business stalls and all efforts are going to survival, not improvement?

Most importantly, what happens when the gold rush ends? What happens when interest rates are higher, the supply of businesses-for-sale increases, and pricing gets back to “normal?” (And believe me it will. It’s like a manager I had back in the 1980’s, when interest rates were 12% or higher, said to me, “Do you really think interest rates will ever get below 10% again?”)

Let’s go 5-10 years in the future.

  • The buyer is a great operator and got a great business. She triples the business and now wants to exit. Ignoring the fact that larger businesses sell for more than smaller ones, all things being equal, she expects to sell the business for about $16 million. But pricing is back to historical norms and the market says she’ll sell it for $12 million. A very nice sum indeed but she’s wondering what went wrong.
  • There was a hiccup in the early years and it’s stifled growth. The owner is burned out, maybe his health is failing, and the whole thing is just a drag. Profits have recovered and are now back to $1 million so he expects to sell for over $5 million, but can only get $4 million or so. Not wondering what went wrong, but really ticked off.

I started out talking about moderation. Paying a moderate amount over the benchmark price is fine (10%). But paying 30% more because the payments are manageable is ridiculous. Common sense should rule the day. Just because you can meet minimum ratios doesn’t mean you should. Just because you can over-leverage it doesn’t mean you should.

 

 

  • This ratio is the amount of profit to annual debt service payments. In this case $135 of profit for every $100 of debt service. Many banks will go as low as 1.25:1 but experienced acquisition lenders want it to be at least 1.5:1.

Learn By Teaching

Three times a year I volunteer at the SBA and teach a class on growing a consulting business. Last Friday was my most recent class and one of the things I told the class was an old teachers adage, “Those who teach learn more than those being taught.”

And once again I walked out of the room with note in my calendar book on things I was telling the class to do, which I need to do better, and a couple ideas from them.

It got me thinking, if you, whether you’re in manufacturing, banking or anything in-between, were training someone to fill-in for you while you take a month off, what are the top five things you would tell them to do? This could be marketing efforts, employee management, operations, sales, finance or any other aspect of your business.

Now ask yourself, how many of those five things do you do as conscientiously as you should? Plans, ideas and strategies are all great, but they don’t accomplish much if you don’t implement them and effectively execute the implementation.

As a result of the class, besides doing the things on my list, I’m going to sit back and think about what I could and should be doing that I’m not doing now. This is not reinventing or creating, it’s getting focus on things that have slipped through the cracks.

“The highest calling of leadership is to unlock the potential of others.” Carly Fiorina