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
Recently I wrote about customer concentration issues and about obstacles to growth. This memo is about something often forgotten and a perfect example of it is a situation Netflix is facing.
NBCUniversal, AT&T’s Warner Media, and Disney are entering the streaming video market. Netflix has 72% of its viewers watching “library programming,” i.e. shows produced by others and whose rights Netflix buys (for a limited amount of time). The above three contribute 55% of library programming viewership and it looks like all of that will go away in the next few years.
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
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
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