It’s Counter-Intuitive – Buy the Company and Lower Prices

The news has been filled with stories about Amazon buying Whole Foods, what might happen, and what did happen. I liked the pictures in the Wall Street Journal showing the price of bananas before and after the deal closed.

Amazon did something counter-intuitive, they lowered prices (supposedly on about 100 regular items, like bananas). One of my favorite stories of how a buyer fixed a company is about when he raised prices about 25%, because he knew the company was severely under market (and no customers left or even complained).

Most new owners look for fat to trim and there’s often a lot there. It’s just like all the storage areas in our homes. After years and years, we suddenly realize we can’t navigate through the attic or closets because there’s just so much stuff. A lot of businesses build up expenses and don’t notice if there are duplicate services, what they have is overpriced, etc.

Amazon’s strategy will no doubt work. They’ll get people in the stores because now they’re competitive on the things we always buy (the Seattle Times just did a comparison on prices for common and not-so-common items between Whole Foods and other stores). Once their people will buy other things because it’s easier and cheaper to pay a little more versus traveling somewhere else to save 43¢ per pound.

The best strategy is to get a customer because if you do what you’re supposed to do you’ll keep them. And, all the studies I’ve seen say it’s 6-10 times more expensive to get a new customer versus doing more business with an existing customer.

“We will not make the same old mistakes. WE will make our own.” Henry Kissinger

Let’s have fun (my wife’s motto)

On September 20, I’ll be again volunteering to teach my class, “Dynamically Growing a Consulting Business” at the local SBA/SCORE office. It’s always an opportunity to remind myself the things I’m recommending to the students are the things I should be always doing myself, especially to enjoy what you’re doing.

Last week in a newsletter from Alan Weiss he wrote how he always asks coaching clients, “Are you having fun?” And, how many of them don’t like that because they think if you’re hard-charging up the corporate ladder or running your business it’s work not fun.

But it better be fun. On page one of my book, Buying A Business That Makes You Rich, I cover the top nine reasons people in audiences give me on why they want to be in business for themselves (whether it’s buy, start, or get a franchise). Then I tell them the number one reason should be to have FUN, which is mentioned maybe 2% of the time.

When business is good, it’s always more fun. When there are challenges they are at least your challenges and you control how to deal with them. But being in control doesn’t mean you are by yourself on the decision-making island.

As the video below covers, you do better with an advisory board or board of directors (or a business coach). Being in business can be lonely, that’s why there are scores of roundtable groups, coaches, and advisory boards. Use the one most appropriate for you.

“No matter how dirty your past is, your future is still spotless.” Drake

Protecting (Someone’s) Turf

While on a trip this summer I was listening to the radio and heard a feature story about a new firefighting plane. It seems a company in California has outfitted, and got FAA approval, for a 747 to carry and disburse fire retardant. And not just drop it but spray it so it doesn’t destroy trees, equipment, or people.

Only one hitch, the US Forest Service won’t let them use the 747s (to help fight fires). In an interview, the owner of the firm couldn’t understand why. He also said the Forest Service put out an RFP for new planes and put in specific size criteria so this firm couldn’t bid.

Last Friday at my Rotary meeting our speaker talked about teamwork, turf battles, and similar. It sure appears this is a good-sized turf battle (and I know there’s two sides to every story). It’s why there’s so many companies able to thrive because they know how to get people to work better together.

I see it not just between employees but between owners and employees. The all-controlling owner, i.e. the control-freak, micro-manager, creates a culture where people stay simply because they don’t want to go through the hassle of a job search (and because the devil you know may be better than devil you don’t know).

It’s why when someone buys a business they are often the, “Breath of fresh air” the company needs. And since at least half of the buyers I meet say they’re good at team building, it’s a great way to get some instant improvement.

The lesson for business owners is to not wait for a buyer but to create your own breath of fresh air, increase productivity, and see the value increase also.

“A jackass can kick down a barn, but it takes a carpenter to build one.” Sam Rayburn

 

When You Think You’ve Had a Bad Day; Or, The Best Laid Plans….

Take a look at this video of a Jimmy Fund (a Boston based charity supporting the Jimmy Fund Clinic for pediatric cancer) former patient throwing out the first pitch at a Boston Red Sox game. It’s funny if you’re not the recipient.

https://www.youtube.com/watch?v=bq-nwZmuLBY

Things don’t always go as planned, do they? In fact, they rarely go as planned, and sometimes that’s not-so-good and other times it’s great. That’s why plans have to be flexible. I’ve given my talk, “Lessons from Unusual Places” dozens of times. The story is about how we took my dad, age 80, to Europe for the first time. After the first full day in London we realized he couldn’t keep up with our plan, so we adapted it (so he could take a nap every afternoon).

The same in life, business, and the buying or selling of a business. We are constantly thrown “curveballs” like the one in the video. It’s like one of the stories in my book If They Can Sell Pet Rocks Why Can’t You Sell Your Business (For What You Want)?) about a lady who blended her business and personal checkbooks in order to write-off every personal expense she could. When a medical emergency hit, she had to sell and sell quickly. She admitted the taxes she saved via scamming the IRS was nowhere close to the amount of the reduced price she received.

  • Have a plan for your business, it’s growth, and realize opportunities will popup where you least expect them.
  • Business buyers, know what you want, realize finding a company is sales, it’s like finding customers, and keep working your plan.
  • Business sellers, take some time before you decide to sell to make your business as attractive as possible to buyers. It will pay off handsomely.

“It’s good to be idealistic. But be prepared to be misunderstood.” Mark Zuckerberg

The Cost of a Startup

Seattle Magazine did an analysis of the costs of opening a 2,000-square foot restaurant and the total costs ranged from $671,000 to $856,000, with, as you’d expect, about 90% of the costs for architects, construction, furniture, fixtures, and equipment. The remainder of the costs were the first week’s labor, food, beverages, etc.

Sounds similar to other industries. Want to open a machine shop, you’ll spend a lot of money on equipment. To become a distributor, you have to have inventory. Service businesses require equipment, parts, and (perhaps) vehicles.

The above is one reason I have a business helping clients buy and sell companies. Unless you have an idea for something new, bold, and exciting (I think all people starting a restaurant think that’s exactly what they have) why not buy an existing business? As long as you put the adjectives, mature, profitable, and fairly priced in front of the word business.

Buyers do more than get a profitable platform with customers, employees, and cash flow. They help the seller move on to their next great adventure in life. Or, as I like to say, when sellers do it right, they exit with style, grace, and more money plus maintain their legacy by selling to the right buyer.

But it doesn’t have to be an individual buying a company, it can be another company and that’s why I have a new book almost finished on the topic of Growth by Acquisition. A company can diversify their product offerings, expand their geographic footprint, take a competitor out of the market, or a combination of the preceding and my other 16 reasons why to consider growing by acquisition (Chapter Two).

“A first-rate soup is more creative than a second-rate painting.” Abraham Maslow

Deceit

It’s a game, a deceitful game. According to a July 7, 2017 Wall Street Journal article, television networks play a game to disguise possible poor ratings. Here’s an excerpt from the article:

“In a game largely sanctioned by TV-ratings firm Nielsen, television networks try to hide their shows’ poor performances on any given night by forgetting how to spell.

That explains the appearance of “NBC Nitely News,” which apparently aired on the Friday of Memorial Day weekend, when a lot of people were away from their TVs.”

It appears all networks do this and have no problem justifying it. But they’re not the only ones playing games. I see or hear about things like this all the time.

  • People I know in the job market find a lot of misleading job descriptions. And to be fair, we know there are a lot of embellished resumes out there.
  • In the small-business buy-sell world there are a lot of misleading games. Using middle-market or public company price-earnings ratios when valuing a small business (or when trying to get a listing) is one.* Trying to convince a buyer owner salary is the same as profit so it appears there are higher profits is another, and much more common.

I’m sure you see or hear of things like this all the time whether it’s pricing in a store or the advertised deal that seems “too good to be true.” You really have to be careful of what you’re being told.

* For those into numbers, according to the PeerComps database, which is small-business buy-sell deals financed by SBA loans, the average price-earnings ratio (the multiple of earnings) is about four, with a coefficient of variation of just over 25%. This means small-businesses typically sell for three to five times EBITDA (earnings before interest, taxes, depreciation, and amortization). Other databases show middle-market firms sell for 6.5-7.0 times EBITDA (I don’t have info on the variance). For reference, at this time the PE ratio for S&P 500 companies averages about 25 and for major bank stocks it’s about 15.

“The practice of deception is not particularly exacting, it is a facility most of can acquire.”  John le Carre

Do What You Do Best

I recently met a business owner whose business was slammed by the Great Recession. It got to the point where family members had to lend the firm money. Their bank then pulled their line of credit so they’re now with a factor, at a very high interest rate.

I’ve been around long enough to know banks usually subordinate owner debt, meaning it’s considered equity, and well behind any bank loans when it comes to repayment. However, this owner said no, his bank doesn’t do that.

In the car after the meeting I called a banker friend with his bank, told her the story, and said, “I bet his banker is in a branch and isn’t a business banker.” Sure enough, that was it, and she said they subordinate debt all the time (so this was an opportunity for her).

This story brings up a good point – you can’t be everything to everyone. The branch banker should have brought in a business banker (and should be glad the client didn’t find this out from another bank). I don’t help startups, other than consulting practices. Business attorneys don’t do family and divorce law. You get the point.

Know what you do well and do more of it. A client of mine, in the market to grow by acquisition, gave me a tip for others (this will be in my upcoming book on growth by acquisition). He said it’s important to take stock of what you do and do well, and know what you offer the marketplace. Only then can you best serve your customers and know what kind of companies you should acquire, including what kind of operational issues you can target and improve.

A good tip for all of us is to know what we do well, i.e. our competitive advantage, don’t worry about what we don’t do, and grow by leveraging our competitive advantage.

“Any man more righteous than his neighbors constitutes a majority of one.” Henry David Thoreau

Go With Your Gut Feel

I recently read an article in an industry newsletter about key factors in getting a buy-sell deal done and it struck me it was applicable to most, if not all, of our businesses.

The statement catching my attention was,

“If you ever get a knot in your stomach during the negotiations that is the time to throw in the towel….”

So true, so true. I have told (buy-sell) clients for years that if their gut tells them something’s wrong it’s time to get away, no matter how good a match the other appears to be on the surface.

Headline: THIS APPLIES TO ALL BUSINESS AND LIFE SITUATIONS

When you feel something isn’t clicking, you’re going off kilter, or there’s a basic uneasiness, then it’s time to get out. Doesn’t matter if it’s (on paper) a great business to buy, (on paper) a great buyer for your business, a seemingly great customer, or anything else – go with your gut feel.

A buyer client told me recently he didn’t trust a business broker/intermediary. I told him to forget it, move on and work with the other ones. I’ve not pursued clients because the feeling wasn’t right. As Alan Weiss says, “You can always make another dollar but you can’t make more time.” And a bad client or customer sucks time (and energy).

God gave us the intuition to sense what’s right and wrong. Don’t ignore it based on the superficial.

“Most human beings have an almost infinite capacity for taking things for granted.” Aldous Huxley

The personal touch wins

I recently had the pleasure of needing tech support a couple times. In my opinion, an online chat is the worst way to get help (for the customer). For the company, it may be the best because, it seems, each support person can handle multiple people at the same time, versus only one via telephone.

But I think it’s a waste of resources. I will bet the old, “Dollars to donuts” it takes more time to bounce between customers and their issues than to concentrate on one at a time. I now realize it’s best to call and talk to someone, especially since most firms allow you to enter your phone number for a call back while keeping your place in the queue. (I feel this way despite the fact that in our changing times many people prefer technology over the phone, a great example being recent studies showing 86% of millennials prefer to do job interviews by text.)

It’s why we must balance our client/customer load. One of my favorite questions to ask audiences is, “What’s worse, having the capacity to make one million widgets a year and only selling 250,000 (other than having the capacity to make two million)?” The answer is, selling one million and only having the capacity to make 250,000.

John Naisbett was right, the more we get high tech the more we’ll need high touch. At some point a sale has to be made, and we all can’t sell like Amazon because we don’t have simple products, we have value.

“If everybody is thinking alike, then somebody isn’t thinking.” George S. Patton

Complicated Doesn’t Get Customers

Computers get faster, more powerful, more streamlined, and at the same time the programs get more complicated, meaning they more and more become resource hogs. I can’t figure out why, after all these years, Microsoft Office has about one gigabyte of updates every couple weeks.

I guess it’s why Moore’s Law about how technology and its transistors double (in speed and capacity) every two years makes sense – it has to. Software programs keep gumming up the machines.

There’s a lesson here and that lesson is don’t fall into the complication trap. There’s a reason salespeople have been taught for decades (maybe a century or more?) to KISS, Keep It Simple Stupid.

I don’t care if you give advice, make, distribute, or retail a product, or provide a hands-on service, make it as simple and easy as possible for your customers. The easier it is for your customers or clients to understand the value you can provide the better.

We all have value propositions, or what marketing people call a USP, unique selling proposition. When you convey it in the fewest words you win. Don’t make your prospects have to think too much, or they (we) will find reasons not to buy.