Author: JohnM

There was a column in the Seattle Times Sunday business section a few months ago titled, “Early Retirement Can Be Hazardous.” This was a financial column, so the focus was on running out of money. It triggered the thought about what exactly is retirement and why there is so much focus and advertising about it.

The government created the concept of retirement as we know it when Social Security was started in the 1930’s. At the time, the typical life expectancy of a male age 65 was age 68-70. It was also the middle of a long depression, which really didn’t end until the start of WW II. By giving citizens a retirement stipend, it was a way to get older people out of the work force and create job openings for younger people.

Now the life expectancy of a 65-year-old male is about 18 years and for a female it’s about 20 years (from the Social Security Administration website). We also have a shortage of qualified workers so there’s no need to push people out of the workforce.

If the government created the concept, then the financial services industry popularized it. Radio ads, TV ads, print ads, workshops, webinars, etc. tells me there’s a lot of money to be made helping people retire. (And studies say most people don’t save much money.)

So it was refreshing to hear an owner say, “I don’t buy into the concept of retirement as most people think of it. I’ll always want to be doing something.” My dad retired as soon as he hit age 62 because he hated, and I mean hated, his big corporate employee (he and many others had been let go 8-10 years earlier and won an age discrimination lawsuit, which got him his job back, but lost the company his loyalty).

When it comes to business owners contemplating selling, the most important question to ask is, “What will be your next great adventure in life?” Many haven’t thought of it. Something triggers the desire to sell but there’s been no planning.

Often it’s one of the following (assuming none of the 3 Ds, divorce, death, or disability/health issue):

• They started the business to work on the widget and now are managing a few dozen people, and they don’t like managing people.
• They’re burned out because they haven’t built a management structure, i.e. they don’t delegate. *
• They’re bored and want a new challenge.
• They’ve lost the battle at home, i.e. their spouse wants them out.

It’s funny how we want our favorite authors to keep writing, musicians to keep playing, actors to keep acting, and yet people always ask others when they’re going to retire, as if it’s a badge of honor to stop contributing.

“I don’t believe in retirement. Everybody who retires too early dies too early.” (Sportswriter) Dan Jenkins

* As per my friend Allan VanderHamm’s recent newsletter, a dependency on the owner reduces the company’s transferable value, meaning when the owner leaves too much of the business leaves. (and the price is lower).

“Buyer Beware: Hollywood Special Effects Now Permeate Property Listings” is a headline in the Wall Street Journal’s March 5, 2019 edition. The gist of the article is sellers and their agents to doctor images of the house for sale. The article states, “The technology allows sellers to green browned out lawns, stage rooms with virtual furniture and even perform full-blown HGTV-style makeovers with the click of a mouse.”

Of course, this is a huge risk to buyers, especially when a Redfin study says up to 35% of buyers made an offer sight-unseen. I’m surprised this took so long! Home sellers are way behind business sellers when it comes to putting lipstick on the pig.

As in the video below and the article “Add-backs, Adjustments, and Assumptions” are prevalent in the buy-sell world. Which is why I was pleasantly surprised when a friend, who recently sold his business to the number one player in his industry (and the only truly strategic buyer) told me he handed his financials over to them with no adjustments, recasting, or anything else.

A big part of what made his business attractive was he paid attention to the details, which I espouse regularly:

• His business wasn’t an extension of his personal checkbook.
• He paid close attention to the numbers and their accuracy.
• There was (and still is) a strong management team, and highly paid, which is why his employee retention is so good.
• Because of the above point there’s no dependency on the owner.
• The company’s been steadily growing.

It’s not hard but too many owners focus solely on the short-term, as in, how can I reduce my taxes this year? If my friend had only concentrated on current taxes (write off personal expenses, buy things not really needed, or expense inventory) his price would have deflated like a tire hitting a nail. Or, the buyer would have passed on the deal.

“If something can corrupt you, you’re corrupted already.” Bob Marley

For the foreseeable future once a month this memo will be on a topic to increase value in a business, which is exactly what business owners should want and is definitely what business buyers are looking for.

I’ll start with one I’ve seen a lot of lately, customer concentration. Here are three examples:

1. Seventy percent of sales to one customer.
2. Seventy-five percent to three customers.
3. Eighty percent to three customers (one being a middleman buying for their clients).

This should scare owners, but usually they feel their relationship is so tight all is okay. To a buyer, with acquisition debt payments, it scares the bejeebers out of them. To spin this around, I’ll repeat something I wrote about years ago because vendor concentration can be as deadly as customer concentration. A past client had about 70% of his sales from one vendor, he lost the line, built up his business, and again was with one vendor at 65%. Lost that vendor when the vendor’s competitor took sales in-house and his vendor went to my past client’s larger competitor.

This stuff happens, all the time. It’s not make-believe or fantasyland. I talked to an owner recently who lost his top customer. Why? Because his salespeople (I’m using the term loosely) made contact once a year. The rest of the year they took orders and cashed commission checks.

So, what happens when it’s time to sell? One recent deal had a price 30% of what it would have been three to five years ago, which was before the top customer changed focus and sales reduced significantly. One of the examples above is a company close to selling and the facts include:

• The price is 50-60% of what it would be if there was no customer above 10% of sales.
• There’s a claw back provision for 20% of the price (if sales drop below certain levels).
• The seller has to stay for (at least) one year to maintain the relationship.

So much for exiting with style, grace, and more money.

The real problem is no matter how often their CPA, banker, consultant, and M&A professional tell them to fix this problem the owner is “fat, dumb, and happy” riding the top-customer wave. It’s why the Wall Street Journal published statistics showing 90% of small to mid-sized businesses are not ready to sell for maximum value.

“There is more stupidity than hydrogen in the universe, and it has a longer shelf life.” Frank Zappa