Knowing Your Market

“Millennials are less loyal, so service agreements are on the decline. Will need to create “clubs” for them to join, with a monthly fee to be a member of the club.”

The above is from a research site to which we subscribe for industry and buy-sell deal information. This line is about the HVAC industry, which has long thrived on service agreements to maintain heating and air conditioning equipment (often mandatory on commercial properties). 

I’m not saying go out and have your business start a “club” to attract younger customers. The lesson here is, know your market. Social media is huge, popular, and many businesses really don’t understand it. So they either don’t use it or they use it incorrectly. I use it some and have come to realize LinkedIn is far and away where my business network and prospective clients are most active.

An example of knowing your market is that people have asked me why my blog doesn’t have comments. It’s because after briefly allowing comments I realized three things:

  1. Most of the businesspeople I associate with don’t have the time to write a lot of comments (I don’t have time either).
  2. I was getting bombarded with robot comments, mostly scams.
  3. People who do leave comments do it mainly for themselves, not for the benefit of other readers.

It’s tough trying to reach prospective customers who can be a moving target. So, understand where your customers hangout (figuratively not the specific restaurant, bar, coffee shop, etc.) and be there for them. The same holds true for those who can refer customers to you

“Different strokes for different folks; And so on and so on and: Scooby dooby dooby.” Everyday People by Sly and the Family Stone

Non-compete Agreements Become Almost Worthless (in Washington State)

This is a little different than our regular memos, but I feel it’s an important subject for Washington business owners.

I recently sent past and present clients a fantastic summary of Washington State’s new non-compete law, taking effect January 1, 2020, which I received from Jeanette Adams Gorman with Socius Law Group in Seattle.

I received a lot of “thank you” and “interesting” comments but the best was, “Wow! this is distressing.” I was a bit surprised so many business owners hadn’t heard much about this.

I won’t get into the details (and I’m glad to send you Jeanette’s report) but will give you my top takeaways.

  • Non-competes will only be applicable to people earning $100,000 or more with the threshold for independent contractors is at $250,000.
  • Non-solicitation agreements and non-disclosure agreements, including sharing of trade secrets, are not affected.
  • Non-competes when the business is sold are still valid (the seller is bound by it).
  • There may have to be compensation to a terminated employee if the company wants to enforce a non-compete.

I encourage business owners to get professional advice on this, so you’re prepared for 2020. Advisors, make sure your clients are aware of this.

“An ounce of prevention is worth a pound of cure.” Benjamin Franklin

Is it Crazy for a Business Owner to Pay A Buyer to Take Over the Business?

Many business owners claim their business would take off if only someone did a few simple things. The usual suspect in “simple things” is to do more marketing. Really? If it’s so easy why isn’t the current owner doing these supposedly simple things? And why would a buyer take the chance on these “simple things” working?

An example

A friend pointed out a retail business for sale whose owner claims it’s in a great location. And it is, for walking around and (having fun) but not for what this business does, given the congestion and limited parking.

The seller states with a little marketing and the addition of multiple additional services they could substantially increase the revenue. This includes extending their hours and hiring more employees. In today’s tight labor market good employees are hard to find and it’s made to sound like it’s easy to find good people. 

Also, the business’s sales are declining, it’s breaking even, and the owner is not taking a salary. 

The seller has a five-year lease, probably with a personal guarantee, and other obligations. It may be cheaper to give someone the business or pay a “buyer” to get out of that lease, other obligations, and the associated worries and headaches.  

Even in this case the “seller” needs be able to back up “why” the business has the potential to get out of its rut. All buyers want to see a clear path to growth and know where they can add value. 

Let’s be realistic, the above is a bit extreme (also rare is hiring a buyer on a consulting contract to fix a business and then buy it via an earnout, but I’ve seen it). But in rare cases, paying to discard a business, like we pay to take junk to the dump, may be better than five more years of hard work for no pay. 

“What’s surreal to you is just somebody’s Wednesday somewhere.” (Novelist) Karen Russell

This was written by Jessica with John’s input

The Grass is Always Greener (When You Only Care About Headlines)

One thing President Trump and other politicians have in common is the bashing of large tech companies. It used to be bashing Walmart. Yes, Walmart took over a lot of small to mid-sized towns. Yes, some small businesses (perhaps many) didn’t survive. But the politicians made it seem like these small retailers were thriving businesses with very high paid employees. 

After talking to owners of and/or looking at information on thousands of businesses I can say, 

“Overall, there aren’t that many good businesses.”

There are a lot of companies providing the owner a well-paying job and nice lifestyle, but these don’t have much value. Value comes from profit over and above owner salary. There are even more businesses with overworked owners whose salary is just adequate. 

When I’m asked how businesses are valued my initial response is, “I don’t know anything about your company and in general, it’s a function of profit. The more profit, the higher the value.” So where is all of this going? To these three points:

  • If you own a thriving business (solid profits after your fair market salary) realize you have one of the ~20-25% (the top quartile). Keep it there, grow it, get yourself out of the day-to-day, and if you have a dominant customer, diversify ASAP.
  • If you’re a business buyer, realize it’s like the old “needle in a haystack,” so keep searching because it can take a long time. Not only do you have to find a business in the top quartile, the owner needs to be motivated to sell (for a fair price), and it has to match your skills.
  • If your business is barely getting by, it’s a struggle to pay bills, you can’t save any money, etc. realize it will be tough to sell. And, by all means, remove from your head thoughts like, “We’ve been in business for 15 years so there’s value to the name.” As per above, the value comes from profits.

We all think what we have is great – better than cold beer (or lemonade) on a hot summer day. But that’s not what matters. What matters is what others think including banks, buyers, appraisers, etc.

“Strive not to be a success but to be of value.” Albert Einstein

The Business Roundtable Creates a Snit Attack

The Wall Street Journal (and I’m sure others) sure had a snit attack last week after the Business Roundtable came out with their latest report saying companies shouldn’t emphasize shareholder return over taking care of employees, customers, suppliers, and community. 

Taking care of people sounds like a good subject for Labor Day week. And what the Roundtable is suggesting sure sounds like the Costco model. Fair prices, good jobs at a fair wage with benefits, very community focused, and while I can’t comment directly on suppliers, I do have a friend who sells to Costco and loves doing business with them.

The above is also what my clients strive for. A client looking at a business to buy didn’t see an expense for benefits. He commented on how he’ll have to add in that cost (versus the common adding back of expenses) because he wasn’t going to be an owner not providing benefits.

I looked at a company recently whose owner seemed to be bragging about how little he could pay his employees. He didn’t connect that with the fact he had high absenteeism and constant turnover. 

With an extremely high employment rate it pays to take care of your people, especially in our robust economy.

As an economics major, I well remember Milton Friedman, who’s the person who stated a corporation’s primary obligation is to the shareholders (and which the Roundtable is now disagreeing with). I think he was wrong then and it’s a wrong philosophy now. Take care of your people (including customers and suppliers) and they’ll take care of you.

“Success is a great deodorant. It takes away all your past smells.” Elizabeth Taylor

Did the Houston Astros do the right thing, the wrong thing, or both?

A female reporter with Sports Illustrated reported about how the Astros assistant general manager directed loud and profane comments towards female reporters in praise of an Astros pitcher whom they had recently acquired after he was on suspension for a domestic violence issue.

When confronted on this the team first fought it. But it turned out to be a true story and the assistant GM and the team did the usual insincere apology along with the customary language about their commitment to the issue.

Then the team admitted they were wrong and fired the offender. But so far haven’t apologized to the original reporter, even though she was in the room when they announced the firing. And, it took input from multiple, backup sources before they were willing to believe a female reporter.

If you had an employee do something like this (inappropriate comments in public, or even in staff meetings), what would you do? Would it matter if it’s one of your top people or if it’s a marginal employee? If you were buying a company and found out about this what would you do?

Trade, Markets, Tariffs, and Socialism (and Confusion)

Could you run your business the same way matters are pointed out in the articles mentioned below? Three interesting headlines from over the past few months baffle me as to what’s going on and let me know why there’s so much confusion in the marketplace.

  1. France Teaches a Lesson in Free Markets (Wall Street Journal)
  2. Charles Koch: Tariffs a ‘Cancer,’ Could Lead to Socialism (Newsmax)
  3. The Trade War’s Winners Don’t Include Us (Wall Street Journal)

As a businessperson the last thing I want to see is the rise of socialism. I want to see opportunity. What these three articles state is we’re compressing free markets and it’s coming from a political party that used to be for less government interference not more. You’ll notice the publications and/or people mentioned here are ones typically associated with the party currently in the White House and Senate, which makes this pretty mind-baffling.

Columnist Greg Ip wrote about how France has opened up competition and he compared cellular service, Internet service, and airfares. For the first two items he used the example of a graduate student from France who in 1999 found the US much better and less expensive for cell service and Internet access. That has now changed because we have four major cellular providers, about to be three, while France has opened up the market to competition and prices have dropped. 

Similar story with Internet service (I know what we pay for it and it’s not a low amount). The US also has four major airlines while France has a third of domestic and half of EU flights provided discount carriers, and lower fares than ever before. His overall theme was it’s not about size but about openness (of markets).

The Koch interview was the shortest article. He called “tariffs and looming trade war a ‘cancer on society’” and said it will lead to isolationism and the rise of socialism. He called tariffs corporate welfare and said, “The less trade we have, the worse everybody is.”

Former World Bank president Robert B. Zoellick wrote an op-ed piece with the highlighted section telling it all, “Lost foreign markets, retaliation, higher prices, falling investment. Where’s the upside?” An example given is from The Peterson institute for International Economics that estimated each steel industry job created (by tariffs) cost $650,000 as US firms pay product.

Zoellick tied the trade war to socialism by using the example of tariffs and how they’ve affected farmers. We tariff Chinese goods, they retaliate by putting tariffs on farm products knowing farmers are big Trump supporters, the farmers suffer, the government gives them money, and all of a sudden anything close to a free market has disappeared. In other words, it’s government control of markets.

In addition, we’re running trillion-dollar deficits during a boom (not even Keynesian’s advocate this type of deficit spending during an upcycle). All of this is what led Koch to say, “Corporate welfare and cronyism is, I think, a contributing factor to so many young people being socialists because if the government is going to determine who succeeds in business, who needs the businesspeople. Just let the government do it. So I think it’s suicidal for the long term.”

I’m writing on this subject because I’m puzzled. There doesn’t seem to be a comprehensive plan or strategy. None of us could run our businesses this way (and be successful).

Financial Shenanigans Versus Incompetence

The Wall Street Journal and others recently reported about an accounting expert who had predicted the Madoff Ponzi scheme and recently went after GE for what he said are their deceptive accounting practices (of course, GE responded this person didn’t know what he was talking about). But this is not about GE but rather about accounting irregularities in general.

We have a government with annual deficits of $1 trillion and with a lot more “off the books” because there are non-budget items. On August 26, 2019 the WSJ had an article about how CEO pay is often much higher than disclosed (due to stock appreciation and clauses that escalate compensation).

And then we get to my world of small business where it’s usually not malicious but is accounting incompetence. Too many owners think their accounting department is like Cinderella – the weak little stepsister who must be tolerated at as little cost as possible. Sometimes it’s because they’d sooner “play” with their product than worry about the numbers and often it’s because they’re doing so well it becomes “management by checkbook,” as in, there’s plenty of money so who cares about cash flow, metrics, etc.

I’m working on a potential deal where the owner (and his advisors) setup five companies, two operating, one management, one for real estate, and one for equipment. They are so intertwined it will take a good CFO or forensic accountant to figure out exactly what their earnings are. And, it’s management by checkbook when the owner says, “we bought too much equipment and too many vehicles last year, so we’ll have to sell some.”

Tip to owners – one of the top three things you can do is have solid financial systems, accurate statements, good management reports, know your KPIs, and other metrics. It makes your life easier, especially as it seems we’ll have an economic correction soon, and when it’s time to sell, increases your value and attracts better buyers.

“The simple truth is that truth is hard to come by, and that once fount it may easily be lost again.” Karl Popper

What Is the American Dream? Part Two

Last month I gave my insights regarding a ProPublica article about how people over 50 won’t be the decision maker when they leave their job.  (Update, IBM is in the midst of a lawsuit for firing up to 100,000 people, targeting older workers. And there seems to be damaging testimony supporting the lawsuit’s premise.) A past American Dreams was to get a job at a large company, work there for 40-45 years, and retire with a gold watch and a pension. But no more, for most people.

I may be dating myself, but I remember in one college class a discussion about how another American Dream was to start a business and sell it to Sears. In those days, Sears was dominant and bought a lot of small businesses. However, a lot of those acquisitions were after Sears became the firm’s top (by far) customer and had the supplier “over the barrel.”

So, what is the American Dream these days? Actually, it should be “dreams” not “dream” as there are many versions. In early 2019 the New York Times had an opinion piece titled, “The American Dream is Alive and Well” with the sub-title of, “Most people in this country say that they are living it – but what they mean by the phrase might surprise you.”

The opening is, “I am pleased to report that the American Dream is alive and well for an overwhelming majority of Americans.” Here’s some interesting statistics:

  • Only 16% said to achieve the American Dream you have to be wealthy.
  • Only 45% said it means having a better quality of life than your parents.
  • And only 49% said it entails having a successful career.

Most interesting, 84% of Republicans and independents and 88% of Democrats said freedom was essential to it and less than 20% in either party believe becoming wealthy is essential. Many said it is experiences, not a lot of money, that bring happiness. With my clients, business ownership tops the list of desired experiences (and then getting out of business for their next great adventure in life).

Overall, all races, all levels of income, and all generations (from under 22 to over 70) are optimistic at an over 70% level. Also interesting is the Times published this during the Trump administration, which hates the Times.

Let’s move on to a Fast Company article titled, “We make $325,000 a year and don’t feel we have enough.” Catchy title but a bit misleading. Three case studies about people making $97,000 (Canadian), $171,000, and $325,000 show close similarities. 

The lowest income couple saves or has “leftover” funds of 12-20% (and a lot of Canadian safety net taxes), the other two have 30-40%. So, when the highest income couple says they feel they don’t have enough it’s because $125,000 is going to some form of savings or investment. Not bad. 

So, what’s my point, or points? Here are three:

  • It’s not as bad as the headlines – and things haven’t been as bad (or as good) as the headlines forever. Realize there are always pockets of people in a tough position no matter how good times are. But publicizing the positive doesn’t sell papers, get clicks, or get viewers. Then factor in social media, which magnifies everything and makes people think things are bad on a macro level. But when they discuss their own situation, i.e. the micro level, we get the results shown in the Times study.
  • We have different objectives – I’m guessing this hasn’t changed too much over the years and now it’s easier to collect information and publicize it so we have a lot more data and therefore insights. Different people strive for different things like money, power, prestige, spirituality, low stress, material goods, etc. No right or wrong and I applaud those who use our safety nets as a helping hand up to achieve their version of the American Dream.
  • Business ownership – as per above, for many, and this includes all of my clients, owning a business is the experience they want. It can include financial benefits but also provides the experiences many want. Those experiences include being successful, helping customers, providing jobs, being creative, and more. As in part one of this two-part newsletter, page one of my book Buying A Business That Makes You Rich, there are numerous reasons besides money people want to buy/own a business.

Conclusion

There is still opportunity everywhere. While it’s not for everybody, business ownership is the vehicle many want to maximize that opportunity, have the experiences they desire, and have a fulfilling life.

The Best Lessons are From Dogs

I recently read Dave Barry’s latest book, Lessons From Lucy; The Simple Joys of an Old, Happy Dog. It’s funny, as one would expect from Dave Barry, insightful, poignant, and not exactly what I expected from him.

I’m not going to “steal his thunder” and give away all his lessons. Read the book (it’s a fast read and extremely entertaining). I will share one lesson, because it’s one of the few mantras I have in my business.

Don’t stop having fun. (And if you have stopped, start having fun again.)

On page one of my book, Buying A Business That Makes You Rich, I state that in addition to all the reasons people have for wanting their own business, fun needs to be at the top of the list. The same goes for a job, yet too many people slog through their days, collecting a paycheck (sometimes a very good paycheck) but not building a career or a lot of happiness.

It’s even more important in our personal lives (to have fun). We can’t go through life like the Puritans, feeling we have to suffer on earth to have everlasting life. But considering most of us spend 25-35% of our adult lives “on the job,” it’s crucial to be doing something you like if not love.

And guess what, when you’re having fun it carries over to your co-workers, customers, family members, and others, and, increases productivity. There’s a lot of money spent on advisors helping employees, and owners, get to the point of enjoying what they do and doing their jobs better. It’s often called culture and it’s a lot easier to destroy a culture than build a great one, which is one reason for all the experts providing great advice.

“Wine is sunlight, held together by water.” Galileo Galilei