From the “You can’t make this up” files

Conversation between business buyer and business broker:

Buyer – “I have a few questions about the financial statements, especially the few items related to the owner’s “other company?”

Broker – “I’m not sure we can get answers. The financial statements are “cloudy.”

Buyer – “What do you mean “cloudy?”

Broker – “I’m not sure they’re accurate.”

Buyer – “Well, the bank needs the answers.”

Broker – “I’m not sure you’ll be able to get a bank loan given these statements.”

Really? Not just about a broker not pre-screening a business to see if it’s worth taking on as a client but how can anybody take on a client, customer, buyer to buy your business, or seller to sell you a business without any “pre-flight checkup” like pilots do?

You can’t be, or even appear to be, that desperate. As I’ve said for years, the only thing worse than no client/customer/deal is a bad one. They always come back to haunt you.

It wasn’t even a full moon

It was mid-month, not even close to a full moon, when I had three weird and similar situations occur with business owners.

  1. An owner told me he would be glad to sell his business, but nobody would see his financial statements or tax returns. Only his CPA and the IRS see them he said. It seems he had sold another business to a consolidator that only cared about revenue. All he had to do was prove his revenue and they were happy. He figured this applied to all business sales.
  2. My friend Tom Broetje with CFO Selections talked to me about a possible referral and warned me I’d have to explain to the owner why he’d have to share his tax returns. I guess he questioned why he’d have to show them to anybody (buyer, bank, etc.).
  3. Finally, we got an NDA from an owner and the last paragraph said the buyer needed make a $5,000 completely non-refundable payment just to see the financial information. When I said in my 25 years in the buy-sell industry I’d never seen or heard of this she replied, “Well, we’re pretty savvy businesspeople.” No, you’re not. You’re not motivated and just being annoying.

I know there’s a (small) trend of people buying houses without seeing them in person but they don’t buy sight unseen as they take virtual tours and often have agents onsite to advise them. People wouldn’t take a job without meeting their boss, reviewing the requirements, etc.

And that’s what a buyer’s analysis is, a virtual tour (see the financial information), “interviewing” the seller, and studying the product, processes, etc. This is normal and something the seller should do on a buyer, an employer on a new hire, and a business on prospective customers and vendors.

Flip the Switch

Recently I got an e-newsletter from my friend Allan VanderHamm with Berntson Porter.

Allan is their valuation and exit planning expert and the newsletter was titled, “How Does Exit Planning Protect Business Value?” My response to Allan was:

One of my lines is, “Owners don’t wake up, flip the switch, and say I want to sell in 2, 3 or 5 years. They flip the switch and say, it’s time to get out (now).”

The newsletter told the story of two owners of similar businesses and how one owner worked very hard, “in the business” and the other sought and acted on advice and worked, “on the business.” The latter owner built a team, converted to S Corp status, and did something near and dear to my heart, grew by acquisition (one of my top reasons to consider growth by acquisition – along with 18 others in my book Company Growth By Acquisition Makes Dollars & Sense – covers how the larger the company the more it will sell for, all else being equal (because the multiple of profit gets higher as businesses get larger).

Planning is important, as is timing. I recently had discussions with a client who would like to sell to one of his three competitors (given his industry, these are the only logical buyers). We talked about where the business is, where it will be (this year is shaping up to be a very good year for him), and the time of the year (it’s a seasonal industry and now through September is the busy season).

While he has a feeling of urgency to move on to his next great adventure in life, it makes sense to do a few things within the business, go full speed ahead to maximize revenue and profits, and be able to present a great story in six months.

The above is a mini-version of a planning story. It does take time and effort to shift from, “what we do now” to “what we need to do to make the business more attractive.” And it can be threatening to an owner who wants to be in control of everything, because one thing that makes a business more attractive, and adds value, is a self-sufficient management team. A solid team means there’s a greatly reduced likelihood of a dependency on the owner.

The last point about owner dependencies is one of my top four things an owner can do to increase value, make the business more attractive to buyers, and have a better business along the way. The other three things are:

  • Show you can grow, don’t just say it or say we tried to keep the business where it is.
  • Have solid financial systems and accurate financial statements. (One of the first things I do when I see financial statements is check if the year-to-date income on the P&L is the same as the year-to-date income on the balance sheet. You’d be surprised how often it isn’t the same.)
  • Demonstrate you can attract and retain good employees (especially in our currently tight labor market).

Conclusion

The 80-20 might even be the 90-10 rule when it comes to owners flipping the switch. It is tough to manage a business, be in control, and implement (a new) strategy. So, it all catches up on the owner, they flip the switch, and say now’s the time. Finally, this is completely different than the owners who are coasting by design, as in, I’m making good money so why would I want to work harder to make more? It’s the same end point but via different routes.

The Magic Question – What Does the Owner Do?

Often simple is the best course of action. In fact, Ockam’s Razor, from William of Ockam in the 14th century, states one should solve problems by choosing the solution that makes the fewest assumptions.

In the case of buying and selling a business, there has to be a match between the skills and interest of the buyer and the seller. And it goes a lot deeper.

The following simple little question to the seller uncovers at least five issues or opportunities. That question is, “What does the seller do on a daily, weekly, monthly basis.” Let’s examine this.

Skills match – as per above, it lets the buyer know if there’s a match between the duties he or she wants to perform and what the seller does (or should I say what the seller needs to do). An overly analytical, introvert type person may love the business model but if the owner is a key component of the sales team and process it’s probably not a good fit. Correspondingly, the outgoing, “I want to be in front of customers” buyer isn’t a good fit for a business requiring attention to detail on bids, contracts, job prototypes, etc.

Dependency – In my talks I say to audiences, you have a dependency on the owner if you can fill in the blank with statements like, “If the owner is the only one who can ___________:”

  • Program the machine
  • Make the big sales
  • Approve all bids

Most people think of dependencies in terms of customer concentration but in small business it’s what the owner does or doesn’t do that often makes a difference. Buyers want owners who can take off for three weeks and return to a company in as good of or better shape as when they left.

In versus on – as in, the buyer wants an owner who works “On” the business versus “In” the business. Working on the business means strategy, growth, vision, etc. Working in the business means being on the shop floor, making sales calls, doing bids, etc. While on the surface it may look like opportunity if the buyer can add strategy and vision, in the short-term it means hiring someone to do the day-to-day tasks that are eating up the seller’s day. It’s the difference between having a job as company president and having a job similar to when the buyer was an employee.

Lifestyle business – my favorite story is about the owner (seller) who told the buyer how he and his sales team worked just hard enough to make the income they wanted and didn’t work anymore. He lost a great buyer who figured changing the culture of laziness to one of growth would alienate the employees, and he’d lose them. This was a lifestyle business, and there are a lot of them.

2No number two – just like on Star Trek Next Generation, you have to have a good number two (employee). Actually, when we say, “no number two person is a red flag,” what we’re really saying it’s the tip of the iceberg, meaning there’s no management team. It ties into the above reasons because it means the owner is integral to the day-to-day operations, works in the business, and this is probably not what the buyer wants in a business.

A simple little question that opens up a plethora of information. As a PS, one of my other top questions for buyers is, “Can you see yourself going there every day?” This one is a gut check, to make sure it’s not just emotion driving the buyer’s interest in the business.

Deal Die When Trust Disappears

It was a bolt-on acquisition, a perfect fit, and a small deal. And it died. It died because of the relationship, or lack thereof.

The buyer and seller seemed to get along fine but a few things happened that caused the buyer to not trust the seller to deliver on post-close obligations.

It started when the seller asked to delay the closing by one month, which didn’t fit the buyer’s plans because that month was a high revenue month (while the next month was a low revenue month), the buyer had other initiatives tied to the acquisition, and some comments made (by the seller’s team) brought to light the fact the seller’s wife was a lot more important to the business than previously claimed.

Then a very reasonable purchase and sale agreement was virtually destroyed by the seller’s attorney. All the legal language issues aside, the edits made it very clear the wife wouldn’t be available for much transition support. This after realizing she is the key employee. Plus, there was again language about delaying the closing date.

Trust is a synonym for relationship. Whether you’re a buyer or a seller, when your gut tells you something is wrong, the chances are high something is wrong. In any event, go with your gut feel.

Entrepreneurs Are Different

Driving home from an evening meeting I was listening to “How I Built This,” an NPR interview show (and podcast) with entrepreneurs. This particular episode was a fascinating discussion with and story about Mark Cuban. Mr. Cuban is well known for being on Shark Tank and owning the Dallas Mavericks.

He became wealthy via a few business endeavors, the biggest one being the invention of streaming audio on the Internet. He said this came about because he wanted to listen to University of Indiana basketball games while living in Texas.

But, the point of this memo is something the host, Guy Raz, asked Mr. Cuban. At one-point Cuban was in his 30’s and a multi-millionaire. Raz asked why he didn’t just “retire” and not work. This is what separates entrepreneurs, good business people, and those who love what they do from the pack of people whose top dream is retirement. The reporter had a hard time understanding why a rich person was still driven.

I know firsthand about this because my dad went from the former group, as one of the most dedicated employees a firm could want, to the latter group after his company did something underhanded to a group of employees, including him. After he died I found a letter to his boss detailing how much sick time, vacation, and other “off days” he had, how he would use them to determine the date he could stop working, and have his retirement kick-in on his 62nd birthday.

Most, if not all, of the people reading this love what they do or are in the process of finding that something they’ll love. It really is a mindset.

“Normality is a paved road; it’s comfortable to walk, but no flowers grow on it.” Vincent van Gogh

 

Emotions and Negotiations

There was a story in the sports section about a Toronto Blue Jays pitcher who had just gone through baseball’s salary arbitration process. He is, to put it mildly, irritated with the team. He said it was tough sitting in a room hearing how bad you are for five hours.

Now let’s put that in perspective. As I recall, his salary was going to about double and the arbitration was over if it should be about $5 million a year or $5.5 million. I am guessing the team wasn’t badmouthing or denigrating him but giving statistical backup as to why their offer was justifiable (compared to his asking price).

My question is, why was the player in the room? Isn’t this something his agent should handle? There are reasons for agents, intermediaries, and other client representatives. When it comes to negotiations we can shield our clients. Someone can tell me what they think about my client, the offer, or anything else about the deal that might be taken the wrong way (and I can do the same to them).

We all know the feeling. I remember selling a truck, the prospective buyer showed up, and the first four or five things out of his mouth were all pointing out what was wrong with the truck. He thought he was negotiating. I thought he was insulting and there was no way I was going to sell it to him unless the offer was for the asking price, which of course it wouldn’t have been.

I’ve sat in meetings where business buyers and sellers have yelled at each other, and then closed the deal. If your skin is so thin you can’t take it, use a pro.

“Human beings are the only creatures who are able to behave irrationally in the name of reason.” Anthropologist Ashley Montagu

 

It’s Been A Great Job But A Lousy Career

I got to talking with a guy about his job, he works for a major tech company, putting together  financing packages for multi-million-dollar purchases (this means he sells financing). His company was acquired about 10 years ago and that’s what led to his statement that’s the title of this memo.

He likes what he does but doesn’t love it. He’s at an age where changing jobs would be tough, and he’s not treated with respect. He told me he hasn’t had a week off in eight years and on a four-day weekend trip to New Orleans he spent most of Thursday and Friday (vacation days) putting out (work) fires.

It’s people like this, usually 10-20 years younger than this person, that allow me to have my business. They get fed up the corporate world and look to escape. When the escape pod is buying a business, that’s where I can help.

It’s also when a business owner says he or she wants to move from X to Y. Y may be a new product, new service, or new geographic area. The options are start a new division or buy a business with said product line or new territory, which is where my book Growth By Acquisition Makes Dollars and Sense comes into play.

Life is too short to have a lousy career. It’s why entrepreneurship is popular.

“Time is an illusion. Lunchtime double so.” Douglas Adams

Founders Are a “Different” Type of Business Buyer

Some people will never own a business. They won’t buy, start, or get a franchise. Others are continually starting or buying companies. And there are subtle differences between the types of people who get into business.

My old friend Bill Pearsall coined the term re-entrepreneur for people who buy not start businesses. But it goes deeper. The individual business buyers I work with have developed management and leadership skills in the corporate world and want to use them to grow whatever business they buy. They understand the importance of a good foundation and since they’re not “product” people there’s less chance they’ll work “in” the business.

After working with people who started a business and considered buying another one (to grow, get employees, have a different customer base, etc.) I find most of them don’t always get you have to pay for what you’re getting.

Having started something they often ask, why would I pay (that much) for it when I can grow into it?
Neither model, either “I want to pay for a great base” or “I’ll pay a little because eventually I’ll do it myself,” is wrong. They’re just different.

Employee Lesson From Sports

In early January the Seattle Times broke a story saying the Green Bay Packers asked the Seattle Seahawks permission to interview Seahawks general manager John Schneider for the GM job in Green Bay.

The Seahawks refused permission and Schneider supposedly wanted to interview for (and wanted) the job. The Times reported NFL rules say permission can be denied if it’s a lateral move but can’t be denied if it’s a promotion. It became a moot point Sunday when the Packers filled the position.

I doubt this will have any effect on any of the parties moving forward but things like this can be sticky situations. Many years ago a client had an employee leave, they went to enforce a non-solicitation agreement, the customer said, “we don’t want to be in the middle so figure it out (without us).” What do you do? Run up legal bills, lose any chance with the customer, or let it go?

I remember another client who did everything right when hiring someone but the industry’s 800-pound gorilla put their legal department on it and the cost of winning wasn’t worth it.

What’s interesting about sports is it’s in the culture to groom people (primarily assistant coaches) for advancement, knowing the advancement will probably be with another team. There’s pride in seeing protégés move ahead, as it should be.

“Never take anyone’s advice.” John Banville