Deal of All Kinds Get Disrupted

In the business news at the end of January were stories about how the Walgreens deal to buy Rite Aid had the price drop because Walgreens, as per a government edict, can’t take over as many Rite Aid stores as planned (someone will have to find a buyer for those other stores).

Things happen all the time to derail deals, and not just buy-sell deals.

Jobs – a good friend was in the job market, had “the perfect” job lined up, an offer was out, and, boom, the parent company did a reorg and froze all hiring.

Customers – a friend’s company went through hell when some changes at their top customer put the emphasis on price and nothing else. They lost a big contract or two, for very little money, even though the customer’s people who use the product hate the competitor, say they have poor quality, and don’t deliver on time. I guess the number crunchers won this round.

Buy-sell – A few years ago I went through a stretch where three deals disintegrated after signing a letter of intent (LOI). It had been a long time since even one went south after there was a signed LOI (when the Great Recession hit six weeks before closing is all I can remember). Two of these deals had legitimate reasons for not happening, i.e. something happened that changed the company.

The other one (and one from about 1.5 years ago) went bad for the reason most good businesses don’t get a deal done with a good buyer, and the reason is trust, or the lack thereof. The deal from three years ago had a seller who wouldn’t sign a contract representing and warrantying what he had told the buyer about the business was true and correct. At this point any trust evaporated.

The more recent one was more complicated but it centered around the perception the seller wasn’t interested in the buyer’s success. When the seller wouldn’t take interest, or offer much help prior to closing it became evident once he had his money he’d be hard to track down.

Things happen, and if there’s trust those things are overcome. As in a case from about 10 years ago when the selling business had a sales decline (the seller took his eye off the ball) and he did what he had to do to keep the buyer on board. In this case, it was hiring him to learn the business while it was being “fixed” and prior to closing.

“Democracy is the theory that the common people know what they want, and deserve to get it – good and hard.” H.L. Mencken

 

Huge Risks? What’s Your Comfort Zone

Last year in Inc. Magazine entrepreneur and columnist Norm Brodsky wrote a column on risk versus reward. As he put it (for one of his businesses), “We have an unexpected shot…. – but it comes with huge risks. How do we decide?”

Every month, week, and day we face business decisions and all have some amount of risk, from minuscule to huge.

Small risk: When we pick up the phone we could hear “no” or we have a great call (on the way to a new client or customer). Some focus too much on the possibility of a no.

One of our Partner On-Call franchisees had telephone phobia. He was a super person, very smart, outgoing, charming, and deadly afraid of the phone. He told me he’d stare at the phone for 15-20 minutes, finally pick it up, dial, and have a great conversation. He’d then repeat the process (starting with the long look at the device). All of this just in case someone said no (I kept telling him the other party can’t reach through the phone line and punch him).

Medium risk: Implementing a growth plan (strategy) may distract us from our normal day-to-day activities. However, if our strategy is right it will sail us past where we are now and create better activities.

High risk: One of the ultimate risks is when a business owner decides to sell or to buy another company. There are the normal risks of an acquisition including culture and process integration. However, the benefits can be huge, if it’s the right target and done correctly. The goal is to have 2+2=22. You don’t do it just for bragging rights.

Selling your business is also fraught with risk. Is the owner truly ready? Will it sell for enough money (for the seller’s-next great adventure in life)? Will he get paid? What will she do post-sale? I’ve learned the top risk (and top reward) is making sure you sell to the right buyer. Most owners prefer a buyer who will take care of their employees, customers, and legacy over a little more money (from the wrong buyer).

“You can get much farther with a kind word and a gun than you can with a kind word alone.” Al Capone

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.

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.

 

Negative Endorsements

With the election just past (yeah!) it made me realize we vote for a lot of things on which we really shouldn’t be voting. Judges are my top example. Who follows judge races? Who tracks their history, knowledge, opinions, etc.?

So, my first step is the voter pamphlet. I’ll glance at who they are, their background, etc. Then I look to see who’s endorsing them. If the endorsements are from people or groups I don’t like, the candidate doesn’t get my vote.

I’ve always wondered how this plays out in business (and life). We really don’t know how endorsements from someone held in negative regard helps or hurts us. I remember when I was starting in this business someone wrote a scathing newsletter about my friend Ted Leverette. The upside was someone called him, hired him and said something like, “I’ve met the author. If that person thinks this way about you I’m sure you’re a great resource.”

In other areas of negative reinforcement:

Business buyers – I tell them to first eliminate what they don’t want, which is usually restaurants, retails, and franchises. The easiest way to shorten the playing field.

Business sellers – Many will not want to sell to entities that just want to flip the business in five years. They want a buyer who will preserve their legacy. So any history of buying and then soon selling will cause them to flee.

Customers – We learn how to eliminate bad customers even though occasionally a bad one sneaks through. Experience teaches us the only thing worse than no customer is a bad customer.

 

“Get your facts first, then you can distort them as you please.” Mark Twain

 

Business Buyers and Sellers Have Prisons to Escape

The following picture is in my book If They Can Sell Pet Rocks Why Can’t You Sell Your Business (For What You Want)? It shows how after awhile someone’s business can become a prison (and they need to plan so they can exit with style, grace, and more money).

 

This next picture, or one like it, should be in my book Buying A Business That Makes You Rich next to the above picture.* Why? Because these buildings are also prisons. They trap the people who commute daily and then do the same old same old thing every day for decades.

 

Some of these people should be taking the initiative and getting control of their life. This means make the leap of faith and become a business owner. And buying a business is the best way to do this, and the easiest to finance.
We’re living in an interesting time (although all times are interesting in one way or another). As in my article, ” Making a Splash,” there’s a plethora of businesses hitting the market as the baby boomer generation is large, entrepreneurial, and aging. And many of these are profitable companies (and of course many aren’t and some have the proverbial lipstick on a pig).
For someone stuck in their urban or suburban jungle what more could they ask for but a solid supply of businesses, an active market, and low interest rates?
So what does it take to be a qualified buyer, in addition to the willingness to make the leap of faith?
  • Management skills so you can manage people, processes, money, and systems.
  • Enough capital to make your down payment (in today’s market, for an individual or small business owner, it’s 10-15% of the price and/or about 2-3 times the salary the buyer is used to receiving.
  • A good personality, so you can relate to the seller and his or her employees, customers, etc.
“What to know what God thinks of money? Look at the people he gave it to.” Dorothy Parker

Buying a Business in a Competitive Marketplace, how to Separate Yourself from the Pack?

By Gregory Kovsky

John Martinka, as one of Seattle’s most successful, knowledgeable, & experienced buyer’s brokers, and I, as the President of IBA, the Pacific Northwest’s oldest business brokerage firm, have collaboratively completed a significant number of transactions involving the purchase & sale of privately held companies, including one already in 2017.   John & I work well together because we are both familiar with the landscape of the transaction process, desire to complete “win-win” transactions, and can serve as resources of what is standard and fair in a transaction.

One competitive edge John’s clients have in pursuit of a business acquisition is they are prepared for the competitive purchase environment presently found in the middle market.

Will Rogers famously said, “You Never Get a Second Chance to Make a First Impression”.

This statement is true in most sales environments and applies to an entrepreneur desiring to purchase a business through a business brokerage firm serving the middle market.  The reality of the current marketplace for privately held companies is that sellers have choices regarding potential buyers for profitable, established companies.   It is therefore prudent for a business buyer to take the steps necessary to separate themselves from the pack, if they want to successfully negotiate a letter of intent and secure first position status to purchase a specific company from a seller.

The following are five common characteristics of business buyers who have successful purchased privately held companies in deals I have facilitated during my 23 years as a business sale intermediary:

  1. Listen More Than You Talk – Most entrepreneurs are confident and have a substantial ego. A buyer who recognizes this will check their ego at the door when meeting a business owner and place the spotlight on the seller encouraging them to talk about the business and their own personal history.  Everyone likes to talk about themselves.   A business buyer who makes an impression with a seller of being a good listener and student early in a transaction generally will lay the groundwork for future “good faith” negotiations and a positive transition period relationship.    Conversely, a business buyer who spends a significant amount of a first meeting with a seller telling them how great they are often will be the party left on the wall when a transaction “dancing partner” is selected for negotiations by the business owner.
  1. Create an Environment of Transparency for the Transaction – A buyer’s due diligence prior to purchasing a privately held company will result in the seller being asked to share a significant amount of confidential information.  This can be an uncomfortable process for a seller because they will likely be asked to share information about their business that they share with very few people.  A buyer that recognizes that this “uncomfortable” situation is on the horizon for the seller, can mitigate the level of discomfort by taking the lead in disclosing information early in the process providing the seller, commonly through their broker, with a resume, personal financial statement, list of their transaction team members, and any other information relevant to the transaction that they deem would increase the seller’s comfort with them as a potential negotiating partner.  Conversely, a business buyer who is guarded in the information they will share with the business broker representing a company and their client, will often be categorized as unqualified rather than qualified as a default.   The most important information to share with a business broker and their client is information on financial strength, liquid assets that can be deployed in a transaction, access to acquisition capital, and relevant experience.
  1. Assemble a Transaction Team – The most common players on a business buyer’s transaction team are an attorney, CPA, and banker.  It is prudent for a business buyer to assemble this team prior to engaging with business owners, so they are prepared to negotiate in “good faith” and move forward in a timely manner.   A transaction can be lost by a business buyer if a timely turnaround time on a letter of intent, preliminary due diligence, or an assessment of financing capability is not possible.   Many times, I have witnessed good, qualified buyers lose out on business acquisitions, even as the preferred buyer on a personal level by a seller, because multiple offers were being simultaneously negotiated and their attorney was slow to turnaround a document, their CPA did not complete a valuation in time for their client to get an offer on the table, or because a buyer was deemed incapable of getting a loan because they could not generate a letter of commitment from their preferred lender.
  1. Negotiate in “Good Faith” and Minimize Direct Confrontation – Business buyers & sellers each have a vested interest in negotiating in their own “best interest” in a transaction. The most significant place this occurs is on price & terms.  Successful business buyers recognize that there is value in being liked by the seller and having them committed to a smooth transition of ownership.   A “win-lose” negotiation runs counter to having a seller in your camp after the transaction is completed.  It is my recommendation that buyers negotiate in a manner that allows them to achieve the necessary transaction terms while at the same time mitigating confrontation.   Strong business sale intermediaries and attorneys will also assist this process by making the negotiation more administrative and less emotional and minimizing direct engagement between the parties in negotiations. Buyers should also remember that if they walk away from the transaction they will not complete the acquisition and start the process all over again.   If a seller walks away, they still will own the company and continue to make money until a sale is completed.  In short, the default setting for business sale negotiation is generally better for the seller than the buyer.
  1. Hold Information in Strict Confidence – It is in the best interest of both a business buyer and seller to keep information related to the potential sale of a privately held company out of the public domain as long as possible. A buyer who breaks confidentiality about a sale or has someone they have shared information with break confidentiality can jeopardize their transaction, as a common default by a seller to protect the business is to disclaim the information and pull the business from the market if it is deemed the information could damage the business.   The Pacific Northwest is a small community.   In a recent transaction John & I facilitated, a banker on the approval team for a loan was a long-time customer of a business being sold that did not know the company was for sale.  The sale came as a surprise to him.  The story had a happy ending, but is a prime example of how inadvertently information about a business sale can become known to a customer despite the best intentions of the parties.

Poor practices regarding confidentiality can also damage a business buyer’s relationship with a business brokerage firm.   IBA has a policy to disclose past confidentiality issues with a specific buyer to our clients prior to disclosing information to the party about a specific company being for sale.  It is common after that disclosure for our clients to indicate they do not wish for that party to receive information on their company.

As Will Rogers said, “You do not get a second chance to make a first impression.”  My recommendation to all buyers desiring to purchase a privately held company is to make the best first impression possible on the business broker representing the business and their client and to employ “best practices” whenever possible throughout the negotiation & acquisition process.

Gregory Kovsky is the President & CEO of IBA (ww.ibainc.com)  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.  Mr. Kovsky can be reached at (425) 454-3052 or .   Questions regarding IBA or the purchase & sale of privately held companies are welcome.

Jealous Dogs and Jealous People

Last week we dog sat for our younger son’s two Golden Retrievers. Quite an experience with monsoon type rains for a few days that left four dogs in the house for most of every day.

These dogs are good friends. If we go on a hike or to the dog park they run around and play together. But in our house? Our Labrador got a bad case of “jealousy.” Any attention or affection to our guests caused him to come over and nudge us for similar affection.

Dogs are just like people in this way, aren’t they? Kids want what other kids have. Employees want what (they think) other employees have. Television shows like the Office are so popular because so many people can relate to the credit-taking, back-biting, and overall human frailties that come to the forefront when people work together.

All you have to do is pick up Inc. Magazine, the Wall Street Journal, or any other business publication in order to see how big an issue this is. Article after article on how people can better work together.

In my world of buy-sell deals I see this manifest itself in three main areas:

  1. Both sides feel the other side is getting more (than they are).
  2. Buyer and seller believe the other party is “nibbling,” always asking for a little more after a deal is struck (possibly a result of reason one).
  3. Wondering why there’s always a need for more information (from the buyer, the bank, the attorneys, etc.). Tip to sellers, buyers will ask the same question more than once not because they’re stupid but to see if they get the same answer every time.

Human nature, which is why many of us have businesses and jobs based on helping others overcome the “people issues” in their life and business.

“You fail all the time. But you aren’t a failure until you start blaming someone else.” Bum Phillips