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

 

 

High Priced Does Not Equal Success

Recently the Wall Street Journal did an article on the highest paid quarterback and wide receiver combinations. They ranked the top 15 and, interestingly, within the top 15:

  • Only four of the top ten made the 2014 playoffs
  • Denver was the only team in the top 10 to make the final four
  • As those of us in Seattle know, the Seahawks weren’t on the list (probably not even close) and the Packers and Patriots (the other two teams in the final four) were near the bottom.

Too many teams spending too much money without getting the results they wanted. Think of this in terms of business. Are you spending too much time or money on unproductive activities? This could be a marketing plan with no metrics to show if it’s working. Or perhaps your people devote a preponderance of time on one large customer, who because of their volume gives you unsatisfactory margins.

Or perhaps it is when companies let long-term employees eat up resources because “they’ve been here forever; they’re like family.” That rarely happens in sports. Competition demands that if you’re not producing, whether you’re a rookie or an aged veteran, you’ll be let go.

It’s a good lesson for all of us whether it’s people, marketing or daily habits.

“A tree is best measured when down, and so it is with people.” Carl Sandburg

Worrying Too Much? Laugh a Little

Some of the biggest smiles and most laughter I’ve had in years came from reading Dave Barry’s latest book, Live Right and Find Happiness (Although Beer is Much Quicker). It ranks up there with seeing The Book of Mormon (especially on Broadway) and Spamalot, which are both non-stop side-splitters.

Some of the books chapters are:

  • A letter to my daughter as she becomes eligible for a Florida learners permit (unless I can get the law changed)
  • The real Mad Men
  • Everything I learned about home ownership I learned from Johnny Carson

It’s the Real Mad Men chapter that really caught my attention. Barry’s examples of how 1950’s and 60’s ad campaigns evolved amid the non-stop smoking, drinking and affairs are hilarious.

  • First ad executive: “I got it! We put a tiny man in a boat in the toilet tank.”
  • Second ad executive: “Perfect! Pass the whiskey.”

Humor, and other attention getting devices, are best when “real” as in “you can’t make this stuff up (as nobody would believe it).” He writes about his parents’ parties with everybody smoking and drinking, and not worried about it. And all the other dangerous things his parents and their friends did, including:

  • “….water they drank right from the tap.”
  • How they didn’t “interrogate the waiter about whether the chicken contained steroids or was allowed to range freely or was executed humanely; they just ordered the damn chicken.”
  • “They didn’t worry about trans fat, gluten, fructose and all the other food components now considered so dangerous they could be used to rob a bank (“Give him the money! He’s got gluten!”)”

The above is fun, funny and entertaining and it leads to the following. “Above all, they did not worry about providing a perfect, risk-free environment for their children. They loved us, sure. But they didn’t feel obligated to spend every waking minute running interference between us and the world.”

This applies to our businesses, not just helicopter parenting. Business is filled with risk, as is life. We take manageable risks based on the anticipated reward. And there will always be risks. We can’t protect our kids, grandkids, selves or our businesses from all eventualities. What we can do is make sure we’re prepared for the ones having a high probability of occurring, and trusting our skills and judgment to handle the rest.

If you have to tell me how honest you are…

In the movie, “Six of a Kind” W.C. Fields plays the sheriff, known as Honest John. When asked how he got the name he goes into a long, rambling story about how as a bartender one of his customers used to take out his glass eye and put in it a tumbler of water. One night he forgot to take it out of the water and when he came in the next morning gave it back to him and “Ever since that day I’ve been known as Honest John.”

I tell this story because I’ve noticed that when people have to say how honest, ethical or of high integrity they are it means to watch out, something isn’t right. Like Honest John, they think that doing the right thing once makes them special. Just don’t look behind the big green curtain.

The following are some examples of what I mean. Maybe I’m sensitive because in the last six months I’ve seen a few of these types of behaviors. I’m hoping and guessing that it will reverse itself.

  • We want to be transparent – we’re hiding something and you’ll never find it.
    I have high integrity – believe what I say, not what I do.
    I’ll answer every question you have – but won’t give complete answers (and that’s not lying, is it?).
    Everything is done in good faith – we have faith we’ll come out on top.
    I have high ethical standards – just not compared to what society believes are high standards.

Socialism May Work in Sports but Not in Business

In the NFL, and other pro sports, the league has a salary cap that teams must adhere to. It’s to promote parity and it’s worked. Over the last 10 years only five of the 32 teams have a cumulative winning percentage of .600 or higher.

In our businesses we don’t have a salary cap, we’re not interested in parity, it’s not a zero-sum game so we all can do well, and at the same time there are factors that keep things in check. Those include:

  • If we pay people too much based on their productivity we’ll lose money. If we don’t watch our costs we’ll lose money. If we ignore sales and marketing strategies business will eventually disappear. A good lesson on this is the restaurant industry. Good restaurateurs know exactly what percentage of sales food costs, labor costs, rent and other key expenses must come in at to make it a profitable venture. Manufacturers should know what their cost of goods sold needs to be. Good metrics make a difference.
  • In the (small business) buy-sell world one of those factors is the banking industry. Good banks add a layer of common sense (don’t get me going on banks that will allow a business buyer to be leveraged to their eyeballs or higher). Banks are in business to be paid back and have their own metrics, which borrowers must meet or exceed. In a way it’s a “pricing cap” that acts as a sanity check.

We don’t have to manage the cap, as NFL teams do, but we do have to manage a budget. Managing a business simply by how much money is in the checking account vs. knowing your numbers is a sign of an upcoming disaster.

“Those who have knowledge don’t predict. Those who predict don’t have knowledge.” Lao Tzu

Security? Maybe Some Common Sense

CNET reported that for the fourth straight year, in 2014, the most popular computer passwords are “123456” and “password.” Runners-up included “letmein,” “baseball,” and “qwerty.”

I often tell my clients, family, and myself to always think in terms of “lowest common denominator.” You can’t depend on many people to do the right thing, think things through or even consider options.

A perfect example of this is an effort in the Washington State legislature to modify, i.e. ease, the rules on payday loans. Let’s face it, the original law was enacted to keep stupid people from damaging their lives (too much).

In my day-to-day world if somebody tells a business owner they will buy their business for a price that seems about twice what the generally accepted range indicates it should be, well, it sounds good but,

  • Will they get financing?
  • Will their advisor knock some sense in them?
  • Or will the seller finally realize that the buyer has so little common sense that their business should not be entrusted to that person?

On the flip side, if a business buyer finds a company whose owner says they will sell it for a ridiculously low price that it seems like a steal, it probably is a steal, for the owner getting out before the roof collapses. If the new hire salesperson sounds too good to be true, as in, “Why would someone of his or her caliber work for this pay rate?” I can guarantee you they are all talk and no action, and no sales will be made.

Computer passwords, business buy-sell, business in general, and in our personal lives it behooves us to step back and ask, “does this make sense?”

“Fiction is the truth inside the lie.” Stephen King