From the “You can’t make this up” files

Conversation between business buyer and business broker:

Buyer – “I have a few questions about the financial statements, especially the few items related to the owner’s “other company?”

Broker – “I’m not sure we can get answers. The financial statements are “cloudy.”

Buyer – “What do you mean “cloudy?”

Broker – “I’m not sure they’re accurate.”

Buyer – “Well, the bank needs the answers.”

Broker – “I’m not sure you’ll be able to get a bank loan given these statements.”

Really? Not just about a broker not pre-screening a business to see if it’s worth taking on as a client but how can anybody take on a client, customer, buyer to buy your business, or seller to sell you a business without any “pre-flight checkup” like pilots do?

You can’t be, or even appear to be, that desperate. As I’ve said for years, the only thing worse than no client/customer/deal is a bad one. They always come back to haunt you.

Peace of Mind? Priceless

Ten and one-half years of owning an iPhone and a freak accident gave me my first broken screen. I had the phone in my jacket pocket, put it over the back of an office chair with a fancy metal design around the back, got out of the meeting, grabbed my phone, and found a beautiful design radiating up my screen.

Replacing an iPhone screen is not cheap. So I bought a tempered glass screen cover with a lifetime guarantee. Pretty cheap compared to this happening again. One could say it’s a form of insurance.

One could say many things we do in life are a form of insurance. We have our attorneys do things to keep us in compliance and out of trouble. Our accountants make sure the IRS or, heaven forbid, the State DOR doesn’t come after us. A good banker keeps you not track versus just lending money (to anybody).

And of course, people like me in an advisory business give our clients peace of mind, ask the right questions, let clients know when they have the right answers, etc.

The cost of a bad contract, erroneous taxes, or a bad business decision is huge. The cost of someone who’s seen the situation hundreds of times and knows what to do, and not do, is virtually priceless.

It’s why we all have businesses.

“If you don’t have a seat at the table, you’re probably on the menu.” Elizabeth Warren

 

Depth Not Dependency

At the start of the 2018 baseball season you might not have believed it when you saw a record number of games snowed out across the Midwest. The Seattle Mariners got off to a decent start is and that’s pretty good when you consider four starters (all proven good hitters) were each on the disabled list for 10 days or more.

They’re winning, and hitting well, because they’re lineup has depth. And depth is something too many businesses ignore. Yes, a lot of owners’ love being in control, but it doesn’t add value.

Maybe I’m sensitive to this because recently I’ve run into a lot of businesses that sound great until you find out what the owner does, which often is way too much. One was described by his number two as, “a very active president” but it’s another that deserves mentioning.

When the owner said he could only be reached at 8:00 pm or later it caught my attention. He has what appears to be a very successful business, but my comment upon learning more was, “He has a high-paying, long-hours job” and the business has a dependency, which is him.

During the day he visited job sites, ran a machine, met customers, etc. At night (8-11 pm he said) he did bids, bookkeeping, and other office work. Yes, he made good money but how could someone replace him? No sane buyer would pay for the company based on the current profits knowing they’ll have to hire a full-time employee to replace some of what the seller does.

The point of business is to have people below your pay grade do work you shouldn’t be doing. As they grow and get experience they should delegate the same way to others. This is what’s called depth, not a dependency.

“Isn’t it nice to think that tomorrow is a new day with no mistakes in it yet?” Novelist Lucy Maud

 

Life Emulates TV or is It Vice Versa?

One of our family members is a fanatic watcher of The Office. He says he’s seen each episode dozens of time (perhaps a little hyperbole here). The Office and Dilbert are similar in that they both have a clueless boss, a sneaky co-worker, the paranoid person, and the nice “mom type” person.

Just like real life. In big business and small business. It’s called culture and it’s what CEOs and owners. are concerned about, or at least should be. It’s part of government too, as we’re seeing with all the stories of harassment, of all types (in government and in large firms).

There’s stuff going on at Google, the Seattle Times just had an article on the non-advancement of women at Microsoft, I look across the lake to Seattle and see any and every unsuccessful group blaming others (and the Seattle government jumping on the cause and looking for money to help them), and across the country the news always seems to have something about strippers, porn stars, and prostitutes.

Do you think it’s any wonder why so many people think about owning their own business?

When you own the business, you can create (or fix) the culture so it’s done your way. The large corporate/government politics and similar can go away. It’s one reason a lot of people choose to work for a small business even though the total comp package may not be the same as at a large corporation. Because whether you’re an owner or an employee there can be a lot more important things than the money.

“Sometimes I’ll start a sentence and I don’t even know where it’s going. I just hope I find it along the way.” Michael Scott on The Office

It wasn’t even a full moon

It was mid-month, not even close to a full moon, when I had three weird and similar situations occur with business owners.

  1. An owner told me he would be glad to sell his business, but nobody would see his financial statements or tax returns. Only his CPA and the IRS see them he said. It seems he had sold another business to a consolidator that only cared about revenue. All he had to do was prove his revenue and they were happy. He figured this applied to all business sales.
  2. My friend Tom Broetje with CFO Selections talked to me about a possible referral and warned me I’d have to explain to the owner why he’d have to share his tax returns. I guess he questioned why he’d have to show them to anybody (buyer, bank, etc.).
  3. Finally, we got an NDA from an owner and the last paragraph said the buyer needed make a $5,000 completely non-refundable payment just to see the financial information. When I said in my 25 years in the buy-sell industry I’d never seen or heard of this she replied, “Well, we’re pretty savvy businesspeople.” No, you’re not. You’re not motivated and just being annoying.

I know there’s a (small) trend of people buying houses without seeing them in person but they don’t buy sight unseen as they take virtual tours and often have agents onsite to advise them. People wouldn’t take a job without meeting their boss, reviewing the requirements, etc.

And that’s what a buyer’s analysis is, a virtual tour (see the financial information), “interviewing” the seller, and studying the product, processes, etc. This is normal and something the seller should do on a buyer, an employer on a new hire, and a business on prospective customers and vendors.

The Start-up Mentality in Business Buyers

Some people will never own a business. They won’t buy, start, or get a franchise. Others are continually starting or buying companies. And there are subtle differences between the types of people who get into business.

My old friend Bill Pearsall coined the term “re-entrepreneur” for people who buy not start businesses. But it goes deeper. Most of the individual business buyers I work with have developed management and leadership skills in the corporate world and want to use them to grow whatever business they buy. They understand the importance of a good foundation and since they’re not “product” people there’s less chance they’ll work “in” the business.

After working with people who started a business and considered buying another one (to grow, get employees, have a different customer base, etc.) I find most of them don’t always get that you have to pay for what you’re getting.

Having started something they often ask, why would I pay (that much) for it when I can grow into it?

Neither model, either “I want to pay for a great base” or “I’ll pay a little because eventually I’ll do it myself,” is wrong. They’re just different.

“The art of the creative process is not seeking and finding; it’s bumbling.” Jonathan Safran Foer

 

 

Using experts – It Pays

There are a lot of things I can do around my house. Paint, install doors, fix some electrical and plumbing issues, etc. There are some things I can’t or won’t do including building things needing a permit (new elevated deck), a kitchen or bathroom remodel, etc. The latter items are when I use an expert.

I got to thinking about this during some recent sports injury rehab on my leg. I had tried chiropractic, massage, stretching, cupping, and foam rolling. All gave short-term temporary relief but no long-term fix. Finally, I met a sports medicine therapist. He put me on an exercise program to build up the muscles supporting the injured area. And, it worked. Quickly!

Everybody reading this has an area of expertise. The trick is getting others to know about it. I think about most of the people I’ve used and its word of mouth. Personal and business friends have provided quality referrals, much better than I can get from any phone app.

Doesn’t matter if you’re an expert at making things, fixing things, providing advice, or something else. If people don’t know about your value proposition it’s a useless skill. So as with all businesses, it comes down to marketing. The more people who know what you do and how well you do it the better. You can’t be bashful about getting the word out.

“Whatever you do, kid, always do it with style.” George M. Cohan

Flip the Switch

Recently I got an e-newsletter from my friend Allan VanderHamm with Berntson Porter.

Allan is their valuation and exit planning expert and the newsletter was titled, “How Does Exit Planning Protect Business Value?” My response to Allan was:

One of my lines is, “Owners don’t wake up, flip the switch, and say I want to sell in 2, 3 or 5 years. They flip the switch and say, it’s time to get out (now).”

The newsletter told the story of two owners of similar businesses and how one owner worked very hard, “in the business” and the other sought and acted on advice and worked, “on the business.” The latter owner built a team, converted to S Corp status, and did something near and dear to my heart, grew by acquisition (one of my top reasons to consider growth by acquisition – along with 18 others in my book Company Growth By Acquisition Makes Dollars & Sense – covers how the larger the company the more it will sell for, all else being equal (because the multiple of profit gets higher as businesses get larger).

Planning is important, as is timing. I recently had discussions with a client who would like to sell to one of his three competitors (given his industry, these are the only logical buyers). We talked about where the business is, where it will be (this year is shaping up to be a very good year for him), and the time of the year (it’s a seasonal industry and now through September is the busy season).

While he has a feeling of urgency to move on to his next great adventure in life, it makes sense to do a few things within the business, go full speed ahead to maximize revenue and profits, and be able to present a great story in six months.

The above is a mini-version of a planning story. It does take time and effort to shift from, “what we do now” to “what we need to do to make the business more attractive.” And it can be threatening to an owner who wants to be in control of everything, because one thing that makes a business more attractive, and adds value, is a self-sufficient management team. A solid team means there’s a greatly reduced likelihood of a dependency on the owner.

The last point about owner dependencies is one of my top four things an owner can do to increase value, make the business more attractive to buyers, and have a better business along the way. The other three things are:

  • Show you can grow, don’t just say it or say we tried to keep the business where it is.
  • Have solid financial systems and accurate financial statements. (One of the first things I do when I see financial statements is check if the year-to-date income on the P&L is the same as the year-to-date income on the balance sheet. You’d be surprised how often it isn’t the same.)
  • Demonstrate you can attract and retain good employees (especially in our currently tight labor market).

Conclusion

The 80-20 might even be the 90-10 rule when it comes to owners flipping the switch. It is tough to manage a business, be in control, and implement (a new) strategy. So, it all catches up on the owner, they flip the switch, and say now’s the time. Finally, this is completely different than the owners who are coasting by design, as in, I’m making good money so why would I want to work harder to make more? It’s the same end point but via different routes.

The Magic Question – What Does the Owner Do?

Often simple is the best course of action. In fact, Ockam’s Razor, from William of Ockam in the 14th century, states one should solve problems by choosing the solution that makes the fewest assumptions.

In the case of buying and selling a business, there has to be a match between the skills and interest of the buyer and the seller. And it goes a lot deeper.

The following simple little question to the seller uncovers at least five issues or opportunities. That question is, “What does the seller do on a daily, weekly, monthly basis.” Let’s examine this.

Skills match – as per above, it lets the buyer know if there’s a match between the duties he or she wants to perform and what the seller does (or should I say what the seller needs to do). An overly analytical, introvert type person may love the business model but if the owner is a key component of the sales team and process it’s probably not a good fit. Correspondingly, the outgoing, “I want to be in front of customers” buyer isn’t a good fit for a business requiring attention to detail on bids, contracts, job prototypes, etc.

Dependency – In my talks I say to audiences, you have a dependency on the owner if you can fill in the blank with statements like, “If the owner is the only one who can ___________:”

  • Program the machine
  • Make the big sales
  • Approve all bids

Most people think of dependencies in terms of customer concentration but in small business it’s what the owner does or doesn’t do that often makes a difference. Buyers want owners who can take off for three weeks and return to a company in as good of or better shape as when they left.

In versus on – as in, the buyer wants an owner who works “On” the business versus “In” the business. Working on the business means strategy, growth, vision, etc. Working in the business means being on the shop floor, making sales calls, doing bids, etc. While on the surface it may look like opportunity if the buyer can add strategy and vision, in the short-term it means hiring someone to do the day-to-day tasks that are eating up the seller’s day. It’s the difference between having a job as company president and having a job similar to when the buyer was an employee.

Lifestyle business – my favorite story is about the owner (seller) who told the buyer how he and his sales team worked just hard enough to make the income they wanted and didn’t work anymore. He lost a great buyer who figured changing the culture of laziness to one of growth would alienate the employees, and he’d lose them. This was a lifestyle business, and there are a lot of them.

2No number two – just like on Star Trek Next Generation, you have to have a good number two (employee). Actually, when we say, “no number two person is a red flag,” what we’re really saying it’s the tip of the iceberg, meaning there’s no management team. It ties into the above reasons because it means the owner is integral to the day-to-day operations, works in the business, and this is probably not what the buyer wants in a business.

A simple little question that opens up a plethora of information. As a PS, one of my other top questions for buyers is, “Can you see yourself going there every day?” This one is a gut check, to make sure it’s not just emotion driving the buyer’s interest in the business.

Deal Die When Trust Disappears

It was a bolt-on acquisition, a perfect fit, and a small deal. And it died. It died because of the relationship, or lack thereof.

The buyer and seller seemed to get along fine but a few things happened that caused the buyer to not trust the seller to deliver on post-close obligations.

It started when the seller asked to delay the closing by one month, which didn’t fit the buyer’s plans because that month was a high revenue month (while the next month was a low revenue month), the buyer had other initiatives tied to the acquisition, and some comments made (by the seller’s team) brought to light the fact the seller’s wife was a lot more important to the business than previously claimed.

Then a very reasonable purchase and sale agreement was virtually destroyed by the seller’s attorney. All the legal language issues aside, the edits made it very clear the wife wouldn’t be available for much transition support. This after realizing she is the key employee. Plus, there was again language about delaying the closing date.

Trust is a synonym for relationship. Whether you’re a buyer or a seller, when your gut tells you something is wrong, the chances are high something is wrong. In any event, go with your gut feel.