Over Promise; Under Deliver

I’ve had a security camera in our house for a couple years now. I won’t mention the company name (they’re local) as the main subject of this memo is about their announcement that while their cameras came with free storage for their person detection feature, they’ve realized it is way too expensive to provide it (to over 1 million customers). They’re not going back on their agreement but rather asking customers to voluntarily pay for it.

My first thoughts included the title of this memo, over promise and under deliver, plus didn’t they see Apple, Amazon Photo (for videos), and Google Drive offer some free storage and then charge, and did they get caught up in the creative process and not pay attention to the budget?

So, what can and should businesses do? Here are five tips:

  • Plan – a good plan will cover things like this and put them to the stress test, i.e. what if people use a lot of storage?
  • Budget – here’s where I’m a bit baffled by my above example because this company has raised over $35 million and much of it from some pretty savvy investment firms. Didn’t somebody catch this? A good budget will run different scenarios from slow to fast growth and usage.
  • Realize, growth sucks cash – super fast growth can be as bad to a company, especially a new company, as slow growth. 
  • Know your market – as mentioned, if the big players like Apple, Google and Amazon don’t offer unlimited free storage why should this firm. It reminds me of something about 10 years ago in my Rotary Club. When expanding our fun run from a 5K to also have a 10K we discussed pricing. One of the number cruncher types said (and I’m not making this up) we should figure out how much we want to raise and divide it by how many people we think will run. That would have given us a fee 2-3 times the market rate and Econ 101 says price elasticity would have driven those numbers way down.
  • Get help – pilots don’t fly solo the first time out and neither should any of us with a (new) business.

The above is speculation as I’m not privy to all the inner workings of the company. But when a business has to retreat from a promise, which was probably a selling point to some customers, it warrants comment. As always, it often comes down to paying attention to the basics.

“To err is human – but it feels divine.” Mae West

Owner Versus GM and a Feel for the Business

It happened again. It shouldn’t surprise me, but it always does. Maybe I’m too optimistic about successful people knowing what they’re doing. 

A burned-out business owner hired a general manager so he could step back and clip coupons.  Of course, the manager didn’t have a “feel” for the business, made changes, and proved it’s rare when a non-owner manager can do as well as someone with a vested interest, i.e. the owner’s money (at risk). Now the owner is back in the company, more burned-out than ever. This is why I did a video podcast on this subject, which I titled, “Small businesses need the adult supervision only and owner can provide.” 

When does it work? To me, it seems when it’s not the founder stepping back there’s a much greater chance of success with a manager/COO. The founder has (typically) done things “their way,” knows the little intricacies of the business they often don’t’ share with others, and hasn’t built a solid management team (and if they have, they often don’t delegate as they should).

A buyer/investor who is used to a board of directors, delegating, not knowing the nuts-and-bolts of the business does better when not in the business day-to-day. They’re used to a chain of command and holding people accountable. 

Back to the story at the beginning. The value of the business is much lower than it was two years ago (lower based on the above, nothing to do with Covid). This foray into a manager with an inactive owner cost him millions. And, it proves that the salary to an owner is not discretionary. The owner earns their keep and it’s a legitimate business expense. 

On September 9 I’m on a panel at the (online) meeting of the Northwest Family Business Advisors (www.nwfba.org)on the topic of “Selling a Family Business.” I may use the above story and definitely plan to emphasize how owner salary is not profit, it’s an expense for valuable work.

“The greatest enemy of knowledge is not ignorance. It is the illusion of knowledge.” (Historian) Daneil J. Boorstin

Be Like Oliver; Do a Little Extra

My wife and I were having dinner last week on the new deck at the Wallingford Tutta Bella along with Joe Fugere, the owner (not name dropping, him being there is integral to the story). It was a beautiful evening and as we shared a dessert and had an espresso, we noticed a young man, Oliver, walking around outside the restaurant.

He eventually went in and then came out to the deck. After a while one of us asked if he needed some help. He didn’t, it turned out he was there looking for a job. He finally met with the manager who must have told him the owner was outside because he came over to Joe to tell him how much he’d like a job at Tutta Bella as he really wants to work in a restaurant.

After he left, we talked about how he did what he did. He didn’t just apply online. He went out of his way to take advantage of the owner being there. And the benefit was Joe gave him some tips and actually went online to write on the application that he (Joe) recommended Oliver. I commented I hope he’s as good an employee as he is being aggressive to get a job.

Six months ago, Tutta Bella and most other businesses were clamoring for employees. Now, the prospective employees have to take action. And it’s not much different for most of our businesses. We have to be aggressive and creative to generate business (or get a job). What worked 6, 12, 18 months ago doesn’t necessarily work now.

We are constantly trying new and different strategies to keep our name in front of referral sources and prospective clients. Like many businesses I see, every potential customer is valuable.

“One of the difficulties of being alive today is that everything is absurd but fewer and fewer things are funny.” (Humorist) Alexandria Petri

Pivoting Isn’t Just for Basketball Players

Basketball players pivot on one foot so they can move their body around to see in all directions. But if they lift up their pivot foot it’s a traveling violation and the ball is turned over to the other team.

Many businesses have needed to pivot due to Covid-19, some have done it successfully, some have lifted their foot, and some have not done anything different.

At the Bellevue Breakfast Rotary Club last week our speaker was Joe Fugere, founder of Tutta Bella. He talked about how they’ve pivoted to more takeout, delivery, a streamlined menu, and a partnership with QFC. The latter has them in over 30 QFC stores with a “take and go” section of their foods, which has been so successful they’ve expanded their Bellevue location’s kitchen to cover the demand.

Starbucks has pivoted. A mailer from Fred Meyer last week featured some new products including Cold Brew coffee concentrate and Fresh Brew Cup, which are airtight sealed cans of ground coffee, each making 4-6 cups. They’ve recognized it’s going to be a while before customers flock back to their shops so they’re making it easier to have their product at home.

On a larger scale, big pharma companies are pivoting away from their normal pricing to cutting deals with the government for Covid vaccines at a lower price than they would get on the open market. Just imagine the bad PR if they didn’t pivot on this issue.

If your business hasn’t been affected by Covid, you’re lucky. If it has, what have you been doing? Or, perhaps a better question is, what should you be doing?

“What do we live for, if it is not to make life less difficult for each other?” George Eliot

When Family Ties Don’t Bind: It’s Trouble Succession Planning Gone Wrong

The July 11-12, 2020 Wall Street Journal had a fascinating article on the dysfunctional British Barclays family. It’s a good example of why it’s great to plan and at the same time the plan must be solid and emotions can’t play (too large of) a part.

The simple story is how the now 85-year-old Frederick and David Barclay built an $8.8 billion empire from nothing. Literally nothing, no inheritance from dad or grandpa, no government grant, etc. They were a team, described as inseparable. They owned London’s Ritz Hotel, the Daily Telegraph newspaper, an online retail business, a logistics and parcel-delivery company, and more. They were noted for being adept at buying and selling companies. 

One good thing they did was start the succession planning process about 30 years ago. How they did it makes one wonder how such smart and successful people can make what appears to be basic mistakes. For one, a big one, they decided three of David’s kids would each get 25% and one of Frederick’s kids 25%. Given they were 50-50 partners does this make sense? Frederick now says he felt sympathetic for his brother because he was ill at the time. This is where the emotions come into play; the hugging at the heartstrings. 

Fast forward to recently and it sounds like a bad reality TV show with secret meetings, bugging meeting rooms, etc. No trust, damaged relationships, and a waste of time and money.

If the article is right, a big mistake was trusting others, even family members. As President Reagan said, “Trust but verify,” which leads me to offer some thoughts on succession planning in general.

  • Don’t get overly obsessed with succession to your kids or grandkids. It has to make sense for all not just the desire to have your kids continue on with what you started (or bought).
  • Get advice from experts and pay attention to it. They’ve been there, done that.
  • Start early (the Barclays’ did).
  • Make sure it follows Rotary’s 4-Way Test and “Is fair to all concerned?”
  • Think through it, there probably isn’t a rush.
  • Monitor what you did, things change.
  • Consider all options including family, management, outside investors or buyers.
  • Know what’s driving the process. Is it money? Is it legacy? Is it giving your kids or team the business? When you know this the rest will be a lot easier.
  • Once you do it, get out of the way. Dad and/or mom can’t hang around too long or be too involved. A board seat is fine, coming in every day to look over your successor’s shoulder doesn’t work.
  • Relationships rule in buy-sell deals. When there are multiple family and/or management members make sure there are good relationships, or you’ll be doomed, and probably back running the business.

It has to be a fair deal. Mom can’t give the business to her son or daughter. Dad can’t go for the jugular moneywise like I wrote about many years ago when Seattle institution Larry’s Market went under. My theory was the kids overpaid and a banker who rejected the deal confirmed it. 

“Is it fair to all concerned?” Rotary’s 4-Way Test

Zooming Around

What have you learned from four months of intense Zoom, Teams, WebEx, Google Meetup, Amazon Chime, and other online meetings? Here are my thoughts.

Positives

  • Unlike the telephone, we get to see other people. And a lot of other people.
  • Also unlike the phone, we can make or view presentations.
  • There have been a lot of learning opportunities (and God knows we all have had the time).
  • They’re safe, unless you spill your coffee on your keyboard.
  • We can actually see nuances like facial expressions.
  • We get to be casual.
  • These meetings will replace some phone calls. I’d much rather have a Zoom call versus a phone call if we have to go over things for an extended time.
  • Most important, we can easily mute what’s going on and still look interested.

Negatives

  • Fatigue as in Zoom fatigue but it applies to all online calls. There can be just too many.
  • They take longer. A 5-minute call is a 20-minute Zoom, which would be 45 minutes plus travel if in person.
  • Connectivity becomes a much bigger issue than cell coverage.
  • There are some home-offices I just don’t want to see.
  • There are personal hygiene habits best not seen.
  • People talk over each other (just like they do in meetings).
  • You catch people multi-tasking and asking others to repeat themselves (pay attention the first time please).

Any other positives or negatives to share? Let me know. Seriously, these meetings are here to stay. They won’t replace the phone, especially calls while we’re in the car, walking the dog, etc. They surely won’t completely replace in-person meetings and get togethers. They’re another method of communication. 

There’s been a lot of talk about the demise of meetings, in-office versus remote work, and similar is divided by type of work. Those in tech and similar are convinced there’s not much need for offices. But you still have to build a relationship to get a client. Creativity doesn’t happen over the phone or online. Just a guess, but when hiring someone you may want to look them in the eye, in person. Even in construction, a relationship means they trust your bid and you don’t build six or seven figure relationships online. 

I paged through my membership directory for Seattle Executives and of the over 100 businesses in the group I only noticed a handful or so of businesses that can survive long-term without in-person contact. A new norm indeed and still a work in progress.

“I would imagine that if you could understand Morse code, a tap dancer would drive you crazy.” (Comedian) Mitch Hedberg

Time for Thinking

s you may know from my email signature, website, the bottom of this newsletter, and elsewhere I have trademarked the term, “The Escape Artist®” for the work we do helping our clients escape their business, their job, or plan for that escape.

But I’m not the real escape artist and I’m not referring to Houdini. I’m referring to the little fuzzball in the picture below. Coco is 10 weeks old and is half Lab and half Siberian Husky. She can escape from almost anywhere. Kid gates, no problem. Backyard gates are now lined with bricks. Furniture barricades, they’ll only slow her down. She seemingly can get anywhere there’s a cord, a backpack, or paper to chew.

I mention this because while her attention span is short and she’s easily distracted, she is super creative. And in today’s world creativity is needed. The same old, same old doesn’t usually work. I don’t consider myself to be very creative. Not like an artist, designer, serial entrepreneur, etc. 

But in today’s world my business has to change. One might say we are “forced” into trying to be of help to our clients in different ways. Creative in finding matches, financing, and deal structures – and in some cases, help our clients survive. There’s no alternative; we, like a lot of companies, have to find new ways to attract customers, deliver our product, etc.

Questions

  • What creativity have you used over the last few months? 
  • Have you brainstormed for new ideas for things not working like they used to? 
  • What happens if you don’t do things differently (out of the box)?

“You have to love a nation that celebrates its independence every July 4th, not with a parade of guns, tanks, and soldiers who file by the White House in a show of strength and muscle, but with family picnics where kids throw Frisbees, the potato salad gets iffy, and the flies die from happiness. You may think you have overeaten, but it is patriotism.” – Erma Bombeck

“The United States is the only country with a known birthday.” – James G. Blaine

Ask the Right Questions; Get the Right Answers

For some interesting early summer reading here are a few things from my buy-sell world. Issues that, for the most part, can be avoided by asking the right questions. However, I can tell you from experience even if you ask the right questions you don’t always get the right answer (meaning what the client really thinks).

Question: (for all owners thinking of selling) “Have you worked with a financial professional to see if the proceeds from the sale are enough for your next great adventure in life?” A deal collapsed when the seller said because of other financial matters in his life he just can’t sell his business now. Believe me, this is not the first time I’ve experienced this, with both my clients and those on the other side of the deal. Plan before you jump.

Question: “What will you do when you sell your business?” I was working on a project involving selling the company to the management team. The owner, a client of at least three other projects, insisted he was prepared to sell. In reality, he wasn’t. He didn’t know what he would do, especially since the answer to the question was not, “Retirement.” He can’t see himself retired. Now, if the answer is retirement, my next question is, “Does your spouse want you around 24/7?”

Question: “Regarding your offer, can you show me your financing package?” A business buyer lost a deal to two other offers that were substantially higher than his offer. Then both other offers couldn’t get the financing together. My constant advise to buyers is, get financing alternatives lined up before making an offer. Another buyer got bank indications of interest before making the offer and it was powerful.

Question: “Have you hit past projections?” There’s a deal lingering because the company (actually the very optimistic seller) can’t seem to ever hit their projections. Another deal was lost recently because the seller insisted on a price based partially on earnings projections for 2019. When those projections turned out to be 25% above the actual earnings the buyer wondered if growth was possible. 

Question: “What are your anticipated capital expenditures?” A business owner is touting the firm’s EBITDA as actual earnings. Yet 25-30% of annual EBITDA is new equipment with an immediate write-off. That’s cash out the door or bank payments over time. It’s a real expense. This is a lot different than when capital expenditures are for a handful of computers and are only 3% of EBITDA. 

To summarize, ask the right questions (usually you’ll get an honest answer), realize how little projections are worth in today’s fast-moving world, get financing lined up before making an offer (on anything, business, home, commercial real estate, etc.), and realize while depreciation used to be a “non-cash” expense, these days it’s probably a real expense in the year assets were purchased.

“The solution to the mystery is always inferior to the mystery itself.” Jorge Luis Borges

Frustration Abounds

People are stressed. Covid has us wondering, frustrated, concerned, and for some, scared. And it boils over into passive-aggressive, snotty, and even mean behavior. And I’m not referring to those making it political.

How else to explain an email I received last week that said, “…if you were a real business you would have answered your phone.”

Okay, I get it. But just think, what if I was someone who could help this person? Or, someone who could buy something from their company?

I preach relationship, relationship, relationship to my clients. Don’t blow it before you have a chance.

Isolated Information May Equal Trouble

Some recent events have reinforced my belief that singular information can easily lead to the wrong conclusion. We see this in the news. A police officer makes a mistake, and some assume all cops are bad. A protestor (or protest hijacker) throws something, and some assume the whole group is bad.

Singular information in other parts of life can also get us off track.

I was looking at some of a client’s financial reports. Revenue and production efficiency should move together. If efficiency goes up so should revenue, and vice versa. But they didn’t; Efficiency was solid, but revenue went down. I found out the reason for this, it made sense but at the same time didn’t make sense. In other words, I now understand why it happened, but production efficiency shouldn’t be calculated the way it is/was. If all I did was look at one or the other, I’d get an incomplete picture.

The same goes for COVID cases. We are constantly barraged with the numbers of new cases. Just paying attention to the top line number can get you worried (it sure has with Washington’s governor). But if you look at the positive cases in relationship to the number of tests, you’ll see the numbers are up because testing is up. As per the Washington Department of Health’s website last week, the percentage of positive tests is (was then) at about half of what it was in April. Want to see the positive numbers go down, test less (that’s a joke).

Take this into account when you look at any business whether it’s to buy it, work there, or offer advice. It’s like peeling an onion. You peel until you get the right answer, whether it’s the one you want or the opposite. When it comes to buy-sell deals, you’re going to see a lot peeling. If sellers thought there used to be a lot of questions, they’ll now find their “onion” just got a got larger.

“Not all those who wander are lost.” J.R.R. Tolkien