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
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:
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.
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.
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
One of the most gratifying feelings we get from our clients is seeing and hearing their excitement and enthusiasm after a buy-sell deal closes. It’s truly their next great adventure in life – and they’re lovin’ it.
“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
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
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
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:
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.
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.
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.
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
In other words, they have vendor concentration issues. No wonder they are putting so much money into producing their own shows and movies.
I have to say in the small to lower middle-market world this is not often an issue. But when it arises, it’s a concern. I remember talking to a seafood processor and packager who got almost all his product from one fishing fleet and an assembler and packager with 80% of his primary component from one source.
A past client was burned twice by this. His top supplier, over 60%, went to in-house distribution. I helped him fix the business and 10-12 years later he called to tell me it happened again. His larger, competitor’s supplier went in-house, his supplier went to his competitor, and he was the odd man out. He sure didn’t learn from experience and it killed him (killed his business anyway). When business is good, we lose track of pitfalls like this, until they sneak up and bite us.
Concentration kills. Whether it’s with customers, employees, vendors, and, especially, the owner.
“The greatest ability in business is to get along with others and to influence their actions.” John Hancock
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