Author: JohnM

When Your Edge Gets Dull

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College basketball coach Jay Wright recently announced he’s stepping down because he lost his edge. Keep in mind he’s one of the top coaches in the country and won two national championships in the last six years.

It’s great he noticed it, which not everybody does (notice). For example:

  • Business owners get to the point where it’s a good life, with good income, and pretty much go through the motions. These are the businesses sharp buyers want to acquire, fundamentally good with a lot of low hanging fruit of things to improve.
  • People who do the same thing over and over because, “That’s the way we’ve always done it.” This could be owners who haven’t grasped the use of data, advisors who aren’t up-to-speed on modern techniques, and, especially, aging politicians who hang on for no reason other than ego (the average age of the U.A. House and Senate is almost 65, an all-time record and the leaders are 80 and above).
  • Employers who didn’t (and haven’t) realize how important it is to take care of their employees. The employees who have realized there are plenty of other options out there so they’re not stuck in something they don’t want to do anymore.
  • There’s a flip side to the last point and it’s the people who never had an edge. A perfect example is from an article I recently saw about how a lot of recent college grads are working hospitality and retail because they can’t get better jobs (perhaps because their education was in something not needed in the market).

It’s hard to notice, and especially realize, you’ve lost your edge. When you do, it’s time to get out the sharpener whether it be a new job, your own business, getting out of your business, having a coach, etc.

“Start where you are. Use what you have. Do what you can.” Arthur Ashe

I’m Burned Out – Should Have Left a Year Ago

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I’m sure I’ve used this line before but it’s so good I’ll use it (again) here. It came from a former client as we discussed the best time to sell a business. 

“The best time to sell is one year before you’re burned out.”

Of course, it’s a trick statement because if we knew things like this life would be a heck of a lot easier, wouldn’t it? It got me thinking about it from two perspectives of leaving your current situation.

Business owners, and these are real-life examples from clients on why they’re exiting:

  • I love the work, I love making sales, I hate managing people. I want to sell and concentrate on strategy and sales for the buyer.
  • The doctor told me if I keep working, he won’t see me anymore because I’ll be in such bad shape, he won’t be able to help me. This after four surgeries for something preventable after the first surgery.
  • A health issue gave me a wakeup call. I needed to slow down so I concentrated on getting the business ready to sell, which included grooming my GM, increasing productivity and therefore margins, and spent less and less time at the business. A PS to this, he says about two hours a day and I think it’s probably 50-60% (and we tell buyers this).
  • The timing is right. A big player in the industry is making acquisitions, I’ve been at it over 30 years, and I need to “strike while the iron’s hot.”
  • We know it’s time, after about 35 years. Still, knowing it’s time and moving forward are two different things. It’s a tough decision for these owners. It’s probably the biggest decision in their lives (other than getting married, having kids, etc.).

Burned out corporate executives needing to shed the corporate shackles:

  • Career advancement has stalled. The corporate world is telling them they’ve plateaued. Stay here and you’ll be a middle manager for the next couple decades.
  • They are sick of it. Don’t like the bureaucracy, politics, backstabbing, and lack of customer service simply to improve shareholder wealth (and bonuses).
  • They’ve built their career around eventually owning a business. The corporate world gave them management and leadership skills and the capital to make the leap of faith into business ownership. All part of their master plan. 
  • Not exactly corporate executives but younger people who are chasing “Entrepreneurship Through Acquisition” (a new buzzword) without putting 20-30 years on the job.
  • They’re let go. The company says, “Bye-bye, you’re part of our announced cost savings.”

Those in private equity have made a similar decision. Some join a firm to buy and run companies. Others create their own “Micro-PE” company so they can buy what they want. But the objective is the same, escape the corporate rat race and be in control.

Bottom line, it’s knowing when to get out of where you are and, most important, taking action.

Create Don’t Just Add Value

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We went for happy hour with friends recently (he gets this weekly memo) and because of his great management team he was wondering if he’s really adding value. 

I told him, don’t be worried about adding value (day-to-day) because what you’ve done is create value. The less important to the business an owner is the better. Plus, at the size of his firm, any likely buyer (private equity, etc.) will want a solid team and will discount the price if the owner is hard to replace.

I also shared what a client had told me about how great he feels because he’s empowering his people and helping them grow. It’s the reason why Seattle companies like Starbucks and Dick’s Drive-In pay for employees’ tuition and companies like Dick’s Costco promote from within for all their store managers.

When you build a team, the train keeps on rolling when one person leaves. You’ve increased expertise and given people a better future, whether in your firm or somewhere else. It’s tough. Often ego gets in the way, and we feel we must do a lot of things ourselves. It should be the opposite.

“I believe the second half of one’s life is meant to be better than the first half. The first half is finding out how you do it. And the second half is enjoying it.” Frances Lear

When You Love What You Do

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One thing we learned from the pandemic mess is a lot of people realized they don’t have to stay in the job they’ve had for years as there are plenty of other opportunities. In that same thought vein:

  • There’s a new assistant pastor at our church and it’s obvious she loves what she’s doing. You can hear it in her voice and see it in her body language.
  • At Easter brunch a friend was espousing on how much she loved working for her employer and how it’s benefited her both financially and emotionally.
  • The April 18 Wall Street Journal had a special section titled, “People Who Hate Retirement And What The Rest of Us Can Learn From Them.”

One of the people featured in the “I hate retirement” article said retirement put a strain on the marriage as they were together a lot more than before. While I get laughs from my line (to prospective business sellers), “If your next great adventure in life is retirement does your spouse want you around 24/7?” Humorous yes, serious, a bigger yes.

I see business owners who can’t let go, they’ll die at their desk. An example is the 87-year-old owner who told me his 48-year-old son wasn’t mature enough to run the business, even though the son was in charge of sales (and more).

Other owners get to the point where after 20, 25, 30 or more years they don’t want to manage anymore, have their net worth on the line, etc. They need a new challenge, or just a break.

People in the corporate world get sick of it and want their own business. When there’s a match with a burned-out owner, we have a deal. Or, when the business is larger, when it’s a match with another company or private equity firm.

“People now listen to gossip as if that’s the truth, but they’ll read news in the newspaper and think it must be a lie.” Harvey Fierstein 

Want to Get the Answers You Want?

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I recently got an email survey from our senior US Senator, Patty Murray. I’m sure she’ll use the results of the survey to state what her constituents want. However, there’s a catch here (or it wouldn’t be in this memo).

Every poll or survey results I’ve seen recently say the top issues people are concerned about include:

  • Crime
  • Inflation
  • The southern border

Think any of the above were on her survey? You’re right, none of them were on it. She’ll get the answers she wants to get. It’s an easy trap to get into. It’s called drinking your own Kool-Aid. 

Over the years I’ve seen numerous studies about the reason employees think their customers buy (the product or service) is vastly different than the reasons the customers give about why they buy. Maybe talk to your customers sometimes, right?

Just look at what’s going on in the job market. A lot of employers found out their employees weren’t that happy when said employees left for new careers, spurred on by the Covid shutdown.

Be careful what you ask because if you ask the wrong questions the answers are meaningless.

“Good things happen slowly. Bad things happen fast.” Abigail Thomas

“I don’t know if that there are any short cuts to doing a good job. Sandra Day O’Connor

Misconceptions Abound

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My wife had some friends over for dessert after they went out for dinner and a couple of the ladies were amazed (surprised) our younger dog was so gentle and friendly because she’s so big, 90 pounds. They assumed because she was big she’d be wild, aggressive, crazy, etc. In fact, she’s one of the calmest dogs around (and loves her belly rubs).

We all have misconceptions on things. In sports the fans always think that one new player will bring a championship. In business it’s often the thought that the best product wins when it’s usually about marketing and sales.

In our daily world we see the following misconceptions:

Business buyers:

  • Believing they have the guts to “pull the trigger.” Industry statistics say 90% of (supposed) business buyers never do a deal.
  • It’s all about the numbers. Important but there’s also those little things like the employees, customers, supply chain, etc. And of course, relationship.
  • A seller with no family in the business has no options. Actually, they have all the options when not tied down to a family sale.

Business owners/sellers:

  • Don’t say, “If only the buyer is good at marketing…” (the business will exponentially grow). No competent buyer will believe that.
  • I just read a $400 million company in my industry sold for 15X EBITDA so my $14 million company should sell for the same multiple.
  • It doesn’t matter I do all the important things in the business. Yes it does and this is called owner dependency and it’s all too common in small companies. Learn to delegate and your value will increase.

There are a lot more and I’m sure you have common ones in your business.

“You can do a lot of inner soul work, but I’m a big fan of Zoloft.” Katherine Heigl

Measure the Right Stuff

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There was a news report about the city of Auburn, WA reinstating their traffic cameras in school zones (not red-light cameras). The spokeswoman for the city talked about how without the cameras the percentage of cars going 26 miles per hour or more (the speed limit is 20-mph) is higher than when there were cameras.

That’s great but is it the right metric? I’m all in favor of school zone speed limits, fining people who exceed those limits, etc. but wouldn’t a better metric be the comparison of incidents with and without the cameras? And how it differs based on the speed limit, which used to be 15 mph years ago?

The same philosophy goes in business. Are you measuring the right things? A client kept talking about revenue, revenue, revenue (goals). I asked why they weren’t focusing on their gross and net margins. It can be easy to generate revenue at a low margin. Too low and you don’t make a profit. Or in a professional service business like mine, you work a lot more for the same net.

In time and materials business (legal, accounting, engineering, etc.) it’s all about the utilization rate. What percentage of your time is billable versus marketing, administration, collaboration, and similar? A firm with 40-50% utilization won’t make money. At 60-70% there should be a lot of profit.

Know what you should be measuring not what’s easy to measure.

“Being right half the time beats being half-right all the time.” Malcolm Forbes

“A hat should be taken off when you greet a lady and left off for the rest of your life. Nothing looks more stupid than a hat.” P.J. O’Rourke

M&A Update from ACG

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The February ACG (Association for Corporate Growth) was the annual M&A update panel discussion. While the panel spoke of middle market deals a lot of what they covered applies to the lower middle market. Here are my top 10 takeaways, with my comments:

  1. It’s a frothy valuation market – sure is although my market has the two sanity checks the larger deals don’t have. It’s usually the buyer’s personal money (individual or small business owner) and the bank is the largest component of financing not just a small piece of it. A similar talking point was, “We’re wading into dangerous territory on multiples, which are being driven by growth and a lot of capital. 20x plus at $50 million plus deals. 
  2. There’s fear of missing out – with the low cost of capital and a demographic push based on the age of owners there is a fear there won’t be as many deals in a few years.
  3. Defense and satellite are strong vs. aerospace – I agree with this. Owners I talk to who do defense work are booming. We can see plane deliveries and how low they currently are.
  4. Must position the business correctly – to get maximum value out of it, yes. Don’t care about price, just want out? Then flip the switch and sell no matter what shape the business is in.
  5. Projections are tough with Covid – projections are tough without Covid. Keep in mind, banks will investigate (thoroughly) and Covid tailwind or headwind, as they should.
  6. Buyers want businesses well represented and presented – the more information provided upfront the better and provided by someone professional who’s done their homework.
  7. Looser definitions of EBITDA – as in the definitions are weakening. With smaller businesses this is the blending of the business and personal checkbooks (and wanting the buyer and bank to believe it all). A related point was, “watch out for big add-backs.”
  8. Founders may know how to grow but don’t want to – I get this because I see it so often. An owner is making a lot of money and doesn’t want more risk, more people, more stress. So they coast, which is opportunity for buyers.
  9. Looking at wages, benefits and other things to retain employees – retention was a huge issue to these buyers, lender, and investment banks. All shared the same thought on this, you have to keep the people you want.
  10. Can this manager think like an owner? – not as important in the small business market but it’s how you get people to grow so the owner can step back and not do day-to-day tasks. They emphasized you have to spend a lot of time on coaching and development. 

It’s an interesting time and all of us in the buy-sell & M&A industry expect 2022 to be an active year. I know we’re busy with sellers and buyers.

Projections, Projections, Do We Really Need Stinkin’ Projections?

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I know they need to “check the box” and get projections. In this case, “they” being bankers. Recently one asked for three years of projections with the first two years by month and the third year annually. Just for fun, consider the following:

  • The folly of predicting winners in March Madness. Column in the Seattle Times said pick Kentucky, they’ve got it all. Oops, out in first round. The WSJ had a column saying pick the defending champs because most don’t pick them. Oops, out in second round. In conference tournaments one announcer said Iowa was so hot they’d go to the final four and another said Seton Hall would go deep as they were peaking at the right time. Oops, both out in the first round.
  • It’s early 2021, vaccines are available, and things are opening up. Would you, would anybody, have predicted future mask mandates after politicians proudly stated if we get vaccinated there’ll be no more masks? What about massive supply chain disruptions, employees taking control of the job market, or a war in Europe?
  • What about inflation? (Almost) nobody predicted that (I’d bet those who did predict inflation are those who have predicted inflation, a stock market crash, depression, etc. for the last 10 plus years, and are finally right). The Fed chief said it was transitory. The Seattle Times business columnist said the other day he was wrong when he said inflation had peaked in December.
  • Just read about all the SPACs. It seems few if any are hitting their projections.

Look, projections can be a good exercise and they set goals. But three years out? The one thing I can predict is in three years multiple things will have happened that nobody thought of.

“Until the lions have their own historians, the history of the hunt will always glorify the hunter.” Chinua Achebe

It’s All About Perspective

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I’ve been listening to a very interesting podcast with a geologist named Randall Carlson. He’s discussing the changes in the earth over the last 15,000 years and he states there’s evidence there was a mile thick sheet of ice over the top half of the northern hemisphere. Then it seems an asteroid hit the earth, the ice started melting, and it was a 5,000-year process to finish melting.

Asteroids are a “thing” with Mr. Carlson. Given his field the changing earth, the history of it, etc. he’s super focused on if and when another asteroid of destruction size will collide with the earth. Most of us go about our days not thinking about meteors, comets, or asteroids. Not Mr. Carlson, he seems to get nervous when something in space comes within 100,000 miles of earth.

I’m talking to a business owner whose company’s earnings in 2020 and 2021 were 20% of 2019, yet he sees nothing but rainbows and opportunity. All is rosy. The asteroid only glanced his company. 

In both cases I’m reminded of old sayings (cliches) like, “Take your blinders off,” and, “Can’t see the forest for the trees.” When it comes to buying, selling, or growing a business:

  • Buyers will get excited about the big picture and at the same time play forensic mechanic on the workings of the company. Trust but verify and then verify again.
  • Owners, especially smart owners, will realize even if they have the best product in the world, they still need to work hard to get people to know about it and buy it.
  • Sellers believe they have a great business and sometimes don’t understand why all the questions. And one of my favorite sayings is, “Just when you think you’ve answered every possible question (about your business), the bank asks more.”

It’s a combination of optimism and skepticism that often leads to success. As in, I’ve got something good and realize it won’t sell itself.

“The future depends entirely on what each of us does every day; a movement is only people moving.” Gloria Steinem”

“It’s hard to be diamond in a rhinestone world.” Dolly Parton