Is it Crazy for a Business Owner to Pay A Buyer to Take Over the Business?

Many business owners claim their business would take off if only someone did a few simple things. The usual suspect in “simple things” is to do more marketing. Really? If it’s so easy why isn’t the current owner doing these supposedly simple things? And why would a buyer take the chance on these “simple things” working?

An example

A friend pointed out a retail business for sale whose owner claims it’s in a great location. And it is, for walking around and (having fun) but not for what this business does, given the congestion and limited parking.

The seller states with a little marketing and the addition of multiple additional services they could substantially increase the revenue. This includes extending their hours and hiring more employees. In today’s tight labor market good employees are hard to find and it’s made to sound like it’s easy to find good people. 

Also, the business’s sales are declining, it’s breaking even, and the owner is not taking a salary. 

The seller has a five-year lease, probably with a personal guarantee, and other obligations. It may be cheaper to give someone the business or pay a “buyer” to get out of that lease, other obligations, and the associated worries and headaches.  

Even in this case the “seller” needs be able to back up “why” the business has the potential to get out of its rut. All buyers want to see a clear path to growth and know where they can add value. 

Let’s be realistic, the above is a bit extreme (also rare is hiring a buyer on a consulting contract to fix a business and then buy it via an earnout, but I’ve seen it). But in rare cases, paying to discard a business, like we pay to take junk to the dump, may be better than five more years of hard work for no pay. 

“What’s surreal to you is just somebody’s Wednesday somewhere.” (Novelist) Karen Russell

This was written by Jessica with John’s input

The Grass is Always Greener (When You Only Care About Headlines)

One thing President Trump and other politicians have in common is the bashing of large tech companies. It used to be bashing Walmart. Yes, Walmart took over a lot of small to mid-sized towns. Yes, some small businesses (perhaps many) didn’t survive. But the politicians made it seem like these small retailers were thriving businesses with very high paid employees. 

After talking to owners of and/or looking at information on thousands of businesses I can say, 

“Overall, there aren’t that many good businesses.”

There are a lot of companies providing the owner a well-paying job and nice lifestyle, but these don’t have much value. Value comes from profit over and above owner salary. There are even more businesses with overworked owners whose salary is just adequate. 

When I’m asked how businesses are valued my initial response is, “I don’t know anything about your company and in general, it’s a function of profit. The more profit, the higher the value.” So where is all of this going? To these three points:

  • If you own a thriving business (solid profits after your fair market salary) realize you have one of the ~20-25% (the top quartile). Keep it there, grow it, get yourself out of the day-to-day, and if you have a dominant customer, diversify ASAP.
  • If you’re a business buyer, realize it’s like the old “needle in a haystack,” so keep searching because it can take a long time. Not only do you have to find a business in the top quartile, the owner needs to be motivated to sell (for a fair price), and it has to match your skills.
  • If your business is barely getting by, it’s a struggle to pay bills, you can’t save any money, etc. realize it will be tough to sell. And, by all means, remove from your head thoughts like, “We’ve been in business for 15 years so there’s value to the name.” As per above, the value comes from profits.

We all think what we have is great – better than cold beer (or lemonade) on a hot summer day. But that’s not what matters. What matters is what others think including banks, buyers, appraisers, etc.

“Strive not to be a success but to be of value.” Albert Einstein

The Business Roundtable Creates a Snit Attack

The Wall Street Journal (and I’m sure others) sure had a snit attack last week after the Business Roundtable came out with their latest report saying companies shouldn’t emphasize shareholder return over taking care of employees, customers, suppliers, and community. 

Taking care of people sounds like a good subject for Labor Day week. And what the Roundtable is suggesting sure sounds like the Costco model. Fair prices, good jobs at a fair wage with benefits, very community focused, and while I can’t comment directly on suppliers, I do have a friend who sells to Costco and loves doing business with them.

The above is also what my clients strive for. A client looking at a business to buy didn’t see an expense for benefits. He commented on how he’ll have to add in that cost (versus the common adding back of expenses) because he wasn’t going to be an owner not providing benefits.

I looked at a company recently whose owner seemed to be bragging about how little he could pay his employees. He didn’t connect that with the fact he had high absenteeism and constant turnover. 

With an extremely high employment rate it pays to take care of your people, especially in our robust economy.

As an economics major, I well remember Milton Friedman, who’s the person who stated a corporation’s primary obligation is to the shareholders (and which the Roundtable is now disagreeing with). I think he was wrong then and it’s a wrong philosophy now. Take care of your people (including customers and suppliers) and they’ll take care of you.

“Success is a great deodorant. It takes away all your past smells.” Elizabeth Taylor

Financial Shenanigans Versus Incompetence

The Wall Street Journal and others recently reported about an accounting expert who had predicted the Madoff Ponzi scheme and recently went after GE for what he said are their deceptive accounting practices (of course, GE responded this person didn’t know what he was talking about). But this is not about GE but rather about accounting irregularities in general.

We have a government with annual deficits of $1 trillion and with a lot more “off the books” because there are non-budget items. On August 26, 2019 the WSJ had an article about how CEO pay is often much higher than disclosed (due to stock appreciation and clauses that escalate compensation).

And then we get to my world of small business where it’s usually not malicious but is accounting incompetence. Too many owners think their accounting department is like Cinderella – the weak little stepsister who must be tolerated at as little cost as possible. Sometimes it’s because they’d sooner “play” with their product than worry about the numbers and often it’s because they’re doing so well it becomes “management by checkbook,” as in, there’s plenty of money so who cares about cash flow, metrics, etc.

I’m working on a potential deal where the owner (and his advisors) setup five companies, two operating, one management, one for real estate, and one for equipment. They are so intertwined it will take a good CFO or forensic accountant to figure out exactly what their earnings are. And, it’s management by checkbook when the owner says, “we bought too much equipment and too many vehicles last year, so we’ll have to sell some.”

Tip to owners – one of the top three things you can do is have solid financial systems, accurate statements, good management reports, know your KPIs, and other metrics. It makes your life easier, especially as it seems we’ll have an economic correction soon, and when it’s time to sell, increases your value and attracts better buyers.

“The simple truth is that truth is hard to come by, and that once fount it may easily be lost again.” Karl Popper

What Is the American Dream? Part Two

Last month I gave my insights regarding a ProPublica article about how people over 50 won’t be the decision maker when they leave their job.  (Update, IBM is in the midst of a lawsuit for firing up to 100,000 people, targeting older workers. And there seems to be damaging testimony supporting the lawsuit’s premise.) A past American Dreams was to get a job at a large company, work there for 40-45 years, and retire with a gold watch and a pension. But no more, for most people.

I may be dating myself, but I remember in one college class a discussion about how another American Dream was to start a business and sell it to Sears. In those days, Sears was dominant and bought a lot of small businesses. However, a lot of those acquisitions were after Sears became the firm’s top (by far) customer and had the supplier “over the barrel.”

So, what is the American Dream these days? Actually, it should be “dreams” not “dream” as there are many versions. In early 2019 the New York Times had an opinion piece titled, “The American Dream is Alive and Well” with the sub-title of, “Most people in this country say that they are living it – but what they mean by the phrase might surprise you.”

The opening is, “I am pleased to report that the American Dream is alive and well for an overwhelming majority of Americans.” Here’s some interesting statistics:

  • Only 16% said to achieve the American Dream you have to be wealthy.
  • Only 45% said it means having a better quality of life than your parents.
  • And only 49% said it entails having a successful career.

Most interesting, 84% of Republicans and independents and 88% of Democrats said freedom was essential to it and less than 20% in either party believe becoming wealthy is essential. Many said it is experiences, not a lot of money, that bring happiness. With my clients, business ownership tops the list of desired experiences (and then getting out of business for their next great adventure in life).

Overall, all races, all levels of income, and all generations (from under 22 to over 70) are optimistic at an over 70% level. Also interesting is the Times published this during the Trump administration, which hates the Times.

Let’s move on to a Fast Company article titled, “We make $325,000 a year and don’t feel we have enough.” Catchy title but a bit misleading. Three case studies about people making $97,000 (Canadian), $171,000, and $325,000 show close similarities. 

The lowest income couple saves or has “leftover” funds of 12-20% (and a lot of Canadian safety net taxes), the other two have 30-40%. So, when the highest income couple says they feel they don’t have enough it’s because $125,000 is going to some form of savings or investment. Not bad. 

So, what’s my point, or points? Here are three:

  • It’s not as bad as the headlines – and things haven’t been as bad (or as good) as the headlines forever. Realize there are always pockets of people in a tough position no matter how good times are. But publicizing the positive doesn’t sell papers, get clicks, or get viewers. Then factor in social media, which magnifies everything and makes people think things are bad on a macro level. But when they discuss their own situation, i.e. the micro level, we get the results shown in the Times study.
  • We have different objectives – I’m guessing this hasn’t changed too much over the years and now it’s easier to collect information and publicize it so we have a lot more data and therefore insights. Different people strive for different things like money, power, prestige, spirituality, low stress, material goods, etc. No right or wrong and I applaud those who use our safety nets as a helping hand up to achieve their version of the American Dream.
  • Business ownership – as per above, for many, and this includes all of my clients, owning a business is the experience they want. It can include financial benefits but also provides the experiences many want. Those experiences include being successful, helping customers, providing jobs, being creative, and more. As in part one of this two-part newsletter, page one of my book Buying A Business That Makes You Rich, there are numerous reasons besides money people want to buy/own a business.

Conclusion

There is still opportunity everywhere. While it’s not for everybody, business ownership is the vehicle many want to maximize that opportunity, have the experiences they desire, and have a fulfilling life.

Stereotypes Can Be Deadly

We were having a cup of coffee and some breakfast at a great little coffee shop-bakery-café in Bozeman, MT before going on a hike. Next to us were three ladies, also dressed for a day in the outdoors. and I couldn’t help but overhear one of them say:

“People from cities really don’t understand the environment. And getting off the ship on an Alaska cruise to spend two hours in shops looking at tchotchkes isn’t getting into the environment.”

A stereotype of city people and I’ll admit many city people aren’t all that knowledgeable about the outdoors. Our fishing guide, who we use every summer, loves to tell (everybody) about the lady from New York city who asked (when seeing a minnow put on a hook), “Do fish really eat other fish?” *Realize fishing guides love to tell the same stories and jokes no matter how many times you’ve heard them, so we just pretend they’re new.*

But knowledge and caring are two different things. Most people, city or rural, don’t want chemicals dumped in their water or on their land. Most want to breathe clean air. Very few if any want their local resources, whether a lake or river in the wilderness or the Hudson river in New York, to be like a man-made lake in Novosibirsk, Russia nicknamed the “Siberian Maldives” because of its turquoise color. Unfortunately, the color is a chemical reaction from ash runoff from a power plant’s industrial dump site.**

So what stereotypes do you have? Some I hear include:

  • You can’t buy this business because you don’t have direct industry experience. (False, very false and tied to the misnomer “Nobody else can run my business because it’s so special.”)
  • I’m starting an advisory business but don’t have any references or testimonials. (Sure you do. You just did the work for another company.)
  • My business can’t grow. (Yes it can, maybe it’s you.)
  • I have to do menial tasks like payroll, HR, reviewing every bid/proposal, etc. (No, owners don’t have to do those things way below their paygrade, you have to trust others and get over being a control freak.)

So, what stereotypes are holding you back from growing, starting a new business, buying one, selling yours and moving on to your next great adventure in life, or anything else?

“Knowing what must be done does away with fear.” Rosa Parks

Stereotypes Can Be Deadly** This lake has become an Instagram phenom and even though people are warned not to go in the water they do. One man who floated on the lake (on a floatie) said, “The next morning, my legs turned slightly red and itched for two days; the water tastes a bit sour, looks like chalk.”

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

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

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