Author: JohnM

When the Union Wins

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The teacher’s unions won, at least in the Puget Sound area; most districts are not returning to the classroom in any material way. Based on the teachers I know, I’d say the union protected the 20% (it’s always the 80-20 rule, isn’t it) of teachers who took advantage of the situation. All the teachers I know are working harder than ever teaching remotely.

I am not anti-union. My wife was in a union for 10 years. My son is a project manager with a union construction company. But there’s a reason almost every business buyer I’ve ever met tells me they want a non-union business. They want to be in control. In most cases, they want the flexibility to treat their people better than what the union would. And to reward those who excel. The teachers I know the best would make a lot more money if there was merit pay. Just like in business, do well and you’re rewarded.

It’s Bad, but Not All is Bad

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Covid has been wicked to a lot of people. It’s been a business boom for some. It’s changed everybody’s life in some way. And we’ve learned from it. We’ve learned there might not be as much travel for business “check-in meetings” given Zoom, Teams, WebEx, etc., that remote work is possible for some, that people do need the comradery you can’t get online, and people are creative.

We’ve recognized remote learning, especially for younger kids, is an unmitigated disaster. But a hybrid of remote learning may be the wave of the future for older students. Just imagine the best lecturer at a school doing the lectures for all the students and other teachers do the hands-on work.

This last point is something I’m working on for our Rotary projects in Antigua. Every project has budget constraints that limit the number of teachers we can train. With a hybrid model of online, in-person, and peer groups we figure we can triple the number of teachers we train every year. This is huge and a win for the teachers and especially the students.

When it comes to business, we’ve had to become more forward thinking given there have been no events like our Getting the Deal Done Breakfast Conference, association meetings, lunch and learns, etc. Even one-on-one networking meetings are scarce. Jessica and I did a lot of walking meetings during the nice weather but those are way down in the winter.

I’ll share our new marketing activities and ask you to think about what you’ve changed in the last year. Besides things like this Weekly Memo, we have:

  • Started a podcast channel featuring conversations with business owners and other professionals (we just got approved for Apple Podcasts and are now on Apple and Spotify).
  • Make sure we have something on social media at least twice a day.
  • Published a new book, Getting the Deal Done, with chapters from 11 other deal pros.

We did some short term things like our Zoom Happy Hours and YouTube interviews about business during Covid, that were very well received. I expect the above to be long-lasting. Sometimes it takes a slap in the face to do something new. It shouldn’t, but it does.

“What would life be without coffee? Bt, then, what is life even with coffee?” King Louis XV of France

“Start every day off with a smile and get it over with.” W.C. Fields

An NFL PR Machine

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Don’t you wish you could have a PR machine like Russell Wilson? For the last couple of weeks he’s been a regular story in the Seattle Times, on radio stations, TV, online, and the mayor of New Orleans did a video encouraging him to get a trade to the Saints. All he did was complain about the Seahawks offensive philosophy and how he gets hit so darn much.

Now, none of us are as well-known or popular as him but it shows what “Word of mouth marketing” can do. Especially when you offer value like a business tip (not a cut and paste from someone else). One of the things I’ve recently realized is, more than ever (this is my tip), it’s tough to overdo marketing, especially online. There is so much clutter (much of it from large corporations) that you have to be constant and consistent. I have a tough time finding posts from those I know and respect so I know it’s tough for others to regularly find me.

When Football, Covid, Protocols, and Systems Collide

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The NFL is down to the final four teams. On at least one of the games this past weekend the announcers talked about how successful the season has been. They said, and I paraphrase, back in July when training camps started nobody knew if they’d get the season in, but they did, with no cancelled games and only a few rescheduled games. They did much better than college football, which was a mess.

This newsletter is not about Covid, but it’s Covid that sets the tone for the business message below. The NFL did it by implementing some protocols we all can follow. They state high-risk close contact as:

  • Less than six feet of proximity.
  • For five minutes or longer in duration.
  • Indoors.
  • Unmasked.

Things we all can’t do are:

  • Daily testing.
  • Having players wear trackers and then investigating any potential close contacts.
  • Using surveillance video.

What it shows to me is diligence can suppress Covid. And before you think I’m in agreement with the Governor of Washington (New York, California, and others) on all the shutdowns, I’m not. My friend Pete McDowell sent me a University of Oregon study saying people don’t catch Covid in (reduced capacity) gyms (I agree based on my going to the gym last fall). I’ve followed contact tracing results a bit and there’s no way people get the virus in (reduced capacity) restaurants.

It makes me think that following the right protocols and having proper systems works, with Covid and other areas in our lives, including:

  • Business buyers who have a plan, set up systems, and follow their protocols will do better at locating, analyzing, and closing a deal on the right business at the right price.
  • Business sellers who take the time to think about what they’ll do if they sell and also get professional input on if the net price of the business is enough for their next great adventure in life will have less seller remorse.
  • Employees who follow the proven plan will advance quicker and be more productive. And if they show how to add value to the current plan all the better (instead of thinking they know more than anybody else and get disengaged).
  • Owners who are willing to listen, act, and delegate have better businesses with more value. It’s not how important the owner is to the day-to-day, it’s how little are they needed in the day-to-day.

It really is pretty simple. If you have a plan that works, and you follow the plan, you’ll be successful. In business, health, and life.

“We are pathetically eager to believe that, if human affairs are managed right, nothing unpleasant need befall anyone.” (Journalist) Max Hastings

Is Your Business Ready to be Sold?

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The first and most common set of questions having to do with the owner’s readiness to sell his or her business tend to be about the owner. And, they’re a lot easier to answer than questions about the business’s readiness. For reference, my first three questions to owners are:

Have you worked with a financial advisor to see how much money you need from the sale to support your next great adventure in life (and do you know what your business is worth – not just what you want for it)?

What will you be doing after the sale?

If this means retirement does your spouse want you around 24/7?

Pretty straightforward, right? But what about the business, not the owner? Keep in mind, every owner thinks their business is so very special, especially when compared to all the other companies out there. But what really needs to be asked and done? Let’s start with a recent Seattle Executives meeting where five members talked about multi-generation businesses, succession, transition, and selling. The most powerful message came from Brian Quint with Aqua Quip, who sold to Leslie’s Pools a couple years ago (hear more from Brian on his podcast interview with me). I sent him an email during his talk saying he must be reading from my book, If They Can Sell Pet Rocks Why Can’t You Sell Your Business (For What You Want?). Here are the intermixed highlights from Brian and the book, with Brian’s direct comments in quotation marks.

  • “Start thinking about selling, think creatively, and do so well before its time.” This fits with my saying, “Most owners don’t get up and drag down the business’ proverbial dimmer switch to prepare over a few years before selling, they flip the switch and say, ‘Sell now’.”
  • “Know the realistic value of the company sooner versus later” (Brian emphasized the word realistic). It’s not based on your best year or wishful thinking; it’s usually based on the last three years of financial performance plus an analysis of the non-financial factors.
  • “Understand what drives the business and its value. Is it expertise, the products, services, process, or IP? Know these things. Drill down on them with an advisor.” I say you need to exploit your value drivers as they’re your competitive advantage, which you leverage to grow.
  • “Know the best buyer for your business.” In my book I cover seven types: individuals (or partners), search funders, family or management team, other small business owners, larger (strategic), companies, private equity, and family offices.
  • “Know the number at which you’re willing to walk away (from the business). This takes some soul searching as it’s a huge decision. If your business isn’t worth what it needs to be now you’ve got some work to do.”
  • Understand it’s not what you get but what you keep. Look at the deal costs and taxes. If your deal is large enough, consult with a tax attorney sooner rather than later.
  • “Understand the risks of selling.” Is there a note? Is there an earnout? Are you expected to, and do you want to, work for the buyer?
  • Brian recommended getting your advisors involved before you sign an NDA. Definitely get them together before you discuss an offer, i.e. Letter of Intent.
  • “Have accurate and timely financial information that accurately reflects your expenses. Minimize your personal expenses run through the business.” Things like car, travel, non-market rent, etc. Also, “Minimize your recast expenses because buyers don’t want to see a lot of them.” If there are too many of these add-backs (to profit) the buyer and banks will discount some of them. And make them realistic. The buyer will have a salary, medical benefits, pension contributions, a mobile phone, etc. 
  • He followed up by saying you should, “Expect a financial colonoscopy as the buyer will want to trace every dollar through the company.” I say expect a business colonoscopy as the buyer will do a detailed scope of the non-financial factors (customers, employees, suppliers, etc.) as well. Expect the buyer to (blindly) talk to customers, meet key employees, and they’ll have to talk to suppliers to get credit terms solidified. And don’t forget the landlord and the buyer’s lease, which needs to be at least as long as any note (bank or your financing) as nobody wants the buyer forced out while owing money.
  • “Do you have a team in place?” The larger the deal, the more the buyer will want a team. Will the team stay, will there be retention agreements, will they be asked to sign a non-compete agreement? A good team will be able to run the business if you’re not there (maybe not grow it like you can but keep it running).
  • Brian had a three-year strategic plan, which buyers like. This shows a sustainable business model.
  • “Realize even with an advisory team you, the seller, will be infinitely involved with driving the deal and driving business growth during due diligence. If the business suffers or stutters the price will go down.”
  • “Once the Letter of Intent is signed the real work begins.” Very true and most sellers don’t understand the amount of information a seller must provide the buyer, the bank, and written proof of everything for the purchase and sale agreement. A client recently told me, “We really aren’t prepared for providing all the information required for a deal.”

Conclusion

Selling a business is like selling a house in some ways. In both cases the more prep time you put in the better the results. Homeowners clean, paint, fix things, and give it “curb appeal.” Business owners need to do the same. It takes longer, a lot of the work has to be done or directly supervised by you, the seller. It’s not like hiring a landscaper, painter, or cleaning service. It requires having the right processes, metrics, documentation, and culture.

Where they differ is home sellers put a sign out front, open the doors, and welcome people in. Business sellers’ shudder at the thought of customers, competitors, employees, and even suppliers finding out they’re (even thinking of) selling. Advice on this – when you get close to the time let people know. Believe me, if you’re 73 years old and taking a dozen weeks of vacation a year, they’ll figure something is up.

Business Buy-Sell and 2021

Posted on by JohnM

It’s 2021 and I sense a lot of optimism, or at least hoped-for optimism. Of course the vaccines are a huge factor in this and there’s good and bad news on this subject.

Good news: Reports are while two doses give 95% protection one dose gives protection in the 80-85% range (and arguing about it among experts takes off), meaning the same amount of vaccine can treat a lot more people. And the hospitalization rate of those vaccinated is near zero and the AstraZeneca product was at zero for the first 30,000 recipients.

Bad news: The government is in charge of the distribution and it’s another case of the left hand not knowing what the right hand is doing. Bottom line, both Democrats and Republicans are really good at self-promotion and really ineffective at getting anything done.

So what do I see in the buy-sell world? Here are three thoughts:

I expect it to be busy at all levels. From micro-businesses like deli’s, dry cleaners, and other small retail to businesses where the owner can actually work “on” the business versus “in” the business to middle market firms.  

Why? It’s still a demographic thing. There’s still a disproportionate share of (non-tech) companies owned by people 55-75 (as regular readers know, I believe most owners still working at 80 or close to it want to die at their desk). Things happen as we get older, health issues, burnout, death, etc.

I’m interested in seeing the deal stats for 2020 from bizbuysell.com, Pitchbook, and others. I don’t know what to expect but guess the numbers will be a bit lower than in 2019. That’s one reason I think 2021 will be busy. And that leads me to two sub-points. 

First, buyers are going to be fussy (fussier than before) and really digging deep (or at least should be). Banks will be more inquisitive than ever, and both should be concerned with the Covid non-financial factors as much as the standard non-financial factors.

To put up with the increased scrutiny sellers really need to be prepared. I wrote recently about one client who said he realized his firm was not ready for the diligence requirements demanded by the buyer. It starts with the financial systems and statements (get an outsourced CFO if you need to up your game in this area) and move on to all aspects of the business, especially the people.

Bottom line, while it will overall be busy it will be busier for those who are pro-active.

“I feel that it is healthier to look out at the world through a window than through a mirror. Otherwise, all you see is yourself and whatever is behind you.” Bill Withers

Happiness, Dogs, and Culture

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Let’s start 2021 on a happy note. On January 2 in the Wall Street Journal there was a column by Susan Pinker titled, “Dogs Really Do Make Us Happier.” Ms. Pinker did research to see if she could prove the “rumors” about dogs making people happier, especially during the pandemic. The results: yes, dogs make people happier and she quotes Lauren Powell, a postdoctoral researcher at the University of Pennsylvania, “Basically we found that the loneliness in the group that got a dog decreased by 40% and stayed at that lower level at eight months.”

What does that have to do with business? Well, if you’re happier you’ll be more productive, creative, and enthusiastic (and for business owners’ enthusiasm is one of the four things I believe an owner needs to be good at managing and/or leading, along with people, processes, and money). 

If your employees are happy, they will be better employees. But you can’t get them a dog or mandate they get one. You can create an atmosphere of happiness, which is called culture. I’m not a culture expert, there are plenty of good ones around, but do know if you cover the basics, you’re 80% there. The basics, to me, include:

  • Respect
  • Listening 
  • Delegating (so they can grow professionally)
  • Fair compensation
  • A great environment

Are you and your company 40% happier, as those people who have a dog are?

“Chance favors the prepared mind.” Louis Pasteur

“Another belief of mine: that everyone else my age is an adult, whereas I am merely in disguise.” Margaret Atwood [Ed: and dogs help you maintain your disguise]

The Advantages of Two Broker Negotiations

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By Gregory Kovsky with IBA

My firm, IBA, has a long history of welcoming “buy side” business brokers into the transactions we facilitate as a “sell side” business brokerage firm serving Washington, Oregon, & Alaska.  The guiding philosophical principle at IBA is the “Golden Rule” of do unto others as you would want them to do unto you.  Applying this principle to our clients, our mission statement goals for each of our engagements is to facilitate a “win-win” transaction in a timely manner while maintaining an environment of confidentiality where a communication atmosphere of full disclosure and the utilization of “best practices” exist between the parties. 

One fairly common business brokerage practice at peer firms that has always seemed counterproductive and not in a “sell side” client’s best interest is discouragement of the participation of a “buy side” broker in the transaction.  The reason for an anti-collaboration attitude is frequently financial, as “buy side” brokers commonly request the ability to share commission, as is common in real estate, something that is financially detrimental to a listing broker.  This position makes sense from the listing broker’s position, if they can potentially sell the business at the same price to another buyer, but is the position in the “best interest” of the seller and the mergers & acquisitions industry.  The position at IBA is “NO”.  The reason for the negative response is multifold.  First, at a superficial level a business broker should be ambivalent to who the buyer is and whether they are represented.  Their goal should be to deliver the best buyer in terms of price, terms, and ability to their client.  Personal self interest should not be a component to the decision process.  

Self-serving financial motivation aside the following are the five primary reasons why it is beneficial to have business brokers on both sides of the table.

  1.  Knowledge – Plain & simply many buyers, “Don’t Know What They Don’t Know”.  There is no substitute for relevant, specific knowledge at an appropriate place and time. A common place where buyer’s brokers add value from a knowledge perspective involves knowing what questions to ask and documentation to review when assessing a company for acquisition.
  2. Experience – Knowledge is beneficial if you have time to comprehend and apply it.  However, in a dynamic marketplace where buyers are competing for a specific company, the ability to make decisions in a timely manner through application of negotiating strategies can be the difference between obtaining a mutually executed letter of intent and being the buyer who needs to find another company to acquire. Experience is the key to being able to act with confidence in a timely manner.
  3. Ability – The end goal or a middle ground compromise can be self-evident in negotiations, however the ability to get there can be problematic, if the pathway in terms of communication and persuasion are not able to be navigated.  There is a reason that significant training is provided to military pilots before they are asked to land on an aircraft carrier or fly a combat mission. The skill they possess is significantly greater than that of a private pilot flying fixed landing gear small planes. Skill takes time and repetition to develop to excellence.  Mergers & Acquisitions intermediaries are the fighter pilots of business negotiations.  It is not recommended to enter a dogfight with a party of greater acumen in the sky or a negotiation without equal skill on both sides.
  4. Resources – The purchase and sale of a privately held company is a team process.  Both sides commonly will have attorneys, accountants, and other professional advisors.  Assembling a team of knowledgeable, experienced, highly skilled transaction team members can be the difference between completing an acquisition or not.  A business broker can be a great source for names of “deal making” professionals to interview as potential support professionals.  Another important member of the “buy side” team is commonly a SBA or commercial banker.  An experienced, knowledgeable business broker can be a great source for banking community referrals, as they will have current knowledge of present credit approval underwriting standards and the appetite for loans at specific banks in the community.
  5. Communication – Anyone who has studied negotiations knows that often the greatest achievements are made through secondary parties or back channel communication.  In a business purchase and sale negotiation, it is common for parties to mentally & emotionally to dig into positions.  Losing face can become an issue that prevents agreement.  I have witnessed many times where intermediaries and/or attorneys get a transaction “out of the mud” and moving forward by continuing communication and based on familiarity for parties that had “stomped off” thinking the deal was lost.  

In my twenty-eight years as a mergers & acquisitions intermediary, I can recall numerous successful transactions where business brokers on both sides of the table played critical roles in getting the deal done.  One of the best “buy side” brokers in the Puget Sound area is John Martinka.  Mr. Martinka has successfully completed deals with IBA representing buyers since the 1990’s.   Our team often recommends him to buyers desiring professional representation and view his participation as a value adding benefit to the deal. Few possess his knowledge, experience, skill, resources, and communication ability.  I look forward to the next time I walk into a conference room and see John sitting on the other side of the table with a buyer who is prepared and ready to purchase a company.    

Gregory Kovsky, the President & CEO of IBA, is available as an information resource to the media, business brokerage, mergers & acquisitions, real estate, and estate planning communities on subjects relevant to the purchase & sale of privately held companies and family-owned businesses.  Professionally, as an intermediary, Mr. Kovsky specializes in the sale of manufacturing, distribution, technology, industrial, marine, and horticulture businesses. Mr. Kovsky can be reached directly at (425) 454-3052 or .  Additional information on IBA, the Pacific Northwest’s oldest business brokerage firm, can be found at www.ibainc.com.  

Dependents Save on Taxes; Dependencies Reduce Value

Posted on by JohnM

Here’s an exchange I recently had with a supposedly seasoned businessperson, growth consultant, and business broker:

Me: “There are a couple issues with this business, one in particular seems serious.”

Him: “Oh, what are they?”

Me: “The main issue is the top two customers are 60% of sales.”

Him: “I don’t see why that’s an issue.”

Really? He doesn’t see it’s an issue? Two customers dominating, the top one at 37%. And this in an industry with larger players, low barriers to entry, and the number two customer moved over from a competitor three years prior (and probably would move again to save a few bucks).

It reminds me of a story in my books about a call from a desperate owner who wanted a buyer for his business. He had helped his 80% (of sales) customer get started (as a contract manufacturer), the customer’s owner brought in a new management team, the new CEO had a friend whose company made the same products, and the rug was pulled out with no notice. Bye-bye big customer, bye-bye business.

Ours advice to one and all (especially owners planning to exit at any time):

Get rid of your dependencies.

  • No dominant customers.
  • No key employees (who would be hard to replace).
  • No major supplier (with limited options other than this supplier).
  • No owner dependency. The less the owner does day-to-day the better. It might be tough on the ego but it sure builds value. Strategy, vision, and growth (including by acquisition) should fill the owner’s calendar.

“I guess a man is the only kind of varmint who sets his own trap, baits it, and then steps in it.” John Steinbeck

Knowing Your Customers

Posted on by JohnM

The recent meeting of Seattle U Family Business Exchange (companies with multiple generations in the business) two of the presenters showed there are multiple ways to please your customer base and keep them loyal.

Aakanksha Sinha and her husband are the owners of Spice Waala, a fairly new Indian restaurant in Seattle featuring Indian Street food. They have an everchanging menu, with new items daily. It is their way of showing off the different types of Indian food.

On the flip side, Jasmine Donovan, president of Dick’s Drive-In, has a menu that has barely changed in decades. When she asked us to put our favorite Dick’s menu items in the Zoom chat the overwhelming favorite was the Dick’s Deluxe, which Jasmine said is a relative newcomer to the menu having been introduced in 1974. Dick’s customers love what Dick’s has and love the familiarity.

Being new, refreshing, and innovative is great, and highly popular. But being steady and knowing what your customers want is equally important. It would be business suicide for Spice Waala to keep the same menu for extended time periods as their customers want to try different things. It would be even faster business suicide if Dick’s started introducing new (and short-term) menu items like the fast-food chains do.

It’s knowing what your customers want, and don’t want, that matters. And what your customers, employees, suppliers, and all others want is, among other things an end to Covid (and a Happy Holiday season).

“God bless us, everyone.” Tiny Tim (a great story)

“Santa, I know him.” Buddy the Elf (one of the best and funniest Christmas movies ever)

Check out our new podcast series by clicking here https://www.buzzsprout.com/1546882