Taking Action – Maybe Tomorrow?

The Wall Street Journal had an article titled, “New Ways to Battle Procrastination.” So, I tore it out to read later.

Seriously, I did tear it out and did so because I was about to go into a meeting and wanted to get rid of the rest of the paper. Like a lot of people, I have a list of things I need to do. And I love checking off those I complete.

But, and this is a big but, when it’s something I can quickly do, I do it right way. Unlike some people I know who say, “I’ll put it in my book.” As we head into 2020, what are the things you want to get done before yearend?

My advice is, get everything you can get done in the next two weeks so 2020 is dominated by new initiatives, growth strategies, and enthusiasm.

“Nothing so needs reforming as other people’s habits.” Mark Twain

Priority: Make Customers Feel Special

It’s common knowledge cable and satellite TV companies have been losing customers to cord cutting, i.e., people using only online streaming services for their in-house viewing entertainment. So it has to have been a balancing act for these firms on how to keep customers, advertisers, and content providers happy.

For years it seemed customers were at the bottom of the list with an example being watching recorded shows on a DVR. Yes, you could fast forward but it’s a game. Watching On-Demand often didn’t allow you to fast forward through commercials (although we figured out you could jump forward and rewind back a little). 

But now, at least on Xfinity, many shows have “smart resume.” There’s a colored bar showing where the commercials end. I’m not sure how the advertisers or content providers (who often charge advertisers) like it, but we sure do.

So, how do you make customers feel special?

  • Sometimes it’s saying, “no.” If you’re not the best option, refer a potential customer to someone better suited to help them. We do this at least once a month.
  • Solve their problem! This is really sales 101. No band-aid solutions, no one size fits all, provide a solid, long-term solution.
  • Communicate, regularly. When things are going well, be in touch because when there’s a hiccup (maybe not even your fault) it will benefit you tremendously.

And by the way, the above philosophy applies doubly to your employees.

“Children see magic because they look for it.” (Author) Christopher Moore

Vaping and other Naïve Actions

There was a recent news story about a Seattle area law enforcement officer suing for about $11 million because of a health condition caused by vaping (a CBD product and something else to relieve his stress and pain). Am I missing something?

He heated a chemical concoction, inhaled it, and figured all was good? He couldn’t imagine burning chemicals could cause bodily damage. 

I also see a lot of naivety in business and in the buy-sell world. A lot of it reminds me of some old sayings like:

  • “Build a better mousetrap” (and the world will come to you).
  • “If we build it, they will come” (Field of Dreams).
  • “Our product is the best on the market” (but the competition markets better).

In the buy-sell world what I see the most is:

  • It’s easy to find a good buyer (they’ll all be standing in line for my business).
  • Finding a mature, profitable, and fairly priced business is easy (it’s the mature, profitable, and fairly priced part that adds the complication as there’s no shortage of lousy and/or overpriced businesses).
  • I (buyer) can fix this business (turnarounds make headlines for a reason, they’re rare).
  • There’s a lot of discretionary cash to cover my debt (are your mortgage, car, tuition, utility payments discretionary? To cover debt you need “real” cash flow after a fair market salary).
  • Our competitive advantage is we’re the cheapest so pay us a lot for the business (someone will figure out a way to undercut you; value is when people pay more for a great product and service).

Don’t vape yourself into trouble in your business, the one you buy, or the deal you want when you sell.

“They always say time changes things, but you actually have to change them yourself.” Andy Warhol

Politicians, Businesspeople, and Rotary’s 4-Way Test

As we experience the holiday season with Peace on Earth, Goodwill to All, Thanks(giving), and the meaning of all this, I want to share my thoughts on what I consider to be one of the best codes of ethics around. It’s Rotary’s 4-Way Test and how I see it applying to politicians and businesspeople.

The 4-Way Test is:

  • Is it the truth?
  • Is it fair to all concerned?
  • Will it build goodwill and better friendships?
  • Will it be beneficial to all concerned?

Is it the truth?

Politicians – I think I could stop here because we all know they all lie, about everything. We have a President who sets the standard with over 12,000 verified false or misleading claims. Politifact states Obama made about 14% the number of “pants on fire” lies as Trump (yes, Democrats and Republicans, they all lie). Here in Seattle a Seattle City Council member, on the Berkeley “ban natural gas” bandwagon, stated a natural gas stove poisons the air in the house. A University of Washington scientist debunked that one pretty quick.

Business – My experience is most businesspeople are pretty truthful, other than owners who blend their business and personal checkbooks. They may write off some personal expenses but do report their income. When it comes time to sell, most care about their legacy (they want the buyer to succeed) and really care about their employees thriving with the new owner.

Is it fair to all concerned?

Politicians – Again, pretty simple as they only care about getting re-elected and the people who can help them accomplish that. This means donors and lobbyists not you or me.

Business – Most really care about their employees and customers. Yes, some (way less than 50%) are greedy, pay low, don’t provide benefits, etc. One telltale sign is often the retirement plan. If it has 95% going to the owner, you have to watch out for that person. 

Will it build goodwill and better friendships?

Politicians – Yes, if you’re a donor, a donor’s business, or a donor’s cause. Otherwise, you’ve got to be kidding.

Business – Small business is relationship business. You can’t succeed if there’s not goodwill between employer and employees, the business and its customers, vendors, and service providers. Face it, customers usually have options. In today’s labor market employees have a lot of options (on my list of the top four things an owner can do to prepare the business for sale is, “Show you can attract and retain great talent.”

Will it be beneficial to all concerned?

Politicians – You know my thoughts on this. See the above three sections. If it’s beneficial to the politician they’ll do it (often meaning they’ll do what the Party tells them to do).

Business – If you’re in business, large or small, you must be able to solve problems, meaning beneficial to your customer, your vendors, and you. Try making a promise like a politician and not delivering on it (we’ll have your order out by the end of the month but when it’s two months late you’ll lose the customer). Things must be beneficial to employees also, or they’ll leave. Most want career advancement and want to be able to take pride in their work.

Conclusion

It’s the holiday season and this is a fun essay. I’m sure you picked up on the general theme, we businesspeople have a higher ethical standard than those we elect. As you give thanks on Thanksgiving, wish friends and family Merry Christmas, Happy Hanukah, and Happy New Year, realize it’s best to carry all those feelings throughout the year, not just in December.

Three Important Buy-Sell Lessons

This is something I sent to our clients recently and realized it has good lessons for all.

I’ve been involved in a real estate buy-sell transaction as over the last 18 months we’ve been trying to sell our family cabin in the Midwest. In this part of the country it is not a red-hot real estate market, with only one exception and the exception is places on a chain of lakes, which our place is not. 

Bottom line, it’s been slow. About one year ago we had a verbal “offer” about 25% below the asking price. Our agent told them not to even bother writing it up, which was the right decision. 

All of a sudden, this fall, after no serious interest all summer, we got two offers. One was another lowball offer, which definitely hurts one’s feelings. The other was in the negotiable range, so we negotiated, and reached agreement.

Lesson one: lowball offers destroy all faith and trust. You don’t even want to deal with the person.

After hundreds if not thousands of online views, scores of people looking at the place in-person, two lowball offers, and one negotiable offer, we came to realize the following, which business sellers often don’t want to accept:

Lesson two: the market was speaking to us about what the value really is.

At the same time, we realized, and this applies to business buyers:

Lesson three: no buyer (maybe a very naïve one) makes an offer they expect to be accepted. 

In fact, if a seller accepts the first offer a buyer makes the buyer should wonder what’s wrong. Because rarely is the asking price what a seller really wants and rarely is the first offer the limit of what a buyer is willing to pay.

Summary, in business deals it’s very much about relationship. In business and real estate, emotion and feelings play a big part.

“Promises only bind those who believe them.” Jacques Chirac

No Floundering Here; Only Great Insights

On October 23 we had our 12th annual Getting the Deal Done Breakfast Conference at the Bellevue Club. As always, our sponsors and expert panelists (beside myself) were PRK Law (Greg Russell), Hutchinson Walter (Marc Hutchinson), Columbia Bank (Bill Barclay, and Chinook Capital Advisors (John O’Dore). Of course, we couldn’t have done it without our ~175 attendees (I don’t have the exact count yet, but Jessica told me she counted three empty chairs).

As I welcomed everybody, I quipped that regular attendees might think we’re a food industry conference given over the last half dozen years we’ve had Renee Behnke (Sur la Table), Joe Whinney (Theo’s Chocolate), Robbie Bach (owner of Manini’s Pasta), and Joe Fugere (Tutta Bella). I explained it made sense to have all of these food industry people because the food industry is a tough and competitive business so it takes really good business people to succeed in it. 

Which brought us to the introduction of Bob Donegan, president of Ivar’s, who spoke on “Lessons our flounder taught us that allowed us to thrive for 82 years.” In recapping Bob’s talk, which received nothing but rave reviews, I won’t steal his talking points but will summarize for you. Bob concentrated on what I’ll call the big three non-financial factors all businesses deal with:

  • Employees
  • Customers
  • Vendors

Employees are on the top of Bob’s list, as they should be. His opening remarks on employees were centered on finding and keeping good people. One of his lessons was, hire for enthusiasm, train for skills. And, keep employees happy. They keep them happy by constantly recognizing their people and making it fun. 

The results include, while industry turnover is 250-400% Ivar’s turnover is 18% for management and 100% for staff. Given it costs over $2,000 to train a new staff member this is huge (with over 50 locations). This leads to better customer service, lower L&I claims, reduced food waste, and higher pay. In addition, it allows the company to give every employee medical, dental, counseling, a 401(k) and meals.

Customers are second on Bob’s list and directly tied to the employees via the customers service provided. Ivar’s does a great job of knowing their customers, and I mean really knowing their customers. Again, Bob shared some statistics (he’s big on measuring being a former CFO). Three of the most interesting categories of metrics, for Ivar’s seafood bar business division, are:

Ivar’s customers visit 3-4 times as often as the national average for a fast serve facility and will travel five times as far (on average).

Their customers average age and income is 50% more than the national average customer while the average purchase is almost triple the average.

The average customer satisfaction score is 50% higher than average, over 90%.

Vendors are also important to Ivar’s and Bob told a story about taking care of a preferred vendor during a time of crisis. They kept paying them even when not getting deliveries. He also told of a partnership with a Native American tribe that gets them high-quality Yukon River salmon. This is why they refer to their vendors as partners.

He closed his talk by discussing how they always think long-term, not quarterly profits. This shows in all of their metrics. And, he emphasized they always want to have fun (which is what I tell business buyers needs to be on the top of their list of reasons why to own your own business). 

Conclusion

I don’t know about other cities so maybe this isn’t unique, but the Seattle area has quite a few, well known restaurants putting people first. Not only Ivar’s but Tutta Bella, Dick’s Drive-In, and Mod Pizza. They offer (one or more of) second chances, benefits, tuition programs, career advancement, and more. And it pays off.

Fantasyland

I was recently talking to a business buyer about what he was looking for in a business. What he said all made sense; a B2B business, logical size range, wide geographic area, etc. 

Then he said he needed a business on which he could pay off the debt (SBA, 10-year term loan) in half the time. That’s 25% annual growth, from day one. And yes, 25% can be achieved. A recent client grew 25% the first year. But over five years? If it takes one year to figure things out, all of a sudden, it’s about a 33% growth rate. But then came the kicker:

“And I don’t want to have to make any investment in the business (to achieve the growth).”

No new (additional) equipment, vehicles, marketing, or people. All the earnings go to debt reduction. This is fantasy land. And it makes me wonder what other fantasies are out there. Some that come to mind are:

  • A business seller believing his or her business is so special traditional valuation methodologies don’t apply to their business.
  • Owners thinking it’s easy to find good salespeople.
  • Advisors (and salespeople) figuring because they know what they’re doing the phone will ring.
  • Business buyers thinking an owner with no family in the business has no good options, other than selling to them with a low down payment (actually this owner has all the options).
  • Company founders believing a bank will lend them money based on their great idea.

I’m sure you’ve seen many more fantasies. 

“We are living in a world today where lemonade is made from artificial flavors and furniture polish is made from real lemons.” Alfred E. Neuman

What is Your Real Income

I’m working with a private equity firm to find add-on HVAC, plumbing, electrical, or refrigeration companies for their plumbing construction firm in the Seattle area (so if you know of any doing at least $5 million in sales who want an investor let me know). The founder of the PE firm has a distinct term for the earnings/income of a company.

He calls it “real income.” What this means is, it’s the income after allowing for all the expenses required to run a business. This means expenses for:

  • A CEO at fair market salary.
  • A CFO type, not just a part-time bookkeeper who doesn’t know what a KPI (key performance indicator) is.
  • Anticipated capital expenditures.
  • Operating interest (a working capital line of credit).

About 15 years ago I started using the term “free cash flow,” which is pretty much the same as what’s above. I would add together profit, owner salary, depreciation, and interest and subtract fair market owner compensation, anticipated capital expenditures, and operating interest.

What I didn’t include was the CFO/controller role and compensation, even though I’ve seen hundreds of businesses with crappy financial systems and crazy financial statements. Not to mention no management reports, no metrics, KPIs, etc. It took a while, but I now understand that’s a role we need to account for when adjusting earnings.

I like the term “real income.” It conveys trust, non-fantasy, and sincerity. It’s now my go-to term.

“The trouble with having an open mind, of course, is that people will insist on trying to put things in it.” (Author) Terry Pratchett

Do Your Customers Know You?

We’ve been working on an ongoing project with Pacific Software Publishing to locate acquisition targets of companies doing website hosting. Many moons ago I came to the conclusion a lot, and I mean a lot, of businesses would be shocked to find out how and where their websites are being hosted. Here’s a handful of what I’ve seen (and my client has many more examples):

A common refrain in business is to get to know your customers. But what about your customers getting to know you, in specific:

  • Unlicensed server software
  • Servers in a house basement without climate control
  • Antiquated hardware and software
  • Hosting as a minimal and (pretty much) ignored part of the business

How you work – using the above example this would include reassuring customers about your equipment, software, facility, support, etc.

Your processes – letting customers know the best way to do just about anything with you including ordering, problem solving, service, etc.

Your people – who are your people, who’s the client liaison for support, logistics, and, most importantly, the following point.

Problem procedures – what happens if there’s a problem with service, delivery, quality, or anything else. In a small business the owner should let it be known they will get involved and help solve any problem.

In buy-sell deals I say one of the three key factors is education (on what it takes to get a deal done). The same with customers. The more insights you share, the better the relationship. 

“If things were simple, word would have gotten around.” (Philosopher) Jacques Demida

Scams in buy-sell deals

On September 8, 2019 the Buzz column in the Seattle Times was titled, “Seattle Cider sues founder, former CEO” and dealt with a lawsuit against the founder of Seattle Cider and Two Beers Brewing initiated by Agrial, a French company that acquired them. In simple terms, the plaintiff alleged the books were cooked to increase the price.

More about the above later and it fits with a quote I saw this summer from Richard Parker, “Numbers don’t lie, sellers do.” I wrote him and told him how I had seen a case where the owners/sellers (creatively) made the numbers lie, at least temporarily. Richard’s response was something like, it’s amazing how creative people can get with this stuff.

The Seattle Cider case involves the seller supposedly doing “channel stuffing.” He allegedly had his top distributor accelerate orders, so sales looked stronger than they really were and then, post-sale, orders declined because the distributor had months and months of product. Oops, the buyer is now getting no orders and had the privilege of paying the seller an inflated amount (again, alleged).

It seems so easy, but this stuff always comes out (at some point). For example, a seller ripped a letter off a bulletin board as she gave the buyer a tour of the business. Turns out the letter was from their top (30%) customer informing them a change in strategy meant they were ending the relationship. The buyer later found out from an employee.

Or many years ago when a buyer sabotaged himself by letting the seller convince him he couldn’t talk to the customers because the industry was so tight word of the sale would somehow get out. Even though his attorney and I told him to “kill the deal,” he agreed (to not do customer research, even as a reference check). Turns out the top, 25%, customer was doing a “test kitchen” of new systems without inviting their current provider (the seller’s firm) to participate. No wonder the seller didn’t want any customer related due diligence. (By not talking to the customers a buyer risks not knowing about damaged relationships. If the customer has already stopped doing business and is still disclosed in the purchase and sale agreement as being an active customer there should be protections in the representations and warranties in the agreement, although it’s still deception and a major hassle.)

And this is not confined to the small business and lower middle market. Just look at what’s in the headlines about We (WeWork). 

When it comes to integrity and ethics, 99% of business owners have a high level (unless you count blending the personal and business checkbooks). But the other 1%…

“Don’t look back. Something might be gaining on you.” Satchel Paige