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

 

Ethics and Good Business

A client called me last week to discuss the following and keep in mind my recent post about how some firms don’t pay enough (good) attention to their people. He told me:

A key manager with one of our competitors called, she said her employer takes her for granted, doesn’t treat her with respect, and she wants to come and work for me. (This is what happens when you create the right culture.)

She also mentioned she was sure some of her customers would come with her because she has the relationship and there is no non-compete or no non-solicitation clause with her employer.

My clients question to me was, if and after he hired her, is it was ethical to go after her customers?

My reply was “That’s business.” They didn’t have her sign a non-solicitation agreement so if you do it positively and above board it’s okay. And I reminded him that after his second acquisition one of the firm’s employees left and did the same thing.

My example was, if she goes to her customers and says, “I’ve found a better opportunity for you and me with XYZ company and I’d like to talk to you about why I feel it’s better for you” it’s okay. If she goes and badmouths her previous employer it’s wrong, it won’t impress her customers, and it could damage his culture.

What do you think? Would you handle this any differently?

BTW, he has all his people sign a non-solicitation agreement.

“Truth exists; only likes are invented.” Georges Braque

 

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

Technology and Its Limits

My four-year-old iMac was being very sluggish so I took it in to Apple’s Genius Bar (a great concept, bring in any Apple device and get free help). The diagnosis was the operating system had some corruption and I needed to reinstall it, which turned out to be a piece of cake with no lost data, settings, etc.

I came away from the experience with three thoughts:

  1. Computers and their software are going to have issues. Doesn’t matter if it’s Apple, Samsung, Microsoft, Dell, or any other company’s products. They are things, like cars, boats, vacuum cleaners, furnaces, etc., and things wear out and have issues. (Which is why repair and service business can be good companies.)
  2. Apple knew there was OS corruption. It’s why they gave me free telephone support as I went through the process (like most firms, they charge for their Apple Care after the warranty period).
  3. Because technology resides in things, and things have issues, it’s no wonder I’m reading so many stories about how the, “Internet of Things” is stalling. Nest thermostats sales have plateaued, Internet connected toasters, refrigerators, etc. aren’t selling. It’s not worth the extra money to have a toaster connected to the Internet.

Not to mention, the more things connected to the Internet the greater the likelihood of unauthorized people (hackers) gaining access to your system. Especially when it’s been proven the companies making these devices aren’t always quick to offer security updates and when they do the users have a

hard time finding the updates and/or just don’t take the time to install the patch.

Useful technology is great. I love the fact cars have an auto setting for lights and wipers. They go on when needed and off when not needed, even though my son tells me this means robots are controlling my life. He’s right in a way as the more we’re dependent on technology the less control we have. And one thing I’ve learned in my life is most people want to at least feel like they’re in control.

It’s why people own (buy) a business. I am always told by audiences “control” is one of the top reasons why they’re considering business ownership. It’s why (former) business owners tend to make lousy employees, they’ve been in control for too long.

“Knowing what you cannot do is more important than knowing what you can do.” Lucille Ball

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

Win-Win Deals: What it Really Means

In many industries, especially in the buy-sell world, the term “win-win deal’ is often thrown around. That said, most people want an, “I win more than you win” deal. Whether it’s a power play, ego, or the want of a higher commission, it happens, in all industries.

When you adhere to Rotary’s Four-Way Test including, “Is it fair to all concerned” you get messages like the one below.

We met several years ago when you were advising a client of yours on the potential acquisition of one of my businesses.

I was always impressed with your direction, demeanor, and fairness during this transaction.  One of our other businesses is in the early stages of evaluating an acquisition of a business that is not for sale and would like to talk to you about some guidance and the services you provide.  

A win-win deal is one where both sides are equally unhappy but realize it was fair to all concerned. Of course, everybody wants the best deal possible but in my world, the absolute best deal is usually a done deal, which is why my newsletter, events, and more are titled, “Getting the Deal Done.” Do this and you’ll increase your chances of having people on the other side want to do business with you.

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.

Why Malls Ban Teenagers and Your Business

I heard an interesting tidbit on the radio recently. The story was how many shopping malls are banning teenagers who are at the mall without a parent or guardian. The kicker was these malls showed an increase in sales after initiating this policy.

The next thing I did was Google this and found numerous stories on this subject, going back to 2006. In these days of easily transmitted fake news it made sense to verify the story (just like buyers and sellers verify information during due diligence).

As we start 2017 it’s good policy to do like these malls, and that is:

Know who you want to do business with (and don’t do business with those who don’t meet your criteria).

Using Pareto’s Principle as a guideline, 20% of your customers will cause 80% of your grief. And I’m sure the 20% on the other end of the spectrum provide 80% of your joy (and maybe even profit).

No matter what your business you can easily target customers by:

  • Size (buying power) – For example, Porsche dealers aren’t going to do direct mail in low income neighborhoods. I’m not going to market to $50 million companies because I don’t have the people or processes to work in that market (just like I stay away from micro businesses, where the owner is the business).
  • Location – some of us can have national or international customers. Others reach the service stress point if the customers are more than an hour away.
  • Personality – as in personal relationships and buy-sell deals, being able to relate to customers goes a long way towards turning the 80-20 rule to the 95-5 rule. If you get along the chances of problems are minimized.

Know who you want to do business with, and don’t deviate from it.

“Beware of all enterprises that require new clothes.” Henry David Thoreau