Rotary and Business Buy-Sell – Part One

Recently I had a Rotary Global Grant approved for our ongoing work in Antigua. As I was writing the grant, I realized there are a lot of similarities between our project, the grant process, and our day-to-day work with clients buying and selling businesses. This newsletter will cover seven similarities of projects with business buyers and next month I do the same for business owners/sellers.

Objective – We must articulate, in detail, what our project hopes to accomplish to get a grant approved. In our case, it’s supply technology and train teachers on how to reach their students more effectively with technology (versus using a 3’x5’ rolling blackboard). A business buyer must know what types of businesses they don’t want, what skills they bring to the deal, their capital, and an attitude of being open to business types they’re not familiar with as many deals come in through the “side door.” And most importantly, a good personality to build a relationship with sellers.

Team – Last time we had 14 students (who setup the computer labs and Wi-Fi networks) and 10 adults. We get a lot done. Buyers need to build a team and it should include a transaction attorney, CPA, deal pro (me), banker, and other experts as needed for environmental, HR (a big one and getting bigger), etc.

Money – Our project gets donations from at least three Rotary clubs and a foundation tied to Antigua that loves not only what we do but that we actually get results. We then triple it with a Rotary Foundation grant. Business buyers need to get their capital put together before starting to search. How much capital will come from the buyer’s savings and investments, is the spouse on board with that amount of investment, if investors are needed will they be friends and family or professional investors? Once this is settled it makes sense to talk with bankers.

Timing – We run our project on tight timelines. Grant submission, approval, shipping by a certain date, travel when the students are on break, etc. Buying a business has timing and timelines also. You’d think most things would be concurrent not consecutive but that’s not the case. For example, many buyers won’t fully engage their attorney until they are absolutely positive their loan is approved. Customers and employees can’t be talked to until the agreement is finalized (and often signed in advance). It’s why I tell buyers if they found a business today it will easily take 90-120 days to meet, build a relationship, get information, analyze, work out a deal, financing, legal, etc. All while the seller is running the business.

Implementation – Once our grant is approved we start implementing. Actually, we start prior to that by securing computer and other equipment donations. We can’t use grant money until final approval and some years that meant buying things the day after approval. Buyers need to do the same. Often, they don’t. Life gets in the way and a story in Buying A Business That Makes You Rich demonstrates this. Michael would tell me, “I’ll get to it after my next game of golf.” I quickly figured out there is always a next game of golf. We talked, he got it, he moved at lightning speed thereafter.

Secure agreements – The Antigua Ministry of Education and others must sign a Memorandum of Understanding agreeing to their responsibilities. For a Caribbean country I’d say they’re pretty good. We did have a year where we didn’t do a project because the government was behind on their obligations and from what I hear, one out of 11 is really good in that part of the world. Buyers need agreements also. They’re with the bank, landlord (the landlord waiver is often a challenge and Jessica recently lost a deal because the landlord wouldn’t offer a long enough lease), vendors, employees, customers, and others.  

Administrivia – When I look at all the little things we have to do to get 24 people to and from Antigua, students hosted by local Rotarians, lodging, cars, activities, little supplies we don’t know we need until we get there, etc. I wonder how my friend Jeff at Newport High School and I do it while having work and families. The same with buyers when they get near the end. It’s why I have a form, edited by seven buyers who had recently closed on deals, of all the annoying little things that need to be done before (and just after) closing.

What I illustrate above shows many things have common ground and other than the use of technology, not much has changed in decades. Buyers and sellers go through the same paces they did 20, 40, 60 years, only they have more tools to help.

You Have to be Better Than the NY City Election Board

New York City finally announced the results of the Mayoral primary. As per a variety of sources I deduced because of ranked choice voting this election was slower and more troublesome than usual (like announcing results that included over 100,000 ballots used to test the new system).

But let’s not go over their inefficiencies, let’s look at why (as per experts) and how it relates to businesses, especially those wanting to sell (for top dollar). As per the reports, the election board is filled with people who have been there way too long, has (political) cronyism, and nepotism, which makes for a culture none of us would want in our companies. As it relates to small business:

Nepotism – and it’s not always bad to have family members in the business but look at this situation. The owner of a nice, growing, and profitable business has his two sons working for him and they are key employees. He needs the money from the sale to retire but says the sons don’t have enough for a down payment (even with a bank/SBA loan at about 10% from the buyer). A first reaction of any outside buyer is going to be, what are the sons going to do if dad sells to me? It’s solvable (we’re meeting soon to go over options) but it will take more time, effort, and money than if the planning had started three years ago (there’s a story in If They Can Sell Pet Rocks Why Can’t You Sell Your Business (For What You Want?) about a couple that planned to transition the business to their son).

Old, long-term employees – an owner states how many of the employees have been there 20-30 years and what I hear is they’ll all be retiring at about the same time. The situation is amplified when there are three or four owners who all want to sell and leave. A good succession plan phases the owners out over time so when it’s time to sell the whole management team doesn’t have to be replaced at the same time. 

Culture – the NY election board (supposedly) has a culture of, “Who cares when the work gets done, I have things to do.” Things like go to the gym, run personal errands, long lunches, etc. In a business, a lifestyle culture is sometimes seen as an opportunity and sometimes as the threat. When an owner told a buyer his sales team and he work just enough to make the income they want, it scared off the buyer. He saw opportunity but it would take effort. He knew (from his meetings) these people weren’t going to change. They’d either keep working with limited results or leave. And having to hire a new team is a sign of disaster.

A lot of what it takes to eliminate the big red flags a buyer sees as lowering value are not hard to fix. They take time and effort. Get an experienced guide, pay attention to the details, and allow enough time to do it right.

“If a politician found he had cannibals among his constituents, he would promise them missionaries for dinner.” H.L. Mencken

“Tradition is the living faith of the dead.” (Historian) Jan Pelikan

Avoiding Taxes Like the Big Guys (and Gals)

The Trump Organization allegedly avoided paying taxes on almost $2 million of compensation to an employee. The allegations and prosecution shouldn’t surprise anybody because:

  • There’s politics involved.
  • There seems to be a family history of this.
  • Most business owners do the same thing but do it to reduce the owner’s taxes not the taxes of an employee.

One of the most irritating aspects of small business buy-sell is when the owner blends their personal and business checkbooks. I’m not talking about a meal or ballgame or round of golf now and then, I’m talking about paying for obvious personal expenses with business funds. One owner (I know his son, who bought out dad’s half of the business) felt the role of the business was to pay for his and all his kids personal bills (insurance, Costco, groceries, etc.). The son doesn’t feel the same way because he plays it straight and gets audited financial statements.

Of course, then the seller will say it’s the job of the buyer (and the bank) to determine what is really a legitimate business expense and what isn’t. In other words, “I’m cheating the IRS, but I won’t cheat you.”

But what if there’s an “Oops” and you must sell? A deal from years ago had an owner who was like the dad mentioned above, and she knew it. When a medical issue arose, she was stuck. She knew the risk and understood the increased price of the business would be more than many years of tax savings. And she’s right! Ignoring the time value of money, it’s 10 years or longer of tax savings to equal the increase price. 

Nobody wants to pay more taxes than they’re obligated to. There’s an inherent desire to get the tax bill as low as possible. But consider the big picture and it’s why I tell owners (and it’s in my book If They Can Sell Pet Rocks Why Can’t You Sell Your Business (For What You Want?)) to not play any games for three years (or more) because in the long run you’re way ahead.

The point of this memo is, just because you can do it (and others, including big names also do it) doesn’t mean you should do it.

“We must believe in free will. We have no choice.” Isaac Bashevis Singer

“At 50, everyone has the face he or she deserves.” George Orwell

Are You a Hunter or a Trapper?

Over the weekend our 14-month-old puppy Coco caught another squirrel. Dogs do catch critters but there are some things you should know about Coco. She’s half-lab and half-husky, 85 pounds, not the fastest dog around by far, sort of a klutz, and she’s hilarious when she slinks towards the bird feeders, where the squirrels hang out and get fat. She thinks she’s sneaking up on them.

She makes up for h er lack of speed and grace with smarts. She doesn’t sit and wait for a squirrel (trapping); she moves to corner them (hunting). And she doesn’t bite them or eat them; she plays with them.

I have an old book by Lionel Haines, written well before my time in this business, and one of his best lines, for business buyers, is, 

“You must act like a hunter not a trapper.”

It is important for business buyers, especially individuals and small business owners, to get the word out and see as many opportunities as possible because it’s hard to find a match. The “perfect” type of business for a buyer may be too large or too small, it could have a serious owner dependency, or a customer concentration issue.

It’s also important for:

  • Job seekers – I hear from outplacement clients 70-90% of good jobs are never advertised or listed. You have to get out and find them.
  • Salespeople – Find customers and/or referral sources means not being just an order taker.
  • Business sellers – going after the pool of logical buyers in such a way word doesn’t get out the business is for sale.
  • Business startups – you must always be on the hunt.

My world is buy-sell, so I emphasize this to buyer clients. Know what you want, go after it, keep in touch with brokers, network like crazy, and don’t be afraid to pick up the phone.

“Mother Nature, in her infinite wisdom, has instilled within each of us a powerful biological instinct to reproduce; this is her way of assuring that the human race, come what may, will never have any disposable income.” Dave Barry

Are You a Hunter or a Trapper?Are You a Hunter or a Trapper?Are You a Hunter or a Trapper?“You know you’re getting old when you get that one candle on the cake. It’s like, ‘See if you can blow this out.’”

Businesspeople Aren’t Like Politicians; Thank Goodness

You only have to read the headlines to realize there’s very little political collaboration these days. And that’s within the two parties as well as between them. The ends of the spectrums are the noisiest and yet all surveys say most people aren’t radical left or radical right.

Could you see if our businesses were like that? We wouldn’t be in business. The buy-sell industry is very collaborative. Business buyers and sellers must get along and collaborate, as must their attorneys, CPAs, and intermediaries. Most do a pretty good job of it. But what about within a business?

Employees rule! There’s a war on talent these days. Employees have more choices and as per the June 14 Wall Street Journal (and other publications) workers are quitting their jobs at a higher rate than any time since the year 2000 and April 2021 saw a record number of people quit, almost 4 million. 

Attracting and, especially, retaining good people is more important than ever. Covid still scares some of them, younger workers in particular. Many of those used to working from home like it, for at least a couple days a week. Employers have to be flexible or their employees will go somewhere else.

It reminds me of the dot com boom when fired employees went out and played until they had 30 days of severance pay left and then went and found a new job with better pay and better benefits. When speaking at outplacement agencies it was tough to get the agency’s clients to pay attention to entrepreneurship because jobs were so plentiful.

For business buyers the seller’s employee age range, the availability of good workers, and the flexibility they can offer people should be on the top of the due diligence list. And if business owners/sellers think it’s not their issue they’ll be in for a surprise.

“Experience is not what happens to a man, it is what a man does with what happens to him.” Aldous Huxley

Businesspeople Aren’t Like Politicians; Thank GoodnessBusinesspeople Aren’t Like Politicians; Thank GoodnessBusinesspeople Aren’t Like Politicians; Thank GoodnessBusinesspeople Aren’t Like Politicians; Thank GoodnessBusinesspeople Aren’t Like Politicians; Thank Goodness

You Can do Better than the Government (any Government)

This weekend I received a postcard from the WA State Department of Health encouraging me to get a Covid vaccine. Funny because I got vaccinated four months ago. It looked like this card was mailed to just about everybody in the State, meaning, no filters applied so pay for mailings to those already vaccinated. Realize this is from the State that I believe led the nation in per capita unemployment fraud due to out-of-date technology. 

Our little company has a CRM that can track a lot of things including who opened a message, who clicked a link in it, and can exclude categories when sending a message (as in, exclude those on the vaccinated list when putting together a reminder mailing). But enough railing on government inefficiencies, which we know are plentiful.

Our use of a CRM for more than just a database is something many business buyers bring to the table. They look at creating efficiencies, and often it’s investing in easy-to-use technology. When I think of how much time our CRM saves us on just excluding people when sending something it’s worth the price of the annual subscription.

Business buyers do a lot more than upgrade technology. As in a recent deal, they bring a breath of fresh air to the business. What are some of those things? Here are a few examples.

  • Outsource mundane functions with a prime example being HR. Don’t have in-house people try to keep up on all the everchanging rules, hire people who do this all the time.
  • Get to know the people. I’ve seen it done with individual conversations, with group sessions, and/or by using surveys. A recent buyer had a situation where the seller transitioning him was gone right after (a delayed) closing. He told me it gave him time to walk around and meet the staff. I commented, “I’ll bet it’s been a long time since there was ‘management by walking around.’”
  • Do little things like, and these are real examples, get paper towel holders, get a new printer that doesn’t take a frustratingly long time to spool jobs, buy a quantity of rubber stamps so shipping department employees don’t have to run around to get the only one, have company lunch-provided days, and, this is a good one, beer Fridays once a month (after work).

None of the above is complicated, it’s common sense. Yes, the joke line is common sense isn’t all that common but what really happens is owners get in a rut. It worked that way for 20 years so let’s keep doing it the same.

“If you wish to forget anything on the spot, make a note that this thing is to be remembered.” Edgar Allan Poe

“I’ve never put much store by honesty. I mean, how can you trust a word whose first letter you don’t even pronounce?” (Writer) Lorrie Moore

Buying a Business; Operating a Business; Selling a Business Employees are More Important than Ever

The US is opening. The EU is opening. And the owner of a painting company told me he could do twice as much work if he had more (good) employees. Owners of electrical contracting businesses, hospitality, manufacturing, and other owners have said the same thing. No matter how open the governments make it there still must be willing and capable people to work.

Publications from the Puget Sound Business Journal, to the New York Times, to the Wall Street Journal and everyone in-between regularly have articles on the job market. Bottom line, it’s an employee friendly market. Some of the facts:

  • Four million people quit their job in April, an all-time high (NYT, June 19).
  • Retirements escalated during covid and those people are not un-retiring (WSJ, June 17).
  • Up to one-third of tech workers plan to do a job search this year. (WSJ, June 19).
  • People saved money over the last year and some feel they have a cushion to get the job they want versus taking what they had (NYT, June 19).
  • It’s an incredibly tight job market (WSJ, June 21).
  • Being able to work remotely at least some of the time will influence employees staying or leaving (PSBJ, June 16).

One of my top four things an owner should do to increase value is, “Show you can attract and retain good people.” The above statistics says this is more important than ever. Heck, in some places fast-food restaurants are offering incentives just to be interviewed. 

Yes, I know some of the not-returning people have underlying conditions and some are getting as much or more money being unemployed, but what I’m seeing a lot of is a mismatch between skills and openings. 

A client company is treading carefully on returning to the office, office protocols, taking PTO, being vaccinated, and all other aspects of work given there’s a lot of burnout. Many people worked harder than ever when working from home, didn’t see much of others, and didn’t travel. They now want to catch up and if their current employer won’t give them the freedoms they want they know another company will.

The above are facts and the question is, what do all these facts mean to small business owners and buy-sell deals?

  • Anybody with office employees (not in the field like tradespeople, delivery people etc.) should do all they can to make sure their people have some life balance. It’s tough to find good people and now is not the time to be shorthanded because there’s a lot of business to be had. An example of taking care of people is our recent mega-heat wave in the Puget Sound area. I know of businesses that closed to protect their employees, monitored the effect of heat on people, and changed hours to let them off before the hottest part of the day.
  • For owners planning a transition my advice is to pay attention to what’s in the paragraph just below the above bullet points. Attracting and retaining good people is always an issue, always. On a buy-in deal I’m working on the owner/seller keeps saying, about employees who bid work, “any monkey can do this job.” Funny how he’s had to go through a lot of “monkeys” before finding some people who can correctly bid and get good jobs.
  • For business buyers, if employees and the management team weren’t on the top of diligence topics they better be now. Many employees fear change, not realizing the buyer wants them more than anything as what they’re buying is really the people. Buyers should be concerned about the pay scale (is it fair or under market), benefits, which must be competitive, work-life balance (I’ve had three clients in the last year tell me about people who left for lower paying government jobs because of a predictable and consistent work schedule. 

Successfully operating a business is not easy, which is why there are ample rewards when done right. And buyers want those successful businesses, which leads to another reward for the owner/seller.

To Call or Not To Call

I looked at the title of a recent article by Joanna Stern in the Wall Street Journal and felt it was either aimed directly at me or I could have written it. The title is, “To Fight Video Call Fatigue, Pick Up the Phone.” 

She covers the basics of why video calls lead to fatigue and those basics include looking at oneself, which is not natural, there’s a lot of sitting (I say get a standup desk), there’s a lot of close-up eye contact, and, let’s face it, looking at a screen is tiring on the eyes and body.

But let’s not concentrate on the above detriments. In-person meetings, video calls, and phone calls all have their place. And if your other party is out-of-the-area a video call is the next best thing to being together. No matter if you’re looking for a job, trying to find customers, or involved in a buy-sell deal, you have to be prepared, no matter what the media (and always be on-your-game in case the phone rings with a potential for business).

As always, no matter how you’re communicating, you must build a relationship. In my world of buy-sell deals, here are five examples of how relationship saved the day.

Mike was one of three buyers making an offer on a business. He was the lowest offer of the three and he got the deal, after a little negotiating but still a lower price than the second lowest offer. Why? The seller liked Mike and felt he was the best person for his business.

Bill had such a strong relationship with his seller that the asking price they gave him was so fair (low) we didn’t negotiate on price.

George had a struggling business nobody would buy (see the first page of If They Can Sell Pet Rocks Why Can’t You Sell Your Business (For What You Want?) for the full story), we fixed it, met a buyer, didn’t sell, but they liked each other so much the deal happened five years later.

Eric and Michael became such good friends that when their deal stalled what it took was getting them to realize they won’t find a better match, so do what it takes to get the deal done, which they did.

The buyer and seller (can’t name them now) also became good friends. When the seller’s attorney went overboard on changing the purchase and sale agreement, the seller said he trusts the buyer, therefore trusts the buyer’s attorney, so let’s go with that attorneys most recent draft.

Yes, I stress relationships a lot, an awful lot, and it’s because they’re so important. Most of us aren’t selling a SaaS product or similar, we’re dealing with people. And we all want to do business with people we like (and trust).

“If you haven’t got any charity in your heart, you have the worst kind of heart trouble.” Bob Hope

“The caterpillar does all the work and the butterfly gets all the publicity.” George Carlin

I was on a conference call with a client whose business was hit by a triple whammy; Covid and two things that must remain confidential and which could have been avoided. We’re talking with the owners of a company in his industry that is the ONLY logical buyer for his firm. At one point my client says, “Life is not very enjoyable right now.”

This happens way too often. Owners get trapped into working “in” the business and don’t see the big picture, they pinch pennies and it costs them dollars, or they don’t have doublechecks on important elements of the business (all three in this case).There’s no easy fix, it takes effort, and often an outside pair of eyes and ears to see through the fog (of day-to-day operations). For more on this see my book If They Can Sell Pet Rocks Why Can’t You Sell Your Business (For What You Want?)

When Think Small Not Big is Best

The other day the Wall Street Journal wrote about how, “Small Investors Look to Small-Town Homes.” One investor said he targets C-level homes in decent neighborhoods.

I’ve always encouraged business buyers to “Think small not big” if they believe they can grow the company, either organically or by acquisition. But, and it’s a big but, don’t buy a C-level business because you can’t upgrade it easily as a home can be with a coat of paint, new flooring, etc. A C-level business takes a lot of time, energy, and money, and may not work out successfully.

On the flip side, business owners need to do all they can to make their business A-level. Because C-level companies get heavily discounted by buyers.