You’re Betting on Yourself

While having lunch with a client he said being a business owner means you’re “betting on yourself,” which is so true. It’s the same thing a salesperson will tell you, especially if they’re on pure commission or have a base salary so low it doesn’t mean much.

The above gives the impression it’s all about money. Money is important but it’s not the only thing. Here are five areas I’ve noticed are important to our clients and other owners.

  • Lifestyle – whether it’s being able to play golf a couple days a week or get in the office at 6 am and stay until 6 pm it’s the owner’s choice (usually). Having a management team that allows the owner to not work as much or only work on what they have a passion for is a key item.
  • Employee growth – at least 80% of business buyers I meet say they want to help build a team, help employees get better at their jobs, etc. Being a mentor is important to many.
  • Family – there’s the implied taking care of the family financially and often buyers will tell me they want a business many owners’ lament that their kids aren’t interested in the business.
  • Accomplishment – when you see your company’s product or service solve a customer’s problem it’s rewarding.
  • Creativity – especially for those coming out of a large corporation the ability to be creative with the product, marketing, sales, employee relations, and more is important. Small businesses often live on creativity and flexibility.

Our work is helping people bet on themselves, and that’s pretty rewarding also.

“Of all the arts, the art of living is probably the most important.” (Novelist) Deborah Levy

“As bad a dresser as I am, anything beats being judged by my character.” David Sedaris

Was it Covid or Was it Not?

According to the New York Times, the current situation with Covid and the economy breaks down into two distinct categories.

  • Republican politicians have done their best to downplay Covid, its effects, the vaccine, etc. and emphasized business viability.
  • Democratic politicians have been ultra-cautious with everything related to Covid and yet have ignored the side effects including the disaster of remote education, mental strain, lost jobs, and business failures.

There is a similar separation of opinion when it comes to the selling and buying of businesses and the effects of Covid. Here are three examples:

  • A client is blaming Covid for not hitting their goals this year. Last year was a super year with one reason being the employees had nothing else to do but work. No travel, no entertainment, not much of anything. This year has shown a drop from that peak performance because people now had things to do and were more than ready to do them, to make up for lost time. Were the goals overly optimistic?
  • A friend told me his business is up 50% this year. He knows part of it is a Covid spike that will not continue but he doesn’t know exactly how much of his growth is related to Covid because 2020 was flat. (thanks to Covid).
  • In analyzing a company for a buyer making an offer, we see tremendous growth from 2020 to 2021, about 60%. We know some of this is normal growth and some of it is related to the pandemic. We just can’t figure out the mix.

This is a tricky situation. A buyer can’t discount all the growth as coming from Covid and a seller can’t claim Covid had no effect when they grow 50 to 60%. It takes some creativity so that neither side gets burned. A buyer will easily get burned if they are not skeptical about huge rates of growth in a business and if that happens the seller may get caught in the fire also. Best to pay attention to the quote below.

“The question is not what you look at but what you see.” Henry David Thoreau 

Sand Trees (Will Disappear)

We were in Florida in early December and happened to see the Palm Beach Christmas displays. The tree in the photo is made of sand. It is gorgeous, you can see it’s about 30 feet high, and obviously took a lot of hard work and skill to create.

It’s a lot like a business in that it takes a lot of skill and hard work to create a good company. And when somebody does that it is quite an accomplishment.

As you look at the sand Christmas tree, imagine what would happen if a rainstorm hit. Or if a rain and windstorm attacked the area. This tree wouldn’t last very long, would it? Businesses aren’t as fragile as a sand tree, but they do have things that can cause them to have reduced performance or even collapse. 

It’s one of the trickiest things a business buyer deals with, determining if those issues are serious enough to cause them to back away from the company. Of course, when a company is for sale, everything is rosy and portrayed the same as if the Christmas tree is resistant to everything.

Look no further than the headlines for what some of those things are in the small business world. They include:

  • The employee retention and recruitment situation given there’s a shortage of good employees.
  • The supply chain issues, which affects small businesses a lot more than huge companies like Amazon and Walmart who can control their own supply and delivery chains.
  • Escalating real estate prices, which may make future rent more expensive than it has been historically. 
  • A customer base that is not only fickle, but it is much more educated due to the plethora of (online) information available on everything.

And then, for companies who have thrived during Covid, the question is, is it a spike or a trend? It causes a great deal of consternation for buyers as they surely don’t want to pay for something that won’t be there in another year or two. Quite a dilemma trying to figure out the staying power of recent growth.

This issue is not going to go away for a while. Just another thing we have to deal with.

“Living at risk is jumping off the Cliff and building your wings on the way down.” Ray Bradbury

Business Buy-Sell Facts

It surprised me when I saw that in less than a week my podcast on business buy sell facts was one of the most popular educational episodes we have. Given that popularity, I figured it also makes for a good newsletter, so here we go.

Dave Chappelle took some heat for saying gender is a fact. Of course, he gets into hot water every time he does a special because he insults just about everybody. Ignore what he said (is a fact), just pay attention to the word fact because in business buy-sell there are facts (musts) buyers and sellers must pay attention to no matter how special a buyer or seller thinks they or their business are.

I did the video version of the podcast with the background being the island of Monserrate, with steam coming out of its volcano and I say if you don’t pay attention to these facts your deal could blow up just like that volcano. FYI, the following are for buyers and sellers of small and midsized businesses. They don’t necessarily apply to private equity size deals.

Business buyers 

  1. Sellers don’t care if you have Six Sigma or are a Lean expert, they care that you can run their business and you show that by demonstrating how you had profits 10% more than other divisions every year or that you cut attrition by 50% over two years.
  2. You will get buyer fever Just keep it under control and don’t let it get you into a dumb deal. 
  3. You will sign a personal guarantee if you’re using a bank and probably if it’s seller financing if the seller has good lawyers. The bank making you sign a personal guarantee always reminds me of a story my friend Mike Flynn, former publisher of the Puget Sound Business Journal, told about a bank president who said if you’re not willing to put up your house why would the bank take a risk on you and lend you money.
  4. You will need some of your money for the deal. It will not be 100% financed by the bank and the seller; you will have skin in the game. 
  5. It is work and it is hard work and time consuming to find a mature, profitable, and fairly priced company. They don’t come to you so don’t sit there waiting for the phone to ring or just looking at ads on the Internet.
  6. The seller controls the deal, if it’s a mature profitable company. If you want to control the deal look for a turnaround business and roll the dice.
  7. It’s not just the numbers. The non-financial factors are just as if not more important than the financial statements. The customers, the employees, the supply chain, the technology, the lease. Jessica recently lost a deal because the landlord wouldn’t give a long-term lease on a location driven business.
  8. Dependencies are real and they are a serious issue. I asked a business broker about a customer concentration issue on one of his listings as the top two customers were almost 60%. He said, “I don’t see that as an issue.” Really? Especially when the number two customer, about 25%, had been brought over two or three years prior when the company hired their general manager from a competitor. Do customers like the company or the general manager?
  9. Don’t overleverage like the big players do. Keep your debt coverage ratio between 1.5:1 and 2:1. 
  10. Don’t get analysis paralysis. There can always be another question. As I write in the preface to Buying A Business That Makes You Rich, you will make a leap of faith and you want to make it off a chair not the roof. 

Business Sellers

  1. The numbers are the numbers, and they must be correct. Don’t rely on AAA – addbacks, adjustments, and assumptions to make profits look higher (than they really are).
  2. Buyers pay based primarily on history, but they won’t buy unless they see growth opportunities. 
  3. There are valuation ranges and your business isn’t so special those ranges don’t apply. Every industry is different, and ranges vary by size. In the small business world, the more profit the higher price. 
  4. Make yourself expendable. The business should not be you. Buyers want to see a team. 
  5. Planning increases the business’ value. You can’t say I hired a new manager two months ago and now everything’s fine and profits will be higher. You have to allow a few years to show stickiness because three years is typically what banks and buyers ask for in financial statements and those statements will show the results of your planning.
  6. Show growth. Don’t say you can grow, just do it. Show growth even if you don’t want to work a little harder, don’t want to hire another employee, etc.  
  7. Realize the buyer is buying your people. Okay, legally they’re buying the business but practically they’re really buying your people. 
  8. The IT department, internal or outsourced, is more important than ever. Just think about all the cybersecurity stuff going on.
  9. Depreciation is a real number. EBITDA is misleading in an asset heavy business. At some point it represents cash out of your bank account.
  10. It’s open kimono time. You will be asked more questions about the business than you ever thought imaginable and just when you think there can’t be any more, the bank will ask more.

Pulling the trigger

After a couple phone conversations plus zoom meetings a (supposed) business buyer wrote me and made three points, which were:

  • His concern over fees.
  • Uncertainty about how those fees and his time commitment will turn out.
  • Pulling the trigger.

I wrote back a one sentence reply, which was:

When you have an answer to your third point everything else will fall into place whether that answer is yes or no.

Going into business for yourself is risky and takes guts. It doesn’t matter if you are starting a business, buying a franchise opportunity, or buying an existing company. Or, as we like to say by an immature, profitable, and fairly priced business.

Leaving your job for a new opportunity is also risky, even in today’s employee friendly job market. You never know how it’s going to turn out once you are on the inside.

So this business buyer who is concerned about whether he will be able to “pull the trigger” really has more serious issues to deal with than finding a good company to buy. He will come across as an unsure and defensive buyer, wanting a perfect business, a perfect deal, and we all know there is no such thing as perfection. Business owners and intermediaries will smell this unsureness (like I smell it) and be very cautious about dealing with him. 

As we head into the last month of the year it’s a time for many people to reflect on where they are and what they want to do. Whatever the decision, part of the decision-making process must be, will I pull the trigger on whatever I say I want to do?

As with my prospective business buyer client, once you answer this question everything else will fall into place.

“After repute, oblivion” (Roman Emperor) Marcus Aurelius

“Familiarity breeds contempt – and children.” Mark Twain

Value Not Fluff

In a recent newsletter from Alan Weiss, he had a quote from Wharton professor and author Adam Grant I found interesting.

Bragging about yourself violates norms of modesty and politeness – and if you were really competent, your work would speak for itself. —Adam Grant

My first thought was LinkedIn (I’ve cancelled my Facebook account). It gets to the point I don’t even want to go on LinkedIn because all I seem to see are corporate ads and people telling others how great they are without offering anything of value.

Value is what we all must not only provide but also delineate what that value is, so we can provide it.

  • Advisors need to show why their clients are better off with him than without them.
  • Business buyers need to convince sellers and their representatives they are the right buyer for the business.
  • Business sellers need to demonstrate the business is a good, sustainable model that isn’t dependent on the owner, a key customer, or special employee. 
  • And especially in today’s employment world, companies need to demonstrate they are the right employer to perspective employees, because it’s an employee driven job market.

What’s even better than demonstrating value (versus bragging) is when others do it for you.

“Bragging about yourself violates norms of modesty and politeness – and if you were really competent, your work would speak for itself.” Adam Grant

When the Algorithm Doesn’t Work

Zillow ended their iBuying program of buying homes and GeekWire wrote the following about it, Just because a business process can be automated, doesn’t necessarily mean it should be automated. And maybe — just maybe — there are components of business that are not better served with AI algorithms doing the job. “

I see this all the time in the buy-sell world, people wanting to slap on a formula to create a valuation. Yet formulas don’t always work because every business is made up of people, and people don’t always conform to what the formula wants.

Zillow’s model (the simple version) was to buy homes based on a formula, renovate them, and sell them at a profit. The Wall Street Journal reported the glitch was Zillow couldn’t renovate them “fast enough amid a shortage of contractors.”

There’s that people thing again. Let’s not forget people are what make a business, good or bad. Which is why the due diligence process in an acquisition, growth strategies, fixing a damaged company, and a lot more involve knowing more about and increasing productivity from the people.

“Time is the longest distance between two places.” Tennessee Williams 

“Time is the longest distance between two places.” Tennessee Williams 

The Right Buyer Means the Right Deal

At our Getting the Deal Done Breakfast Conference on November 4 there was universal agreement from the panelists* and our speaker, Mike Atkinson, CEO of Seattle Coffee Gear, that the most important component when selling a business is having the right buyer.

Seattle Coffee Gear was recapitalized by a PE firm whose people are experts in growing the online component of a business. As Mike mentioned, they were the right buyer.

I’ve experienced this multiple times in my career. 

  • A buyer is the lowest of three offers but gets the deal because the seller thinks, “He’s the right person for my company and my people.” 
  • An owner who liked (loved) the buyer so much he made an offering price so low there didn’t have to be any negotiation (of price).
  • Owners who brought buyers in to help run the business before closing, to not lose them as their buyer.

Of course, it goes the other way also. I’ve had buyers make an offer they felt the seller couldn’t refuse because they know they were such a good fit for the business (this is often a strategic buyer). 

When does all this happen? When there’s a relationship between buyer and seller. More than the numbers, more than the other factors, it’s when buyer and seller hit it off like old friends.

“Being president is like running a cemetery: You’ve got a lot of people under you and nobody’s listening.” President Bill Clinton* Myself and Greg Russell with PRK Livengood Law, Marc Hutchinson with Hutchinson Walter CPA, Jeff 

One Size Does Not Fit All

I recently bought some custom-made pants. The representative of the firm took all kinds of measurements, entered them into the company’s software, and supposedly I can now easily get pants, shirts, suits, etc. based on those measurements.

Except the pants were so tight in the calves I joked they looked like they were from Lulu Lemon. I asked the rep if she wanted to measure my legs and she said, no, they had all the measurements they needed. Of course, the second edition of the pants are fine in the calves but too tight in the thighs (maybe she should have measured, just sayin’).

You can have the best software (is this AI?) but it’s still garbage in, garbage out. In this case the garbage in was incomplete information. My calves and thighs were never measured, the program just assumed what the measurements would be based on standard metrics.

The above is a good lesson for many things. A good salesperson will ask a lot of questions, not talk a lot. They’ll find out what makes their (prospective) customer’s situation special (different). They’ll customize the solution for them so it’s a win-win, even if the software says something else.

I see this all the time when discussing business buy sell deals. Somebody will say something like, I’d pay 4X for that business. Without knowing if that business has three customers or 300 customers, a fantastic management team or the owner does everything. 

What’s even worse is when I see software programs that claim to give a business valuation by only entering a few select numbers. They don’t take into account the couple things mentioned in the previous paragraph or any of the other non-financial factors like the lease, the supply chain, technology, etc.

Like my clothes ordering, solving a problem for a client or customer requires more than just superficial input. What it takes is understanding the whole scope of the situation. One size does not fit all and as the old saying goes, the devil is in the details.

“The human imagination cannot be programmed by a computer. Or imagination is our greatest hope for survival.” (Artist) Keith Haring

“Politics is the art of postponing decisions until they are no longer relevant.” (Former French Prime Minister) Henri Queuille

Oops – There Goes Your Workforce

On October 14, 2021 Washington’s Governor announced he expects 8% of the State’s employees to not have jobs on Monday, October 18 because those people are not vaccinated (and the vaccine mandate takes effect then). He also said he doesn’t expect any disruption of State services.

If you (or a client, friend, business you frequent) lost 8% of your employees all at once what would happen? Let’s see:

  • It’s hard to find a business not looking for employees. Almost every store has signs out saying, “We’re hiring.” Lose 8% and reduce hours?
  • Delays in product delivery or services are already slow because the “People supply chain” is damaged. Lose 8% and really irritate customers (the owner of one of our favorite restaurants told us the labor shortage has made customers nasty because service is slower than normal).
  • There’s only so much overtime people want to work, and employers want to pay for. Lose 8% and to fill those hours with existing people means payroll jumps 50% for those hours.

And the list goes on (and on).

There’s a lot of money out there. A lot of money for buy-sell deals, venture capital, home improvements, and more. It appears the State has so much money they’re keeping workers that aren’t really needed. Maybe this is a solution to the shortage of workers in the private sector.

“Stupidity is always amazing, no matter how used to it you become.” Jean Cocteau

“Nothing is as dangerous for the state as those who would govern kingdoms with maxims found in books.” Cardinal Richelieu