Like a lot of you I’ve been on more webinars the last six weeks than I usually go on in six months to a year. And, there’s actually been some good ones.
An interesting one was put on by Salesforce and featured Mark Cuban. A few of the things he said were:
Now is the time to amplify your brand.
Connect with people, don’t sell.
Everybody is scared (at some varying level).
The disaster recovery programs from the government are like automatic overdraft protection.
A really good webinar was put on by Business Brokerage Press (BBP) and the points the experts made are valuable for more than just the buy-sell industry. Here are the ones I noted with my comments in parentheses:
We all need to do a better job of screening potential clients and customers to make sure they’re serious, what they have is viable, they’re viable. (Not just now, always.)
Most owners are concentrating on core business functions, not exit planning. (Many are concentrating on survival.)
For new clients, now is the time to get paperwork in order and be ready to go when the time is right.
Baby boomers are not getting any younger. The tsunami of exiting owners predicted over the last 10-12 years hasn’t hit yet. Maybe this will push it over the top. (I agree, there’s been no spike of exiting owners, just a slow increase.)
To business sellers, set a firm expectation of value and cash at closing. (They emphasized the word firm as we know people remember what they want to remember.)
To owners who have been coasting – watch out! (Yes, a culture of coasting will be hard to change to one of urgency.)
Good people will be available to improve your team. (On my Zoom Happy Hour on April 16 Joe Fugere said they’re looking at all the good people let go by other restaurants.)
Show you can bounce back. (Not just for those selling but for those wanting to reassure customers, employees, and vendors).
Business buyers will be expecting deals and consider using an earnout.
This will push up bottom feeder (business buyers) and it’s way too soon to get freaked out over value. (I agree, I’m seeing the bottom feeders out there, going after businesses in industries hit hard.)
Business buyers who want to pay based on the last 12 months of earnings for businesses hurt by COVID-19 won’t want to pay based on the last 12 months for those companies that got a spike.
The reverse is true of sellers.
Buy-sell experts are going to have to figure out how to mitigate the situation. We could see deal structures change (more seller financing), more earnouts, buyers will be more cautious, etc. (And, we don’t know how banks are going to look at all of this.)
On the other end of the spectrum, I was on a Zoom meeting with a bunch of corporate people and corporate consultants. Talk about heads in the ozone. These people had no idea about the “real world.” One lady actually said that nobody will want to own a car anymore now that we know we can all work from home. Okay, other than those people delivering things to her home, working in stores, on construction sites, installing furnaces, cutting hair, etc. Or, those who like the freedom of getting out, hauling their boat, going skiing, and other activities.
Regarding the points from BBP, I can’t argue with the points made and I also think you can take out the business buy-sell specifics and apply most of these points to business in general. Businesses shouldn’t coast, we don’t know what banks will do regarding lines of credit and other non-transaction loans, and many of us will have to mitigate numerous circumstances.
Fact: Politicians, all politicians, from both parties, promise more jobs, better jobs, increased pay, and anything else they think will garner them votes.
Fact: None of the politicians have any idea what’s really going on or what to do.
Help wanted is very common
It’s a fact of life these days that a majority of businesses can’t find enough good workers with the emphasis on the word good (as in skilled, competent, will show up for work every day, etc.). Not just in big cities like Seattle but in small towns I’ve been to over the last couple years. Signs abound seeking workers.
In December 2019 the Wall Street Journal had an article titled, “American Factories Demand White-Collar Education for Blue-Collar Work.” The article summarizes what I regularly see, an increase in advanced machinery, more production with fewer workers, and the need for smarter workers. The article is filled with statistics, which I won’t repeat here, and the bottom line is, from large firms like Honeywell, Caterpillar, and Harley-Davidson to small businesses, more is being done with less, as the following graphs from the article show.
My mother was a teacher, many of my parents’ good friends were educators, so I grew up in a culture of education (you can imagine the repercussions when I misbehaved in school, i.e. disrespected a teacher). So it’s no wonder I’ve given a lot back via my Rotary projects in schools.
Want people to have better paying jobs, give them the training and education to get them. A couple years ago we had a speaker at the Bellevue Breakfast Rotary Club whose organization was (is) trying to get our educational system to emulate the European system by getting kids who aren’t going to go to college into a trade program sooner versus later. An alternative to graduating high school with no interest in college and no real job skills. It’s why I admire companies like Dick’s Drive-In and Starbucks that pay for higher education for their workers, even though they may use that education to get a different job.
It’s a technology world
Technology is really what it’s all about. Not just code writing or playing games but knowing how to use technology on the job. The WSJ article states not only has the manufacturing industry dramatically increased the ratio of capital to labor, but they’ve had double-digit growth of jobs requiring “complex problem-solving skills” versus a decline in jobs requiring the least amount (of complex problem-solving skills). In fact, over 40% of manufacturing workers now have a college degree, almost as many as those with a high school diploma or less.
One of the members of my Rotary Club is with a company using technology (artificial intelligence actually) to match people, employers, and careers. When you get people doing what they like (love) they’ll be better employees, change jobs less often, and be more productive. As the WSJ article said, in a quote from a plant manager, “If you want to be one of those people [who want to just punch in and punch out every day], you won’t be successful here.”
This is why I added “Show you can attract and retain great employees” to my list of what business owners should do to make their business more attractive to buyers. It’s why one of the important skills a buyer can have is to be successful at team building. As I often say and have repeatedly written in my newsletters, business buyers aren’t really buying the company, they’re buying the people.
The January 21, 2020 Wall Street Journal had an article titled, “Sears Woes Overwhelm Spun-Off Hardware Stores.” It’s common knowledge Sears is in trouble, big trouble. What this article points out is independently owned Sears Hometown and Outlet Stores are in dire straits because Sears is, to put it bluntly, screwing them.
The stores don’t own the inventory, Sears owns it and they pay the store owners a commission. But Sears is not able to provide goods to sell due to their financial problems. And, they control the prices the stores can sell things for, which are higher prices than on the Sears website.
Arrangements like the above are commonplace. You think you’re in business for yourself but you’re a quasi-businessowner. It may be what you can sell, what you can charge, where you can market yourself, etc. No matter what, if the restrictions stifle what you can do, you should reconsider.
People who want to be in business, versus working for someone else, generally want control, independence, the ability to be creative, and more income (and equity). Pretty much in the above order – money is rarely mentioned first, second, or third.
If you’re thinking of owning a business, know what you want from the business and be very careful if you’re not in full control.
“There is always a well-known solution to every human problem – neat, plausible, and wrong.” H.L Mencken
The title of this memo is a line one of my son’s likes to say regarding technology in cars, homes, and everywhere else. We see and hear about it every day. Robots in warehouses, manufacturing, Alexa and Google Home, toasters with Wi-Fi, AI doing medical diagnosis, and more.
I’m amazed at all the ideas for using technology where it hasn’t been used before. It works for customers in the Uber/Lyft industry but not so much for the cash-draining companies, so far. If you pay attention, you’ll see a lot of these ideas don’t make it. And it’s because some things need the human touch. Almost 40 years ago John Naisbett wrote Megatrends and stated the more high tech we get the more high touch we’ll want.
As I’m always asked about good and bad industries, I pay attention to this stuff. Walking through an airport it struck me that food will always need the human touch. Sure there’s automation but watching someone pushing a cart of food boxes through the airport made me realize people will always be involved with growing, moving, cooking, and especially eating food.
The key to a good business is to blend technology with people. A mechanic uses computer devices but still has to hook up the machine, turn the wrench, etc. Heating systems may be very automatic, but someone has to clean them, fix them, install them, and haul away the old ones.
What are you doing in your business to blend technology with people? Over the last two weeks I met an owner still doing the books on paper (no QuickBooks) and an owner who modernized the company, dramatically reducing overhead by using technology and its systems.
The more you can integrate technology into the business the more time you’ll have to meet clients and prospective clients, which is how you grow most businesses.
“True terror is to wake up one morning and discover that your high school class is running the country.” Kurt Vonnegut
The attorney looked at the audience and said, “Make sure you understand everything in your agreements. If there are any ambiguities, they will come back on you, not your attorney.” This was many years ago when said attorney and I were on a panel together.
Wise words, aren’t they? I will never forget them. I thought of this the other day when an exit planning client told me about a dispute over a distribution agreement with another company. And, it seems the other party also ignored this advice, thus a mess.
Without giving away any details, my client signed an agreement that gives the other side an out. The other party signed it including a clause that gives additional control to my client. How does this happen you may ask? Here’s how.
My client got to the point where he told his lawyer he didn’t want to spend any more money on legal fees. The lawyer had mentioned the out clause, but the client was mentally more concerned with fees than anything else. However, the lawyer should have said something like, “There’s no charge for this conversation as you need to realize the other side can get out of the agreement at any time, leaving you with expenses and no recourse.”
The other party said, when it was pointed out there was a clause giving my client ownership of the brand (versus distribution rights), “An employee of ours put that in there and we didn’t notice it.”
In both cases, not paying attention to the details, not noticing ambiguity, and being cost conscious versus results conscious. In the buy-sell world there are more details, more intricacies, and lot more words to read and understand than in the above example.
In all cases, don’t ignore the advice above.
“A little alarm now and then keeps life from stagnation.” (Author) Fanny Burney
Running a small business is easy. Having a small business as an absentee owner is a piece of cake. The employees can operate the business without adult, i.e. owner, supervision.
The above are all myths of small business and here’s an example:
In the mid-1990’s at a Chamber of Commerce meeting I met the owner of a new auto service center in Kirkland. We hit it off, started taking our cars there (as did numerous family members and friends), got great service, honest pricing, etc. They did little things right like saying you’ll need brakes in about six months versus wanting to do them immediately. Or giving the car a once-over look for no charge.
Unfortunately, the owner died a couple years ago. His wife sold the business to a technology executive who bought it as a passive investment. I hope the wife got paid in full at closing.
We started noticing little things like the phone not being answered and messages not returned. Our only needs were oil changes, the (recently promoted) service manager knew us, and all was good (for us). But obviously not for other customers and definitely not for the employees. It went from a family-business culture to one where the manager said to my wife, “It’s now just a job. I work my hours and go home.”
Guess what? Now the phone isn’t answered at all, the blinds are down, and the doors are locked. About five years ago I started using the term “adult supervision” to describe what an owner needs to bring to the business. This business used to have adult supervision and thus the employees were happy, the customers were happy, and the business thrived.
Don’t think this only applies to very small, consumer businesses like a garage. I’ve seen business with sales of $5-15 million suffer similar issues when the owner decided to take his or her eye off the ball, spend more time vacationing than working, or just clipped coupons (taking a huge salary or distribution as the business grew stagnate).
“The universe if full of magical things patiently waiting for our wits to grow sharper.” (Author) Eden Phillpotts
This was originally written for the blog on www.ibainc.com.
An interesting title of an article about how the author helps his company’s clients, isn’t it? Immediately telling readers the subject might not be for them. It’s because I’m not a salesperson, one size doesn’t fit all, etc. In fact, I start out speaking engagements on buying a business by telling the audience (usually management and executive level people0 there’s a good chance it’s not for them.
But when it is for you, be sure to do it correctly. And that means don’t jump in without a plan and when it comes to growth by acquisition that means know why you’re doing it.
In my book, Company Growth By Acquisition Makes Dollars & Sense I have a list of 19 reasons to consider growing by acquisition. I’ll list them here and go into detail on six of them.
The cake – 16 solid reasons (in alphabetical order)
Acquire great talent, including the seller
Assets are cheaper as a package
Competitive Advantage (fill a weakness)
Diamonds in the rough
Diversify your product offerings
Integration is easier
Location, location, location
Make a competitor go away
Psychology – Employees like to be part of a winner (growing firm), just like sports bandwagons
Risk, it’s a lot lower
Overhead the same, volume higher
Vendor relationship strategies
The icing – the top three
Customers (efficiency vs. make more calls)
Yes, we can!
The bigger you are…the better
Acquire great talent
Good employees are hard to find and often are not in the job market. Just talk to any executive recruiter. While all buyers want capable employees, most strategic buyers (that’s you) also prefer to see a solid management team in place.
Great employees with industry knowledge and experience are in the job market even less. When you are looking for great salespeople, I believe this is amplified. They won’t change if they’ve got a good thing going. Here are some statistics from an executive recruiter, which explains why it’s tough to find good people.
82% of people aren’t searching for a job.
Leadership, or the lack thereof, is the top reason management people switch jobs (not money).
46% of millennials left their last job because of the lack of career growth.
If you acquire their company and create an atmosphere of growth, those employees will want to stay. While I can’t comment on the culture in all companies, I do know that many small family-owned businesses have owners who are coasting. They are doing very well, they aren’t working too hard, and they don’t want to disrupt the nice moneymaking system they have.
Dependencies are a huge issue in most small businesses. By being larger you can reduce most or all of the following:
Not too much explanation is needed. More customers over your expanded revenue base, more employees, deeper management, less product concentration, and most importantly, there’s more talent to take a load off the owner. And an owner dependency is often the brightest red flag for most profitable small businesses. Of course the owner has to be willing to take advantage of the deeper bench by delegating to them.
Psychology – Be part of a winning team
Employees want to be part of a winning team. They want to feel they’re contributing to a winning effort. It’s very much like sports, the more the team wins, the greater the number of fans it has.
I’m thinking of a young man in his early 20’s whom I know. He took a while to figure out some things in life and is now steadily employed and has been for the last few years (with the same company). He’s proud of his job, his contribution, and showed disdain when a new, younger employee (whom he called “the kid”) flaunted the rules and wasn’t dedicated. (But let’s be honest, some employees at this level don’t care, but they’re not the ones who are important anyway, like “the kid.”
Now elevate this to the more experienced people including the management team. In one company there was some doubt about the general manager accepting new ownership. However, this doubt was unfounded as he’s leaped at the chance to implement quality controls, better processes, and accountability.
The icing – the big three
Now here are the top three reasons to grow by acquisition.
“This would be a great business if it wasn’t for those darn customers” was a semiserious comment someone made to me years ago. Of course it’s the annoying (bad) customers he was referring to. It’s good customers we all want more of—customers who are loyal, steady, in good financial shape, growing, pay their bills on time, appreciate the value you offer, and consider you part of their team.
An ideal situation is where there are some overlapping products, so there is some continuity and synergy to be achieved. The figure below shows this. Your salespeople now have an easy transition to discussing, and selling, their products, and their salespeople have an easy transition to discussing, and selling, your products.
In simple terms, if your primary motivation is acquiring a customer base, you are acquiring market share. You may have many other reasons (above), but the bottom line is you are buying customers, and that means top-line growth.
Yes, we can!
This is not about ego; it is about building an exit strategy in order to get a higher selling price. Buying another company, assimilating it into your operation, and showing that the combined profits are greater than the two individual companies’ profits demonstrates to potential buyers that this can be done. It proves you have the team that can integrate one operation into another.
This integration could be their assimilating your firm into theirs or it could be a signal that growing your business (or now a division of theirs) is possible by further acquisitions. A management team that can successfully integrate other firms without major disruption and with immediate efficiencies is a valued team. Too many big mergers and acquisitions fail. Up to 95 percent of public mergers do not live up to expectations. A savvy buyer will appreciate this talent and experience associated with past integrations.
Why larger firms sell for more than smaller ones (all other things being equal)
The bigger your business is, the more it will sell for, all other things being equal. A $50 million (revenue) company with 10 percent earnings will sell for a higher multiple (of profit, earnings, free cash flow, or whatever metric you use) than a $25 million company with 10 percent earnings, which will sell for a higher multiple than a $10 million company, and so on.
There are generally accepted ranges for multiples of earnings based on the range of companies’ revenue. However, too many small business owners see in the Wall Street Journal that a $300 million company in their industry sold for ten times earnings and assume their small business will also sell for ten times. That won’t happen; there’s more risk in smaller businesses than larger, so the desired return on investment is higher.
The fastest and safest way to grow from $5 to 15 million is by acquisition. Buy another firm in your industry—a supplier, customer, or unrelated company that provides diversification—to have an immediate revenue increase and a larger platform from which to grow organically. See more profit and a higher multiple when you exit.
“It’s not bragging if you can do it.” (Dizzy Dean, 1934)
A lot of business owners talk about their company’s potential or the growth that will occur if the buyer just “does some marketing.” Of course, most of this is just talk. Business buyers of all types and sizes are a skeptical lot. When buyers hear too much about potential they think the seller has tried every conceivable way to grow and can’t.
So prove you can do it. Grow organically and also go out and buy another company. Show that you can integrate the people, processes, financial systems, customer service, and everything else into your operation. Private equity groups and large corporations make multiple acquisitions. If you can buy another firm and successfully assimilate it, you become more attractive to these buyers. They will assume you can do it again and that your management team is capable. Strategic buyers and equity group buyers highly value management teams—it can even increase the multiple (compared to having the same size company that has not made acquisitions).
We’ve covered just six of my 19 reasons on why it makes sense to grow by acquisition. I realize most may not apply to your business. It’s the few that do apply that are the reasons why this strategy may make sense. Heck, your catalyst may be a reason not mentioned here. The point is this has worked for many companies and you should always have your eyes open looking for opportunities as there are a lot of good reasons to do so.
At the same time I must acknowledge there are pitfalls you need to avoid, but they can be avoided if handled correctly. How you handle the cultural integration makes a huge difference. Letting (most of) the employees, with both companies, know their jobs are safe is important, as with any acquisition. And you will be taking on debt, but this debt comes with good things like customers, good margins, cash flow, etc. If it makes sense to buy another company these pitfalls are easily overcome. As a very wise executive once told me, “Growth hides a lot of operational warts.”
As we experience the holiday season with Peace on Earth, Goodwill to All, Thanks(giving), and the meaning of all this, I want to share my thoughts on what I consider to be one of the best codes of ethics around. It’s Rotary’s 4-Way Test and how I see it applying to politicians and businesspeople.
The 4-Way Test is:
Is it the truth?
Is it fair to all concerned?
Will it build goodwill and better friendships?
Will it be beneficial to all concerned?
Is it the truth?
Politicians – I think I could stop here because we all know they all lie, about everything. We have a President who sets the standard with over 12,000 verified false or misleading claims. Politifact states Obama made about 14% the number of “pants on fire” lies as Trump (yes, Democrats and Republicans, they all lie). Here in Seattle a Seattle City Council member, on the Berkeley “ban natural gas” bandwagon, stated a natural gas stove poisons the air in the house. A University of Washington scientist debunked that one pretty quick.
Business – My experience is most businesspeople are pretty truthful, other than owners who blend their business and personal checkbooks. They may write off some personal expenses but do report their income. When it comes time to sell, most care about their legacy (they want the buyer to succeed) and really care about their employees thriving with the new owner.
Is it fair to all concerned?
Politicians – Again, pretty simple as they only care about getting re-elected and the people who can help them accomplish that. This means donors and lobbyists not you or me.
Business – Most really care about their employees and customers. Yes, some (way less than 50%) are greedy, pay low, don’t provide benefits, etc. One telltale sign is often the retirement plan. If it has 95% going to the owner, you have to watch out for that person.
Will it build goodwill and better friendships?
Politicians – Yes, if you’re a donor, a donor’s business, or a donor’s cause. Otherwise, you’ve got to be kidding.
Business – Small business is relationship business. You can’t succeed if there’s not goodwill between employer and employees, the business and its customers, vendors, and service providers. Face it, customers usually have options. In today’s labor market employees have a lot of options (on my list of the top four things an owner can do to prepare the business for sale is, “Show you can attract and retain great talent.”
Will it be beneficial to all concerned?
Politicians – You know my thoughts on this. See the above three sections. If it’s beneficial to the politician they’ll do it (often meaning they’ll do what the Party tells them to do).
Business – If you’re in business, large or small, you must be able to solve problems, meaning beneficial to your customer, your vendors, and you. Try making a promise like a politician and not delivering on it (we’ll have your order out by the end of the month but when it’s two months late you’ll lose the customer). Things must be beneficial to employees also, or they’ll leave. Most want career advancement and want to be able to take pride in their work.
It’s the holiday season and this is a fun essay. I’m sure you picked up on the general theme, we businesspeople have a higher ethical standard than those we elect. As you give thanks on Thanksgiving, wish friends and family Merry Christmas, Happy Hanukah, and Happy New Year, realize it’s best to carry all those feelings throughout the year, not just in December.
This is something I sent to our clients recently and realized it has good lessons for all.
I’ve been involved in a real estate buy-sell transaction as over the last 18 months we’ve been trying to sell our family cabin in the Midwest. In this part of the country it is not a red-hot real estate market, with only one exception and the exception is places on a chain of lakes, which our place is not.
Bottom line, it’s been slow. About one year ago we had a verbal “offer” about 25% below the asking price. Our agent told them not to even bother writing it up, which was the right decision.
All of a sudden, this fall, after no serious interest all summer, we got two offers. One was another lowball offer, which definitely hurts one’s feelings. The other was in the negotiable range, so we negotiated, and reached agreement.
Lesson one: lowball offers destroy all faith and trust. You don’t even want to deal with the person.
After hundreds if not thousands of online views, scores of people looking at the place in-person, two lowball offers, and one negotiable offer, we came to realize the following, which business sellers often don’t want to accept:
Lesson two: the market was speaking to us about what the value really is.
At the same time, we realized, and this applies to business buyers:
Lesson three: no buyer (maybe a very naïve one) makes an offer they expect to be accepted.
In fact, if a seller accepts the first offer a buyer makes the buyer should wonder what’s wrong. Because rarely is the asking price what a seller really wants and rarely is the first offer the limit of what a buyer is willing to pay.
Summary, in business deals it’s very much about relationship. In business and real estate, emotion and feelings play a big part.
“Promises only bind those who believe them.” Jacques Chirac
I was recently talking to a business buyer about what he was looking for in a business. What he said all made sense; a B2B business, logical size range, wide geographic area, etc.
Then he said he needed a business on which he could pay off the debt (SBA, 10-year term loan) in half the time. That’s 25% annual growth, from day one. And yes, 25% can be achieved. A recent client grew 25% the first year. But over five years? If it takes one year to figure things out, all of a sudden, it’s about a 33% growth rate. But then came the kicker:
“And I don’t want to have to make any investment in the business (to achieve the growth).”
No new (additional) equipment, vehicles, marketing, or people. All the earnings go to debt reduction. This is fantasy land. And it makes me wonder what other fantasies are out there. Some that come to mind are:
A business seller believing his or her business is so special traditional valuation methodologies don’t apply to their business.
Owners thinking it’s easy to find good salespeople.
Advisors (and salespeople) figuring because they know what they’re doing the phone will ring.
Business buyers thinking an owner with no family in the business has no good options, other than selling to them with a low down payment (actually this owner has all the options).
Company founders believing a bank will lend them money based on their great idea.
I’m sure you’ve seen many more fantasies.
“We are living in a world today where lemonade is made from artificial flavors and furniture polish is made from real lemons.” Alfred E. Neuman