Be an “A” Business

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.

No Saturated Markets, Please

A recent Wall Street Journal has an article on how cellphone carriers are back to giving away phones with a contract or financing phones with no down payment. This is a saturated market. Is there any way to grow besides taking customers from other carriers? Maybe more kids getting phones and at a younger age?

Note to business owners (and buyers): Don’t get stuck in a market that’s pretty much at capacity. I’ve yet to meet a buyer who didn’t want to grow the business they acquire. It’s a serious issue and limits the company’s value when a buyer can’t see how they can grow the business.

Why Work for a Small Business (or Own One)?

There are reasons why people want to own (and buy) a small business. I’ve gone over the reasons why people want to buy and own a company a few times before and a lot of those reasons are why employees choose a small business instead of a huge company to work for. Let’s start with some names in the news recently.

  • Major League Baseball’s collective bargaining agreement ends after this season. It will be contentious over a few issues. Keep in mind, baseball players have the best deal compared to all sports as all contracts are fully guaranteed (thanks to Marvin Miller, head of the players association from 1966-1982).
  • The NCAA is in the midst of turmoil over NIL (players getting paid for their name, image and likeness) and the disparity of conditions for male versus female players.
  • Amazon just had a union vote, I’m sure there will be more, and they are now pledging to improve workplace conditions in warehouses.
  • Boeing employees in the transportation division and Teamsters Union vote to authorize a strike. All Boeing unions are upset over outsourcing, moving jobs out of the Puget Sound area, and downsizing while stating executives got bonuses while slashing jobs.
  • The teacher’s union dominated the talks of getting kids back to school. I saw a survey saying the vast majority of teachers wanted to return but the union stuck up for the vocal minority.

Contrast that with some of our past and current clients that have people who could easily be called “The Minister of Enthusiasm” for the company. They live, eat, drink, and breathe the company culture. It creates a contagious buzz throughout the firm.

As we see people return to the workplace, look at the contrast between the five bullet points and the preceding paragraph. Not the specific organizations but the theme of us versus them compared to, “We love this place.” Why do people like working for small companies? I think the reasons are pretty much the same as why people want to own one, with one difference, that being they probably won’t have as rich a salary plus benefits package. But the following seven reasons make up for it:

  • Creativity – there’s a lot more opportunity for it in small business as small business is always looking for better ways.
  • Rewards can be earned by good work versus given in mass to all because a contract says to do it that way.
  • Freedom to do things outside the box.
  • Listened to when they have value to contribute (or even when they don’t).
  • Flexibility to go to the dentist during the day, start early so they can leave early to see their child’s game or recital.
  • Advancement of their career is possible without selling their soul.
  • Fun whether it be “Beer Fridays,” retreats, family events, or just the general atmosphere of enjoying oneself while working.

Our business is centered on helping clients exit with style, grace, and more money and helping people buy the right business the right way. I write the above because nothing is more important to a business than its people. One may say profits are the most important item but without the right people there are no profits.

It all comes down to the fact that if you have a great team your company is more valuable and when it’s time to exit the value will be higher. As my past client Bob Gordon said, as he looked a seller in the eye, “You may think I’m buying your business but what I’m really buying is your people.”

There is nothing better an owner can do than have happy and productive employees. You don’t want the employees to say the new owner (buyer) is a “Breath of fresh air.” You want them to say, “Thank goodness nothing changed.”

Flaunting the Rules

We got back from a week in Scottsdale and on the outbound flight, as we landed, the pilot asked us to stay in our seats as there was a law enforcement issue. At the gate, two airline employees came onboard to escort a young couple off the plane.

As we left, I overheard employees say the issue had to do with drinks and not wearing masks. The couple was being “interviewed” by the police as we crossed the gate area. Later I was walking out behind the couple and the cops and heard one of the cops say they don’t enforce mask wearing but passengers have to adhere to airline rules. The young lady commented she thought they were going to be arrested.

On the radio Monday morning I heard an announcer say how on a flight over the weekend he got admonished by a flight attendant for not putting his mask back on after eating (he said he was putting it up to his face when she snarled at him).

So, what does this have to do with business? Masks are like other rules and guidelines. Some are overbearing about them and others flaunt them and in business, I see the following.

  • Owners who overly blend their business and personal checkbooks, making it hard to determine exactly how much money the business makes. 
  • One could add here the CPAs who get their clients so obsessed with reducing taxes they do stupid things (like buy new stuff they don’t need just to reduce taxes).
  • Business buyers who think they deserve perfection when there are no perfect businesses or perfect deals.
  • Business sellers who don’t think valuation methodologies apply to their business, because their business is so different and special.
  • On the flip side, attorneys who dig in on minutia and lose track of getting the deal done (which sounds like a great title for a book).

What this means is actions about masks are no different than what people do all the time.

“Why is it a surprise to find that people other than ourselves are able to tell lies?” Alice Munro

Overleverage is Why Banks Shouldn’t Think Like Investors

Last year it was Deutche Bank and Trump. Now it’s Credit Suisse with Archegos and Greensill. These large banks seem to have forgotten the Five C’s of banking (capacity, character, capital, collateral, and conditions). And corporate execs take a lot more risk than if they had to stand behind the loans. A sixth C could be added, check (and double-check) as Credit Suisse “admitted” they didn’t know Archegos was also borrowing (to the hilt) with other banks.

On April 5 the Wall Street Journal had a frontpage article titled, “Small-Business Owners Feel Weight of Personal Debt Guarantees.” While it wasn’t all about bank loans, a large portion of the article was about lease guarantees, as I’ve previously written personal guarantees are common with small-business bank loans. 

The article made it appear banks are more willing to work out things than landlords and others. Here’s a quote from the article, “Banks don’t want to pursue guarantees,” said Alan Thomes, a managing director in charge of SBA lending at Cadence Bank N.A., noting that the process can be costly and messy. “It’s our desire to work it out,” he added.

Makes sense given another recent headline I saw, “Office-Space Subleases Flood Market.” I get what landlords are going through. When mega-companies are subleasing space it decreases the landlords leasing abilities, and they have mortgages to pay.

What this all means I really don’t know. But I do know that business buyers and business owners who are borrowing money can’t overleverage themselves. Some banks will allow borrowers to have a very low (1.1:1 or 1.2:1) debt coverage ratio (the first number is free cash flow and the second number is debt service payments). Good bankers will want their clients to have at least a 1.5:1 ratio and if it’s a small buy-sell deal a 2:1 ratio.

Prudence is a wise course of action when borrowing, and personally guaranteeing. Don’t emulate corporate types playing with other people’s money.

“Throughout the world the more wrong a man does, the more indignant is he at wrong done to him.” Anthony Trollope

“What sane person could live in this world and not be crazy.” Ursula K. LeGuin

Bad News Sells

As was predicted, news outlet ratings have fallen, especially those that are anti-Trump. People want to see, hear, and read negative news. In the first month since the Inauguration:

  • CNN was off 45% (down 16% in prime time in Q1 2021)
  • MSNBC down 26% (down 8% in prime time in Q1 2021)
  • The Washington Post 26% fewer unique visitors
  • The NY Times was down 17%
  • Fox News was down 6% (down 32% in prime time in Q1 2021)

Say good or bad things about Trump, he was a boon to all media (and I’m guessing Fox News went down when Trump replaced Obama, for the same reasons).

Bad news sells. Look at the headlines. Recently it was headlines about how the ship stuck in the Suez Canal would take a month to be dislodged and by then the world economy would collapse. It was freed in six days. When it comes to news and day-to-day business here are some thoughts in three areas: 

  • When a business is for sale, there is no bad news. Everything is rosy, no warts, no issues, and a very bright future. Two percent growth the last five years, no matter, it will be 10-15% the next five years. Look, the previous is a bit of hyperbole but you get my point.
  • On the flip side, all businesses have something wrong with them and some buyers think it’s their job to ignore the profits and pick apart every little thing. These buyers rarely get a deal done because nothing is good enough.

And did you ever hear outsiders talk about what a company can do in three easy steps to be more productive and profitable? My favorite was hearing two government employees discuss what the $100 million dollar firm where one of their wives worked should be doing to be better. Really?

I tell my clients there are no perfect businesses and no perfect deals. But their business, or the one a buyer is acquiring, have figured out how to be successful and profitable. Perfection is for brain surgery. 

“All things are so very uncertain, and that’s exactly what makes me fell reassured. “ (Author) Tove Jansson

Business Drivers that Decrease Value

The other day Jessica was saying how she’s come to realize we and others say about the same things when it comes to what makes a business more salable and a buyer more attractive to a business seller or intermediary. She’s right and here’s an example of a trifecta of issues one owner had.

Regular readers of this Weekly Memo know I stress the following.

  • Buy-sell is a relationship game.
  • There are four main things every owner should do in order to exit with style, grace, and more money.
  • I have three questions I ask owners when they’re thinking of selling.

Don’t think the above is just theory, it’s not as the following illustrates.

  • I asked the potential seller if he’d worked with a financial advisor to see what he needed for his next great adventure in life. His answer was no and “just about all my wealth is in the company.” This is not uncommon and he’s looking to diversify his assets by selling all or part of the business.
  • My four areas of action for sellers are to have good financial systems, show you can grow (don’t just say if a buyer hired a salesperson the business would take off), attract and retain great people, and reduce dependencies, especially any owner dependency. This owner had been approached by a large firm and, “they beat me up on price because the business was too dependent on me.” To his credit, he’s been working on not being involved in the day-to-day.
  • Then a couple years ago a buyer made an acceptable offer that he turned down. He told me, “I didn’t want my employees working for him.” He went on to say the buyer was a young guy from a rich family, had a degree, but no good experience. The buyer flunked a big test when the seller asked him some questions about possible problems (which all businesses face) and there were no good answers.

This stuff is not from a textbook. These issues are prevalent in too many small businesses when the owner is too tied to the day-to-day operations plus thinks their business is so special buyers will line up with huge checks when it’s time to sell. They only will if the owner pays attention to those things buyers want in a business.

“I don’t need time. I need a deadline.” Duke Ellington

Don’t be Greedy – Be the Best

The New York Times reported on a “little-noticed court ruling in December (2020).” The ruling was against the former board members of the Jones Group, an ownership group of apparel brands including Gloria Vanderbilt, Anne Klein and Nine West. In 2014 the Jones Group sold to Sycamore Partners in a highly (one might say overly) leveraged deal. 

The court ruled the “officers and directors had better think twice before agreeing” to deals with this type of structure. Duh! If it sounds too good to be true it probably is. It’s why good bankers (for our clients’ size of deals) won’t let a buyer have the bare-minimum debt coverage ratio. There needs to be a cushion because “things happen” and one of the best and worst things is fast growth. Growth sucks cash and that’s where the cushion comes into play.

Here are some related situations where the best:

  • Business buyer has the whole package including price, abilities, relationship building, and more. As many in the buy-sell world know, the best buyer is not always the one offering the highest price.
  • Business to acquire is not always the one that’s the best deal. It’s the company the buyer can grow, add value, and see themselves going into every day with a smile on their face.
  • Customer doesn’t always pay the most. But they’re loyal, work out issues, and refer others to you.
  • Job isn’t necessarily the highest paying job; it has the whole package including culture and career advancement opportunities. 
  • Employee to hire isn’t the one who will work for less. It’s probably the one who expects, and is warranted, a higher salary because they’ll have higher productivity.

It comes down to looking at the whole package, not just the shiny stuff (like the money).

“If I had to live my life again, I’d make the same mistakes, only sooner.” Tallulah Bankhead

“It’s funny. All you have to do is say something nobody understands and they’ll do practically anything you want them to.” J.D. Salinger 

The Challenges of Buying (and Selling) a Business

A month or so after a business buy-sell transaction the buyer said he had found some challenges but was making his way through them. Finding a business to buy is much different than finding a house to buy. There’s no MLS, the seller doesn’t want anybody to know the business is for sale, there’s a lot more information to verify, and comparable sales information is limited.

Similarly, moving into a house is easy, especially compared to taking over a business. The house is clean, it’s been inspected so you know what to fix or upgrade, and it’s really about unpacking and getting settled. 

When taking over a business you have to deal with customers, employees, operations, culture, cashflow, and more. Here are three things owners should do to make it smoother for buyers (and increase the ease of selling and the price).

Run it as a business, not a lifestyle. Run it as if you’re not selling but are in it maximize growth and profit. Realize the little things you know how to do in your sleep from 37 years as an owner (as an unconscious competent) aren’t second nature to the buyer. There not second nature to your staff, which is why a business plan, job descriptions, and delegation are so important.

As I’ve written many times before, the buyer is buying your people as much, or more, than they are buying your “company.” Employees are the lifeblood of any business so treat them well, pay them well, let them grow, and trust them.

Financial people will tell you to measure everything. Those numbers are the buyer’s (and the bank’s) insight into your business. The abovementioned buyer bought a good business that didn’t follow normal accounting practices (not even GAAP, just normal). This is a project-based business and work in process was not being recorded on the balance sheet. How do you know how profitable a project was if you don’t track things correctly? This means have a good accounting system and pay attention to it.

I could go on but you get the point. Take the little extra time it takes to do things right, not just run from project to project.

“If the highest aim of a captain were to preserve his ship, he would keep it in port forever.” Thomas Aquinas

Hobbies of any kind are boring, except to people who have the same hobby.” Dave Barry

Why Buy and Own a Business?

The March 1, 2021 comic Non Sequitur by Wiley gives us a great answer (to the headline). You can see the comic here* and in the second panel one of the characters answers the question, “If you could go back knowing what you know now, what would you do differently?” with:

“I wouldn’t be so self-conscious in high school and I’d work toward the career I really wanted instead of settling for a job I can’t wait to retire from…”

Something you want to do as a career verus “just a job” is what it should be about, right? This is why people leave their corporate jobs to own a business, whether by starting one, buying one, or getting a franchise. But this is not a rah-rah for ownership, because that’s not needed for those serious about it. Rather, here are a few things out of the news that all business buyers should watch out for and sellers should correct, if it’s an issue with their company.

  • Greensill Depended On a Few For Much Revenue,” Wall Street Journal, March 8, 2021. Customer concentration can be a killer. Greensill had 90% of its revenue from five clients in 2019. There’s a reason buyers and banks get nervous about concentration. Often the seller (and sometimes the broker) will dismiss this by saying things like, “They’ve been a customer for years.” Yes, a customer of the seller and what happens when there’s a new owner? Or a change in the customer’s management, or how a problem is handled?
  • UPS’s new CEO is focusing on the bottom line by weeding out less-profitable customers (Wall Street Journal, March 6, 2021). This is where good job-cost accounting comes into play, so you know your customers profitability. An owner I know was approached by his top (30%) customer about buying his business. For a variety of reasons, he turned down the offer, said he realizes he will lose the customer at some point, and pointed out the 30% of revenue was only 10% of gross profit so it won’t be that big a hit (and he works daily to diversify the customer base). If you’d like a slide deck on customer loyalty and due diligence from a ACG webinar send us an email.
  • Boeing has been in the news again as a couple Pratt & Whitney engines lost parts while flying. Note to buyers, inspect the equipment, the inventory, and the technology. Owners thinking of selling in the near future are notorious for not investing in assets as they did in prior years. Owners should invest in the business as if there’s no plan to sell. The price can only go down if anticipated capital expenditures are higher than normal.
  • Microsoft Exchange customers, at least 60,000, were hit by an aggressive hacking operation that saw stolen emails and malware installation. A client of ours was recently hit by ransomware. Owners need to keep the technology up to date, have protections, and really pay attention to all aspects of cybersecurity. Our podcast series features (separate) discussions with Jennifer Hill and David Henderson on cybersecurity and Dan Weedin on crisis management. Spoiler alert, cybercrime is one of the top two risks businesses face.
  • Trust is the currency that is most valuable in this uncertain moment” is on the front page of the March 5, 2021 Puget Sound Business Journal and it’s a quote from KD Hall. I disagree. Trust is most valuable at all times, especially in a buy-sell situation. No trust, no deal. What seller or buyer would sell to or buy from someone they don’t like or trust? Who would make or accept a job offer to or from someone they don’t like? Not a sane person, that’s for sure.

Business ownership, especially via buying a mature, profitable, and fairly priced business, is the best thing for a lot of people. Just make sure you buy the right business the right way and you pay attention to the above (and all other details of the business).

* Due to copyright laws, I can’t publish the comic’s panel.