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


Taking Things for Granted

Last month I had eye surgery and a blurry eye makes you realize how we take sight, hearing, health, and other things for granted. Ask anybody who’s been hit by the nasty viruses going around this winter and I’m sure you’ll get an earful.

So, what do we (most people) take for granted in our businesses? Usually it’s the people and often it’s not intentional, it’s just that we get focused on our machines, our product, the margins and forget about who runs the machines, buys the product, etc. While I could create a long list of situations where the owner berated their people, here are a few more interesting examples.

Last year I visited a manufacturing business and noticed the employees eating their lunches in their cars. I wondered why, moved on to my meeting, and then, on a tour of the plant, realized why they were in their cars. The lunchroom needed a pressure washer and large amounts of disinfectant.

Many years ago, client Keith Jackson with Industrial Revolution, in response to my question about how his marketing was going, told me, “It’s amazing what happens when you actually pick up the phone and call your customers.” The previous owner took orders; Keith took interest in his customers.

A past client had trouble keeping good vendors. He lost two primary vendors (the second had replaced the first). Selling more of their product and accepting their assistance would have preserved the relationship.

The above said, many, many employers do take care of their employees and their customers. Things like great benefit plans, super coffee machines, beer Friday, and more create an atmosphere that encourages people to stay – and contribute.

Next week’s memo will cover what can happen when you don’t make employees feel appreciated.

“All looks yellow to the jaundiced eye.” Alexander Pope


Slow, Fast, or Manageable Growth?

In mid-2016 the Wall Street Journal published an article titled, “Demand Swells for Chickens That Grow More Slowly.” The gist of the article is companies (Whole Foods, Starbucks, and others) believe customers will pay more for products from birds that grow slower (than those full of hormones and other additives).
This is a great analogy to businesses and their growth. Do you want a business with slow, fast, or rocket ship growth? Naïve people instantly thing they would want rocket ship growth, not realizing the pitfalls. Smart people, smart business buyers, understand slow and steady is the best if the company can achieve fast growth with better leadership, marketing, and direction.
See a (suddenly) fast growing company and a buyer will wonder if that grow is sustainable. Did she push harder right before selling? Did he cut deals to increase sales? Is it a spike or a trend? Buyers are skeptical and rightfully so. And after perusing the Internet business listings they feel they’ve seen just about every outrageous claim about a lousy business (to make it appear to be a good, solid company).
So, what are the top pitfalls to a super-fast growing company. Here are three:
  1. Growth sucks cash. The faster you grow the more cash you need because you pay your people weekly, your rent monthly, and your customers may pay you in 45-60 days. I’m in retail you say and I get paid at the time of the sale. Well, what about all the inventory you now need to keep up with demand?
  2. People, good people, are scarce in today’s economy. A business owner recently told me he could sell a lot more product if he had the people to handle the load. Raising the minimum wage level doesn’t raise the skill level. Good people are hard to find and not delivering to your customer is a kiss of death.
  3. Without proper leadership, management, and attention to detail the company can spin out of control. For example, it’s a lot harder to manage the logistic of 22 crews in the field versus eight. A manufacturing company I worked with took on every piece of business they could find, only to see their margins deteriorate as their employees were overworked and stressed.
Manageable growth is what you want as it tends to be more profitable growth.
“When action is needed, optimism, even of the mildly delusional variety, may be a great thing.” Daniel Kahneman

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

Regulations and Micromanagement

Tom Douglas is perhaps Seattle’s most famous chef/restaurateur with 900 employees and 19 establishments, all within a 10-block radius of his original restaurant, the Dahlia Lounge. So, it was interesting when he told the Puget Sound Business Journal the Seattle City Council and the mayor don’t like business. He stated, “They are not thinking like businesspeople, and yet they want to run our businesses.”

He was referring to increased wage requirements (he supports higher wages but objects to different rules for different sized businesses), scheduling regulations, giving workers input on their schedules, sick pay rules, and more.

While it’s easy to say it’s regulations run amuck (it is), it’s a case of political micromanagement. Micromanagement is bad enough on its own but it’s bad when people with authority and smarts in one area (in this case getting elected and probably nothing else) think they know everything about every issue or situation (especially business).

It’s a good lesson for all businesses. People thrive when you let them fly or crash (pretty much) on their own. There’s a huge difference between being a mentor or coach and a dictator. If we assume Douglas is right (and he’s been pretty darn successful), then the politicians are hurting many small businesses.

I’ve told this story before (but it’s such a great example). A client’s actions were known to his employees as “drive-bys.” He would stand over someone, watch them, make a snarly, passive-aggressive comment, and walk away. No guidance, no input, and no encouragement. He’d find the 5% that wasn’t being done the way he wanted it done and ignore the 95% that was being done as it should be done (or better).

“Truth is, everybody is going to hurt you: You just gotta find the ones worth suffering for.” Bob Marley

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, 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