Rotary and Business Buy-Sell – Part One

Recently I had a Rotary Global Grant approved for our ongoing work in Antigua. As I was writing the grant, I realized there are a lot of similarities between our project, the grant process, and our day-to-day work with clients buying and selling businesses. This newsletter will cover seven similarities of projects with business buyers and next month I do the same for business owners/sellers.

Objective – We must articulate, in detail, what our project hopes to accomplish to get a grant approved. In our case, it’s supply technology and train teachers on how to reach their students more effectively with technology (versus using a 3’x5’ rolling blackboard). A business buyer must know what types of businesses they don’t want, what skills they bring to the deal, their capital, and an attitude of being open to business types they’re not familiar with as many deals come in through the “side door.” And most importantly, a good personality to build a relationship with sellers.

Team – Last time we had 14 students (who setup the computer labs and Wi-Fi networks) and 10 adults. We get a lot done. Buyers need to build a team and it should include a transaction attorney, CPA, deal pro (me), banker, and other experts as needed for environmental, HR (a big one and getting bigger), etc.

Money – Our project gets donations from at least three Rotary clubs and a foundation tied to Antigua that loves not only what we do but that we actually get results. We then triple it with a Rotary Foundation grant. Business buyers need to get their capital put together before starting to search. How much capital will come from the buyer’s savings and investments, is the spouse on board with that amount of investment, if investors are needed will they be friends and family or professional investors? Once this is settled it makes sense to talk with bankers.

Timing – We run our project on tight timelines. Grant submission, approval, shipping by a certain date, travel when the students are on break, etc. Buying a business has timing and timelines also. You’d think most things would be concurrent not consecutive but that’s not the case. For example, many buyers won’t fully engage their attorney until they are absolutely positive their loan is approved. Customers and employees can’t be talked to until the agreement is finalized (and often signed in advance). It’s why I tell buyers if they found a business today it will easily take 90-120 days to meet, build a relationship, get information, analyze, work out a deal, financing, legal, etc. All while the seller is running the business.

Implementation – Once our grant is approved we start implementing. Actually, we start prior to that by securing computer and other equipment donations. We can’t use grant money until final approval and some years that meant buying things the day after approval. Buyers need to do the same. Often, they don’t. Life gets in the way and a story in Buying A Business That Makes You Rich demonstrates this. Michael would tell me, “I’ll get to it after my next game of golf.” I quickly figured out there is always a next game of golf. We talked, he got it, he moved at lightning speed thereafter.

Secure agreements – The Antigua Ministry of Education and others must sign a Memorandum of Understanding agreeing to their responsibilities. For a Caribbean country I’d say they’re pretty good. We did have a year where we didn’t do a project because the government was behind on their obligations and from what I hear, one out of 11 is really good in that part of the world. Buyers need agreements also. They’re with the bank, landlord (the landlord waiver is often a challenge and Jessica recently lost a deal because the landlord wouldn’t offer a long enough lease), vendors, employees, customers, and others.  

Administrivia – When I look at all the little things we have to do to get 24 people to and from Antigua, students hosted by local Rotarians, lodging, cars, activities, little supplies we don’t know we need until we get there, etc. I wonder how my friend Jeff at Newport High School and I do it while having work and families. The same with buyers when they get near the end. It’s why I have a form, edited by seven buyers who had recently closed on deals, of all the annoying little things that need to be done before (and just after) closing.

What I illustrate above shows many things have common ground and other than the use of technology, not much has changed in decades. Buyers and sellers go through the same paces they did 20, 40, 60 years, only they have more tools to help.

Are You a Hunter or a Trapper?

Over the weekend our 14-month-old puppy Coco caught another squirrel. Dogs do catch critters but there are some things you should know about Coco. She’s half-lab and half-husky, 85 pounds, not the fastest dog around by far, sort of a klutz, and she’s hilarious when she slinks towards the bird feeders, where the squirrels hang out and get fat. She thinks she’s sneaking up on them.

She makes up for h er lack of speed and grace with smarts. She doesn’t sit and wait for a squirrel (trapping); she moves to corner them (hunting). And she doesn’t bite them or eat them; she plays with them.

I have an old book by Lionel Haines, written well before my time in this business, and one of his best lines, for business buyers, is, 

“You must act like a hunter not a trapper.”

It is important for business buyers, especially individuals and small business owners, to get the word out and see as many opportunities as possible because it’s hard to find a match. The “perfect” type of business for a buyer may be too large or too small, it could have a serious owner dependency, or a customer concentration issue.

It’s also important for:

  • Job seekers – I hear from outplacement clients 70-90% of good jobs are never advertised or listed. You have to get out and find them.
  • Salespeople – Find customers and/or referral sources means not being just an order taker.
  • Business sellers – going after the pool of logical buyers in such a way word doesn’t get out the business is for sale.
  • Business startups – you must always be on the hunt.

My world is buy-sell, so I emphasize this to buyer clients. Know what you want, go after it, keep in touch with brokers, network like crazy, and don’t be afraid to pick up the phone.

“Mother Nature, in her infinite wisdom, has instilled within each of us a powerful biological instinct to reproduce; this is her way of assuring that the human race, come what may, will never have any disposable income.” Dave Barry

Are You a Hunter or a Trapper?Are You a Hunter or a Trapper?Are You a Hunter or a Trapper?“You know you’re getting old when you get that one candle on the cake. It’s like, ‘See if you can blow this out.’”

Businesspeople Aren’t Like Politicians; Thank Goodness

You only have to read the headlines to realize there’s very little political collaboration these days. And that’s within the two parties as well as between them. The ends of the spectrums are the noisiest and yet all surveys say most people aren’t radical left or radical right.

Could you see if our businesses were like that? We wouldn’t be in business. The buy-sell industry is very collaborative. Business buyers and sellers must get along and collaborate, as must their attorneys, CPAs, and intermediaries. Most do a pretty good job of it. But what about within a business?

Employees rule! There’s a war on talent these days. Employees have more choices and as per the June 14 Wall Street Journal (and other publications) workers are quitting their jobs at a higher rate than any time since the year 2000 and April 2021 saw a record number of people quit, almost 4 million. 

Attracting and, especially, retaining good people is more important than ever. Covid still scares some of them, younger workers in particular. Many of those used to working from home like it, for at least a couple days a week. Employers have to be flexible or their employees will go somewhere else.

It reminds me of the dot com boom when fired employees went out and played until they had 30 days of severance pay left and then went and found a new job with better pay and better benefits. When speaking at outplacement agencies it was tough to get the agency’s clients to pay attention to entrepreneurship because jobs were so plentiful.

For business buyers the seller’s employee age range, the availability of good workers, and the flexibility they can offer people should be on the top of the due diligence list. And if business owners/sellers think it’s not their issue they’ll be in for a surprise.

“Experience is not what happens to a man, it is what a man does with what happens to him.” Aldous Huxley

Businesspeople Aren’t Like Politicians; Thank GoodnessBusinesspeople Aren’t Like Politicians; Thank GoodnessBusinesspeople Aren’t Like Politicians; Thank GoodnessBusinesspeople Aren’t Like Politicians; Thank GoodnessBusinesspeople Aren’t Like Politicians; Thank Goodness

You Can do Better than the Government (any Government)

This weekend I received a postcard from the WA State Department of Health encouraging me to get a Covid vaccine. Funny because I got vaccinated four months ago. It looked like this card was mailed to just about everybody in the State, meaning, no filters applied so pay for mailings to those already vaccinated. Realize this is from the State that I believe led the nation in per capita unemployment fraud due to out-of-date technology. 

Our little company has a CRM that can track a lot of things including who opened a message, who clicked a link in it, and can exclude categories when sending a message (as in, exclude those on the vaccinated list when putting together a reminder mailing). But enough railing on government inefficiencies, which we know are plentiful.

Our use of a CRM for more than just a database is something many business buyers bring to the table. They look at creating efficiencies, and often it’s investing in easy-to-use technology. When I think of how much time our CRM saves us on just excluding people when sending something it’s worth the price of the annual subscription.

Business buyers do a lot more than upgrade technology. As in a recent deal, they bring a breath of fresh air to the business. What are some of those things? Here are a few examples.

  • Outsource mundane functions with a prime example being HR. Don’t have in-house people try to keep up on all the everchanging rules, hire people who do this all the time.
  • Get to know the people. I’ve seen it done with individual conversations, with group sessions, and/or by using surveys. A recent buyer had a situation where the seller transitioning him was gone right after (a delayed) closing. He told me it gave him time to walk around and meet the staff. I commented, “I’ll bet it’s been a long time since there was ‘management by walking around.’”
  • Do little things like, and these are real examples, get paper towel holders, get a new printer that doesn’t take a frustratingly long time to spool jobs, buy a quantity of rubber stamps so shipping department employees don’t have to run around to get the only one, have company lunch-provided days, and, this is a good one, beer Fridays once a month (after work).

None of the above is complicated, it’s common sense. Yes, the joke line is common sense isn’t all that common but what really happens is owners get in a rut. It worked that way for 20 years so let’s keep doing it the same.

“If you wish to forget anything on the spot, make a note that this thing is to be remembered.” Edgar Allan Poe

“I’ve never put much store by honesty. I mean, how can you trust a word whose first letter you don’t even pronounce?” (Writer) Lorrie Moore

Buying a Business; Operating a Business; Selling a Business Employees are More Important than Ever

The US is opening. The EU is opening. And the owner of a painting company told me he could do twice as much work if he had more (good) employees. Owners of electrical contracting businesses, hospitality, manufacturing, and other owners have said the same thing. No matter how open the governments make it there still must be willing and capable people to work.

Publications from the Puget Sound Business Journal, to the New York Times, to the Wall Street Journal and everyone in-between regularly have articles on the job market. Bottom line, it’s an employee friendly market. Some of the facts:

  • Four million people quit their job in April, an all-time high (NYT, June 19).
  • Retirements escalated during covid and those people are not un-retiring (WSJ, June 17).
  • Up to one-third of tech workers plan to do a job search this year. (WSJ, June 19).
  • People saved money over the last year and some feel they have a cushion to get the job they want versus taking what they had (NYT, June 19).
  • It’s an incredibly tight job market (WSJ, June 21).
  • Being able to work remotely at least some of the time will influence employees staying or leaving (PSBJ, June 16).

One of my top four things an owner should do to increase value is, “Show you can attract and retain good people.” The above statistics says this is more important than ever. Heck, in some places fast-food restaurants are offering incentives just to be interviewed. 

Yes, I know some of the not-returning people have underlying conditions and some are getting as much or more money being unemployed, but what I’m seeing a lot of is a mismatch between skills and openings. 

A client company is treading carefully on returning to the office, office protocols, taking PTO, being vaccinated, and all other aspects of work given there’s a lot of burnout. Many people worked harder than ever when working from home, didn’t see much of others, and didn’t travel. They now want to catch up and if their current employer won’t give them the freedoms they want they know another company will.

The above are facts and the question is, what do all these facts mean to small business owners and buy-sell deals?

  • Anybody with office employees (not in the field like tradespeople, delivery people etc.) should do all they can to make sure their people have some life balance. It’s tough to find good people and now is not the time to be shorthanded because there’s a lot of business to be had. An example of taking care of people is our recent mega-heat wave in the Puget Sound area. I know of businesses that closed to protect their employees, monitored the effect of heat on people, and changed hours to let them off before the hottest part of the day.
  • For owners planning a transition my advice is to pay attention to what’s in the paragraph just below the above bullet points. Attracting and retaining good people is always an issue, always. On a buy-in deal I’m working on the owner/seller keeps saying, about employees who bid work, “any monkey can do this job.” Funny how he’s had to go through a lot of “monkeys” before finding some people who can correctly bid and get good jobs.
  • For business buyers, if employees and the management team weren’t on the top of diligence topics they better be now. Many employees fear change, not realizing the buyer wants them more than anything as what they’re buying is really the people. Buyers should be concerned about the pay scale (is it fair or under market), benefits, which must be competitive, work-life balance (I’ve had three clients in the last year tell me about people who left for lower paying government jobs because of a predictable and consistent work schedule. 

Successfully operating a business is not easy, which is why there are ample rewards when done right. And buyers want those successful businesses, which leads to another reward for the owner/seller.

When Think Small Not Big is Best

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.

When You’re Wrong, You’re Wrong

I was wrong. I’ll admit it. Go back a year and then I thought a lot of distressed companies would hit the market in Q2 and Q3 of 2020. They didn’t, at least not a massive amount of them. So, what happened?

PPP and other government loans saved a lot of businesses from going under. A client of ours saw her customer base put on severe government restrictions. Her company was allowed to remain open but there weren’t many customers to sell to. Without both PPP loans the company wouldn’t have survived. Add to this the Main Street lending program and the Restaurant Recovery Act and a lot of jobs, and businesses, were saved.

I’m starting to see more hurt companies on the market. The owners have just had enough. The problem is most of them aren’t salable, aren’t financeable (at the price the owner wants), and the only logical buyer for them may be someone in a related industry, who can consolidate.

One problem is the owners still see their business as it was in 2019 while the buyers and banks see it as it is now. I get it. When talking to owners about their future the optimistic-entrepreneur side comes out, as it should. What I don’t get is when they’re working with a broker to sell the business and the broker obviously hasn’t looked them in the eye and told them to fix the darn thing before trying to sell it (FYI, there are brokers/intermediaries who do this and actually help the owner fix it before selling).

In real estate, residential or commercial, it’s a lot easier to estimate the cost to rehab a building (assuming a top-notch inspector was involved). With a business, it’s not that easy. You’re dealing with the marketplace, economy, customers, employees, and competitors. 

Bottom line, if you or a client of yours wants to sell but the business isn’t ready take steps to get it where it should be in order to exit with style, grace, and more money. And now for a shameless plug, get our book If They Can Sell Pet Rocks Why Can’t You Sell Your Business (For What You Want?)

“If it wasn’t for the effort, I could argue against hard work all day.” Janan Ganesh

Being offended is the natural consequence of leaving one’s home.” Fran Leibowitz 

Deals Should be Nothing but Common Sense

Recently Jessica and I attended a webinar put on by investor Tony Cappaert and his guest Sam Rosati, owner of two light manufacturing businesses. That day I put on LinkedIn how it seemed Sam was channeling my thoughts on things to look out for in a deal. Here’s a short summary of what we got from the session.

Operating experience – Sam said be careful if you don’t have operating experience. If interested in a manufacturing or distribution business make sure you are comfortable with the setting and with blue collar workers. At one point he said if a buyer is uncomfortable taking inventory in a hot, dirty warehouse they should forget the deal and go back to their spreadsheets. Experience is important and it’s why we say a good buyer should be able to lead and manage, to some degree, people, processes, money, and enthusiasm.

EBITDA ‡ FCF – Sam’s comments about how you can’t calculate ROI based on EBITDA when it’s a capital expenditure type business sounds like one of my Myths of Business Valuation: Using EBITDA in a capital-intensive business will burn the buyer. You must use free cash flow to truly calculate ROI.

Financial diligence – we agree a Quality of Earnings report is not usually necessary for small business deals (those that fit in the SBA loan range) but you must get a “proof of cash” from a CPA firm. We used to call this a mini-audit (not as sexy as QofE or proof of cash) and it means tying the money on the bank statements to sales reports and financial statements. “Trust but verify” as President Reagan said.

Customers and employees – we also agree they are the key to most companies and you have to make them part of the diligence. My rule is, if a buyer is not allowed to talk to the customers (blindly, as a reference check as someone wanting to use the services) the deal is on hold or off.

Working Capital – it was an interesting discussion and Q&A on this. Working capital is always a bit confusing, especially where there’s work-in-process, which never seems to be recorded correctly in small businesses. For one deal Sam said they looked at the trailing 24 months to get the average but most of the time they use 12 months (which is pretty standard).

Due diligence – Sam commented you need to get the whole story and have trust in each other as they are key factors in the due diligence process. You don’t want to push too hard about things that don’t matter too much. We say, “don’t get analysis paralysis,” get what you need so you can make your leap of faith off a chair not the roof.

Owner Dependency
 – What makes a great business is having reliable management. A passive seller gives you the opportunity to work on the business, not in the business. Sam gave an example of a trick he uses. He calls the owner at 9 pm from an unknown number and if the owner answers, there is a good chance the owner is the go-to contact at all times. This means it’s a very involved seller with little to no support, which could be a red flag. It’s why we list owner dependency as one of the top four things an owner should fix before selling.

Passive owners – to me, there are very few reasons for a truly passive owner to sell. It could be health, not wanting the risk of a lawsuit or similar, or just the ongoing worry. Sam made it clear the best situation is an owner who works “On” not “In” the business (an old and very true refrain).

People are key – One of our four things an owner should do when planning to exit is to be able to attract and retain great employees. Sam said basically the same thing, “Managing people is hard, but finding quality talent at a fair price is VERY hard (today)”

Broker relationships -Sam said if it wasn’t for keeping in touch with brokers, this deal would not have closed. This is what happened to them: they stayed in touch with the broker, they built a good relationship, and the broker came back to them when the first deal fell apart.

Seller’s market – first, it’s always a seller’s market for good businesses. It’s even more so now with so many hurt by Covid, which Sam emphasized. Buyers need to be proactive (not lazy) and not fall into the trap of overpaying. The only thing worse than no deal is a bad deal.

As I said in the first paragraph, the comments in the webinar are the same as our thoughts and what’s in our books, podcasts, and newsletters. There really isn’t anything new in this area but there are a lot of exaggerations, or should I say “Putting lipstick on the pig.” 

It’s often because the owner woke up one day and said, “Let’s flip the switch and sell.” They should have got up one day three years prior and said, “Let’s start dimming the switch by getting the business ready for a buyer in a few years.” When the business and the owner are ready to sell the owner will exit with style, grace, and more money.

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.