Martinka Consulting

425-576-1814 john@johnmartinka.com

Block & Tackle Better And Hit Harder

Posted on by JohnM

Regular readers know that I like to make analogies between sports and business. As it’s football season let’s discuss how football fans can really get into it. They follow their team, the NFL, the draft, play fantasy football, play Madden Football and more. They study it, critique their teams, especially the coaching staffs, and wonder why the coaches do the things they do (as they, the fans, know what would have worked). They also tend to ignore the fact there’s another team trying just as hard and another coaching staff making adjustments during the game.

Every diehard fan knows in the deepest part of their heart that if their team’s coach would only call the schemes (aka the player formations and plays) they (the fan) would have called then the game would have gone better. A huge reason for this attitude is that fans play the Madden Football video game where each player calls a play and if your defensive scheme stops the play, well, you’re a football genius. So, they think, why don’t my coaches call the right schemes?

Fans and reporters have become vocal about this. If you read the sports page (paper and screen) you know this. I hear it’s huge on sports talk radio, which I don’t listen to.

On September 21, 2014 Green Bay Packers coach Mike McCarthy said, “Scheme is not a crutch.” In other words, no scheme will work if you don’t block and tackle better, hit harder, run faster and do all the other things that determine the outcome of the game.

A few days after I heard this I was in a semi-public area, the guy next to me was on a business call and he said, “We need to block and tackle better.” That’s really what it comes down to, isn’t. Last year the Seahawks exceled at the basics. They blocked better, tackled better, hit harder and won the Super Bowl.

When companies do the basics better they will also excel and it doesn’t matter if your company is just you, a handful or hundreds of employees. Do the basics better and thrive. Here are a few examples:

  • Want to raise revenues? You have to get the word out (marketing). You have to have competent sales people who can build relationships, show value, make calls, stay in touch and do everything it takes to make the customer happy. In today’s world one of the things that gets overlooked too often is the personal touch. A business owner told me recently that he asked his sales staff where they were on keeping in touch with customers and potential orders. One person told him they had sent out emails recently, to which he told them to pick up the phone, call the customer and show some interest in doing business with them.
  • Is it necessary to decrease costs? If done right you won’t be doing this more than once, plus some review, but it can be a worthy exercise. I remember sitting at the computer with a client as we went down their chart of expense accounts. I pressed her on what it was, why it was there, etc. We were about 20% of the way through when she told me she knew what to do and would do it. Their expenses were out of control and she figured out quickly that the big reason was her partner was a spendthrift. As the business grew she ignored costs and they had grown exponentially.
  • Is your process inefficient (this could be manufacturing, distribution, service or restaurant)? Maybe it’s time to bring in a process expert to improve efficiencies. Perhaps your equipment is outdated and not productive enough. If you’re not the expert in this area, as I’m not, get help.

Business is like football; block and tackle better and you’ll do better. Hit harder (figuratively in business) and you’ll win. People have written books on improving the above areas and on a lot more aspects of a business (supply chain management, culture, finance, etc.) so this is just a sample of what you can do. Football is a collision sport and business is a contact sport. The more contacts you have the better you’ll do and that’s not just in sales but having people who can guide you in all aspects of the business.

Talk Competance

Posted on by JohnM

One of the more interesting outdoor things one can do is go fishing with a guide. You not only can learn a lot but it’s fun to observe their culture. The best guides are enjoyable to be with, educate you and know the best places to fish.

Whether the guide is quiet and serious or talkative and fun they have their catch phrases. My favorite three are:

  • “Boy have they been biting the last couple of days.”
  • “The fish don’t bite the day after a cold front comes in (substitute warm front, rain or any other weather condition, and this is always said after you’re done fishing and they’re paid).”
  • [After a fish gets off the line] “That’s why they call it fishing not catching.”

I mention this because we all have our stock phrases. I hear a lot of the same things from bankers, as they all have similar criteria for making loans.

I have my lines that I find myself saying without even thinking about them because they’ve become so natural. I’m sure you do too. When we sound relaxed and comfortable it lets others know we’re competent.

As I’ve helped others get into the consulting business one of the top things I stress is to get to the point so you don’t sound like you’re reciting a script. In other words, be yourself and know your stuff.

“Reality is the leading cause of stress among those in touch with it.’ Lily Tomlin  

To Be an “A” Business

Posted on by JohnM

In the September 2014 Mergers & Acquisitions magazine there was mention of how in today’s market sellers and investment bankers are trying to get “A” prices for “B” businesses.

Surprise, surprise! I don’t think it’s just in today’s market. I don’t think there are too many, if any, business owners who think they have anything but an “A” business. It’s just like how every football fan feels that the NFL draft gave their team the missing pieces to win the Super Bowl.

First let me state that to me any business making a profit after paying the owner a fair market salary for the work he or she does is a “B” or better business. To get to the “A” level (as a small business, which is different than if it’s a middle-market business) a business should have the following usual suspects (of a quality business):

  • A management team, which means the owner can take off for a month with no disruption.
  • Consistent and growing profits, again, after paying the owner a fair market salary.
  • Sustainable growth with an understanding of why growth is occurring (quality of earnings).
  • Achieving scale as it’s rare to see a business doing under $5 million in sales be an “A” business.
  • Solid financial systems and accurate financial statements.
  • Be a leader in product quality, service and innovation.
  • Customer and vendor diversity, loyalty and strength.

“A” businesses will make more money, provide the owner more free time and sell for more money. Why not strive to become an “A” business, or remain as one if you are.

“The free thinking of one age is the common sense of the next” Matthew Arnold

[Very] Small Things Keep Employees Happy

Posted on by JohnM

During a meeting with a group of clients last week another client, Tom McKown, the owner of Industrial Automation, presented on his best practices. Tom concentrated on people and culture. The topic was a huge hit and brought out some of the things my clients do to improve morale.

  • Tom Miller, Western Industrial Tooling, shared that right after he bought the company they did a branding exercise and the employees noted that part of the company’s brand was “Bagel Day” every Thursday. One of the most appreciative things he did was get rid of the old coffee machine and replace it with a Keurig. The reaction was incredibly positive.
  • Fred Barkman, Spectra Labs, told me that when he upgraded the cheap, canned coffee to coffee from a specialty roaster it was like he walked on water. Fred’s business is in Fife so he gets four season tickets to the Tacoma Rainiers and lets the employees use them. The positive feedback is worth the few thousand dollars. He also puts out a snack assortment (chips, etc.) from Costco every week and the $11 a week returns itself in multiples.
  • Finally, Rick Locke with Windows, Doors and More, started holding all-employee monthly meetings after he bought his business and told me the response from the warehouse and similar workers was phenomenal. They had never been included in any company updates or given insights on goals. Rick also keeps soda pop, water and snacks available for free in the lunchroom and, as one might expect, it’s a big hit.

Little things matter (a lot). There is little reason to be cheap when sometimes all it takes is a few dollars to return thousands.

“I’ve never understood why people consider youth a time of freedom and joy. It’s probably because they’ve forgotten their own.” Margaret Atwood

Interest Rates Lower; Business Prices Higher

Posted on by JohnM

June 2014Mergers & Acquisitions magazine has an article titled “Loosening Up” that discusses how intense competition has forced lenders to be more aggressive on pricing (lower) and have covenant-lite loans.

Summer 2014, the lead article in Seattle investment banking firm Zachary Scott’s newsletter, Insight, is titled, “”8″ is the New “6” – For Now, Lenient credit has contributed to higher prices for businesses” (the 8 and 6 refer to the multiple of EBITDA Private Equity Groups are paying for businesses).

While both of the above deal with middle market deals, and while middle market deals have different driving forces (think Private Equity Groups with too much money chasing too few deals), the above does carry over to smaller deals. In my world where the 80-20 rule says most of my clients’ deals will be in the $2-10 million range it’s not that there’s too much money. The challenge is, as always, finding a profitable business that fits the buyer’s skill set and has a willing, motivated seller.

I represent a lot of business buyers and often I hear something like the following, “I won’t pay more than X times cash flow” (or profit, or EBITDA – pick your term). For the buyer stuck on a low number, my comment is to “get over it.” That was then, this is now.

Let’s look at a couple scenarios, which are based on two client deals. For this example we’ll use the term “free cash flow” (FCF) and define it as EBITDA less capital expenditures and after owner salary.

  • FCF (1) = $1,000,000
  • FCF (2) = $1,250,000
  • Price = $5,333,000
  • Bank debt = $4,000,000

I’m showing two similarly priced deals with different FCF to point out that different companies, in different industries, and both highly profitable can be priced differently. (For more on this see the chapters on the non-financial factors in my books and the second article in the Zachary Scott Summer 2014 newsletter titled, “What’s in a Multiple; It is necessary to look under the hood to find the factors driving value.”

The above examples have the bank lending either 4X FCF or 3.2X FCF. The buyer who says something like, “I won’t pay more than 3, or 3.5 or 4, times cash flow” won’t get the deal when the bank will lend that amount or more. Another buyer will offer more, given the generous terms, or, the seller’s advisors will inform them on how much banks will lend and the seller will leverage that information to get a higher price.

So, what can change this? The obvious answer is if interest rates go up. If interest rates escalate more of the payment goes to interest, less to principal and there will be downward pressure on price. Another answer is if the anticipated bubble of businesses on the market appears, creating more choices for buyers. (As per SunTrust Bank in 2010, over 40% of owners have delayed their exit by at least two years because of the recession; and as now times are good, I’m guessing a lot of them are enjoying their highly profitable years).

For buyers, you can’t just look at the price and especially the multiple. As one of my Rules of Business Buying states, “Cash and cash flow is King.” If your payments are $500,000 a year it doesn’t matter if your payments are based on the fact that you paid $5,000,000 or 5% more/less or 10% more/less, your payments are your payments.

For sellers, thinking of selling, this may be the best time ever to sell. There are great buyers out there, money is super-cheap and that means prices are high.

Pay Attention!

Posted on by JohnM

There’s a commercial running on TV for Guinness’s new American Lager beer. I’m not here to critique the beer, or even the fact that Guinness is venturing into a new product line.

No, I’m wondering why they didn’t do their homework. They proudly say that they use Willamette hops. They pronounce it Will-a-met, while it’s pronounced Will-lam-it, Willamette being an area in Oregon.

It’s a lesson for everybody to pay attention and get the little things right. Especially when trying to make a good impression on customers, or prospective customers.

 

Yes, Cash Flow is Important

Posted on by JohnM

In the March 2014 edition of Mergers & Acquisition magazine there was a quote that compared public companies and Private Equity Groups. It was, “Our experience is that PE firms tend to have a different focus than publicly traded companies. For PE firms, cash flow, EBITDA, and low cap ex are very important.”

Let’s translate the above for small business and our personal lives. It’s like, “Well duh!” These things are very important in most peoples’ day-to-day lives.

  • Cash flow – one of my rules for both business buyers and sellers is, “Cash (and cash flow) is King.” Small businesses need timely cash flow. We have to pay our people this week so it helps if our customers pay us in a timely manner. The same at home; if a client or employer doesn’t pay us on time we can’t call the bank and ask them to a free pass to pay the mortgage until we get paid.
  • EBITDA – let’s concentrate on the “E” (earnings). Our businesses and our households need earnings. The more we have, the better our life can be (we’re assuming we aren’t sacrificing our soul to get those earnings).
  • Low Cap Ex – Capital expenditures are necessary to keep our business and our home running efficiently. There are a lot of things we could enjoy significantly more than having to prematurely replace a machine, a truck, a refrigerator or a plumbing system. In my world of buy-sell deals, buyers expect everything to be in proper working order and properly maintained or licensed (in the case of software). We properly maintain things so we can use that money for a trip, tuition or our IRA.

“I intend to live forever or die trying.” Groucho Marx

A Dynamic Brand Overcomes All

Posted on by JohnM

The NFL made a deal with Microsoft to provide all teams with Surface tablets for use during games. A nice PR event for Microsoft, even given the $400 million they committed to spend, given their tablet was a bit “late to the game” (pun intended).

However, Geekwire reported on an article in The Verge that stated that during the September 7 Saints-Falcons game, the FOX commentator said, “They’ve gotten rid of the pictures and now they’ve got the iPad-like tools.”

Ouch!

Ouch for Microsoft, and a lesson to all of us on why we need to have a brand that transcends the competition. The trendsetter gets permanently locked into peoples’ brains.

You know the lesson here; we need to all ask ourselves if we have a brand as strong as that of the iPad, at least in our world. Being the big fish in a small pond can be great, especially if we constantly solidify our position.

Three times a year I teach a class at the SBA titled, “Dynamically Growing a Consulting Business” and in the section on branding I emphasize building a brand requires:

  1. Time
  2. Constant effort
  3. Repetition

Whether you’re selling a professional service as I do, a product, an industrial service, food or anything else, you have to do the things necessary so that when your product or service is cited, your company is mentioned as the symbol of quality. It takes work but it’s worth it, as I’m sure Apple would attest to when it comes to tablets.

“We all need a splash of bad taste. No taste is what I’m against” Diana Vreeland

Are You Changing Lives?

Posted on by JohnM

While at the lake we don’t have broadband, Netflix, On Demand or our DVR. What we have is a handful of over-the-air TV stations and a DVD player, on which we recently watched a couple of old comedy classics, Caddyshack and Animal House.

After watching them I realized that three of the top five original members of Saturday Night Live were in those movies (Bill Murray, Chevy Chase and John Belushi). That show was cutting edge, hilarious and changed the viewing habits for many people of that generation. No longer was it, “What are we going to do on Saturday night?” but, “What are we going to do and where will we be to watch SNL?

It’s great when we can say that we do something that positively changes the habits and lives of our customers/clients, the same way SNL changed the Saturday night schedule of millions of people.

A logical question is, where exactly do you do to have that kind of influence? If you don’t know the answer (in business anyway) you should figure it out. It’s called your value proposition and it’s your reason for being profitable.

“Your whole life passes in front of your eyes before you die. This is called living.” Terry Pratchett

Serendipity Can Be Huge

Posted on by JohnM

It’s not just being in the right place at the right time, it’s capitalizing on it.

  • In 1925 New York Yankees first baseman Wally Pipp sat out a game with a headache and his substitute was Lou Gehrig, who went on to set a then-record by playing in 2,130 consecutive games.
  • In 1951 New York Giants outfielder Bobby Thompson hit “The shot heard ’round the world,” a pennant clinching home run. Three years later he was traded to the Milwaukee Braves, broke his ankle in spring training and was replaced by a young right fielder named Hank Aaron, who went on to hit more home runs than any other non-steroid-using player in baseball history.
  • In 2001 Tom Brady became the New England Patriots starting quarterback when Drew Bledsoe was injured. So far he has won three Super Bowls and two MVP awards.

It’s called making the most of the opportunity. We all have to do it whether it’s taking advantage of our education, grasping on to a mentor, realizing we’ve met the person we want to marry or anything else that can change our lives.

I’ll venture to guess that we all have numerous opportunities in our businesses and our lives. When we’re successful it’s because we’ve not only recognized them but taken advantage of them, to the fullest extent. It pays to be ready because we never know when opportunity will present itself.

“Be prepared.” The Boy Scouts Motto