The Start-up Mentality in Business Buyers

Some people will never own a business. They won’t buy, start, or get a franchise. Others are continually starting or buying companies. And there are subtle differences between the types of people who get into business.

My old friend Bill Pearsall coined the term “re-entrepreneur” for people who buy not start businesses. But it goes deeper. Most of the individual business buyers I work with have developed management and leadership skills in the corporate world and want to use them to grow whatever business they buy. They understand the importance of a good foundation and since they’re not “product” people there’s less chance they’ll work “in” the business.

After working with people who started a business and considered buying another one (to grow, get employees, have a different customer base, etc.) I find most of them don’t always get that you have to pay for what you’re getting.

Having started something they often ask, why would I pay (that much) for it when I can grow into it?

Neither model, either “I want to pay for a great base” or “I’ll pay a little because eventually I’ll do it myself,” is wrong. They’re just different.

“The art of the creative process is not seeking and finding; it’s bumbling.” Jonathan Safran Foer

 

 

Using experts – It Pays

There are a lot of things I can do around my house. Paint, install doors, fix some electrical and plumbing issues, etc. There are some things I can’t or won’t do including building things needing a permit (new elevated deck), a kitchen or bathroom remodel, etc. The latter items are when I use an expert.

I got to thinking about this during some recent sports injury rehab on my leg. I had tried chiropractic, massage, stretching, cupping, and foam rolling. All gave short-term temporary relief but no long-term fix. Finally, I met a sports medicine therapist. He put me on an exercise program to build up the muscles supporting the injured area. And, it worked. Quickly!

Everybody reading this has an area of expertise. The trick is getting others to know about it. I think about most of the people I’ve used and its word of mouth. Personal and business friends have provided quality referrals, much better than I can get from any phone app.

Doesn’t matter if you’re an expert at making things, fixing things, providing advice, or something else. If people don’t know about your value proposition it’s a useless skill. So as with all businesses, it comes down to marketing. The more people who know what you do and how well you do it the better. You can’t be bashful about getting the word out.

“Whatever you do, kid, always do it with style.” George M. Cohan

Flip the Switch

Recently I got an e-newsletter from my friend Allan VanderHamm with Berntson Porter.

Allan is their valuation and exit planning expert and the newsletter was titled, “How Does Exit Planning Protect Business Value?” My response to Allan was:

One of my lines is, “Owners don’t wake up, flip the switch, and say I want to sell in 2, 3 or 5 years. They flip the switch and say, it’s time to get out (now).”

The newsletter told the story of two owners of similar businesses and how one owner worked very hard, “in the business” and the other sought and acted on advice and worked, “on the business.” The latter owner built a team, converted to S Corp status, and did something near and dear to my heart, grew by acquisition (one of my top reasons to consider growth by acquisition – along with 18 others in my book Company Growth By Acquisition Makes Dollars & Sense – covers how the larger the company the more it will sell for, all else being equal (because the multiple of profit gets higher as businesses get larger).

Planning is important, as is timing. I recently had discussions with a client who would like to sell to one of his three competitors (given his industry, these are the only logical buyers). We talked about where the business is, where it will be (this year is shaping up to be a very good year for him), and the time of the year (it’s a seasonal industry and now through September is the busy season).

While he has a feeling of urgency to move on to his next great adventure in life, it makes sense to do a few things within the business, go full speed ahead to maximize revenue and profits, and be able to present a great story in six months.

The above is a mini-version of a planning story. It does take time and effort to shift from, “what we do now” to “what we need to do to make the business more attractive.” And it can be threatening to an owner who wants to be in control of everything, because one thing that makes a business more attractive, and adds value, is a self-sufficient management team. A solid team means there’s a greatly reduced likelihood of a dependency on the owner.

The last point about owner dependencies is one of my top four things an owner can do to increase value, make the business more attractive to buyers, and have a better business along the way. The other three things are:

  • Show you can grow, don’t just say it or say we tried to keep the business where it is.
  • Have solid financial systems and accurate financial statements. (One of the first things I do when I see financial statements is check if the year-to-date income on the P&L is the same as the year-to-date income on the balance sheet. You’d be surprised how often it isn’t the same.)
  • Demonstrate you can attract and retain good employees (especially in our currently tight labor market).

Conclusion

The 80-20 might even be the 90-10 rule when it comes to owners flipping the switch. It is tough to manage a business, be in control, and implement (a new) strategy. So, it all catches up on the owner, they flip the switch, and say now’s the time. Finally, this is completely different than the owners who are coasting by design, as in, I’m making good money so why would I want to work harder to make more? It’s the same end point but via different routes.

The Magic Question – What Does the Owner Do?

Often simple is the best course of action. In fact, Ockam’s Razor, from William of Ockam in the 14th century, states one should solve problems by choosing the solution that makes the fewest assumptions.

In the case of buying and selling a business, there has to be a match between the skills and interest of the buyer and the seller. And it goes a lot deeper.

The following simple little question to the seller uncovers at least five issues or opportunities. That question is, “What does the seller do on a daily, weekly, monthly basis.” Let’s examine this.

Skills match – as per above, it lets the buyer know if there’s a match between the duties he or she wants to perform and what the seller does (or should I say what the seller needs to do). An overly analytical, introvert type person may love the business model but if the owner is a key component of the sales team and process it’s probably not a good fit. Correspondingly, the outgoing, “I want to be in front of customers” buyer isn’t a good fit for a business requiring attention to detail on bids, contracts, job prototypes, etc.

Dependency – In my talks I say to audiences, you have a dependency on the owner if you can fill in the blank with statements like, “If the owner is the only one who can ___________:”

  • Program the machine
  • Make the big sales
  • Approve all bids

Most people think of dependencies in terms of customer concentration but in small business it’s what the owner does or doesn’t do that often makes a difference. Buyers want owners who can take off for three weeks and return to a company in as good of or better shape as when they left.

In versus on – as in, the buyer wants an owner who works “On” the business versus “In” the business. Working on the business means strategy, growth, vision, etc. Working in the business means being on the shop floor, making sales calls, doing bids, etc. While on the surface it may look like opportunity if the buyer can add strategy and vision, in the short-term it means hiring someone to do the day-to-day tasks that are eating up the seller’s day. It’s the difference between having a job as company president and having a job similar to when the buyer was an employee.

Lifestyle business – my favorite story is about the owner (seller) who told the buyer how he and his sales team worked just hard enough to make the income they wanted and didn’t work anymore. He lost a great buyer who figured changing the culture of laziness to one of growth would alienate the employees, and he’d lose them. This was a lifestyle business, and there are a lot of them.

2No number two – just like on Star Trek Next Generation, you have to have a good number two (employee). Actually, when we say, “no number two person is a red flag,” what we’re really saying it’s the tip of the iceberg, meaning there’s no management team. It ties into the above reasons because it means the owner is integral to the day-to-day operations, works in the business, and this is probably not what the buyer wants in a business.

A simple little question that opens up a plethora of information. As a PS, one of my other top questions for buyers is, “Can you see yourself going there every day?” This one is a gut check, to make sure it’s not just emotion driving the buyer’s interest in the business.

Deal Die When Trust Disappears

It was a bolt-on acquisition, a perfect fit, and a small deal. And it died. It died because of the relationship, or lack thereof.

The buyer and seller seemed to get along fine but a few things happened that caused the buyer to not trust the seller to deliver on post-close obligations.

It started when the seller asked to delay the closing by one month, which didn’t fit the buyer’s plans because that month was a high revenue month (while the next month was a low revenue month), the buyer had other initiatives tied to the acquisition, and some comments made (by the seller’s team) brought to light the fact the seller’s wife was a lot more important to the business than previously claimed.

Then a very reasonable purchase and sale agreement was virtually destroyed by the seller’s attorney. All the legal language issues aside, the edits made it very clear the wife wouldn’t be available for much transition support. This after realizing she is the key employee. Plus, there was again language about delaying the closing date.

Trust is a synonym for relationship. Whether you’re a buyer or a seller, when your gut tells you something is wrong, the chances are high something is wrong. In any event, go with your gut feel.

Football and Business – Cut To Thrive

For sports fans, and especially reporters, spring is a busy time of the year. Baseball season is starting, March Madness, NFL free agency and draft, and the winter leagues heading to the playoffs.

Football fans feel angst when because of (primarily) salary cap issues teams let fan favorites go; Richard Sherman in Seattle, Jordy Nelson in Green Bay, and many others (both of those mentioned probably in their respective team’s Hall of Fame). It’s tough on all, including management.

And we need to have the same attitude in our business. Just because someone’s been with us for a long time doesn’t make them untouchable. Salespeople know this by the size of their commission. Others, not so easily aware.

Football legend Vince Lombardi had three keys to staying on top. Two were psychological and the other was pragmatic:

“There is a tendency to stay with the players that won the championship – even if he isn’t as good as he was. And it’s the very human thing to do. However, there is no room for that type of emotion. Football is a hardheaded cold business. No matter what a player did last year, he must go if he can’t do it this year.”

Not just employees. Cutting customers or vendors is just as important. Bad customers can make your life miserable, and just aren’t worth it. Vendors not keeping current on products, always late on shipments, etc. will have your team screaming.

It’s tough because it affects others’ lives. In our case, it’s not athletes making $5-15 million a year. But it has to be done so it doesn’t detrimentally affect your or my life.

Entrepreneurs Are Different

Driving home from an evening meeting I was listening to “How I Built This,” an NPR interview show (and podcast) with entrepreneurs. This particular episode was a fascinating discussion with and story about Mark Cuban. Mr. Cuban is well known for being on Shark Tank and owning the Dallas Mavericks.

He became wealthy via a few business endeavors, the biggest one being the invention of streaming audio on the Internet. He said this came about because he wanted to listen to University of Indiana basketball games while living in Texas.

But, the point of this memo is something the host, Guy Raz, asked Mr. Cuban. At one-point Cuban was in his 30’s and a multi-millionaire. Raz asked why he didn’t just “retire” and not work. This is what separates entrepreneurs, good business people, and those who love what they do from the pack of people whose top dream is retirement. The reporter had a hard time understanding why a rich person was still driven.

I know firsthand about this because my dad went from the former group, as one of the most dedicated employees a firm could want, to the latter group after his company did something underhanded to a group of employees, including him. After he died I found a letter to his boss detailing how much sick time, vacation, and other “off days” he had, how he would use them to determine the date he could stop working, and have his retirement kick-in on his 62nd birthday.

Most, if not all, of the people reading this love what they do or are in the process of finding that something they’ll love. It really is a mindset.

“Normality is a paved road; it’s comfortable to walk, but no flowers grow on it.” Vincent van Gogh

 

Find People Who Accept Advice

The NFL combine is going on in Indianapolis as I write this. It’s where the best college players gather with team representatives to show off their skills. They sprint, lift, run obstacle courses, and are interviewed by coaches. One veteran reporter wrote, when asked how important this event is for coaches to evaluate talent levels:

The coaches know who can play. Now they want to know who can be coached.

Isn’t that business (and life) in general? When we hire someone we want someone who can be coached. We don’t want a know-it-all, we want someone who will be a team player.

It’s just as important when seeking new clients. In the class I teach at the SBA on growing a consulting business one of my favorite lines is, “The only thing worse than no client is a bad client.” When we solve a customer’s problem we want them to participate, heed our advice, and implement it. Being stubborn doesn’t work.

It doesn’t matter if you’re selling highly technical components for an end product, providing advice, or repairing critical equipment. It’s a lot easier when your client is “coachable.”

“Common sense and a sense of humor are the same thing.” Clive James

 

Emotions and Negotiations

There was a story in the sports section about a Toronto Blue Jays pitcher who had just gone through baseball’s salary arbitration process. He is, to put it mildly, irritated with the team. He said it was tough sitting in a room hearing how bad you are for five hours.

Now let’s put that in perspective. As I recall, his salary was going to about double and the arbitration was over if it should be about $5 million a year or $5.5 million. I am guessing the team wasn’t badmouthing or denigrating him but giving statistical backup as to why their offer was justifiable (compared to his asking price).

My question is, why was the player in the room? Isn’t this something his agent should handle? There are reasons for agents, intermediaries, and other client representatives. When it comes to negotiations we can shield our clients. Someone can tell me what they think about my client, the offer, or anything else about the deal that might be taken the wrong way (and I can do the same to them).

We all know the feeling. I remember selling a truck, the prospective buyer showed up, and the first four or five things out of his mouth were all pointing out what was wrong with the truck. He thought he was negotiating. I thought he was insulting and there was no way I was going to sell it to him unless the offer was for the asking price, which of course it wouldn’t have been.

I’ve sat in meetings where business buyers and sellers have yelled at each other, and then closed the deal. If your skin is so thin you can’t take it, use a pro.

“Human beings are the only creatures who are able to behave irrationally in the name of reason.” Anthropologist Ashley Montagu

 

Get More Done By Doing Less

On January 13, 2018 the Wall Street Journal published an article by Morten T. Hansen titled, “The Key to Success? Doing Less.” It’s in the vein of the book “Rest” by Alex Soojung-Kim Pang and the book “When” by Daniel Pink (last month’s newsletter). The second level headline of the article includes the line, “most top performers…have one thing in common: they accept fewer tasks and obsess over them.”

Hansen starts by discussing the “Natalie Question,” as in how Natalie did it, it being about how, “Natalie bested me at work – and went home each day at 6pm.” “Bested me” meant her work was better than his and “her analysis contained crisper insights, more compelling thoughts.” All while working a lot fewer hours.

Here are a few things I gleaned from the article.

  • Find the simplest solution, as per Occam’s razor (the simplest answer or path is usually the best one). He gives an example of how a boss had him distill a presentation down to one slide, yes, one slide.
  • Say no and/or start classifying work around its value versus internal and goals (as value is what we all need to offer). Make others realize they should not want you spread too thin so what you do gets done great.
  • The previous point is important because by having a narrow scope productivity goes up about 25%.
  • Don’t focus on activity, focus on results. He gives the example of a engineer who was always too busy given he wanted to get his reports in on time. What he didn’t realize was those reports weren’t needed or required anymore (he missed the memo I guess, as he was too busy writing reports). Or, don’t worry about how many phone calls you made, concentrate on how many appointment you made.

So how does this affect your and my world? First, don’t make work or let others make work (either make it for you or do it themselves so they can’t get to what’s important). As New Yorker’s like to say, get to the point.”

I mentioned how this philosophy is similar to what’s in the book Rest. I know when I focus and set my mind to something it gets done sooner and the result is better. It’s the same with business buyers and sellers. If they concentrate on what they need to do as part of the process, deals get done more often and quicker.

Conclusion     

This seems to be a popular topic as I’ve mentioned two books and this article. I also just received a newsletter from my CRM provider titled, “3 Ways to Be More Productive At Work In 2018.” The three ways mentioned are remove distractions, start time blocking, and say no. As we’ve moved to a faster paced world where technology is omnipresent, there appears to be a lot of research going into getting things done versus being busy. John Naisbitt was absolutely right, the more high tech we get the more high touch we need. And one thing high touch means is not feeling we have to do more just because we have 24/7 access to work via our phones, tablets, etc. (we need to do it right and with urgency).