For the Right Price…

“You can’t afford to buy the business” dad said to his kids, who were running the business as he enjoyed retirement. Not to insult dad, but if it’s priced right it’s affordable. Dad obviously feels the business is the cutest puppy or most adorable baby there is – so of course his kids can’t afford it.

Well, sentimental feelings don’t count for much when valuing a business, a car, a house, and many other things. These things aren’t like a piece of art where beauty is in the eye of the beholder. When there’s a raft of comparable sales and/or financing limits there are built-in pricing guidelines (with limited exceptions).

When we’re attached to something it’s hard to let go and especially hard to believe it’s worth less than we feel it is (the key word being feel, as in feelings or emotion versus logic or evidence). We can put an emotional component on a lot of things as in:

  • I’ll take a smaller salary to work here because I don’t have to commute, the culture is great, or I’m learning skills I can leverage in the future.
  • I’ll buy the red convertible because it makes me look cool, even though there’s no room for the car seats.
  • I’ll pay more for (fill in the blank) because I love it.

In other words, business buyers – be careful you don’t let emotion cause you to pay what “dad” wants for the business.

“Clothes make the man. Naked people exercise little or no influence on society.” Mark Twain

 

What’s Worse Than an Owner Dependency?

The company does $15-20 million in annual sales and the owner has taken a fancy to being “one of the guys.” He thinks it’s fun. And I’ll bet it is fun. The problem is a top customer commented to one of the management staff about this, as follows:

“We’ve never seen anything like him. We’ve never seen an owner making deliveries, stocking, or pushing a broom from a company big enough for a project like this.  If he’s doing that, who is running the company?  Based on that and other things I don’t know if we can recommend using your company again”

So let me repeat the headline, what’s worse than an owner dependency? Well, maybe an owner who doesn’t impress his customers (or his staff). An owner who should be seen as a leader, not a doer. An owner who should be keeping customer relationships tight, managing cash flow, motivating his people, etc.

When I and others say owners should reduce their dependency it means they should concentrate on growth, vision, and strategy not doing menial tasks.

“Self-righteousness feels good for a moment, but only in the way that peeing your pants feels warm for a moment.” (Author) Nadia Bolz-Weber

Do You Listen?

The workers at Vale, the Brazilian iron-ore giant, predicted the dam holding mining waste would fail. It did.

Boeing workers complained there were shortcuts taken on the 737 Max. They were right.

Both sets of workers comments fell on deaf ears. It could have been their managers didn’t want to take bad news up the corporate ladder, or they feared they’d lose their bonus if deadlines or metrics weren’t met, or perhaps some other reason. But in the end, they didn’t pay attention to the warnings.

I’ve met quite a few business owners who started their company because their employer wouldn’t act on their idea. I’ve seen firms who’ve lost employees because the employees wanted career growth and the owner was content to keep the business at the same level.

This last point raises the question, do you listen to your people? Business buyers often find out more about the workings of the business from the staff than from the owner. They get more ideas regarding growth from the employees.

Do you listen to your customers? What about your vendors? I’m sure most people would say yes although I wonder if it’s true. One of my former clients has employees and customers encouraging (nagging) him to upgrade equipment and offer more modern services. But he can’t make a decision. He’s at an age where he sees the end of the line and is happy with the money he’s making and the amount of time he works.

So, the question is, who will he lose first – his customers or his employees? (Or will they leave at the same time.)

“To pay attention, this is our endless and proper work.” (Poet) Mary Oliver

The Pitfalls of Absentee Ownership

Absentee ownership is a dream of many would be business owners. Imaginations run wild when thinking of having a business where all you have to do is check in every so often and have money transferred to your personal bank account.

After a recent meeting with the managing member of an absentee ownership group I realized there are (potential) pitfalls, both ongoing and when it’s time to sell. Here are three I noticed:

  1. If it’s not yours, you don’t take as good care of it compared to if you own it. In this case the employees went about their jobs but the building was filthy, the equipment area was a mess, and there wasn’t the pride of ownership. The offices needed a coat of paint, carpets replaced, bathrooms scoured*, and some general upkeep. Given the owners are thinking of selling the business one would think they would spiff it up to make a good first impression.
  2. The above is part of a larger issue and that’s the overall culture. The saying, when the cat’s away the mice will play, is very true. I’ve said for years small to lower middle-market companies need the adult supervision only an owner can provide. I’m not saying the employees won’t do a good job. I’m saying it’s often the little extra that’s the difference between profitable and very profitable, bonuses or no bonuses, career advancement or no advancement.
  3. Finally, unless the business is large enough to attract a strategic buyer the market is limited, at least at the price the owner(s) want (based on the company’s earnings). A financial buyer will have to figure out how to get a salary plus pay for the company. One of the worst things the buyer can do is come in and replace a loyal employee (in order to justify his or her salary).

As the saying goes, it’s always something. Planning and preparation can prevent many issues, like what this memo is about.

“Happiness is not an absolute value. It is a state of comparison.” (Author) Zadie Smith

* This reminds me of a deal many years ago. The closing was at the company’s office, the offices were well taken care of, especially for an industrial business, and the buyer’s wife proclaimed the first thing she would do would be to clean the bathrooms. It’s all a matter of perspective. Industrial office bathroom cleanliness is different than luxury hotel cleanliness.

Build a Stronger Business Foundation

I was talking with the founder of a private equity group, we got on the subject of management in the companies they’ve acquired, and he said the following to me:

We’ve never worked with a firm where the owner had built a strong enough management team to have that management team run the company after we’ve bought it.

He went on to say it’s rare, very rare, when the owner is capable enough to stay on in upper management and add value as they scale the business (keep in mind, their model is to grow and grow fast). In other words, they go in to every deal knowing they’ll be bringing in new management (and having the cost and disruption associated with the new team).

So what about smaller companies, not private equity targets? Let’s just say the private equity targets do a better job than smaller firms. Bottom line, the vast majority of privately held businesses don’t build an infrastructure of people. They may have great machines, dynamic marketing, and solid processes, but lack depth when it comes to upper level people. It’s so common I’m sure there are books about why this is.

It’s tough to let go, I know firsthand. But to grow you have to shed responsibilities. For owners wanting to exit and sell for maximum value, the less they do (day-to-day) the better.

“There is no situation so bad that it can’t get worse tomorrow.” (British lawmaker) Damian Green

 

Are You Experienced?

Headline in the Wall Street Journal, April 23, 2019: Help Wanted: Hitting Coach.

Question from (many) business sellers: Does the buyer have experience in my industry?

Question from business buyers: Do I need direct industry experience?

Let me answer the two questions by giving you the gist of the abovementioned article. Hitting a baseball is hard, good hitting coaches are even harder to find, 19 current major league hitting coaches played less than 100 games in the majors, 13 didn’t even play in the majors, and four never even played in the minor leagues.

In other words, being a good hitter is exactly what you don’t need to have been to be a good hitting coach. Baseball executives have realized there’s a lot more to it. It’s about understanding data analytics, teaching, mechanics, etc.

Business buyers rarely need direct experience. They need management and leadership skills. They need to be able to manage people, processes, money, and systems, with people being the most important (in most cases).

The most successful buyers are those who see the big picture not just how to “make the widget.” They’ve developed their skills in the corporate world or through previous business ownership. They’re willing to teach and train employees, delegate, see trends, and seek growth opportunities.

“When we are no longer able to change a situation, we are challenged to change ourselves.” Viktor Frankl

Stagnant Industry, Stagnant Company, What To Do?

Recently the Bellevue Breakfast Rotary Club had a recap meeting following our very successful fundraising event, the All in for Autism 10K-5K run and walk. One of our members wondered what we have to do to breakthrough our participant plateau, as we’ve been at about the same number for years.

One of our event consultants from Orswell Events told us we should be happy and proud about what we’re doing because at most post-run meetings these days the organizations are asking, “We’re down 500 people, what should we do>?

So, we’re putting on an event in a saturated market (runs, walks, bike rides, etc.) and holding our own when others are struggling. Something to be proud of and concerned about.

What should a business do when facing the same situation? Let’s look at what we did.

  • We rallied around a cause, in our case, autism and the autism community. A business can’t grow as easily via a non-profit connection, but they can create a community of loyal customers, do things for those customers, and help solve their problems. (I do see more and more companies mentioning how they give back; one new restaurant has a saying, “You Dine – We Donate.)
  • We really picked it up on the social media marketing. While we still had posters and rack cards around town, we also used email blasts, Facebook, Google AdWords, and more to constantly be reminding people about our event. In other words, marketing consistently and constantly.
  • We promoted teams with our sponsors, beneficiaries, and the general public, especially the autism community. And those teams will be featured in future marketing.

I’ll compare the last bullet point to a business growing by acquisition. Team organizers went out and got others to join them. A business can grow market share, even in a stagnant industry, by buying other companies or their customer list.

And if you’re not in a stagnant industry, do the same things. Create a community, market, and acquire.

“You can have friends or you can correct people’s grammar.” (Author) Mary Norris

When Sports, Kids, and Relationships Collide

This is not about sports, but it’s based on the April 5, 2019 Wall Street Journal’s sports page, which had an article about former UCLA and NBA player Earl Watson and his goal to coach college basketball, preferably at his alma mater.

He’s done some coaching, including the NBA, and is now back at UCLA getting his degree. A former player thinks he’d be a great college coach and said, “These days it’s less about the X’s and O’s and more about relating and getting kids’ attention. UCLA continues to hire outsiders that can’t connect with the players.” Watson was quoted saying, “These kids’ stories are truly amazing. Their brands are amazing.”

Pay attention to the following from the above and my comments below:

  • It’s more about relating (than operations)
  • Get peoples’ attention
  • Stories, as in we all have stories
  • (Young players) brands are amazing

Business is about relationships. You get clients or customers and referrals to them based on relationships. Business buying and selling is a relationship game first and foremost.

You have to get the attention of those with whom you want to reach and connect. There’s a lot of noise in the world today and more, easily accessible, information than ever before. How do you stand out in the crowd?

Stories sell because stories are remembered. Working with a client the other day I told him he had fascinating stories about what he’s done in his career and he looked enthusiastic when he told them (he leaned forward, spoke forcefully, etc.).

Brands are so very important. The article mentioned some incoming players (coming out of high school) have larger social-media followings than their (future) school’s athletic department. For some it’s in-person, for others it’s via social-media, and no matter what your mechanism your brand needs to be built, nurtured, and constantly reinforced. It’s what I trademarked, The Escape Artist™ for the work I do helping people escape their job, business, or plateau.

No matter what business you’re in, it’s a people, marketing, and relationship business.

“Knowledge is power, if you know it about the right person.” (Author) Ethel Watts Mumford

Early Retirement, Forced Retirement, What Retirement

There was a column in the Seattle Times Sunday business section a few months ago titled, “Early Retirement Can Be Hazardous.” This was a financial column, so the focus was on running out of money. It triggered the thought about what exactly is retirement and why there is so much focus and advertising about it.

The government created the concept of retirement as we know it when Social Security was started in the 1930’s. At the time, the typical life expectancy of a male age 65 was age 68-70. It was also the middle of a long depression, which really didn’t end until the start of WW II. By giving citizens a retirement stipend, it was a way to get older people out of the work force and create job openings for younger people.

Now the life expectancy of a 65-year-old male is about 18 years and for a female it’s about 20 years (from the Social Security Administration website). We also have a shortage of qualified workers so there’s no need to push people out of the workforce.

If the government created the concept, then the financial services industry popularized it. Radio ads, TV ads, print ads, workshops, webinars, etc. tells me there’s a lot of money to be made helping people retire. (And studies say most people don’t save much money.)

So it was refreshing to hear an owner say, “I don’t buy into the concept of retirement as most people think of it. I’ll always want to be doing something.” My dad retired as soon as he hit age 62 because he hated, and I mean hated, his big corporate employee (he and many others had been let go 8-10 years earlier and won an age discrimination lawsuit, which got him his job back, but lost the company his loyalty).

When it comes to business owners contemplating selling, the most important question to ask is, “What will be your next great adventure in life?” Many haven’t thought of it. Something triggers the desire to sell but there’s been no planning.

Often it’s one of the following (assuming none of the 3 Ds, divorce, death, or disability/health issue):

  • They started the business to work on the widget and now are managing a few dozen people, and they don’t like managing people.
  • They’re burned out because they haven’t built a management structure, i.e. they don’t delegate. *
  • They’re bored and want a new challenge.
  • They’ve lost the battle at home, i.e. their spouse wants them out.

It’s funny how we want our favorite authors to keep writing, musicians to keep playing, actors to keep acting, and yet people always ask others when they’re going to retire, as if it’s a badge of honor to stop contributing.

“I don’t believe in retirement. Everybody who retires too early dies too early.” (Sportswriter) Dan Jenkins

* As per my friend Allan VanderHamm’s recent newsletter, a dependency on the owner reduces the company’s transferable value, meaning when the owner leaves too much of the business leaves. (and the price is lower).

Lipstick on a Pig; Homes and Businesses

Buyer Beware: Hollywood Special Effects Now Permeate Property Listings” is a headline in the Wall Street Journal’s March 5, 2019 edition. The gist of the article is sellers and their agents to doctor images of the house for sale. The article states, “The technology allows sellers to green browned out lawns, stage rooms with virtual furniture and even perform full-blown HGTV-style makeovers with the click of a mouse.”

Of course, this is a huge risk to buyers, especially when a Redfin study says up to 35% of buyers made an offer sight-unseen. I’m surprised this took so long! Home sellers are way behind business sellers when it comes to putting lipstick on the pig.

As in the video below and the article “Add-backs, Adjustments, and Assumptions” are prevalent in the buy-sell world. Which is why I was pleasantly surprised when a friend, who recently sold his business to the number one player in his industry (and the only truly strategic buyer) told me he handed his financials over to them with no adjustments, recasting, or anything else.

A big part of what made his business attractive was he paid attention to the details, which I espouse regularly:

  • His business wasn’t an extension of his personal checkbook.
  • He paid close attention to the numbers and their accuracy.
  • There was (and still is) a strong management team, and highly paid, which is why his employee retention is so good.
  • Because of the above point there’s no dependency on the owner.
  • The company’s been steadily growing.

It’s not hard but too many owners focus solely on the short-term, as in, how can I reduce my taxes this year? If my friend had only concentrated on current taxes (write off personal expenses, buy things not really needed, or expense inventory) his price would have deflated like a tire hitting a nail. Or, the buyer would have passed on the deal.

“If something can corrupt you, you’re corrupted already.” Bob Marley