Which Employee Would You Want?

A little after they opened at 9 am on the Friday before the July 4 weekend I went to get a haircut. I wasn’t the only one and was told it would be about 20 minutes. So, I walked across the street, got a cup of coffee, checked emails, etc.

I came back 17 minutes later and instead of two stylists there was only one. After a few minutes another customer told me the other stylist didn’t feel good and was across the street getting food. (My thoughts flashed to my friend Steve Brilling’s stories about owning hair cutting franchise businesses and his biggest issue being the punctuality, mood, and condition of the stylists.)

The stylist came back, went behind the counter, and ate her food. By now there were five or six people waiting. Two other stylists were scheduled to start at 10 am, one arrived about 9:45, and the other at 9:50. The first saw the situation, quickly got ready, and said he’d start early (and I was next). The second proceeded to setup, clean his equipment, and watch the clock. At 10 am sharp he took the next customer.

So which employee would you want, the one who jumps in to help or one who watches the clock? What about the one who showed up not prepared to work and had to take 30 minutes off to get food and eat it (and 9 am is not an early start to the day, is it?).

The above is not uncommon, just substitute any industry. Every business is looking for employees, great, good, and even not-so-good. Employers tolerate mediocre people because it’s better than the other options. Companies are moving away from drug testing to get people.

This is why I added, “Show you can attract and retain great employees” to my items of what owners should do to make their businesses more attractive to buyers.

“Your employees come first. And if you treat your employees right, guess what? Your customers come back, and that makes your shareholders happy. Start with employees and the rest follows from that.” Herb Kelleher

Some Rules are More Important Than Others

I don’t know exactly what happened.

I don’t know if it happened to a male or female.

I do know that my wife nudged me and pointed to the airplane’s pilot reaming out a passenger for touching a flight attendant (perhaps inappropriately?). I heard things including:

  • “We will have law enforcement meet you when we land” (and they did, the Port Authority police escorted the man off the plane as the rest of us were asked to stay seated).
  • “If I hear of anything else I’ll land the plane at the closest airport and have Marshalls meet you.”
  • “Don’t you ever touch one of our attendants again.”

Some things are just off limits, and that includes just about anything on an airplane. One of my thoughts was, if this guy stands up (to confront the pilot) how fast could I get there? (Pretty fast with only two people on aisles ahead of me and – making a judgment call here – I’m bigger, stronger, and faster than both of them.)

Create a disturbance or touch an employee on a plane (or joke about weapons) and there’s no leeway on the rules, you’re in trouble. Steal from your employer and you’re gone.

Other rules may have some slack.

  • Some employee transgressions may need to be accumulated to force action (which is why HR people recommend detailed employee file notes).
  • An appraiser may say a business is worth a certain amount but that may not be what it sells for. I recently, again, had a buyer say he’d pay a couple hundred thousand more than “it’s worth” because he knew what he could do with that particular business.
  • Marketing rules have a lot of flexibility. The only one that’s sacrosanct is to always be marketing. What you do for your marketing doesn’t have to be rigid.

It’s the rules with leeway that make life and business interesting. And what can separate good leaders from not-so-good ones. Knowing how to handle situations to help others, without enabling them.

“People never believe in volcanos, until the lava overflows them.” Philosopher George Santayana

 

Fool Me Once Or Fool Me All The Time

On June 2, 2018 Jason Zweig’s article in the Wall Street Journal was titled, “The Fanciful Alphabet Soup Companies Use to Fool You.” The premise of the article was most of the financial jargon used to provide insights into companies’ health are make-believe and don’t reflect actual conditions, i.e. true profitability.

First, five points from the article I found interesting and then some comparisons to other areas of business.

  1. This goes back to before the stock market crash of 1929. A 1932 research paper showed firms had loaded up with cash and post-crash, “companies were flush with cash and investors beleaguered,” which they wouldn’t pay out.
  2. Investors have always looked at net income as a way to assess businesses. But companies have come up with new measures of “modified” profit with the chief culprit being the term Ebitda (earnings before interest, taxes, depreciation, and amortization). Zweig writes that any form of modified profit isn’t cash flow.
  3. Fifteen years ago, Charlie Munger, Warren Buffett’s business partner, called Ebitda, “bulls*#t earnings. For more, just Google the terms Warren Buffet and Ebitda. My favorite is when Buffett compares people who buy into the term Ebitda to those who think capital expenditures are funded by the tooth fairy.
  4. There’s now a plethora of Ebitda clone terms including those showing “profit” before things like stock-based pay, marketing, business development, and administrative expenses. Zweig asks, “Can “Ebidtdaft” be far behind?”
  5. So far this year there have been over 450 documents filed with the SEC with suffices tacked on to Ebitda. One analyst wonders if pretty soon companies will start multiplying earnings as a measure of performance (yes, it’s sarcasm).

So let’s look at the above in the context of other areas, starting with advertising. A perfect example is car dealers who advertise free oil changes for life. Well, if it sounds too good to be true…. A car guy told me about the hitch in the program. You’ll get the oil change plus a list of work you need to do on the car. If you don’t have them do that work the extended warranty and oil changes go away. Like the above, it’s knowing the details (in the fine print).

Now for what I see every day in the buy-sell world. First, most of the creative Ebitda terms in the public market have nothing on the creativity used when selling businesses. Adjusted Ebitda or adjusted earnings are the norm. I get the feeling many people, even in my industry, don’t understand the difference between profit, Ebitda, and cash flow.

There’s a tendency to “add-back” almost any expense deemed “unnecessary” to running the business. To some people, this list includes:

  • Owner salary (really interesting when adding back the salaries of multiple, departing owners).
  • Medical insurance expense.
  • Marketing expenses (the marketing didn’t work so it’s really profit).
  • Owner “perks” like cell phone, car, travel to conferences, etc. (as if all owners don’t deduct these).
  • And a recent one I’ve seen, the expense for research and development (for a company with a patented propriety product).

Conclusion

The magic of inflated earnings is all around us, and not just in the financial world. Misleading ads, inflated resumes, stories about high school athletic accomplishments (Glory Days as Bruce Springsteen called them), and many other things. The good news is most people see through these things. The problem is some don’t see through the fog and make decisions based on false information.

Innovation isn’t just in tech

When we think of innovation we think of the technology industry, don’t we? We tend to think of disrupters like Amazon, Google, Netflix, and others. Or perhaps the company that started SaaS (Software as a Service), which has permeated into way too many industries and businesses. It seems almost every time I look at some service they want a subscription; from wine clubs to every software possible, to maintenance agreements, and more.

Here’s an interesting non-tech industry innovation taking place in Washington (and I’m sure other states). It has to do with the cannabis industry, specifically retailers. While legal in a handful or two of states, the Feds still haven’t legalized marijuana. Therefore, the businesses can’t take debit or credit cards because they all run through a federal system.

Or can they (take cards as payment)? Shops have started taking debit cards because they’re able to set it up to be an ATM transaction not a debit card purchase. It’s treated the same way as going to any cash machine. Voila, an innovative workaround.

So ask yourself, are you doing anything innovative in your business? Have you found new ways to attract, serve, or keep customers? Any new services or products on the horizon?

Talking about a business with someone recently they mentioned how an owner, when asked why his sales aren’t a lot higher, said he didn’t want to work any harder as he was happy with his income. That’s atrophy. If you’re not growing you’re stagnant and on the way down. Innovation doesn’t have to be game-changing, it has to make positive change.

“In preparing for battle, I have always found that plans are useless, but planning is indispensable.” Dwight Eisenhower

When It’s Your Own Money….

A few months ago the Wall Street Journal’s Business section’s headline was, “China Conglomerate Gets Lifeline.” The sub-headline was, “Government is helping HNA Group right itself after acquisition spree loaded it with debt.”

The lesson here is simple, don’t over-leverage yourself. It’s good advice for us personally and in business.

But notice how they got in trouble; an acquisition spree. I’m a big fan of growth by acquisition, when it’s done right and for the right reasons. Heck, it’s why in my book, Company Growth By Acquisition Makes Dollars & SenseI cover 19 reasons to consider this strategy.

Here’s a big tip – if the deal only makes sense if the acquired company grows, it’s a bad deal.

There’s a lot of money out there, especially in the private equity and family office world. In my world, where bank financing is the primary source of funds we have my favorite two sanity checks:

  • It’s the buyer’s money (not a fund).
  • The banks have debt coverage ratios and good bankers want the debt coverage to be well above the minimum requirement.

My tip doesn’t only apply to company acquisitions. It applies to other things as well. If you get a new customer at a discounted price hoping to show them your quality and then raise prices, you’ll (usually) be disappointed. If you hire someone who isn’t qualified hoping they’ll improve, you’ll be disappointed.

Optimism is necessary and important. Optimism without common sense gets us into trouble.

“No matter how cynical you become, it’s never enough to keep up.” Lily Tomlin

$3 Million or $3 Billion, the Fundamentals Matter

The May 21, 2018 Wall Street Journal had a special section titled, “C-Suite Strategies.” I found the interview with Hain Celestial (organic foods and teas) founder and CEO Irwin Simon to be fascinating, with great lessons for businesses of all sizes.

Let’s start at the end, with something specific to my day-to-day business, and then move on to more general insights. Here’s the last paragraph of the article.

“There are a lot of benefits being a part of a bigger company. Being a $3 billion-plus public company, when you hit a bump in the road you feel it. If you are a $50 billion or $60 billion company, you don’t get those.”

Interesting, especially because I have a hard time convincing some people there’s more risk in a $3 million company versus a $15 million company versus a $50 million company. The owner (business seller) and their representatives often see how a company 100 times their size sold for some high multiple (of profit). If the owner of a multi-billion firm sees more risk in his compared to larger firms shouldn’t small business owners recognize this also?

Here are some other insights from the interview:

  • Branding works– Simon said millennials like brand name products (like most of us), if the price is close. It’s why you and I need to constantly work on our brand, so we aren’t thrown into the commodity basket with commodity prices.
  • Quality sells– people will pay more organic, but only 5-10% more. Don’t fixate on the 5-10% numbers, the bottom line is, in every business, quality sells. We pay more for quality cars versus, a basic car, quality clothes, shoes, sporting goods, etc.
  • Beware of trends– in Hain Celestial’s world the trends include low or no fat, low carb, gluten free, etc. Simon said, “They better taste good.” Back to the quality theme again. Whatever you do better “taste” good. It’s where repeat business comes from.
  • Build on your strengths– Hain has 11 products accounting for 93% of their sales. They’re building on these products, shedding underperformers. Like Jack Welch said at GE, let go of your bottom 10% of employees every year. Whether it’s people, products, services, etc., go with what is most profitable.

Conclusion

None of the above is new. We all have probably heard these insights many times and it’s interesting how these fundamentals cross industry lines. The same things I work on my advisory business are the same things a multi-billion-dollar food manufacturer works on. Like in sports, where the best professional athletes constantly work on their basic fundamentals, we should also.

 

 

Opioids Aren’t The Only Addiction

This memo was co-written by Jessica and John based on Jessica’s observations at a recent event.

150 attendees, great presentations, and numerous breakout sessions made for a rewarding and enjoyable day. Thanks to Columbia Bank for sponsoring their annual Women’s Event.

However, I noticed right from the start the majority of the people had their phones sitting on thetable. When the speaker was speaking I noticed some were scrolling, a few got up and walked out of the room (to make calls I’m assuming), and some were just staring at their device. Talk about an addiction.

Keep in mind the sessions were a maximum of 45 minutes and had 15-minute breaks between sessions. To me, it’s a sign of respect when someone is speaking to pay attention, nobody is as good a multi-tasker as they think they are.

Which brings me to an article in the Wall Street Journal on this very subject, it’s titled, “Eye on the Ball, Not on the Phone.”

The articled reported about how a number of managers tried different tactics to limit personal phone use at work. Why? Because just having their phone sitting on their desk lowered the employee’s cognitive performance compared to having it in another location.

Some bosses installed an app to track total time on the phone, which resulted in less time spent on the phone as the employees knew they were being monitored (this was a 45-day study).  One manager eliminated all personal phone use at desks, another had employees go to a common area to use their phone, and one manager stated he missed his phone jut as much as his employees did.

This comes down to finding a balance.  Each company’s balance will be different but right for them. This is the same as when business buyers evaluate if the seller’s responsibilities are what the buyer wants to be doing. For instance, if the current owner does all the sales and the buyer is a “behind the scenes” type of person, then the business probably isn’t a good fit. But if the buyer likes getting in front of people then it may be a fit. For more on this subject see our article, “The Magic Question – What Does the Owner Do?

“If ignorance is bliss, why aren’t there more happy people in the world?” Comedian Stephen Fry

Know your market

We have some house guests, a young couple from Ecuador, he having been an exchange student of ours a dozen years ago. On May 8 I showed them the front page of the Seattle Times and an article about how a survey showed the high cost of living is the number one thing people don’t like about the area (taking over the perennial top item, traffic). Cost of living really means the cost of housing.

She read the article, saw how home prices are going up about 15% a year and commented how people will be rich if this keeps happening. So I gave her a short lesson in economics.

  • Just because the price goes up doesn’t mean it’s money you can spend.
  • What goes up can go down, as we saw 10 years ago.
  • When the home prices go up so do your property taxes. Ours went up about 15% this year.
  • And, someone has to be able to pay the high prices and there’s a limited number of people who can afford the high-end homes (median home price in Seattle is $819,000 and on the Eastside it’s $943,000), especially if prices keep rising. Well-above market priced houses take a lot longer to sell in our neighborhood.
  • If you sell, you have to find somewhere else to live (and unless you plan to move out of the area you’re paying a high price for a new place).

The above (especially the fourth point) applies to our everyday businesses also. The larger the size of the firms in your target market the fewer there are, i.e. you have a limited number of customers. According to Hoover’s (D&B) and NAICS.com only about:

  • 4.5% of companies have sales greater than $2.5 million
  • 3% of companies have sales greater than $5 million
  • Less than 2% have sales greater than $10 million

In addition, about 90% of businesses do less than $500,000 in sales.

Bottom line, you have to know your market. It doesn’t matter if you’re selling widgets, advice, service, or anything else. I know in the buy-sell world it gets more competitive as the company and deal sizes get larger; just look at what’s going on in the Private Equity market where acquisition prices are getting ridiculously high.

When it’s competitive, it’s when service plays a big part. It’s where small business shouldthrive by being caring, nimble, and fast. The continually profitable companies recognize and do this.

d

The Robots Are Taking Over

“Say goodbye to your bank teller and your insurance agent” is the opening line of a just released Fast Company article titled, “AI Could Kill 2.5 Million Financial Jobs – And Save Banks $1 Trillion.”

Google just announced the launch of “Duplex,” an AI application that can call and make appointments for you with the party on the other end of the line thinking it’s a human. There’s a resume scanning program that can review 1,500 resumes an hour (good luck to job seekers trying to stand out in the crowd).

Fast Company based their article on research from the firm Autonomous that recently issued an 84-page report on this and predicts:

  • Software agents (machines) will hold conversations with clients.
  • AI will oversee the ever more complex regulations department with real-time oversight of the company’s actions.
  • AI will determine credit risk, insurance underwriting, assess claims damage using machine vision, and select investments (don’t investment firms already use computers to time trades?).

Over half of what I do with/for my clients is advise, counsel, and provide quasi-therapy versus analytical work like spreadsheets, reviewing documents, etc. I think we’re a long way off from when machines can offer the “personal touch.”

Maybe they will replace some jobs like insurance agents or claims adjustors. But I wonder how many people will really want this. It, again, goes back to John Naisbitt’s statement about how the more high tech we get the more high touch we’ll need. Interesting times indeed.

“The use of life is to spend it for something that outlasts it.” Willam James