Buyer Fever – An Example

We all get it, actually many times. It could be something simple like a gym membership (those 20 pounds will melt off), a bit more involved like a car (I sure look cool in this red car), or even a house (wow, what a kitchen).

When buyer fever hits about a business it can be trouble. I’ve seen my share of buyers with the fever, and it usually comes back to haunt them. Buyers with the fever will pay too much, do incomplete due diligence, or ignore blemishes.

Saw an extreme case recently. The buyer loved, and I mean loved, the service. So he bought the business. Never mind he didn’t have the license to run it, meaning he had to hire someone with that license and was therefore at the mercy of that employee staying. Never mind he grossly overpaid. He got to own the business whose services he was infatuated with.

Love of a product or service is never a good reason to buy a business, which is why it’s called buyer fever. When emotion overtakes logic, it leads to trouble.

Are You Overly Enamored?

Some friends have a daughter in her early 30’s who has a decent but not high paying job, is attractive and outgoing, and still lives at home. When I stated the daughter needs a boyfriend the mom said, “Oh, I know, but she’s so fussy.” Maybe, and maybe mom’s rose-colored glasses are on. I would seem to me it’s hard to attract a good boyfriend when you’re still living at home.

We all get enamored with things we’re close to. (We think) our house is worth more than the market says it is, so is our car, and what about the following three business things?

  • Business owners often make the abovementioned mom seem realistic. They rarely see warts; they only see something special. The owner can’t take a vacation, it’s a sign of how important he is. One customer is 52% of sales, or three are 80% of sales, it’s a sign of how much they love us. Or the owners who saysomething like, “I know how businesses are valued but we’re not like other companies, so those rules don’t apply to us.” Sure.
  • What about service providers who get hung up on their methodology? Anybody familiar with Alan Weiss knows he tells advisors to forget their seven-step process for this or the eleven-step system for that. In other words, don’t fall in love with your methodology, figure out what your client’s problem is and fix it.
  • Finally, there are business buyers, who, for this discussion, fall into three groups. The first are those I wrote about a few weeks ago, who get buyer fever and can see no wrong in the company they’re in love with, i.e. they must have it, at any cost. Second, are those so captivated by their own (supposed) abilities they think they can fix any underperforming company (of course, this isn’t all that common). Finally, we have the buyers who throw away the rose-colored glasses and put on their darkest sunglasses, blacking out every business because it’s not sexy enough, perfect, can’t grow fast enough (without needing capital), intellectually stimulating, etc.

The above are why we have experts in various fields including real estate, auto sales, business buy-sell, business improvement, tax, insurance, legal, and other areas.

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

When You’re In Over Your Head…

AB InBev, which makes one out of every four beers sold worldwide and owns hundreds of brands is selling assets in Australia, Asia, and Central America. Why? Because an acquisition spree got them to the size they are but also saddled them with massive amounts of debt And there’s a lesson here for small businesses and individuals.

Many things can derail a business’s value (customer concentration, owner dependency, etc.) and there’s nothing wrong with manageable debt. But the beer market is struggling, both in emerging and mature markets, and that threw AB InBev’s debt coverage out of whack, i.e. not enough profits to cover debt payments the way they wanted to.

Growth is great. We all want to grow. Business buyers especially want to grow. But growth for growth’s sake can throw things off kilter. It doesn’t matter if it’s beer, widgets, aerospace, or something else, manageable growth with attention paid to margins and cash flow is what you want.

The key is to understand what you do best and do more of it. When you want to expand your product or service offerings make sure there’s a market. Don’t be trying to sell beer when customers are moving to other beverages.

And, whether personal or business, manage your debt, your cash flow, and your growth so you don’t fall off the cliff.

“Insanity is a relative. It depends on who has who locked in what cage.” Ray Bradbury

 

Are You Ready for a Storm Surge?

I was watching a fascinating video on the Weather Channel app about Tropical Storm/Hurricane Barry in Louisiana. The scene started with what looked like a grassy country road or trail, soon it looked wet, then a small creek about one foot wide was visible, and before you knew it, a torrent of water was flowing, filled with debris.

These surges come so quickly and it’s one reason people get trapped; they think they have time when they don’t. The same can happen in business. I’ve had a few times when it seemed I could do no wrong when it came to getting clients. New client here, new client there, new client everywhere. Then the work needed to be done all starts hitting at the same time.

For us it means putting in a little more time, doing less marketing, postponing admin work, etc. What about for businesses making or selling a product or labor-intensive service (fixing furnaces, installing systems, etc.) when they experience (usually short-term) hockey stick growth? Here are three traps to watch out for:

  1. Growth sucks cash and it’s why a couple huge orders can deplete the checking account. We just met with an owner who told us how they bought the rights to sell a new product line from a struggling competitor. First step, stock up on inventory because customers were frustrated about everything being “out of stock.” This means a lot of cash out the door. Then, there’s a royalty on sales, which is a great way to buy something but means less margin until it’s paid off.
  2. Who’s going to do the work? Simple story, over the last two years I’ve seen 8-10 electrical contracting businesses either on the market or I’ve talked to owners thinking of selling. Every one of them said they could do a lot more business (double in many cases) if only they had the people. Fast growth, big orders, and similar can create a short-term labor shortage, force overtime and its increased cost, or cause delivery delays. Watch out when large opportunities appear in your sales pipeline.
  3. A question I’ve asked numerous audiences is, “What’s worse, having the capacity to make one million widgets and only selling 250,000 (other than having the capacity for two million)?” The answer is, having the capacity to make 250,000 and selling one million. Your processes and systems will get strained. This assumes the business even has processes and systems, which most small business have in only a rudimentary form. What is really common is when the process is mostly in the owner’s head and there’s a bottleneck because there’s only so much one person can do.

The solutions aren’t easy but are doable. From lining up credit before it’s needed to instilling a culture that attracts good people to working on process improvement all will help if done in advance.

“There is never enough time to do all the nothing you want.” (Cartoonist) Bill Waterson

When the Fever Hits

The fever can hit anybody over just about anything. It’s called “Buyer Fever” when we want something so much we throw logic out the window. It could be a car, a house, a job, an employee to hire, a spouse, and in my day-to-day world, a business (or to get out of a business).

Recently we were referred to a business owner who had the fever and desperately wanted out. Why? Because a couple years prior he got buyer fever and desperately wanted in. He loved the company’s services so much he had to have the company.

Unfortunately, the fever got in the way of logic and due diligence. The business seller had the experience, and more importantly, the required licenses to operate the business. The buyer had to hire someone with those licenses (there goes $100,000 out the door the seller didn’t have to pay).

Let’s be realistic, you have to have the desire for what you’re buying and in the case of businesses there’s a huge difference between, “I can see myself going to work there every day, adding value, and enjoying it” and, “I must have this, at (just about) any price.”

More realism – business buyer fever doesn’t happen that often. Most buyers are overly fussy and skeptical. With my clients I can only think of a few over the last 20 plus years. But I know it’s out there because every year I meet multiple owners who got buyer fever and are digging themselves out of it. It’s usually a good business bought the wrong way (meaning they paid too much).

It will be a hard lesson for the above owner, hard as in money-losing. Given it’s a specialty, licensed service I referred him to an industry expert because it needs work. Maybe the owner should have asked “The Magic Question,” described in the video below.

“Beauty is always transient, which is why it is so interesting. Ugliness lasts longer.” Stephen Bayley

 

What Is the American Dream? Part One

During the 2018-19 holidays ProPublica published an article titled, “If You’re Over 50, Chances Are the Decision to Leave a Job Won’t be Yours.*Let’s start with some highlights from the article:

  • While there are stories about individuals and their situations, most of the facts come from a study started in 1992 that’s been tracking 20,000 people, especially when they hit age 50.
  • By 2016, 56% of these people had been laid off or left under such circumstances it was evident they were pushed out (forced retirement).
  • Only 10% of them earn as much as they did before they lost their job with most suffering big money losses.
  • In 2018 there were 20.7 million people laid off. Older, more experienced people have their experience held against them and one-third of those in their 50’s lose two or more jobs.
  • While layoffs hit all age groups, those over 50 suffer the most as they don’t get hired as often or as fast as younger job seekers.
  • There is less government oversight to prevent age discrimination. (I’ve written about this before as my dad was part of a group layoff of people over 50 and they won a class action lawsuit to get their jobs back. The company lost a group of loyal, I’ll do-what-it-takes employees for bitter, I’ll go-through-the-motions employees).

There are a lot more statistics in the article, but you get the drift. So, what are the alternatives? Given what our business focuses on, the buying and selling of businesses, you can bet that’s one of the alternatives, but not the only one.

First, it’s easy to say, “Take control of your life and get your own business.” But it’s not that easy and it’s not for everybody. It takes capital (or other household income), the right skills, and guts. The last point isn’t meant to diminish people who don’t have the desire or fortitude to own their own business. As I write in Buying A Business That Makes You Rich, my mother was a college level teacher who couldn’t imagine anything riskier than a government paycheck every month. She just didn’t have the risk tolerance.

An option besides business ownership is to work for a small to mid-sized business. While the pay and benefits don’t always match what one can get from a large corporation, there’s a lot more flexibility and good people are highly valued. I’m not just saying this; I see it. Owners regularly tell me about the long-tenured employees they have (caveat: if many of those long-tenured employees are in their sixties buyers get scared about too much institutional knowledge walking out the door in the near future, which is why all businesses need expertise spread out over all age ranges).

When it comes to business ownership, there are three, and only three, ways to get into business. You can start a company (and this includes consulting or advisory work), buy a franchise, or buy a (mature, profitable, and fairly priced) business. Buying a business is for those people who:

  • Are fed up with working for someone else.
  • Don’t have the creative juices to come up with an idea for a new company.
  • Have honed their management skills so, to varying degrees, they can manage people, processes, money, and systems, with an emphasis on people.
  • Have the money, or access to it, to fund a down payment (the bank and the seller will finance the rest of the deal).

Then it’s a matter of why, as in, what do I want to get out of business ownership? Many people think money is the prime motivator, and it is for some, especially those tied to private equity, search funds, or similar. But from asking hundreds and hundreds of audiences, here are the reasons I hear the most (and they’re on page one of my book):

  • Control
  • Reap the benefits of my smart and hard work
  • Independence
  • Decision authority
  • Flexibility
  • Income potential
  • Equity or net worth
  • Creativity
  • So I can be the boss

To give away my punch line, the top reason should be to have fun. To enjoy what you’re doing – it’s your business after all – because of all the above reasons.

Notice the common thread in the above; control, independence, decision authority, be the boss, and creativity (to solve customer problems not as in starting a business) are all about the same. Business buyers want to do things their way, pure and simple. No big boss in Pittsburgh micro-managing their numbers every week. No corporate ladder peers (or employees) doing whatever it takes to advance, with no thoughts of ethics or integrity. No risk that once you’re making “too much” money you’ll be replaced with someone half your age and one-third your salary (see above).

Conclusion

For most people, the concept of working the same job for 40 years or more is a foreign concept. If you’re not in government or quasi-government (think Boeing) you’re going to have multiple jobs. Some by your choice and some by your employer’s choice. Heck, friends in their 50’s at Microsoft feel (know) their days are numbered. For some, business ownership is a way out of this trap.

Next, I’ll cover what exactly is the American Dream and how it’s been changing over the years.

* Thanks to Jeff Levy for making me aware of the ProPublica article.

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