Are You a Doer or a Manager? One is Much Better

I was at an educational event and ended up talking to someone in a completely different industry than mine. When he heard what I do his comment was how one of the toughest things about small to lower middle market businesses is they have owners who won’t let go, i.e. the owner is a dependency. So true, and we all know many owners like this.

It reminded me of a recent meeting with an owner who said, “I manage the managers. I get called when there’s a problem.” He’s over having to be responsible for everything.

What a difference between the above two stories. And this isn’t just with small companies. I’ve recently seen a few middle market businesses with the same issue. As the business grows the owner(s) keep doing what they did, which may be improving processes, having the important customer relationships, or having (too) many direct reports.

Do you see yourself in the above example? Do you see clients of yours? If so, realize the value of the business is higher if the owner manages the managers. Recently a very qualified buyer walked away from a deal because the seller was so important to the business, and the buyer didn’t have expertise to replace a departing owner (who didn’t want to stay for more than 90 days).

So, how do you determine if the owner’s a dependency? It’s not hard. Often the owner will brag about all they do. Or, ask what they do on a daily, weekly, and monthly basis. If it’s a consumer business check the reviews and see if they mention the owner or the company or a variety of employees.

An owner should do as little as possible below their pay grade.

“Truth is confirmed by inspection and delay; falsehood by haste and uncertainty.” Tacitus (a Roman Empire Senator)

Networking and Friends

In her March 16, 2019 Wall Street Journal column, Kids, Don’t Become Success Robots, Peggy Noonan wrote about the recent college application scandal. Her emphasis was about how when parents cheat the kids believe cheating is normal and will have regrets doing so.

She told a story about speaking at an Ivy League school and being surprised because the students didn’t want to talk about any subjects or doing high-quality work (to succeed in life0 but about networking. Not networking as we think of it, but as “how can I use other people to benefit me.” She tried to explain it’s about the quality of the work you do and asked them, “Why don’t you just make friends?”

She came away disillusioned and felt the students had been trained to be shallow and see others as commodities.

So, what does that have to do with you and me? We think of networking a way to have a win-win relationship. It’s not taking advantage of others, it is making friends in order to help each other. It’s pretty easy to spot people who care more about themselves than their clients, their referral sources, or anybody else. I look at my referral tracking list and realize the vast majority come from people I consider friends. People with whom I would enjoy having a cup of coffee, a beer, or a meal.

My takeaway from this is if your objective is to get to know others better and understand how you can help them, you’ll end up being rewarded in the long run.

“Do not network. Make friends. Learn about the lives of others.” Peggy Noonan

Lipstick on a Pig; Homes and Businesses

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

Strong Economy – Strong Buy-Sell Market

Record number of small business sales in 2018!

This as per bizbuysell.com. More businesses sold after being advertised on bizbuysell.com than any other year, and 2017 was 25% higher than 2016.

Our first question is: what is “small?” Well, the median revenue of these companies was about $500,000 and the median selling price was about $250,000. Pretty small. What we call micro-businesses. Typically these are companies where the owner is behind the counter and if he or she hired someone to do that work they would go broke.

Second question: is there similar activity with larger companies, small, mid-sized, and lower middle market firms? The answer is yes, based on the activity level of everybody we know in the M&A/buy-sell industry. What we write about is aimed at the $10 million deal and below.

The third, and most important question is: Why? The top four reasons are:

  • Demographics
  • Corporate baloney (and we really don’t mean baloney, but this is a family newsletter)
  • Growth
  • Easy money

Demographics

The driving force is the baby boomer generation is large and highly entrepreneurial (as per an Intuit study saying this generation owns a disproportionate share of businesses. Look at some of the statistics.

  • Wall Street Journal– The greatest transfer of wealth in history will occur in this country over the next decade; an estimated $10 trillion is expected to change hands, and much of this wealth is tied up in family businesses. 70% of medium sized companies will change hands (2008).
  • PriceWaterhouseCoopers– Two-thirds of companies with sales of $5,000,000 to $50,000,000 will change hands in the next 10 years (2011).
  • Magazine– 65-75% of small companies in the US – some 10 million – likely hang up a “for sale” sign in the next 10 years (2015).
  • Axial– 66% of businesses with employees are owned by baby boomers (2015).
  • Barlow research– Two-thirds of lower middle-market business owners are expected to retire. Their average age of retirement is 67. Between 35 & 45% of these owners are 65 or older (2018).

Notice the same predictions from 2008-2015? It’s because we had a little event 10 years ago affectionately called the “Great Recession.” And guess what? Most of those owners planning to sell had to delay it. Sixty percent of them delayed their exit by at least two years, as per a study by Sun Trust Bank. Next, the economy got pretty good starting in 2011 and most of those soon-to-exit owners were now saying, “recession, what recession, this is pretty good (so why would I sell)?”

But life has a way of catching up with us. Health issues, lower risk tolerance, spouses saying, “get out and spend time with me and our grandkids,” and just wanting to relax.

The bottom line, demographics is the driving force (not that all sellers are in this age range, just a lot of them).

Corporate baloney

What about corporate baloney? We have a few articles in our “writing folder” (articles I’ve saved to write about) on bad management, how technology is replacing people, and employee unhappiness. Gallup recently released a five-year-long study showing the variance between high and low productivity is 70% attributable to the manager. For years the annual Gallup study has shown only about one-third of employees are highly engaged. In successful businesses (and successful departments I’m sure) with good managers the figure is above 68%.

In other words, people are more and more getting fed up with corporate life and those willing to make the leap of faith are doing so at a good clip. They’re betting they are smarter and better managers, leaders, and operators than their corporate bosses (usually these people are better than their bosses but get trapped in the corporate labyrinth) and they’ll benefit financially and emotionally with their own business (which most do).

Growth

There’s a reason we published the book Company Growth by Acquisition Makes Dollars & Sense. It’s a strategy more and more businesses are interested in given how hard it is to find people, especially good salespeople, grow organically, start a new location, steal customers from competitors, acquire new products, and many other reasons (there are 19 reasons to consider growth by acquisition in the book).

While it’s tough to buy a direct competitor, almost every seller will fear giving the “secret sauce” to a direct competitor, there are plenty of other options, including buying a:

  • Customer’s company
  • Supplier’s company
  • Similar firm in a different market
  • Synergistic product line firm
  • Company with equipment you need (and customers to go with it)
  • Contract manufacturer (of your product)

Easy money

It’s not reckless money like it was 15 years ago but financing options abound, including for lower middle market and below sized deals.

For larger deals there’s more money than deals so investors are everywhere. But it’s the current SBA loan program that’s a win-win-win for buyer, seller, and bank (the SBA doesn’t make loans they guarantee a large portion to the bank).

In the second edition of Buying A Business That Makes You Richthe section on creative financing was almost eliminated because of the SBA program’s current iteration it removes the need for most creative financing techniques. It’s because these loans have following features:

  • $5 million loan limit (meaning up to a $6-7 million deal).
  • Ten-year amortization.
  • Cash flow is king (they don’t require full collateralization, but will take as much as they can).
  • Ten percent buyer down payment (minimum), which frees up cash to grow the business.

In addition, some banks are now adding junior debt (second position, higher interest rate) on top of their SBA loan to get to a $9-10 million deal.

Conclusion

Let’s conclude with a prognostication. Barring unforeseen events like the Great Recession or 9-11 this should continue. Demographics are driving it and the other factors are fueling it. The business schools turn out some pretty sharp people who let the corporate world hone their skills and build their capital. And, they are taught to think about add-on acquisitions. Even an economic correction won’t slow this trend. John’s 25 years in this business and an additional dozen or more his friend Ted Leverette has have shown us “normal” corrections, aka recessions, don’t have much effect on the buy-sell market. Older owners will want out instead of fighting the fight and the corporate baloney will increase, providing us with the buyers.

Getting Comfortable With the Uncomfortable

“You have to get comfortable with the uncomfortable if you want to grow.” I heard this recently and it hit home. It reminded me of our Partner On-Call member who had a hard time picking up the phone, until he picked it up, and the call went great. Of course, he deliberated again for 15-20 minutes (his estimate of time) by staring at the phone before making another (successful) call.

The other day I asked Jessica to make a list of the top three things she’s uncomfortable with after one year in her job. Her list was:

Writing – not surprising, is it? As I tell groups, if you can write a few paragraphs people are impressed because most people can’t write a decent sentence. So, she works on it weekly.

Asking for referrals – this is tough, isn’t it? To actually ask someone for something. It takes confidence in yourself, which was another issue with our Partner On-Call franchisees, being at the desk where the buck stops is a lot different than running a middle-market company or a large department.

Follow through – again, it’s easy, for 80% of us, to get distracted. Start five things, finish none, repeat the next day. An accountant friend recently told me she’s not organized (yes, surprising coming from an accountant). It’s why I short list tasks, number them, and don’t start the next one on the list until the previous one is done.

What are your uncomfortable things? (We all have them.) It takes effort to get comfortable with them, but it’s worth it.

“You have to get comfortable with the uncomfortable if you want to grow.” Matt LaFleur

What, You Only Have Six Customers?

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

Are You Making a Difference?

“We can’t measure what you’ve done for us over the years. We are so far ahead of where we would be without your help.”This is one of those statements that sticks in your brain, at least it stuck in mine.

The above was said by the Director of Education of the island country of Antigua as we reviewed our Rotary service project and planned for the future. No matter what business you’re in, look at your testimonials; do they sound like the above? i.e. we’re better off with you (or your company) than without you? This being one of Partner On-Call’s tag lines.

When I teach my class at the SBA on “Dynamically Growing a Consulting Business” I use the “better off” line at least half a dozen times. I want to drill it into the students head you have to offer value, not just be an expert in your field. It doesn’t matter if you offer advice and counsel, make widgets, rent money, or anything else, your customers must feel they can’t live without you.

There’s not much more I can write on this subject without being redundant by filling more space.

Leadership – In Rotary Projects and Business

Some things are the same everywhere. I’m writing this on the flight home from Antigua, following our Rotary project. Last week we were at one of our favorite schools, a prestigious private primary school.

We had some issues with the Internet, so I talked to one of the non-teacher employees about it and asked if the principal, Mrs. Pringle, was still there that day. He replied that she no longer worked at the school and said if she did still work there these issues wouldn’t be happening.

Leadership is leadership whether it’s a large business, small business, non-profit, or a school. Good leaders keep the situation under control when “things happen.” And, the employees know (a good leader from an ineffective one).

Here’s a different example. Because we didn’t do this project last year all of our students were first timers. So, no experience. While the teacher assigned team leaders, after a few days we could see changes. On one or two of our teams the natural, take charge kids stepped up and very quickly we had the real leaders. They were the ones who not only knew what they were doing but did what needed to be done and instructed others on what to do.

In your business do you see people stepping up? Business owners, do you allow this to happen (employees taking charge)? I ask because a dependency on the owner is something I’ve seen a lot of lately and it usually means a lack of delegating. Combined with customer concentration issues (the owner has the relationships with the few customers totaling 75% of annual revenue). It’s a huge issue, it scares business buyers and banks.

“One of the hardest things in life to learn are which bridges to cross and which bridges to burn.” Oprah Winfrey *

* Owners, burn the bridge where you control everything and cross the delegation bridge.

Developing Versus Developed (Countries)

I’m writing this from the island of Antigua where we’re here on a Rotary service project, “Improving Education Through Technology.” We have 10 Bellevue school district students from the technology program working on computer networks and installing Wi-Fi networks.

There are similarities and differences between Antigua and the US. Some of the similarities include:

It doesn’t matter where you are, people are people. Some are different colors, different sizes, have different customs, etc. But they all (pretty much) care about each other, their country, their friends, and families. We are warmly greeted here by not only the local Rotarians but people at the car rental place, hotel staff, restaurant staff, and others. It’s like we’re old friends.

There’s a lot of growth in both countries. Seattle leads the US in cranes and Antigua has numerous new buildings, businesses, and restaurants since we were here last year, just not as high.

The roads suck in both places and traffic stinks. We saw a bumper sticker here today reading, “Not Drunk, Avoiding Potholes.” Not enough capacity, poor upkeep, limited planning – it seems to be universal – with road construction everywhere.

Some of the differences are:

There’s a lot more respect for leaders and authority here. Imagine this in the US: at a planning meeting Sunday one of the local Rotarians was talking about a meeting we had Monday with the Prime Minister. Even though the Rotarian is in the “other party,” when questioned he said how he would respect what the PM said as he was “my country’s leader.” Imagine a Democrat saying that about Trump or a Trump supporter saying that about a Obama or any future Democrat President.

The US, and especially areas like Seattle, are fortunate to have a lot of growth, capital to grow, and money in general. Things are pretty good all across the country. In Antigua, there’s a lot of impoverishment, menial jobs, and limited opportunity. If some think there’s a huge divide in the US they should check out places like Antigua.

We’re here because there’s a great need. The Ministry of Education has pretty much said they won’t support the primary schools with technology. This includes helping the teachers improve themselves so they can teach better using technology and the many applications now available. The students know more about tech devices and how to use them than most of the teachers – and they want to learn via their devices, not via the old blackboard.

“Human relationships are vast as deserts. They demand all daring.” John Ruskin