When the Union Wins

The teacher’s unions won, at least in the Puget Sound area; most districts are not returning to the classroom in any material way. Based on the teachers I know, I’d say the union protected the 20% (it’s always the 80-20 rule, isn’t it) of teachers who took advantage of the situation. All the teachers I know are working harder than ever teaching remotely.

I am not anti-union. My wife was in a union for 10 years. My son is a project manager with a union construction company. But there’s a reason almost every business buyer I’ve ever met tells me they want a non-union business. They want to be in control. In most cases, they want the flexibility to treat their people better than what the union would. And to reward those who excel. The teachers I know the best would make a lot more money if there was merit pay. Just like in business, do well and you’re rewarded.

When Football, Covid, Protocols, and Systems Collide

The NFL is down to the final four teams. On at least one of the games this past weekend the announcers talked about how successful the season has been. They said, and I paraphrase, back in July when training camps started nobody knew if they’d get the season in, but they did, with no cancelled games and only a few rescheduled games. They did much better than college football, which was a mess.

This newsletter is not about Covid, but it’s Covid that sets the tone for the business message below. The NFL did it by implementing some protocols we all can follow. They state high-risk close contact as:

  • Less than six feet of proximity.
  • For five minutes or longer in duration.
  • Indoors.
  • Unmasked.

Things we all can’t do are:

  • Daily testing.
  • Having players wear trackers and then investigating any potential close contacts.
  • Using surveillance video.

What it shows to me is diligence can suppress Covid. And before you think I’m in agreement with the Governor of Washington (New York, California, and others) on all the shutdowns, I’m not. My friend Pete McDowell sent me a University of Oregon study saying people don’t catch Covid in (reduced capacity) gyms (I agree based on my going to the gym last fall). I’ve followed contact tracing results a bit and there’s no way people get the virus in (reduced capacity) restaurants.

It makes me think that following the right protocols and having proper systems works, with Covid and other areas in our lives, including:

  • Business buyers who have a plan, set up systems, and follow their protocols will do better at locating, analyzing, and closing a deal on the right business at the right price.
  • Business sellers who take the time to think about what they’ll do if they sell and also get professional input on if the net price of the business is enough for their next great adventure in life will have less seller remorse.
  • Employees who follow the proven plan will advance quicker and be more productive. And if they show how to add value to the current plan all the better (instead of thinking they know more than anybody else and get disengaged).
  • Owners who are willing to listen, act, and delegate have better businesses with more value. It’s not how important the owner is to the day-to-day, it’s how little are they needed in the day-to-day.

It really is pretty simple. If you have a plan that works, and you follow the plan, you’ll be successful. In business, health, and life.

“We are pathetically eager to believe that, if human affairs are managed right, nothing unpleasant need befall anyone.” (Journalist) Max Hastings

Business Buy-Sell and 2021

It’s 2021 and I sense a lot of optimism, or at least hoped-for optimism. Of course the vaccines are a huge factor in this and there’s good and bad news on this subject.

Good news: Reports are while two doses give 95% protection one dose gives protection in the 80-85% range (and arguing about it among experts takes off), meaning the same amount of vaccine can treat a lot more people. And the hospitalization rate of those vaccinated is near zero and the AstraZeneca product was at zero for the first 30,000 recipients.

Bad news: The government is in charge of the distribution and it’s another case of the left hand not knowing what the right hand is doing. Bottom line, both Democrats and Republicans are really good at self-promotion and really ineffective at getting anything done.

So what do I see in the buy-sell world? Here are three thoughts:

I expect it to be busy at all levels. From micro-businesses like deli’s, dry cleaners, and other small retail to businesses where the owner can actually work “on” the business versus “in” the business to middle market firms.  

Why? It’s still a demographic thing. There’s still a disproportionate share of (non-tech) companies owned by people 55-75 (as regular readers know, I believe most owners still working at 80 or close to it want to die at their desk). Things happen as we get older, health issues, burnout, death, etc.

I’m interested in seeing the deal stats for 2020 from bizbuysell.com, Pitchbook, and others. I don’t know what to expect but guess the numbers will be a bit lower than in 2019. That’s one reason I think 2021 will be busy. And that leads me to two sub-points. 

First, buyers are going to be fussy (fussier than before) and really digging deep (or at least should be). Banks will be more inquisitive than ever, and both should be concerned with the Covid non-financial factors as much as the standard non-financial factors.

To put up with the increased scrutiny sellers really need to be prepared. I wrote recently about one client who said he realized his firm was not ready for the diligence requirements demanded by the buyer. It starts with the financial systems and statements (get an outsourced CFO if you need to up your game in this area) and move on to all aspects of the business, especially the people.

Bottom line, while it will overall be busy it will be busier for those who are pro-active.

“I feel that it is healthier to look out at the world through a window than through a mirror. Otherwise, all you see is yourself and whatever is behind you.” Bill Withers

The Advantages of Two Broker Negotiations

By Gregory Kovsky with IBA

My firm, IBA, has a long history of welcoming “buy side” business brokers into the transactions we facilitate as a “sell side” business brokerage firm serving Washington, Oregon, & Alaska.  The guiding philosophical principle at IBA is the “Golden Rule” of do unto others as you would want them to do unto you.  Applying this principle to our clients, our mission statement goals for each of our engagements is to facilitate a “win-win” transaction in a timely manner while maintaining an environment of confidentiality where a communication atmosphere of full disclosure and the utilization of “best practices” exist between the parties. 

One fairly common business brokerage practice at peer firms that has always seemed counterproductive and not in a “sell side” client’s best interest is discouragement of the participation of a “buy side” broker in the transaction.  The reason for an anti-collaboration attitude is frequently financial, as “buy side” brokers commonly request the ability to share commission, as is common in real estate, something that is financially detrimental to a listing broker.  This position makes sense from the listing broker’s position, if they can potentially sell the business at the same price to another buyer, but is the position in the “best interest” of the seller and the mergers & acquisitions industry.  The position at IBA is “NO”.  The reason for the negative response is multifold.  First, at a superficial level a business broker should be ambivalent to who the buyer is and whether they are represented.  Their goal should be to deliver the best buyer in terms of price, terms, and ability to their client.  Personal self interest should not be a component to the decision process.  

Self-serving financial motivation aside the following are the five primary reasons why it is beneficial to have business brokers on both sides of the table.

  1.  Knowledge – Plain & simply many buyers, “Don’t Know What They Don’t Know”.  There is no substitute for relevant, specific knowledge at an appropriate place and time. A common place where buyer’s brokers add value from a knowledge perspective involves knowing what questions to ask and documentation to review when assessing a company for acquisition.
  2. Experience – Knowledge is beneficial if you have time to comprehend and apply it.  However, in a dynamic marketplace where buyers are competing for a specific company, the ability to make decisions in a timely manner through application of negotiating strategies can be the difference between obtaining a mutually executed letter of intent and being the buyer who needs to find another company to acquire. Experience is the key to being able to act with confidence in a timely manner.
  3. Ability – The end goal or a middle ground compromise can be self-evident in negotiations, however the ability to get there can be problematic, if the pathway in terms of communication and persuasion are not able to be navigated.  There is a reason that significant training is provided to military pilots before they are asked to land on an aircraft carrier or fly a combat mission. The skill they possess is significantly greater than that of a private pilot flying fixed landing gear small planes. Skill takes time and repetition to develop to excellence.  Mergers & Acquisitions intermediaries are the fighter pilots of business negotiations.  It is not recommended to enter a dogfight with a party of greater acumen in the sky or a negotiation without equal skill on both sides.
  4. Resources – The purchase and sale of a privately held company is a team process.  Both sides commonly will have attorneys, accountants, and other professional advisors.  Assembling a team of knowledgeable, experienced, highly skilled transaction team members can be the difference between completing an acquisition or not.  A business broker can be a great source for names of “deal making” professionals to interview as potential support professionals.  Another important member of the “buy side” team is commonly a SBA or commercial banker.  An experienced, knowledgeable business broker can be a great source for banking community referrals, as they will have current knowledge of present credit approval underwriting standards and the appetite for loans at specific banks in the community.
  5. Communication – Anyone who has studied negotiations knows that often the greatest achievements are made through secondary parties or back channel communication.  In a business purchase and sale negotiation, it is common for parties to mentally & emotionally to dig into positions.  Losing face can become an issue that prevents agreement.  I have witnessed many times where intermediaries and/or attorneys get a transaction “out of the mud” and moving forward by continuing communication and based on familiarity for parties that had “stomped off” thinking the deal was lost.  

In my twenty-eight years as a mergers & acquisitions intermediary, I can recall numerous successful transactions where business brokers on both sides of the table played critical roles in getting the deal done.  One of the best “buy side” brokers in the Puget Sound area is John Martinka.  Mr. Martinka has successfully completed deals with IBA representing buyers since the 1990’s.   Our team often recommends him to buyers desiring professional representation and view his participation as a value adding benefit to the deal. Few possess his knowledge, experience, skill, resources, and communication ability.  I look forward to the next time I walk into a conference room and see John sitting on the other side of the table with a buyer who is prepared and ready to purchase a company.    

Gregory Kovsky, the President & CEO of IBA, is available as an information resource to the media, business brokerage, mergers & acquisitions, real estate, and estate planning communities on subjects relevant to the purchase & sale of privately held companies and family-owned businesses.  Professionally, as an intermediary, Mr. Kovsky specializes in the sale of manufacturing, distribution, technology, industrial, marine, and horticulture businesses. Mr. Kovsky can be reached directly at (425) 454-3052 or .  Additional information on IBA, the Pacific Northwest’s oldest business brokerage firm, can be found at www.ibainc.com.  

Covid Entrepreneurs

The November 19, 2020 Wall Street Journal had a front-page article titled, “New Entrepreneurs Emerge From Wreck of Covid Economy.” Some of the highlights from the article are:

  • A lot of people are turning their skills into a business and it’s their job “in” the business. Skills like personal training, hair styling, freelance chefs, and more.
  • New business licenses are up 32% over the first nine months of the year compared to 2019.
  • Between 10% and 11.2% of workers are self-employed.
  • People are realizing the new normal will be much different than the old normal.

But what about those people who don’t have a “job” skill? These are the people who know how to manage people, processes, money, and enthusiasm. For them, it’s buying a mature, profitable, and fairly priced business.

Why? The most common answers audiences have given me on this include:

  • To take control of their life, career, and finances.
  • To benefit themselves not shareholders from their smart and hard work.
  • Having fun!
  • Letting their creativity shine.
  • Flexibility – if they want to go to their kid’s game or recital they can.

But it’s more than the above. There’s an inner satisfaction to not be beholding to a corporation, a boss, or a boss’ boss. Yes, you have to take care of customers and employees, which is important, and that brings us back to the reasons – to do it your way. Whether it’s a job or your own business happiness and having fun is crucial. It’s like the character Michael Burnham on Star Trek Discovery who states how much she loves what she does and doesn’t want to anything else.

We’re going to see more and more of this. And, for owners whose companies have been hurt by Covid, these buyers aren’t your answer because they want a non-distressed company, but other firms looking to grow by acquisition are your exit. 

“Reality is that which, when you stop believing in it, doesn’t go away.” Phillip K. Dick

Make it Complicated or Keep it Simple?

Apple and Microsoft are trillion-dollar companies, very successful, have lots of smart people so why can’t either of them figure out how to have an email program without glitches? Email has been around for a few decades, so you’d think they’d have figured it out. 

Apple mail stalls on my laptop when getting new messages. Sometimes to the point of having to close and reopen the program. It slows down my desktop to the point I don’t use it anymore.

Therefore, I use Outlook on my desktop (and Jessica uses it for business email). We agree, it has a horrible search function, you can’t drag emails from one folder to another, and it keeps refreshing itself. Most annoying is when all of the emails in the Inbox disappear and you get a cheerful message about how nice it is to have an empty inbox. Then they reappear, sometimes with new date and time stamps. Sometimes with duplicate copies. Friends have shared they have issues also, some the same, some different. 

Outlook is over 30 times as big as Apple Mail, Contacts, and Calendar combined. And when things get that big, they’re like how battleships can’t maneuver fast, like an attack boat. Are both companies filled with people trying to make things perfect?

Just like in business. Small businesses should be able to move faster and have more flexibility than large ones (Amazon maybe being an exception). It’s one reason why people want to own a business; so they can make decisions and see the result of their actions.

And now is a good time to buy a business, or buy another one. Any time there’s a catastrophic event, like Covid or the recession (or both), it pushes owners thinking of exiting over the tipping point. To take control and benefit themselves from their hard and smart work.

“A marriage is always made up of two people who are prepared to swear that only the other one snores.” (Author) Terry Pratchett 

Ask the Right Question or Get the Wrong Answer

Here are a couple questions reporters asked (the wrong way.

  • Reporter (to football QB): Do you think other teams have figured you out?
  • QB (rolling eyes): Based on one game? It’s the only game we’ve lost all year.
  • Reporter (to President Trump): Why have so many more Black people been killed by police than White people?
  • President (correctly answering the question that was asked): More White people have been killed by police than Black people.

In the sports Q&A the reporter made an assumption based on (at the time) an isolated incident (and the future showed it was an isolated incident). He should have asked an open-ended question like, “What happened today (to cause the bad performance)?”

In the political case, the reporter meant to ask about why a higher percentage of the Black population versus the White population, not about an absolute number. But she didn’t phrase it correctly. She got the right answer to the wrong question.

When I teach my class on growing a consulting business at the Seattle SBA/SCORE office I make a point that sales is asking questions, and asking the right questions is an important component of the process. Sales is not what we imagine happens when we think of a used car lot.

Good lawyers, good consultants, good interviewers all ask good questions. On the flip side, those being interviewed for a job need to ask as good or better questions about the position and the company. Business buyers and sellers both need to ask the other party good questions, open-ended ones to get insights.

Asking the right questions is just one of the topics in my upcoming book, Getting the Deal Done, which is now at the designer. It is 61 short chapters, each a strategy to get a buy-sell deal successfully closed. I wrote 50 of the chapters and 11 deal making friends each provided their expertise via a chapter.

“All humans are stupid, but the smarter ones at least have a handle on their own ignorance.” John Cleese

When You’re Sunk You’re Sunk

Forbes.com reported bankrupt Chucky Cheese is spending $2.3 million dollars to destroy 7 billion prize tickets, which would fill 65 cargo-shipping containers. Why? Because it’s about 25% of the $9 million cost if they were redeemed for prizes. 

We all deal with sunk costs. Buy a new car, decide you don’t like it, you’re out the 20% they say is the immediate market discount. Invest in a new machine, it’s not what you really need, you’re out.

Things like above always remind me of a past client who bought a (what turned out to be) great business for next to nothing (and this is not a pitch like the books and courses on how to buy a good business with little to no money – which doesn’t happen). 

How did this happen? The company expanded from Seattle into Portland, it wasn’t going well, and they got stubborn, as in, “We’ll sell our way out of this.” They didn’t. And, at a peak of the real estate market they bought a building. The buyer got the Seattle operation by paying off the State Department of Revenue, the phone company, and the top supplier. He later told me, “I knew it was a good business, I just didn’t know it would be this lucrative.”

About 8-10 years ago I came up with what I thought was a compelling idea for a line of service to potential clients. It wasn’t as compelling to them as it was to me, so I dropped it. The costs (mostly time and energy) were sunk, gone, and that was okay. I learned a lesson, picked up one client (five projects, none for this idea), a few good marketing tactics.

I mention these things because in the buy-sell world I see all the time owners (and their intermediaries) trying to convince buyers the failed advertising campaign is really profit because it didn’t work. Or, the ops manager who wasn’t as good as he or she claimed is really profit because it was a bad hire.

No. That’s business. That’s life. If you don’t try things you won’t learn what doesn’t work. Not every decision is a good decision (meaning didn’t live up to its potential). The good businesses often just have made more good decisions than not-so-good ones.

“It is inhumane, in my opinion, to force people who have a genuine medical need for coffee to wait in line behind people who apparently view it as some kind of recreational activity.” Dave Barry

What Exactly are You (Personally) Guaranteeing?

In the 1990s, President Trump nearly ruined himself by personally guaranteeing many millions of dollars in loans, and then said he regretted guaranteeing them. But it seems he has not followed his own advice. With the NY Times releasing some of his tax records and other financial information, he allegedly is personally responsible for loans totaling at least $421 million, most of which is coming due within four years.

What does all of this mean? Realize when you get a mortgage or a car loan you are signing a promissory note, guaranteeing you will pay it back. These loans have collateral so the lender can go after your house or car to help repay the debt if you don’t pay. Where it gets “sticky” is when there’s no collateral, which is rare when it’s a personal loan, other than credit cards, which don’t have collateral.

When an individual or small-business owner wants a loan they usually personally guarantee it. When the loan is to an individual, say an executive buying a business, if the loan is to the person it is a legal obligation on that person an in affect, they are guaranteeing it. If the lender makes the loan to a corporation or LLC, which most are, they ask the borrower to personally guarantee it. 

When a private equity firm or similar investment firm borrows money, the partners won’t sign a personal guarantee. The same with larger corporations. So one has to wonder why lenders asked the president to personally guarantee all the loans. Not knowing the details, I can only guess it’s because they were risky loans, there was worry about non-payment, and hiding behind the corporate veil. 

I asked my friend Greg Russell with PRK Livengood Law in Bellevue (www.prklaw.com) about personal guarantees and here are his comments:

  • He reiterated a bank will want a personal guarantee when the loan is made to an entity.
  • Business sellers will want a personal guarantee as they are unsecured creditors, coming in after any senior debt, personal home equity, etc.
  • A borrower with a personal guarantee must report it for any financial dealings and this contingent liability may impact the availability of credit.
  • A personal guarantee can hold for a long time. There is a statute of limitations of six years, which starts from the time of breach. Within this time the lender can get a judgment to keep the debt alive.

Lenders, of all types, have the most interest in personal guarantees so I discussed them with Bill Barclay, Regional Manager of Commercial Banking with Columbia Bank. Here’s what Bill had to say:

  • 95% of Columbia Bank’s loans have a personal guarantee on the borrower. He said, “If things hit the fan, we want them walking down the aisle with us.”
  • Those not having a guarantee are generally larger firms with diversified ownership and management along with private equity firms.
  • If there’s not a guarantee expect tighter loan covenants that may create a personal guarantee if triggered.
  • An existing personal guarantee (from a different lender) won’t have much impact on future credit if there’s only one. The bank will look at all contingent liabilities and multiple guarantees may require a closer look.

Conclusion

Personal guarantees are something business owners, business tenants, those of us in the buy-sell world, and others deal with all the time. Business buyers and other borrowers do their best to avoid them, but those with the money make the rules. I always come back to a client from about a dozen years ago who didn’t like what the bank was doing. He didn’t think they were creative or flexible enough. I commented to him, “The bank’s not in business to be creative or flexible, they’re in business to be paid back.” I know if I lent someone money I’d want as much security as possible. 

Businesses and Workers – It Must be Teamwork

Two interesting articles appeared on September 6. The Seattle Times published a Los Angeles Times article titled, “Instacart shoppers face unforgiving metrics: ‘It’s a very easy job to lose’” and American Compass released an essay titled, “Conservatives Should Ensure Workers a Seat at the Table.

The Times article covers the harsh metrics imposed on Instacart shoppers including ongoing tracking of order filling, notices to employees via an app when they’ve earned a 10-minute break, and monitoring the words employees use with customers to make sure they use the preferred script. They offer low wages, keep employees from getting enough hours to have benefits, and drive them hard. These are the jobs people leave regularly creating turnover and training costs for employers.

The American Compass is a conservative organization so it’s a bit surprising they wrote what they did about unions, including, “Rather than cheer the demise of a once-valuable institution, conservatives should seek reform and reinvigoration of the laws that govern organizing and collective bargaining…” They make the case it’s a mutually beneficial relationship when owners, managers, and workers work together.

Compare the above to most small businesses. Talking to business buyers, I regularly hear about how they like building teams, helping employees grow, and improve. Business sellers often seem to care more about their people keeping their jobs than the price they get for the business (as in, I’ll take a little less from someone I feel I can trust to take care of my people).

Unions came about because of horrible working conditions. In my opinion, one reason they’ve lost membership is they became too rigid and too political (for private sector workers). 

It’s interesting to see how things could swing back with influence from both sides of the political spectrum. It’s also fascinating to see how some technology-based service companies (like Instacart) are returning to the employment practices reminiscent of 100 years ago.

There has to be a balance between management and workers because animosity hurts all.

“Take a rest; a field that has rested gives a better crop.” (Roman poet) Ovid