As business (and life) have visibly come to a standstill there’s still activity. In the last few days I’ve talked to or emailed with four people in my industry and all have said they have things going on, just not as many in-person meetings.
I do think buy-sell deals will be delayed as buyers (and banks) see if the virus is having any effect on the business’s performance. In a meeting last Saturday, we all agreed Americans are quick to panic, hence the run on toilet paper and other items, and also quick to get back to normal.
I plan to have us do what we normally do, albeit with a lot more of our conversations on the phone.
I’d be remiss to not write this memo about the Coronavirus and yet I’m not going to go into whether it’s just the flu (like some say), over or under reaction, or if people should wear masks to bed. I do know the virus has a longer than normal life of being alive, spreads super-fast through our easily traveled and networked world, and that’s what’s concerning people So, let’s cover what it’s doing to people like you and me, i.e. business owners and executives.
The headlines tell us the airline industry, cruise industry, and therefore related businesses like hotels and suppliers are having problems. But what about small businesses, that I really feel for? Here are a few examples:
Restaurants – we went out with friends last weekend and a restaurant I’d expect to be full on a Saturday night was maybe at 75%. The Jersey Mike’s sub shop in Kirkland was on social media reminding people they were open (so come on in). Pagliacci Pizza sent an email out about their health and cleanliness policies, i.e. come in for some pizza, we’re okay.
Catering – this is an industry hit hard. Two owners told me about all the events being cancelled (one is more concerned about her employees not getting hours and pay than anything else). KIRO7 did a segment on how devastating it is for caterers. My Rotary club, like many others, has canceled at least three meetings. I feel sorry for the staff who won’t be working those days.
Product companies – a client is worried about the big industry trade show at which they exhibit because many of their customers are from overseas, and probably won’t attend, and see her new products.
A good friend owns a video production company. All their jobs in March and April sans one cancelled in the last couple weeks. Wow!
Alternatively, I was in five retail places over the weekend and they sure didn’t seem to be suffering from a lack of shoppers and a person on a call Monday said he was calling from a jammed packed coffee shop.
All over the media is the recommendation from government to have employees work from home, if they can. Easier said than done I say, having had a home office for over 20 years. It takes time to realize you’re “at work.” I used to have a quarterly breakfast with a business friend and when he started working from home he told me how hard it was to stay away from the refrigerator.
Last week a business owner said she has some people working from home and estimates they get done about 70% of what they get done in the office. And, we’ll find out if having certain people work from home improves or damages culture.
The attorney looked at the audience and said, “Make sure you understand everything in your agreements. If there are any ambiguities, they will come back on you, not your attorney.” This was many years ago when said attorney and I were on a panel together.
Wise words, aren’t they? I will never forget them. I thought of this the other day when an exit planning client told me about a dispute over a distribution agreement with another company. And, it seems the other party also ignored this advice, thus a mess.
Without giving away any details, my client signed an agreement that gives the other side an out. The other party signed it including a clause that gives additional control to my client. How does this happen you may ask? Here’s how.
My client got to the point where he told his lawyer he didn’t want to spend any more money on legal fees. The lawyer had mentioned the out clause, but the client was mentally more concerned with fees than anything else. However, the lawyer should have said something like, “There’s no charge for this conversation as you need to realize the other side can get out of the agreement at any time, leaving you with expenses and no recourse.”
The other party said, when it was pointed out there was a clause giving my client ownership of the brand (versus distribution rights), “An employee of ours put that in there and we didn’t notice it.”
In both cases, not paying attention to the details, not noticing ambiguity, and being cost conscious versus results conscious. In the buy-sell world there are more details, more intricacies, and lot more words to read and understand than in the above example.
In all cases, don’t ignore the advice above.
“A little alarm now and then keeps life from stagnation.” (Author) Fanny Burney
Running a small business is easy. Having a small business as an absentee owner is a piece of cake. The employees can operate the business without adult, i.e. owner, supervision.
The above are all myths of small business and here’s an example:
In the mid-1990’s at a Chamber of Commerce meeting I met the owner of a new auto service center in Kirkland. We hit it off, started taking our cars there (as did numerous family members and friends), got great service, honest pricing, etc. They did little things right like saying you’ll need brakes in about six months versus wanting to do them immediately. Or giving the car a once-over look for no charge.
Unfortunately, the owner died a couple years ago. His wife sold the business to a technology executive who bought it as a passive investment. I hope the wife got paid in full at closing.
We started noticing little things like the phone not being answered and messages not returned. Our only needs were oil changes, the (recently promoted) service manager knew us, and all was good (for us). But obviously not for other customers and definitely not for the employees. It went from a family-business culture to one where the manager said to my wife, “It’s now just a job. I work my hours and go home.”
Guess what? Now the phone isn’t answered at all, the blinds are down, and the doors are locked. About five years ago I started using the term “adult supervision” to describe what an owner needs to bring to the business. This business used to have adult supervision and thus the employees were happy, the customers were happy, and the business thrived.
Don’t think this only applies to very small, consumer businesses like a garage. I’ve seen business with sales of $5-15 million suffer similar issues when the owner decided to take his or her eye off the ball, spend more time vacationing than working, or just clipped coupons (taking a huge salary or distribution as the business grew stagnate).
“The universe if full of magical things patiently waiting for our wits to grow sharper.” (Author) Eden Phillpotts
It’s 2020. Another year, another decade. Doesn’t seem that long-ago people were worried about the world collapsing on 1-1-2000 because of computer clocks, does it?
As Jessica and I talked last week about getting back in the swing of things after the holiday break, one word we used a lot was urgency. Urgency on our marketing, urgency with our clients, and just keeping things moving.
Seattle football fans know the Seahawks would have had a home game in the playoffs if they had shown some urgency on the one yard line instead of getting a delay of game penalty.
Urgency doesn’t mean rushing into things without a strategy or good tactics. To me it means when the starters gun goes off you move at the appropriate pace. By this I mean, in marketing you can move fast. Making changes to your processes or culture are done at a different pace so you don’t trip and fall. It’s different for all of us.
Think about three areas in your business where you can pick up the pace. And then move on them now, not next month or next quarter.
“Few things are harder to put with than the annoyance of a good example.” Mark Twain
We recently spent a long weekend cleaning out our family cabin, which recently sold. As we thought about all we did over the years, we realized it was about a five-year project, which ties very well to what business owners should do when planning their exit.
It was about five years ago when we made an effort to get rid of junk. The cabin’s been in the family for almost 60 years and my dad was a hoarder. If one tool was good, three of the same were better. We got rid of five winches, and I don’t recall seeing one in use for decades. We estimated at least one ton of stuff went to the dump.
In my ACTION Plan* ™ to sell a business the “A” stands for arrange all the affairs of the company. Like with our cabin, it starts with cleaning. Cleaning the facility so it looks like you care. Cleaning up the books so they paint a true picture of the company’s performance. Making everything (operations, finance, marketing, etc.) look as presentable as possible to a pair of (skeptical) buyer eyes.
Once we decided to sell it was a full effort to “have it ready.” This meant quasi-staging (there’s only so much you can do in 700 square feet). This meant getting rid of glasses, plates, area rugs, furniture, and anything else that made the place look cluttered or smaller (it’s small already). We cut and trimmed the grass a lot more often, touched up the paint, removed an old storage building, and kept it clean and tidy.
What we learned is no matter what you do, a buyer will find things you didn’t do. And believe me, a home inspector will find even more of those things. Just like business buyers approach companies with a skeptical eye. And the bank looks at it with a completely different set of eyes, given they really want to get paid back. (Given we don’t live near the cabin, we really didn’t have the time to get to the little things, like we all should at our homes and owners should do in their business).
The “C” in my ACTION plan stands for counsel the company, its people, and processes. This means keep everything up-to-speed, like we did with the cabin once we put it on the market. In a business this means pay attention to the non-financial factors. Its customers, employees, suppliers, market conditions, and anything else that influences the numbers.
I learned some interesting lessons selling a cabin in a soft market, from 2000 miles away, and not having the ability to be there enough to manage the little things. Given owners are around their business daily it’s not a good excuse to not pay attention to the things making a business more attractive to a buyer.
“Don’t ever think you’ve succeeded. Always try to do better – otherwise, drop dead.” Arturo Toscanini
* Arrange all the affairs of the company
Coach and counsel the company; its people, process and systems
Transmit and teach all the good “things” about your firm
(and those “things” are)
Intricacies that make your company special
Operations and management systems in place that will make a transition smooth
Numbers, all the financials in understandable form, straightforward with no “tricks”
Somewhere over the rainbow… is the successful sale and exit of your business. But who will buy it? What will make them want to pay more? Should I really worry about these things because it’s such a great company?
Let’s cut to the chase. Almost all buyers are going to look at multiple companies, anywhere from a handful to a few dozen. They compare, contrast, look for opportunity, a fair deal, and, above all, are skeptical by nature (all you have to do is look at the online ads and see the platitudes heaped upon businesses that are losing money). So, you have to be ready, and you have to be ready for your logical buyer.
Types of Buyers
There are two classes of business buyers, strategic and financial. Financial buyers tend to want a return on investment based on the current operations. Strategic buyers often look at synergies, reduced overhead, etc. to boost the return.
Within those classes there are seven types of business buyers; although each type has its unique features, there is some overlap:
Individuals (or partners)
Family and/or management team (different but similar characteristics)
Small business owners (growth by acquisition)
Large companies (strategic buyers)
Private equity groups
Family offices and fund-less sponsors
Most of the above are self-explanatory but you may not be familiar with some of the buyer types, so I’ll explain a few. Search fund buyers are (usually) individuals who want to buy a larger business than they can afford on their own. They work with investors, who fund their search, i.e. a salary while looking for a business, in return for the opportunity to invest in the deal. This is quite popular and is now taught in numerous MBA programs.
Family offices are very wealthy families that often want to diversify their holdings by purchasing operating companies. Fundless sponsor buyers are a cross between private equity and search fund buyers as they find the deal, then raise the money, often from family offices and private equity (these funding sources are quasi-financial buyers as they often want a return based on performance, not synergies with their current operation).
Financial buyers tend to be individuals, family, management, small-business owners, and sometimes search funds. They tend to be interested in:
A fair-market salary for the job of company president.
Scalability—most buyers want a business they can work on versus work in.
Profits in addition to salary—this is how the buyer will pay off acquisition debt, fund growth, and cover any hiccups to the business.
Not only income, but also net-worth increase (like you have achieved through business ownership)—every payment they make on the acquisition debt increases their personal net worth because those payments come from the profit the business generates.
A deal structure that allows them to make a down payment from their personal funds (this can include the help of friends and family) with the rest of the price covered by a bank loan and/or seller financing.
A business that is salable in the future—something they feel can be grown, in an industry that has a future, and is attractive to buyers.
Manageable risk—people who buy businesses are usually more risk-averse than people who start businesses.
Financial buyers who are individuals, small business owners, family, or management typically make acquisitions up to about $10 million, with the majority of the deals at $6 million or less.
A friend was selling his profitable business. He told me there were three potential buyers, including one strategic buyer and one pure financial buyer. The financial buyer made the best offer!
Just because a company is seen as a strategic buyer doesn’t mean it will automatically pay more. I recently was involved in negotiations for a large industry player to buy a “small” business in the same industry. The buyer’s starting point for pricing was the value of the assets. Like with my friend’s situation, strategic buyers are just not throwing money around.
Goals are an ongoing task, not just for a calendar year.
Many years ago I was a regular at a pretty cool restaurant in Minneapolis, when I traveled there about once a month on business. I remember the manager telling me, as he propped up my wobbly table, unstable tables have always been, “The bane of the restaurant industry.” And he’s right. Invent a table that doesn’t wobble and you’ll have quite a business.
So, what’s the bane of your business? Is it:
Marketing – this is a common one. I’ve talked to so many owners who say something like, “If only we knew how to market better.”
Sales – too often there are more order takers than true salespeople. And, finding a good salesperson is one of the toughest hires there is.
Inefficient operations – growth, and I mean profitable growth, can mask a lot of problems. But if there’s not growth or when it stops, it’s time to get an expert in to improve productivity. Improve gross margin by 2 points in a $5 million business and it’s $100,000 to the bottom line.
Poor culture – let’s face it, most problems have to do with the people. Don’t believe it? Just look at all the articles, podcasts, etc. on management, leadership, culture, and similar. I always find it amazing when we do “focus group” type meetings with employees. Very insightful (and usually the owner is surprised by the results).
A dependency (key customer, an employee who if they left would create a huge problem, or you, the owner, can’t get away without risking catastrophe) – easy to spot, tough to fix (quickly). But when it comes time to sell, a large dependency will scare buyers away or reduce the price.
It’s time to figure out the bane of your business and deal with it (or them).
“The main dangers in this life are the people who want to change everything – or nothing.” Nancy Astor
This was originally written for the blog on www.ibainc.com.
An interesting title of an article about how the author helps his company’s clients, isn’t it? Immediately telling readers the subject might not be for them. It’s because I’m not a salesperson, one size doesn’t fit all, etc. In fact, I start out speaking engagements on buying a business by telling the audience (usually management and executive level people0 there’s a good chance it’s not for them.
But when it is for you, be sure to do it correctly. And that means don’t jump in without a plan and when it comes to growth by acquisition that means know why you’re doing it.
In my book, Company Growth By Acquisition Makes Dollars & Sense I have a list of 19 reasons to consider growing by acquisition. I’ll list them here and go into detail on six of them.
The cake – 16 solid reasons (in alphabetical order)
Acquire great talent, including the seller
Assets are cheaper as a package
Competitive Advantage (fill a weakness)
Diamonds in the rough
Diversify your product offerings
Integration is easier
Location, location, location
Make a competitor go away
Psychology – Employees like to be part of a winner (growing firm), just like sports bandwagons
Risk, it’s a lot lower
Overhead the same, volume higher
Vendor relationship strategies
The icing – the top three
Customers (efficiency vs. make more calls)
Yes, we can!
The bigger you are…the better
Acquire great talent
Good employees are hard to find and often are not in the job market. Just talk to any executive recruiter. While all buyers want capable employees, most strategic buyers (that’s you) also prefer to see a solid management team in place.
Great employees with industry knowledge and experience are in the job market even less. When you are looking for great salespeople, I believe this is amplified. They won’t change if they’ve got a good thing going. Here are some statistics from an executive recruiter, which explains why it’s tough to find good people.
82% of people aren’t searching for a job.
Leadership, or the lack thereof, is the top reason management people switch jobs (not money).
46% of millennials left their last job because of the lack of career growth.
If you acquire their company and create an atmosphere of growth, those employees will want to stay. While I can’t comment on the culture in all companies, I do know that many small family-owned businesses have owners who are coasting. They are doing very well, they aren’t working too hard, and they don’t want to disrupt the nice moneymaking system they have.
Dependencies are a huge issue in most small businesses. By being larger you can reduce most or all of the following:
Not too much explanation is needed. More customers over your expanded revenue base, more employees, deeper management, less product concentration, and most importantly, there’s more talent to take a load off the owner. And an owner dependency is often the brightest red flag for most profitable small businesses. Of course the owner has to be willing to take advantage of the deeper bench by delegating to them.
Psychology – Be part of a winning team
Employees want to be part of a winning team. They want to feel they’re contributing to a winning effort. It’s very much like sports, the more the team wins, the greater the number of fans it has.
I’m thinking of a young man in his early 20’s whom I know. He took a while to figure out some things in life and is now steadily employed and has been for the last few years (with the same company). He’s proud of his job, his contribution, and showed disdain when a new, younger employee (whom he called “the kid”) flaunted the rules and wasn’t dedicated. (But let’s be honest, some employees at this level don’t care, but they’re not the ones who are important anyway, like “the kid.”
Now elevate this to the more experienced people including the management team. In one company there was some doubt about the general manager accepting new ownership. However, this doubt was unfounded as he’s leaped at the chance to implement quality controls, better processes, and accountability.
The icing – the big three
Now here are the top three reasons to grow by acquisition.
“This would be a great business if it wasn’t for those darn customers” was a semiserious comment someone made to me years ago. Of course it’s the annoying (bad) customers he was referring to. It’s good customers we all want more of—customers who are loyal, steady, in good financial shape, growing, pay their bills on time, appreciate the value you offer, and consider you part of their team.
An ideal situation is where there are some overlapping products, so there is some continuity and synergy to be achieved. The figure below shows this. Your salespeople now have an easy transition to discussing, and selling, their products, and their salespeople have an easy transition to discussing, and selling, your products.
In simple terms, if your primary motivation is acquiring a customer base, you are acquiring market share. You may have many other reasons (above), but the bottom line is you are buying customers, and that means top-line growth.
Yes, we can!
This is not about ego; it is about building an exit strategy in order to get a higher selling price. Buying another company, assimilating it into your operation, and showing that the combined profits are greater than the two individual companies’ profits demonstrates to potential buyers that this can be done. It proves you have the team that can integrate one operation into another.
This integration could be their assimilating your firm into theirs or it could be a signal that growing your business (or now a division of theirs) is possible by further acquisitions. A management team that can successfully integrate other firms without major disruption and with immediate efficiencies is a valued team. Too many big mergers and acquisitions fail. Up to 95 percent of public mergers do not live up to expectations. A savvy buyer will appreciate this talent and experience associated with past integrations.
Why larger firms sell for more than smaller ones (all other things being equal)
The bigger your business is, the more it will sell for, all other things being equal. A $50 million (revenue) company with 10 percent earnings will sell for a higher multiple (of profit, earnings, free cash flow, or whatever metric you use) than a $25 million company with 10 percent earnings, which will sell for a higher multiple than a $10 million company, and so on.
There are generally accepted ranges for multiples of earnings based on the range of companies’ revenue. However, too many small business owners see in the Wall Street Journal that a $300 million company in their industry sold for ten times earnings and assume their small business will also sell for ten times. That won’t happen; there’s more risk in smaller businesses than larger, so the desired return on investment is higher.
The fastest and safest way to grow from $5 to 15 million is by acquisition. Buy another firm in your industry—a supplier, customer, or unrelated company that provides diversification—to have an immediate revenue increase and a larger platform from which to grow organically. See more profit and a higher multiple when you exit.
“It’s not bragging if you can do it.” (Dizzy Dean, 1934)
A lot of business owners talk about their company’s potential or the growth that will occur if the buyer just “does some marketing.” Of course, most of this is just talk. Business buyers of all types and sizes are a skeptical lot. When buyers hear too much about potential they think the seller has tried every conceivable way to grow and can’t.
So prove you can do it. Grow organically and also go out and buy another company. Show that you can integrate the people, processes, financial systems, customer service, and everything else into your operation. Private equity groups and large corporations make multiple acquisitions. If you can buy another firm and successfully assimilate it, you become more attractive to these buyers. They will assume you can do it again and that your management team is capable. Strategic buyers and equity group buyers highly value management teams—it can even increase the multiple (compared to having the same size company that has not made acquisitions).
We’ve covered just six of my 19 reasons on why it makes sense to grow by acquisition. I realize most may not apply to your business. It’s the few that do apply that are the reasons why this strategy may make sense. Heck, your catalyst may be a reason not mentioned here. The point is this has worked for many companies and you should always have your eyes open looking for opportunities as there are a lot of good reasons to do so.
At the same time I must acknowledge there are pitfalls you need to avoid, but they can be avoided if handled correctly. How you handle the cultural integration makes a huge difference. Letting (most of) the employees, with both companies, know their jobs are safe is important, as with any acquisition. And you will be taking on debt, but this debt comes with good things like customers, good margins, cash flow, etc. If it makes sense to buy another company these pitfalls are easily overcome. As a very wise executive once told me, “Growth hides a lot of operational warts.”
Gazing out the window of a high-rise I saw workers on scaffolding on a building across the street. My first reaction was, “That looks like fun. It must be exciting to work above the city.”
My second thought was hanging from a building is a lot like entrepreneurship. It’s risky, thrilling, and can be very rewarding. It may not be your life at risk (like hanging from a building) but rather money, respect, and sanity. And the odds of an entrepreneur failing are much greater than a cable, with multiple redundancies, snapping.
Within a business the scaffolding reminds me of what too many businesses have, and that’s a dependency. The workers suspended above the ground are dependent on the equipment, the maintenance, and other people. If any fail the result can be catastrophic.
The same is true in business, especially small and mid-sized businesses. Too often there’s a dependency on one, two, or three customers, a key employee or two, or the controlling, unwilling to delegate owner.
Often it works out in spite of the dependency. But then it’s time to exit and the buyer worries the cable will snap leaving him with acquisition debt payments but a missing key customer or employee or the (previous) owner, who has too many secret sauce recipes in her head.
Lesson: high-rise scaffolding has redundancies to prevent a disaster and a business’s redundancies are having a diverse customer base, knowledge spread amongst numerous employees, and an owner who’s built a team he delegates to. This is what leads to a high reward.
“The three most harmful addictions are heroin, carbohydrates, and a monthly salary.” (Statistician) Nassim Nicholas