When You’re Behind the (Proverbial) Eight Ball

We are constantly bombarded with news and information about 5G. How fast it is, what it can allow us to do, how it may interfere with air traffic control, etc.

We don’t hear too much about 3G (old news) unless you’re in the security and alarm business. Because sometime soon all alarm systems that use 3G will be obsolete. Alarm companies must replace the wireless cards in their systems with updated cards that are more advanced than 3G and this must be done in-person (and it’s a cost that can’t be fully passed on to the customer). 

The industry also has an issue when the alarm system is connected to a landline. Why? Because almost everybody is switching to a VOIP system and these systems don’t work with alarm monitoring. So, guess what? Another switch is needed with new equipment.

So why talk about all this that’s specific to one industry? Because it points out how all of us need to stay up-to-speed on changes and anticipated changes. If we don’t, we’ll be like the alarm companies that ignored the 3G phase out and have been calling other firms asking if they’ll acquire them (and pay for the upgrades).

Think about what it could be in your industry. Is it cybersecurity, new regulations, new technology now available, alternate suppliers, or something else? Doing it the same old way because that’s how it’s always been done may lead to catastrophe, especially if a competitor moves faster and disrupts your market.

“There is nothing to be learned from the second kick of a mule.” Mark Twain

“You have to grow up, start paying the rent, and have your heart broken before you can understand country music.” Emmy Lou Harris

Founder’s Syndrome Can be Deadly (to the Business)

I’m working with a client whose company was hurt and is experiencing a slow recovery. After decades of ownership the owner is burned out and knows he needs to sell, but also fears not having his business. For background, it is not a dynamic industry, the management team is weak, and their pace is the opposite of “having urgency.”

We’re talking with an industry buyer with the right people, the right technology, and the money to take my client’s firm and modernize it. FYI, estimates are my client would need to invest about $1 million to get the needed technology and people.

That said, every so often my client will say something like, “I’m not sure others can do what we do.” I call this the “Founder’s Syndrome.” As in, my business is so special it will be tough for anybody else to run it. In this case he’s ignoring the fact the suitor overlaps about 2/3 of what his firm does, has about four times the sales, is growing fast, and is very profitable.

Founder’s syndrome usually equals an owner dependency. As in, the owner is the only one who can:

  • Work with key customers.
  • Finalize and approve all bids.
  • Design products (last year we ran into a company whose 82-year-old owner was the lead designer of very complicated and technical products). 

On the flip side, a great owner will listen to his or her CFO, management team, and outside advisors. They’ll delegate and let people grow. They realize their value goes up when they are somewhat expendable, because they work on not in the business.

“Every sin is the result of collaboration.” (Author) Stephen Crane

“The problem with putting two and two together is that sometimes you get four, and sometimes you get 22.” (Author) Dashiell Hammett

It’s Not a Problem, It’s Just Small Business Accounting

While evaluating a company, there were some questions about how some financial transactions are handled on the books. Multiple theories of what could be going on were brought up. I finally said, “I’ll bet it’s just small business accounting.”

After an explanation from the owner, we all came to realize it was nothing more than small business accounting. Because during the year nobody generally looks at their books except the owner and their accountant and sometimes their bank. They don’t worry if things aren’t done exactly the way they should be throughout the year because they know there will be year-end adjustments to get everything in line.

This was not too bad of a case. As I have said and written many times, one of the problems with small businesses is the accounting department is often treated like Cinderella, the weak little stepsister off in the corner. For many owners, they love their product and want to grow their business so it’s a pain to have to deal with all the accounting detail. It’s the same as why salespeople would sooner be out making a sale than submitting paperwork.

And when it comes time to exit the company and sell it, it’s often an issue as the buyer, their CPA, and the bank want to know exactly what they’re getting into. It’s why one of my four immediate things an owner can do to make their company ready for sale is to have great financial systems, so you have accurate financial statements. Make it so those on the outside know exactly what is going on when they look at your financial statements.

“Invest in inflation. It’s the only thing going up.” Will Rogers

The Great Resignation = Taking Control

“The pandemic has unleashed a historic burst in entrepreneurship and self-employment. Hundreds of thousands of Americans are striking out on their own as consultants, retailers, and small-business owners.” This is the opening paragraph from an article in the November 30, 2021 Wall Street Journal titled, Workers Quit Driving Jobs in Droves To Become Their Own Bosses.

Here are the most interesting pieces of information I garnered from the article:

  • Through October of 2021 4,540,000 new businesses applied for a federal tax and identification number, up 56% from 2019.
  • The share of workers with firms of 1000 or more employees has fallen for the first time in 17 years.
  • The percentage of workers who are self-employed is the highest it has been in 11 years.
  • From a person who started their own business, “I feel so successful and wake up every day like, “’I wonder what’s going to happen today.’”
  • Another person who struck out on their own said his favorite part is not having to deal with corporate policies or bureaucracy.
  • This person also commented, when offered a job from one of his clients, “I told them, I’ve seen the light.”

While a very high percentage of the new businesses are people starting a company, primarily one where they will be the only employee, there are other ways to be in business for yourself. For people who may not have the business skills to start or by a business, a franchise is a great way to enter self-employment.

For those who have the skills necessary to manage people, money, processes, and enthusiasm, buying a (mature, profitable, and fairly priced) business is often the best option. And in the spirit of the holidays, if you or someone you know would like a complimentary copy of my book, Buying A Business That Makes You Rich, let me know and we’ll get you a paper or Kindle version.

The same offer of a free copy goes for our other books:

  • If They Can Sell Pet Rocks Why Can’t You Sell Your Business (For What You Want?) 
  • Company Growth By Acquisition Makes Dollars & Sense
  • Getting the Deal Done. 

Overthinking is Prevalent

On New Year’s Eve I was talking with a new business owner. He closed his deal and takes over operations on January 3. During the conversation he stated he is nervous and has anxiety about owning and running a company. I told him if he wasn’t nervous there would be something wrong with him as it is a huge step. 

Or, as I say in my book, Buying A Business That Makes You Rich, you are making a leap of faith and you want it to be off a chair not the roof, which he clearly is doing (making a small leap) due to all the diligence and preparation. His response was an indifferent, “OK.: Then I said:

“Don’t overthink it. You’re smart, capable, and have run larger companies than this.”

His enthusiastic response was, “That’s really great advice.”

It’s something we all do too often, we overthink by wondering about:

  • All the things that could go wrong, which have never gone wrong in the past
  • Scenarios about how others will react when they probably aren’t giving the issue one iota of thought
  • All the minutiae, most of which doesn’t matter at all, and keeps us from moving forward with our plans on a timely basis

A new year is a great time to consider this. Although it is just as important every day, week, every month of any year. 

“If you can’t beat them, arrange to have them beaten.” George Carlin

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