Don’t Drive (Your Business) Over the Curb

Owners travel a road every day and their road has curbs. The wider the road the better. Last month I wrote about customer concentration, a dangerous curb that significantly narrows the road (decreases value). Another important one is growth, or the lack thereof. What are some of the common reasons for a lack of growth?

The industry is shrinking – as in the product is dying a slow death. Forget about 100 plus years ago and the buggy whip analogy, go back five to ten years and look at what happened to CDs and DVDs, and the jewel cases they come in. Possible solutions: buy other companies in your industry or buy a company in another industry to diversify.

There’s a restrictive territory – if you can only sell in certain counties, zip codes, or even metro areas you may reach capacity. Possible solution: get other territories or product lines.

The people can’t handle any more volume – often it’s the owner whom the business outgrows but it can be the whole team. It’s tough managing 50 people instead of 15 or handling cash flow at a level beyond what the line of credit allows for. Possible solution: hire a CEO or COO who can manage a larger firm (and work with them, don’t just turn it over to them).

The owner doesn’t want to grow – this is the most important itemon the list when it comes to decreasing value and I see this all the time. The owner makes a lot of money (it’s all relative), the employees are looking for career advancement, and the owner won’t take the risk or make the investment to act on (good) ideas. So the business coasts. If it goes on long enough the great employees leave and there’s a second-rate team that doesn’t have good ideas and can’t handle growth. Solution: don’t fall into the coasting trap. As in the section in my book If They Can Sell Pet Rocks Why Can’t You Sell Your Business (For What You Want?), show growth, know why it happened, and keep it going. You’ll be rewarded in more ways than one.

You can’t look at the write-up of any business for sale without seeing the word potential. It resonates a lot better if the company’s been growing at 10% a year instead of being flat. Flat sales (and therefore decreasing profits) narrow the road.

“Mystique is 100 times better than publicity.” Michael Ovitz

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

Strong Economy – Strong Buy-Sell Market

Record number of small business sales in 2018!

This as per bizbuysell.com. More businesses sold after being advertised on bizbuysell.com than any other year, and 2017 was 25% higher than 2016.

Our first question is: what is “small?” Well, the median revenue of these companies was about $500,000 and the median selling price was about $250,000. Pretty small. What we call micro-businesses. Typically these are companies where the owner is behind the counter and if he or she hired someone to do that work they would go broke.

Second question: is there similar activity with larger companies, small, mid-sized, and lower middle market firms? The answer is yes, based on the activity level of everybody we know in the M&A/buy-sell industry. What we write about is aimed at the $10 million deal and below.

The third, and most important question is: Why? The top four reasons are:

  • Demographics
  • Corporate baloney (and we really don’t mean baloney, but this is a family newsletter)
  • Growth
  • Easy money

Demographics

The driving force is the baby boomer generation is large and highly entrepreneurial (as per an Intuit study saying this generation owns a disproportionate share of businesses. Look at some of the statistics.

  • Wall Street Journal– The greatest transfer of wealth in history will occur in this country over the next decade; an estimated $10 trillion is expected to change hands, and much of this wealth is tied up in family businesses. 70% of medium sized companies will change hands (2008).
  • PriceWaterhouseCoopers– Two-thirds of companies with sales of $5,000,000 to $50,000,000 will change hands in the next 10 years (2011).
  • Magazine– 65-75% of small companies in the US – some 10 million – likely hang up a “for sale” sign in the next 10 years (2015).
  • Axial– 66% of businesses with employees are owned by baby boomers (2015).
  • Barlow research– Two-thirds of lower middle-market business owners are expected to retire. Their average age of retirement is 67. Between 35 & 45% of these owners are 65 or older (2018).

Notice the same predictions from 2008-2015? It’s because we had a little event 10 years ago affectionately called the “Great Recession.” And guess what? Most of those owners planning to sell had to delay it. Sixty percent of them delayed their exit by at least two years, as per a study by Sun Trust Bank. Next, the economy got pretty good starting in 2011 and most of those soon-to-exit owners were now saying, “recession, what recession, this is pretty good (so why would I sell)?”

But life has a way of catching up with us. Health issues, lower risk tolerance, spouses saying, “get out and spend time with me and our grandkids,” and just wanting to relax.

The bottom line, demographics is the driving force (not that all sellers are in this age range, just a lot of them).

Corporate baloney

What about corporate baloney? We have a few articles in our “writing folder” (articles I’ve saved to write about) on bad management, how technology is replacing people, and employee unhappiness. Gallup recently released a five-year-long study showing the variance between high and low productivity is 70% attributable to the manager. For years the annual Gallup study has shown only about one-third of employees are highly engaged. In successful businesses (and successful departments I’m sure) with good managers the figure is above 68%.

In other words, people are more and more getting fed up with corporate life and those willing to make the leap of faith are doing so at a good clip. They’re betting they are smarter and better managers, leaders, and operators than their corporate bosses (usually these people are better than their bosses but get trapped in the corporate labyrinth) and they’ll benefit financially and emotionally with their own business (which most do).

Growth

There’s a reason we published the book Company Growth by Acquisition Makes Dollars & Sense. It’s a strategy more and more businesses are interested in given how hard it is to find people, especially good salespeople, grow organically, start a new location, steal customers from competitors, acquire new products, and many other reasons (there are 19 reasons to consider growth by acquisition in the book).

While it’s tough to buy a direct competitor, almost every seller will fear giving the “secret sauce” to a direct competitor, there are plenty of other options, including buying a:

  • Customer’s company
  • Supplier’s company
  • Similar firm in a different market
  • Synergistic product line firm
  • Company with equipment you need (and customers to go with it)
  • Contract manufacturer (of your product)

Easy money

It’s not reckless money like it was 15 years ago but financing options abound, including for lower middle market and below sized deals.

For larger deals there’s more money than deals so investors are everywhere. But it’s the current SBA loan program that’s a win-win-win for buyer, seller, and bank (the SBA doesn’t make loans they guarantee a large portion to the bank).

In the second edition of Buying A Business That Makes You Richthe section on creative financing was almost eliminated because of the SBA program’s current iteration it removes the need for most creative financing techniques. It’s because these loans have following features:

  • $5 million loan limit (meaning up to a $6-7 million deal).
  • Ten-year amortization.
  • Cash flow is king (they don’t require full collateralization, but will take as much as they can).
  • Ten percent buyer down payment (minimum), which frees up cash to grow the business.

In addition, some banks are now adding junior debt (second position, higher interest rate) on top of their SBA loan to get to a $9-10 million deal.

Conclusion

Let’s conclude with a prognostication. Barring unforeseen events like the Great Recession or 9-11 this should continue. Demographics are driving it and the other factors are fueling it. The business schools turn out some pretty sharp people who let the corporate world hone their skills and build their capital. And, they are taught to think about add-on acquisitions. Even an economic correction won’t slow this trend. John’s 25 years in this business and an additional dozen or more his friend Ted Leverette has have shown us “normal” corrections, aka recessions, don’t have much effect on the buy-sell market. Older owners will want out instead of fighting the fight and the corporate baloney will increase, providing us with the buyers.

Getting Comfortable With the Uncomfortable

“You have to get comfortable with the uncomfortable if you want to grow.” I heard this recently and it hit home. It reminded me of our Partner On-Call member who had a hard time picking up the phone, until he picked it up, and the call went great. Of course, he deliberated again for 15-20 minutes (his estimate of time) by staring at the phone before making another (successful) call.

The other day I asked Jessica to make a list of the top three things she’s uncomfortable with after one year in her job. Her list was:

Writing – not surprising, is it? As I tell groups, if you can write a few paragraphs people are impressed because most people can’t write a decent sentence. So, she works on it weekly.

Asking for referrals – this is tough, isn’t it? To actually ask someone for something. It takes confidence in yourself, which was another issue with our Partner On-Call franchisees, being at the desk where the buck stops is a lot different than running a middle-market company or a large department.

Follow through – again, it’s easy, for 80% of us, to get distracted. Start five things, finish none, repeat the next day. An accountant friend recently told me she’s not organized (yes, surprising coming from an accountant). It’s why I short list tasks, number them, and don’t start the next one on the list until the previous one is done.

What are your uncomfortable things? (We all have them.) It takes effort to get comfortable with them, but it’s worth it.

“You have to get comfortable with the uncomfortable if you want to grow.” Matt LaFleur

What, You Only Have Six Customers?

For the foreseeable future once a month this memo will be on a topic to increase value in a business, which is exactly what business owners should want and is definitely what business buyers are looking for.

I’ll start with one I’ve seen a lot of lately, customer concentration. Here are three examples:

  1. Seventy percent of sales to one customer.
  2. Seventy-five percent to three customers.
  3. Eighty percent to three customers (one being a middleman buying for their clients).

This should scare owners, but usually they feel their relationship is so tight all is okay. To a buyer, with acquisition debt payments, it scares the bejeebers out of them. To spin this around, I’ll repeat something I wrote about years ago because vendor concentration can be as deadly as customer concentration. A past client had about 70% of his sales from one vendor, he lost the line, built up his business, and again was with one vendor at 65%. Lost that vendor when the vendor’s competitor took sales in-house and his vendor went to my past client’s larger competitor.

This stuff happens, all the time. It’s not make-believe or fantasyland. I talked to an owner recently who lost his top customer. Why? Because his salespeople (I’m using the term loosely) made contact once a year. The rest of the year they took orders and cashed commission checks.

So, what happens when it’s time to sell? One recent deal had a price 30% of what it would have been three to five years ago, which was before the top customer changed focus and sales reduced significantly. One of the examples above is a company close to selling and the facts include:

  • The price is 50-60% of what it would be if there was no customer above 10% of sales.
  • There’s a claw back provision for 20% of the price (if sales drop below certain levels).
  • The seller has to stay for (at least) one year to maintain the relationship.

So much for exiting with style, grace, and more money.

The real problem is no matter how often their CPA, banker, consultant, and M&A professional tell them to fix this problem the owner is “fat, dumb, and happy” riding the top-customer wave. It’s why the Wall Street Journal published statistics showing 90% of small to mid-sized businesses are not ready to sell for maximum value.

“There is more stupidity than hydrogen in the universe, and it has a longer shelf life.” Frank Zappa

Fussy Buyers & Naive Sellers

My friend Dennis Hebert with CFO Selections called recently regarding a client of his who is thinking of selling to his COO/GM. The holidays got in the way and then Dennis told me he felt they didn’t have a good understanding of what it takes to do a deal, so he gave them a redacted purchase and sale agreement. It caused them to pause and think.

Business sellers often underestimate the complexity of what’s involved in selling a company. It’s their cute little puppy so they think everybody will think it’s adorable. Even when others find it adorable there’s still a lot of work. The amount of detailed information requested by the buyer, bank, and attorneys can be overwhelming. Deal fatigue is common.

Most business people are optimistic, it’s a necessary trait, and sellers are no different. The complexity of a buy-sell deal can be extremely high and reduce optimism. It’s not like selling or giving away a cute puppy.

On the flip side, most business buyers are too fussy. I remind all buyers there are no perfect businesses and no perfect deals. Watch out for anything that looks too good.

No small business saves the world or changes western civilization. But these businesses do create jobs, wealth, and a lifestyle, for both the employees and the owner. In fact, boring is often best. Buyers need to answer the following three questions:

  • Can you see yourself going in there every day?
  • Can you add value?
  • Is it a viable business model that doesn’t violate your values?

The rest is analysis, due diligence, negotiation, etc. And, on the flip side to the seller underestimating the complexity of the process, the buyer needs to realize they can always ask another question, and they need to get over that impulse, and make a decision. As I write in the preface to Buying A Business That Makes You Rich, buyers will make a leap of faith and it needs to be off a chair not the roof.

“How desperately difficult it is to be honest with oneself. It is much easier to be honest with other people.” Author Edward E. Benson

When “Word of Mouth” Isn’t Enough

I’m talking to an owner who’s pretty darn proud of the fact he doesn’t do any marketing or have any sales effort because it’s all “word of mouth.” He tells me this knowing I know his friend (with the same type of business) in a noticeably smaller market that has two to three times the revenue he has.

My first thought was, maybe if you did some marketing, you’d be making more money, and more importantly, have a more valuable business. By his own admission, this owner spends a good amount of time working “In” the business. He’s working well under his pay grade when he does this and probably works more hours than he would if he grew the business.

Word of mouth is great, especially for businesses like mine where referrals are the platinum standard. But those referrals only come as the result of marketing. But for a more traditional B2B or B2C firm (like this one that sells to businesses, government, and consumers) there needs to be marketing plus some sales effort.

A salesperson should be calling on the businesses and government buyers letting them know about new offerings, building the relationship, etc. As consumers, what’s the first thing we do when we need a new product or service? Right, we Google it. Some SEO or AdWords is sure worth a try.

Marketing is what creates customers, which creates buzz, which leads to the word of mouth phenomenon, and even more customers.

“I don’t always follow my own advice.” Edith Wharton