When Your Edge Gets Dull

College basketball coach Jay Wright recently announced he’s stepping down because he lost his edge. Keep in mind he’s one of the top coaches in the country and won two national championships in the last six years.

It’s great he noticed it, which not everybody does (notice). For example:

  • Business owners get to the point where it’s a good life, with good income, and pretty much go through the motions. These are the businesses sharp buyers want to acquire, fundamentally good with a lot of low hanging fruit of things to improve.
  • People who do the same thing over and over because, “That’s the way we’ve always done it.” This could be owners who haven’t grasped the use of data, advisors who aren’t up-to-speed on modern techniques, and, especially, aging politicians who hang on for no reason other than ego (the average age of the U.A. House and Senate is almost 65, an all-time record and the leaders are 80 and above).
  • Employers who didn’t (and haven’t) realize how important it is to take care of their employees. The employees who have realized there are plenty of other options out there so they’re not stuck in something they don’t want to do anymore.
  • There’s a flip side to the last point and it’s the people who never had an edge. A perfect example is from an article I recently saw about how a lot of recent college grads are working hospitality and retail because they can’t get better jobs (perhaps because their education was in something not needed in the market).

It’s hard to notice, and especially realize, you’ve lost your edge. When you do, it’s time to get out the sharpener whether it be a new job, your own business, getting out of your business, having a coach, etc.

“Start where you are. Use what you have. Do what you can.” Arthur Ashe

I’m Burned Out – Should Have Left a Year Ago

I’m sure I’ve used this line before but it’s so good I’ll use it (again) here. It came from a former client as we discussed the best time to sell a business. 

“The best time to sell is one year before you’re burned out.”

Of course, it’s a trick statement because if we knew things like this life would be a heck of a lot easier, wouldn’t it? It got me thinking about it from two perspectives of leaving your current situation.

Business owners, and these are real-life examples from clients on why they’re exiting:

  • I love the work, I love making sales, I hate managing people. I want to sell and concentrate on strategy and sales for the buyer.
  • The doctor told me if I keep working, he won’t see me anymore because I’ll be in such bad shape, he won’t be able to help me. This after four surgeries for something preventable after the first surgery.
  • A health issue gave me a wakeup call. I needed to slow down so I concentrated on getting the business ready to sell, which included grooming my GM, increasing productivity and therefore margins, and spent less and less time at the business. A PS to this, he says about two hours a day and I think it’s probably 50-60% (and we tell buyers this).
  • The timing is right. A big player in the industry is making acquisitions, I’ve been at it over 30 years, and I need to “strike while the iron’s hot.”
  • We know it’s time, after about 35 years. Still, knowing it’s time and moving forward are two different things. It’s a tough decision for these owners. It’s probably the biggest decision in their lives (other than getting married, having kids, etc.).

Burned out corporate executives needing to shed the corporate shackles:

  • Career advancement has stalled. The corporate world is telling them they’ve plateaued. Stay here and you’ll be a middle manager for the next couple decades.
  • They are sick of it. Don’t like the bureaucracy, politics, backstabbing, and lack of customer service simply to improve shareholder wealth (and bonuses).
  • They’ve built their career around eventually owning a business. The corporate world gave them management and leadership skills and the capital to make the leap of faith into business ownership. All part of their master plan. 
  • Not exactly corporate executives but younger people who are chasing “Entrepreneurship Through Acquisition” (a new buzzword) without putting 20-30 years on the job.
  • They’re let go. The company says, “Bye-bye, you’re part of our announced cost savings.”

Those in private equity have made a similar decision. Some join a firm to buy and run companies. Others create their own “Micro-PE” company so they can buy what they want. But the objective is the same, escape the corporate rat race and be in control.

Bottom line, it’s knowing when to get out of where you are and, most important, taking action.

When You Love What You Do

One thing we learned from the pandemic mess is a lot of people realized they don’t have to stay in the job they’ve had for years as there are plenty of other opportunities. In that same thought vein:

  • There’s a new assistant pastor at our church and it’s obvious she loves what she’s doing. You can hear it in her voice and see it in her body language.
  • At Easter brunch a friend was espousing on how much she loved working for her employer and how it’s benefited her both financially and emotionally.
  • The April 18 Wall Street Journal had a special section titled, “People Who Hate Retirement And What The Rest of Us Can Learn From Them.”

One of the people featured in the “I hate retirement” article said retirement put a strain on the marriage as they were together a lot more than before. While I get laughs from my line (to prospective business sellers), “If your next great adventure in life is retirement does your spouse want you around 24/7?” Humorous yes, serious, a bigger yes.

I see business owners who can’t let go, they’ll die at their desk. An example is the 87-year-old owner who told me his 48-year-old son wasn’t mature enough to run the business, even though the son was in charge of sales (and more).

Other owners get to the point where after 20, 25, 30 or more years they don’t want to manage anymore, have their net worth on the line, etc. They need a new challenge, or just a break.

People in the corporate world get sick of it and want their own business. When there’s a match with a burned-out owner, we have a deal. Or, when the business is larger, when it’s a match with another company or private equity firm.

“People now listen to gossip as if that’s the truth, but they’ll read news in the newspaper and think it must be a lie.” Harvey Fierstein 

Misconceptions Abound

My wife had some friends over for dessert after they went out for dinner and a couple of the ladies were amazed (surprised) our younger dog was so gentle and friendly because she’s so big, 90 pounds. They assumed because she was big she’d be wild, aggressive, crazy, etc. In fact, she’s one of the calmest dogs around (and loves her belly rubs).

We all have misconceptions on things. In sports the fans always think that one new player will bring a championship. In business it’s often the thought that the best product wins when it’s usually about marketing and sales.

In our daily world we see the following misconceptions:

Business buyers:

  • Believing they have the guts to “pull the trigger.” Industry statistics say 90% of (supposed) business buyers never do a deal.
  • It’s all about the numbers. Important but there’s also those little things like the employees, customers, supply chain, etc. And of course, relationship.
  • A seller with no family in the business has no options. Actually, they have all the options when not tied down to a family sale.

Business owners/sellers:

  • Don’t say, “If only the buyer is good at marketing…” (the business will exponentially grow). No competent buyer will believe that.
  • I just read a $400 million company in my industry sold for 15X EBITDA so my $14 million company should sell for the same multiple.
  • It doesn’t matter I do all the important things in the business. Yes it does and this is called owner dependency and it’s all too common in small companies. Learn to delegate and your value will increase.

There are a lot more and I’m sure you have common ones in your business.

“You can do a lot of inner soul work, but I’m a big fan of Zoloft.” Katherine Heigl

M&A Update from ACG

The February ACG (Association for Corporate Growth) was the annual M&A update panel discussion. While the panel spoke of middle market deals a lot of what they covered applies to the lower middle market. Here are my top 10 takeaways, with my comments:

  1. It’s a frothy valuation market – sure is although my market has the two sanity checks the larger deals don’t have. It’s usually the buyer’s personal money (individual or small business owner) and the bank is the largest component of financing not just a small piece of it. A similar talking point was, “We’re wading into dangerous territory on multiples, which are being driven by growth and a lot of capital. 20x plus at $50 million plus deals. 
  2. There’s fear of missing out – with the low cost of capital and a demographic push based on the age of owners there is a fear there won’t be as many deals in a few years.
  3. Defense and satellite are strong vs. aerospace – I agree with this. Owners I talk to who do defense work are booming. We can see plane deliveries and how low they currently are.
  4. Must position the business correctly – to get maximum value out of it, yes. Don’t care about price, just want out? Then flip the switch and sell no matter what shape the business is in.
  5. Projections are tough with Covid – projections are tough without Covid. Keep in mind, banks will investigate (thoroughly) and Covid tailwind or headwind, as they should.
  6. Buyers want businesses well represented and presented – the more information provided upfront the better and provided by someone professional who’s done their homework.
  7. Looser definitions of EBITDA – as in the definitions are weakening. With smaller businesses this is the blending of the business and personal checkbooks (and wanting the buyer and bank to believe it all). A related point was, “watch out for big add-backs.”
  8. Founders may know how to grow but don’t want to – I get this because I see it so often. An owner is making a lot of money and doesn’t want more risk, more people, more stress. So they coast, which is opportunity for buyers.
  9. Looking at wages, benefits and other things to retain employees – retention was a huge issue to these buyers, lender, and investment banks. All shared the same thought on this, you have to keep the people you want.
  10. Can this manager think like an owner? – not as important in the small business market but it’s how you get people to grow so the owner can step back and not do day-to-day tasks. They emphasized you have to spend a lot of time on coaching and development. 

It’s an interesting time and all of us in the buy-sell & M&A industry expect 2022 to be an active year. I know we’re busy with sellers and buyers.

It’s All About Perspective

I’ve been listening to a very interesting podcast with a geologist named Randall Carlson. He’s discussing the changes in the earth over the last 15,000 years and he states there’s evidence there was a mile thick sheet of ice over the top half of the northern hemisphere. Then it seems an asteroid hit the earth, the ice started melting, and it was a 5,000-year process to finish melting.

Asteroids are a “thing” with Mr. Carlson. Given his field the changing earth, the history of it, etc. he’s super focused on if and when another asteroid of destruction size will collide with the earth. Most of us go about our days not thinking about meteors, comets, or asteroids. Not Mr. Carlson, he seems to get nervous when something in space comes within 100,000 miles of earth.

I’m talking to a business owner whose company’s earnings in 2020 and 2021 were 20% of 2019, yet he sees nothing but rainbows and opportunity. All is rosy. The asteroid only glanced his company. 

In both cases I’m reminded of old sayings (cliches) like, “Take your blinders off,” and, “Can’t see the forest for the trees.” When it comes to buying, selling, or growing a business:

  • Buyers will get excited about the big picture and at the same time play forensic mechanic on the workings of the company. Trust but verify and then verify again.
  • Owners, especially smart owners, will realize even if they have the best product in the world, they still need to work hard to get people to know about it and buy it.
  • Sellers believe they have a great business and sometimes don’t understand why all the questions. And one of my favorite sayings is, “Just when you think you’ve answered every possible question (about your business), the bank asks more.”

It’s a combination of optimism and skepticism that often leads to success. As in, I’ve got something good and realize it won’t sell itself.

“The future depends entirely on what each of us does every day; a movement is only people moving.” Gloria Steinem”

“It’s hard to be diamond in a rhinestone world.” Dolly Parton

You Want to Sell Your Business to Whom?

I can easily tell you some people who would never make it as a business owner.

  • The editorial columnist in the Seattle Times who wrote about lingering Covid, masks going away, and how scared he still is.
  • The news announcer on NPR who had to “warn” listeners they would hear gunshots from a firing range in the next segment.
  • The arts organizations executive directors who say they’ll still require masks after WA State removes the requirement.

Being a business owner and/or buyer requires guts, among other things like smarts, desire, and risk-taking. For business sellers, here are some things to be concerned with about any buyer.

  • Are they the right person for the business? Do they have the skills to grow it and the personality to relate to the customers and employees?
  • Money, as in can they afford the business and the corresponding bank loan, still have cash left to help grow the company, and can they manage finances? 
  • Do they have a team to help buy it and can they effectively utilize the existing management team?
  • Can they make decisions without getting analysis paralysis?
  • Does he or she ask good tough and insightful questions to show they grasp what’s going on (a buyer skating through diligence is a bad sign)?

Diligence goes both ways and it’s more than money that makes someone (or company) the best buyer.

“A bad rendition of you is better than a good rendition of somebody else.” Willie Dixon

Full Disclosure – It’s What Works

Headline in what I call the personal interest column in the Wall Street Journal on February 8, 2022, “Realtors Embrace Brutal Honestly. ‘Smells Like a Farmtown.’” The article is about how some realtors are mentioning the downside of their communities whether it’s smell, weather, terrain, or something else. 

Taking care of (potential) problems before they happen. After all, there are detriments to every house, neighborhood, and community. 

In our world of buy-sell deals we see a wide range of business-for-sale descriptions, including:

  1. Those that state nothing more than opportunity, potential, and growth. My favorite was a business losing over $200,000 per year for at least the last three years and when justifying the price, the broker said, “potential.”
  2. Some that are very basic, just lay out the facts and history, with very little embellishment. As in, here are the numbers, so make a decision. An example of this was a one paragraph description of the business with the P&L from the preceding year. And somebody paid this person to sell their business.
  3. And then there are the memorandums with complete information. If there’s customer concentration, mention it. Same for restrictive license agreements, a key employee dependency, or upcoming capital expenditures. A memorandum on a deal I was involved with a couple years ago covered the following topics to show honesty and reality (there are no perfect businesses):
  • Business weaknesses
  • Impediments to growth
  • Limitations on services
  • Buyer concerns

All the above were pretty mild and when you fully disclose, the rest or what you state is taken more seriously. And this applies to everything in life. Sooner or later weaknesses are discovered.

“Where is the knowledge we have lost in information.” T.S. Eliot

Agendas Can Get in the Way

We all have agendas, every one of us. First let’s look at a couple in the media and then some in business.

Are you surprised there are bi-partisan bills to forbid members of Congress to actively trade stocks while in office (as they have access to “insider” information)? This trading has been something both very left-wing and very right-wing politicians have been accused of. Of course, will anything happen? 

No surprise, probably not because those responsible for taking the bills to the respective floors are active traders. As we know, their agenda (all their agendas) is to benefit themselves first and their constituents and the country next. 

Then look at the vaccine and related issues (disclaimer, I’ve received two shots). Lots of agendas. 

  • Don’t tell me I have to get a vaccine.
  • Everybody must get a vaccine.
  • Can’t go to public places without a vaccine card.
  • You must wear a mask.
  • You’re ridiculed if you wear a mask.
  • Executive orders circumventing democratic processes (to be in control).

I know people who won’t get a vaccine because of number one above, some who can’t because of chemo treatments, and some who just don’t trust a synthetic vaccine, which really isn’t a vaccine but a “shot” because it doesn’t absolutely prevent Covid like the vaccines for polio, measles, rubella, etc.

And of course we hear about people who cheat to get a fourth (or more) shot even when after it was mandated in Israel ABC news reported, “An Israeli hospital on Monday [January 17, 2022] said preliminary research indicates a fourth dose of the coronavirus vaccine provides only limited defense against the omicron variant…”

And speaking of vaccine agendas, follow the money. The top investors in Pfizer are Blackrock, Vanguard, and State Street. For Moderna it’s about the same with the top investor a British investment firm. Think the push for governments paying for more shots is altruistic? Think there are government employees thinking about leaving government and getting a nice job in pharma or the pharma lobbying industry?

Let’s move to things in our daily business lives. Everybody we deal with has an agenda, some aggressive, some for personal gain, some for business gain.

Employees – Just read the articles on people sabotaging fellow employees for their own benefit and you’ll realize it’s often “all about me.” Career advancement by any way possible is common (but it’s not done by all). Long-term, doing the right thing the right way is more beneficial to career growth.

Advisors – The attorney was a good friend, he had done our wills, we referred business back and forth, and did things socially. I called to ask a yes or no question about a new will, got the answer, and then a bill for over $125 for a “minimum phone call” charge. He lost the job of the new will and future referrals to his firm. Doing the little extra for a client pays off in the long run. 

Customers – A friend shared with me how a long-term customer recently left for a few pennies an item, ignoring that he had provided proprietary (and exclusive) designs, which she wanted to take to a competitor. Good customers value service, quality, and value. 

Business buyers – The good ones, the majority, want a win-win deal. Some want the best deal possible, for (only) themselves, and these are the buyers who rarely, if ever, actually do a deal. It must be too good to be true and sellers are too smart for that. A mature, profitable, and fairly priced business should be the goal. 

Business sellers – Sometimes there’s a huge emphasis on the price, at any cost. The real emphasis should be a fair price from a great buyer. who will let the employees thrive, preserve the legacy, and make any payments due the seller.

Fact it, most of us have agendas, but good agendas don’t make the headlines or cause problems.

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