Covid Entrepreneurs

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

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

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

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

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

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

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

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

Make it Complicated or Keep it Simple?

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

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

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

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

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

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

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

Ask the Right Question or Get the Wrong Answer

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

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

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

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

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

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

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

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

When You’re Sunk You’re Sunk

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

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

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

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

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

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

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

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

What Exactly are You (Personally) Guaranteeing?

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

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

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

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

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

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

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

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

Conclusion

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

Businesses and Workers – It Must be Teamwork

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

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

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

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

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

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

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

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

Time Change – Life Change

Our dogs have been affected ed by the change from Daylight Savings to Standard Time. They get up at the same “time” in the morning, but the clock says it’s an hour earlier, so we get up earlier also.

Change is tough for a lot of us, people and dogs. Change of a job, home, school, and especially when it comes to business ownership. It’s why I tell people half of what I do falls into the intangible’s category, because we deal with big change.

One client told me the ability to share his thoughts and questions with someone on a peer level was the most important part of our relationship. Knowing the right questions to ask and the right answers to get is what most of us want.

The buying or selling of a business is often the biggest life-changing and financial change for business buyers and owners/sellers. An experienced guide with a proven plan adds a lot of value (whether my firm or another reputable firm).

When City Slickers Go Camping

I was reminded of the Billy Crystal movie City Slickers when I saw the following, which would be funny if these people weren’t damaging our planet:

  • A Seattle Times article on how the Cascade wilderness areas are being trashed (organic and inorganic waste) by city people deciding to get outdoors during the pandemic but not knowing how to act (as in, carry out their waste).
  • A neighbor who loves the isolated outdoors said a deep-woods campground that usually has half of their 30 campsites available was filled with large RVs the last time he went there.
  • A recent Wall Street Journal human interest article about city dwellers experiences in the outdoors. The two best stories are about the young lady who didn’t bring a sleeping bag because it was hot out, camped in a valley, and said she had never been so cold in her life and another lady who was appalled by campsite restrooms (an outhouse I’m assuming) and drove over a mile to a gas station to relieve herself.

So what does this have to do with business? The analogy is there are a lot of people who get into business with the same amount of preparation as the city slickers described above. I get calls regularly from people wanting to get into business (often starting one) and it’s usually to create a job using their skills versus growing a business (I refer these people to the local SBA/SCORE office so they can get a mentor and counseling). 

Advice: 

  • Know why you want to do what you’re going to do.
  • Get the right help to succeed.
  • Realize getting into business (or exiting) isn’t easy. 
  • Plan.
  • Make a decision; analysis paralysis doesn’t help anybody.

Things always look better and easier from the outside. Just like, “the grass is always greener on the other side.” It’s only looks easy, better, or greener when you don’t do the things you’re supposed to do and do them correctly. Doing it the right way takes more time and effort, and it’s worth it.

If You Don’t Have Time to Do It Right, When Will You Have Time to Do It Over” John Wooden

Coasting – Downhill

A business owner told me his sales were X dollars – put in whatever figure you want, $100,000, $1,000,000 or $10,000,000. His actual sales were:

  • 2017 – 90% of X
  • 2018 – 75% of X
  • 2019 – 65% of X
  • 2020 – on track for 50% of X 

The abovementioned owner is coasting and the business is going downhill. And once on the slope it’s tough to recover. I’m sure there’s not a lot of calling to customers, much less prospective customers. I can’t imagine there’s much marketing at all.

What’s compounding this is he has no idea of what’s really going on. Yet all it takes is paying attention to the financial statements. He doesn’t need to have management reports, although they would add a lot of value and clarity.

Business buyers want one of two things:

  • A well-oiled machine with room to grow.
  • An underperforming business in a solid industry (coasting).

What they rarely want is a damaged beyond-repair business. Whether you’re an owner or advise owners, keep these points in mind. Coasting (downhill) doesn’t let you exit with style, grace, and more money.

“If liberty means anything at all it means the right to tell people what they do not what to hear.” George Orwell