Rotary and Business Buy-Sell – Part Two

This is the counter article to what I wrote in July, about business buyers and my Rotary projects given we 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.

Objective – We must articulate, in detail, what our project hopes to accomplish to get a grant approved. In our case, it’s supplying technology and training teachers on how to reach their students more effectively with said technology (versus using a 3’x5’ rolling blackboard). A business seller must know if the proceeds from the sale are enough for their next great adventure in life, what that next great adventure is, and what they want from a buyer, which is usually to sell to someone who will take care of their employees and preserve their legacy (and pay them).

Team – Last time we had 14 students (who setup the computer labs and Wi-Fi networks) and 10 adults. We get a lot done. Sellers need to build a team and it should include a financial advisor, transaction attorney, CPA, deal pro, and other experts as needed. Others could include a Quality of Earnings pro, and environmental consultant, and an HR pro to make sure all employee issues are in compliance with local, state, and federal laws.

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 get results. We then triple it with a Rotary Foundation grant. Sellers not only need to know the price but the net after tax and fees (it’s not what you get, it’s what you keep). And then it’s when the seller gets the money. Upfront, over time, and/or get more if the business grows (an earnout).

Timing – We run our project on tight timelines. Grant submission, approval, shipping by a certain date, travel when the students are on break, etc. Unfortunately, too many owners aren’t on a timeline. They wake up one day, flip the (proverbial) switch and say, “I’m selling.” As in my book, If They Can Sell Pet Rocks Why Can’t You Sell Your Business (For What You Want?) the more preparation an owner puts into their business the more they’ll get for it.

Implementation – Once our grant is approved, we start implementing. Actually,s 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. The same goes for sellers, once committed, take action. If all the prep was done right it will go faster and smoother. And the chances of seller remorse decrease exponentially (versus the owner who shops the business with no skin in the game to see what the market says it’s worth).

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. What do sellers need? A good management team that will sign employment agreements with the buyer (if asked), a landlord willing to give a long-term lease, loyal customers (with or without contracts) who don’t shop price, and, ta-da for 2021, suppliers who can actually supply.

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. Because sellers are running a business – and running it as if not selling is so important – they need to lean on their intermediary, lawyer, and accountant to do the things those pros do regularly, even if it costs a little more.

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 ago, only they have more tools to help.

If It’s on the Internet it Must (Not) Be True

When It’s Time to Just Do It

On the edge of TMI, I had an MRI on my wrist recently and then started doing what we all do, an Internet search for treatments for a torn wrist ligament. What I found scared the heck out of me as numerous (respected) sites had information saying there’s an 18-month recovery from surgery, no driving for a few weeks, and even office work is off limits for 2-3 weeks.

Then I spoke to the doctor and he said 4-6 weeks in a cast, and six weeks of rehab. And I could drive, type, workout, etc. right away, it’s just that my wrist will be stabilized. Once again, just because it’s on the Internet doesn’t make it true and correct. Often, it’s facts, what facts?

So gossip, old wives tales, and the Internet info all come into play in my, and many of your, daily dealings. For me it’s things like:

Business (soon-to-be) sellers: My buddies at the club told me what my business is worth so that’s what I want.  Prepare my business, why? My business isn’t like all the others, so the common valuation methods don’t apply (it’s worth more).

Business buyers: I’ll pay X times earnings for that business. Without knowing if there are 3 customers or 300, a lot of cap ex needed versus all assets having a long useful life, or if it’s the owner and only the owner doing the important functions. Another one, actually paying attention to insights from people who have never done a deal.

Operators: We’ve always done it the way we’re doing it so why change? Answer: a new owner who spent $50 a month on a software application that congregates invoices for one upload to the customer instead of manually entering 350-400 invoices every month.

And one final tip to owners who are even thinking of selling within the next few years – this from a wise old business broker – give hints to your employees that you will retire someday, say the one-week vacation would have been better if it was a month, and when at “that age” let them know your plans. FYI, a consulting client from about 10 years ago was at “that age” and the employees were wondering how long he’d be around. I had him share his plans, which were to be there at least five more years and the restlessness stopped.

“A good storyteller is a person who has a good memory and hopes other people haven’t.” (Humorist) Irvin. S. Cobb

“In order to get on living, one must try to escape the death involved in perfectionism.” Hannah Arendt

Details, Details, Those Darn Details

When is 25% ownership in a small, privately held business not really 25% ownership?

When you try to sell your shares.

I got a newsletter from a BVWire (a valuation and buy-sell deal compilation company) and one of the articles dealt with the complicated issue of minority ownership in a business. While not boring you with the details of the case, the bottom line was a court decided the firm’s operating agreement specified the sale of shares called for fair market compensation of the assets of the business but not the interest (ownership) in the business.

So, some 25% owner in Oregon is not going to be happy because he, she, or the attorney didn’t catch this qualifier. Details are important and think of all the things we must do regularly where lack of details can confuse or derail things.

Communication – I just read another newsletter about properly addressing an audience (and the same applies to an audience of one, two, or three not only a room full). You must direct your message to whom you’re speaking. Talking to employees about needing to grow faster when they’re already working 50-60-hour weeks doesn’t cut it.

Agreements – I work in the buy-sell world where there are always discussions over the same issues (wordings). The same is true in employee agreements, vendor agreements, etc.

Life – Don’t be specific with kids and they’ll find any little loophole. You sure wouldn’t want your contractor missing a few things or your home to be like an oceanside condo in Florida (collapsed). And just think of all the little details musicians, artists, athletes, and others pay attention to. Or maybe you’ll be like a good friend of ours who didn’t pay attention to community property laws when getting married and got burned big time during the divorce. (One of them had a lot of assets at the time of the marriage and the other was in debt. Guess who got 55%?)

It’s always the little things that take the most time and effort.

“Never marry a man you wouldn’t want to be divorced from.” Nora Ephron

“Success is a lousy teacher. It seduces smart people into thinking they can‘t lose.” Bill Gates

Inadequate Technology Will Bite You Big Time

I was surprised when I saw the survey of Q2 2021 buy-sell deals and its ranking of due diligence items given IT was at or near the bottom of every list (deals sorted by size). I can’t remember when I saw a selling company whose hardware, software, licenses, and cybersecurity were all up-to-date and adequate.

I tell business buyers to figure they will have to invest in IT sooner versus later and to immediately check out what cybersecurity measures are in place. I’ve had clients have an employee almost fall for the fake wire transfer scheme, have a ransomware attack, and we all get phishing type emails multiple times a day. 

What was at the top of the lists was employees, which is where it should be. All one has to do is look at a business publication to realize the employee market is in turmoil for many, many industries. It comes back to, can a company attract and retain great people, with an emphasis on retaining (in today’s market)? It can be a balancing act and the employees have more options than ever now.

Customer concentration was near the top, again, where it should be. This issue will never be minimalized. What I expect will move up the list in future quarters is suppliers and supply chains. There aren’t too many owners and execs I’ve talked to recently who aren’t experiencing or worried about their supply chain. And constant price increases including retroactive price increases on orders placed but not shipped. Wow! The customer ordered it at a fixed price based on the current supplier price, there’s a backlog from the manufacturer, they’re raising the price, and seller to the end user eats the increase.

Finally, the lease. Jessica lost a deal because the landlord wouldn’t offer a long enough lease on a location driven business. With the skyrocketing real estate market in the Puget Sound and other areas there’s a good chance the buyer will pay more, sometimes much more, than the seller has been paying. This has to be factored into the valuation.

Five diligence areas above, all equally important, and all more important than ever given the market turmoil we’re experiencing with people, products, and real estate.

“A people that values its privileges above its principles soon loses both.” President Dwight D. Eisenhower

Inadequate Technology Will Bite You Big Time“More and more we are into communications; and less and less into communication.” Studs Terkel

Bigger Isn’t Always Better

Headline: Some Bartell customers say goodbye after changes by Rite Aid (Seattle Times, August 11, 2021).

Background: Rite Aid bought 131-year-old Seattle institution Bartell Drugs earlier this year and according to this article it’s been a disaster. Why? Here are the top reasons mentioned (and following those reasons are some comments from my friend Brian Quint who a few years ago sold his third-generation business, Aqua Quip, to Leslie’s, the nations largest pool supply company). Remember, these are things mentioned in the article and are not confirmed.

Culture – the article mentioned the culture around customer service and employees has changed from “we’re local and friendly” to “we’re corporate.” Employee turnover, long hold times on the phone, prescription delays, and more.

Poor transition planning – apparently a rushed effort to assimilate Bartell’s into Rite Aid, including a new back-office system. 

Labor shortages – as mentioned, high turnover. To be fair, on September 21, 2021 the Wall Street Journal had a business section frontpage article about how CVS is short 25,000 employees and Walgreens is in the same predicament.

Service – a perfect example is reportedly a Renton store had a backlog of over 700 prescriptions. Enough said.

Customer reaction – One customer said, in an article ending quote, “I want to stick with them. The whole reason I was going there is because they weren’t Rite Aid.”

When I talked to Brian, I made sure we didn’t discuss the allegations in the Times article as we have no proof they’re accurate (but probably are). Here are some transition tips from Brian when selling to a larger (much larger) firm.

Shelf life – (spoken like a true retailer) make as few changes as possible with your team. Because like it or not, change is taken as a negative, especially with a family business. He worked on consistency and stability. One year before changing the 401k plan and three years for the payroll service.

No rapid changes – they didn’t change products (supported by the buyer), the stores look the same, same POS system, same ordering, and all the same to the customers (I know, I’m one).

Communication – any absence of information means assumptions, negative assumptions. Be specific as well as communicate consistently, with clarity, and offer collaboration. The temperature of the culture went down from 10 to 9+ the first year to 7 after almost 3 years. One reason was limited corporate communication to the employees.

HR – the scourge of many businesses, especially larger firms. After almost three years HR is taking over. This means short staffing, HR review of all pay raises and hiring, and therefore everything is strictly formulated (see above on culture and communication).

Sometimes a large-firm or private equity buyer is the only or best option for an owner option. I don’t recall too many business sellers who say they wanted their employees to not keep their jobs. But that’s up to the buyer. Individual and small-business-owner buyers know they are buying the people more than anything. Large organizations just can’t help themselves and often blow it with the employees.

Getting Change Means Tormenting Someone

Well, I can’t be your mentor without occasionally being your tormentor,” Dr. Sharon Fieldstone.

When I heard this it was a “stop the presses” moment because everybody who advises clients, manages people, raises kids, or just about anything else has to use tough love to get through to others. Tough love means you’re taking people out of their comfort zone, i.e., tormenting them. It could be:

  • Telling a business owner what their business is really worth.
  • Giving a “truthful” review to an employee (as in, you’re not getting a bonus…).
  • A banker saying, “No, we can’t lend you money because…”
  • Legal advice about what someone is doing is wrong and will get them into trouble.
  • Informing a business buyer the business they love is not a good deal (company has issues, the price is too high, etc.), so keep searching. 
  • Or, the flip side, telling a buyer to get moving before they lose the deal.
  • A CPA telling a client, “No, you can’t deduct your daughter’s college tuition” (or similar).

I’ll bet you can think of times someone did this to you or you did this to clients, employees, or family members. We can’t grow if we’re not held accountable.

Well, I can’t be your mentor without occasionally being your tormentor,” Dr. Sharon Fieldstone

“I am extraordinarily patient, provided I get my own way in the end.” Margaret Thatcher

Fear of the Unknown

Did you ever do something you haven’t done in a while and pay the price? Maybe an exercise routine that leaves you with sore muscles? Or having a meeting at a place known for their pastries, having one (which you rarely do), and paying the price? Yeah, I did the latter recently.

Or what about doing things you’ve never done before? Maybe it’s skydiving, or scuba diving, or entering a run or bike ride much longer than you’ve ever done before. Apprehension, right?

That’s how our clients feel when they decide to buy or sell a business, having never done it before. People who are good at providing professional services do more than just the tangible things. They’re good at handholding, supporting, listening, and asking questions. 

In Buying A Business That Makes You Rich I tell business buyers they absolutely will make a leap of faith and they want to do it off a chair, not the roof (we help lower the jump). Were all the right questions asked? Are they overpaying? What isn’t the seller telling them (that he or she should be disclosing)?

The same holds true for business sellers as they make a big change in life. Did they sell to the right buyer? Will their employees be valued and keep their jobs? What will be their next great adventure in life?

My point is, buying and selling a business (as well as starting one, operating one, growing one) is a lot smoother with the right team. And it adds value to the business when there’s both an internal (management) team and an external team of advisors.

“It is only through labor and painful effort, by grim energy and resolute courage, that we move on to better things.” Theodore Roosevelt

“We are rarely proud when we are along.” Voltaire

Simple is Best

When there’s water all over the bottom of a refrigerator it’s a sign something is wrong. Our Samsung refrigerator has a problem, and it seems, judging from YouTube videos, it’s been going on years and they haven’t fixed it.

Refrigerators use coolant, which changes from a liquid to gas and cools the air, which then has lower humidity. The excess water is to drain and be evaporated by the heat from the compressor. But in Samsung models (and others I’m sure) the water freezes in the drain tube, overflows, and guess what? There’s water in the frig.

The fix is simple. There’s an OEM part that hangs from the heat coil into the drain tube. It’s ½ to 1” long and doesn’t work well. The aftermarket part is about 3”, probably costs about 17¢ to make and sells for $7 on Amazon (and $14 at the parts store). It carries more heat to the drain tube and eliminates freezing.

A picture containing floor, wooden, wood, lumber

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A lot of things in life and business are simple, if we let them be simple.

  • Business sellers – simple decision, prepare your business for sale and exit with style, grace, and more money. Don’t prepare it and sell for less.
  • Business buyers – decide which leap of faith you’re going to make. A small leap on a mature, profitable, and fairly priced business or a big leap on a company treading water.
  • Operators – simply make decisions sooner and move on. Especially with people. From numerous client situations, whenever there’s a problem employee jettison them ASAP. Every owner I know in this situation said, “Why didn’t I do it sooner?”

And it was pretty simple to take the back panel off the inside of the refrigerator and hang this part on the coil. Plus, our appliance is now almost as clean as when it was new.

“The past is never where you think you left it.” (Writer) Katherine Anne Porter

“If you get dealt lemons in life, you should make lemon lavender mojitos!” Harriet Walter (as the character Deborah Welton)

Can You Find People to Manage in the Covid/Delta Era?

Ted Lasso this, Ted Lasso that, it doesn’t take much effort to find articles or podcasts on management based on Ted Lasso. So, I won’t write about him and will only provide some of my favorite Ted Lasso quotes at the end (those suitable for a family publication).

Those who read this memo regularly know I pull a lot of my content from the headlines so when I saw the Wall Street Journal’sAugust 16, 2021 Journal Report on The New Workplace it felt like a cornucopia of content. Hard to pass up a front-page headline of “Employees Are Back. Bosses, Don’t Blow It. Plus the other article headlines:

  • Don’t Kid Yourself: The Fear Is Here For a While
  • What Bosses Can Do to Reduce Anxiety for Returning Workers
  • Here Comes The Two-Tier Workplace
  • Ways to Bridge the Hybrid Communications Gap

On the same day I got an email from the Puget Sound Business Journal containing links to these articles:

  • Employer sentiments shifting on vaccine mandates
  • The tables have turned: How Covid changed the ideal job listing
  • What employers can do when workers refuse to get vaccinated
  • Delta variant has many companies rethinking their return

Pretty enlightening, isn’t it? For business operators, buyers, and sellers the labor market is, or should be, the number one issue. And maybe issues two, three, and four. In the last few weeks I’ve talked to business owners in the following industries about the labor shortage: restaurant, auto supplies distribution, food production, supplements, metal manufacturing, and many more. These shortages, and supply chain issues, many caused by labor shortages up the chain, are affecting all of us.

My pressure washer hose broke and it’s tough finding a replacement. Where I bought it has no parts and no new washers. Starbucks has had signs about limited food choices due to supplier issues. An owner told me in order to hire an inexperienced 18-year-old he had to pay her more than his current people and therefore their wages went up so they can make more than the new person. Yikes!

It goes back to one of my four rules for business owners/sellers: be able to attract and retain good people.

When asked how he takes his tea: “Well, usually I take it right back to the counter, because someone’s made a horrible mistake.” Ted Lasso (this is one of my favorites, especially for my tea loving friends).

“That right there, that’s a scone, OK? It’s like a muffin, except it sucks all of the spit out of your mouth.” Ted Lasso

“Be honest with me. It’s a prank, right? The tea? Like when us tourist folks aren’t around, y’all know it tastes like garbage?”

Be a Breath of Fresh Air

Surprised. Pleasantly surprised along with wonderment is how I’d describe my reaction when a lady I didn’t know came up to me gushing with thank you after thank you. Why I asked? She told me it was for my help in getting the business buy-sell deal done. The buyer, she said, was “A breath of fresh air.” She loved working for him.

This is not unusual (to have the buyer be a breath of fresh air). Here are a few more examples from a variety of clients:

  • Spending the first few days of ownership doing, “Management by walking around” to get to know the employees and small-group meetings. He said they told him the previous owner never did either.
  • Immediately learning the team’s skills and delegating. Did they sure liked that.
  • Taking routine tasks off management level peoples’ job description so they could concentrate on growth and productivity. 
  • Doing a survey of the management team to find out what they thought were the strengths and weaknesses. 
  • Sitting down and listening to the employees. Listening. Wow, what a concept.

But what if the owner doesn’t want to sell and let a buyer be the breath of fresh air? Here are some tips and realize when doing these things you’re really preparing the business so you can exit with style, grace, and more money.

  • Perform a “mock” due diligence. The best is to have an outside pair of eyes make the observations, ask the questions, etc. Next best is to have a group of managers do it. The worst is the owner doing it themselves because they’ll see and hear what they want to see and hear. This is a lot more than the numbers. It’s diving into customer relationships, employees, management, IT, suppliers and supply chain, etc. 
  • Work on eliminating dependencies, starting with any owner dependency, and moving on to customers, employee, supplier, the lease, a certain technology, etc. When the owner is the business, it reduces value the same way as if there’s 53% of sales to one customer or one supplier who in effect controls the business.
  • Exploit any growth opportunities. Don’t just take orders, reach out. I have a quote in my computer from my friend Keith Jackson with Industrial Revolution and it’s, “It’s amazing what happens when you pick up the phone and call your customers.” That’s being a breath of fresh air.
  • Take action. As another good friend, Rod Jones, says, “Have a Nike moment.” Every strategy advisor will tell you there’s no shortage of good strategies but there’s a lack of implementing.

Many years ago, a wise old business broker told me the unprepared business (and seller) will have it take twice as long to sell (vs. a prepared business) and sell for much less. He added, “Selling a business is like painting a house. All the hard work is in the preparation, the painting is the easy part.”

Was he right with his comments? You better believe it. In a just released survey by the International Business Brokers Association in conjunction with M&A Source we see the following from deals in Q2 2021:

  • About 2/3 of sold businesses in the survey did no exit planning. None.
  • About 20% did some exit planning, for less than a year, which includes simply talking to a broker.
  • Depending on the size of the business, anywhere from 45% to 71% sold because of an unsolicited offer.

About 20% did some exit planning for less than one year, which includes simply talking to a broker.

Depending on the size of the business, anywhere from 45% to 71% sold because of an unsolicited offer.

To summarize, they weren’t ready, they were probably thinking but not taking action, and when the situation arose, they jumped on it. Ready or not, here we come, was the mantra.

As I’m writing this a friend emailed me and asked for a couple copies of If They Can Sell Pet Rocks Why Can’t You Sell Your Business (For What You Want?) for friends of this thinking of exiting. I’ll make the same offer to those of you reading this. If you’d like a complimentary copy of it (or any of my books) for yourself, a friend, or client let me know and I’ll get one to you.

Realize what I write above is not easy. It takes time, effort, leadership, and buy-in. To quote 2021’s favorite seer, Ted Lasso, “Takin’ on a challenge is a lot like riding a horse. If you’re comfortable while you’re doin’ it, you’re probably doin’ it wrong.” But it’s worth it.