What’s Going On*

Over the last couple months I’ve been on a lot of webinars, Zoom meetings, and other online events, as I’m sure many of you have. Besides my Zoom Business Social & Happy Hour events I’ve attended ones hosted by Business Brokerage Press, Mark Cuban, Alan Weiss, Ted Leverette, Patricia Fripp, and others. Here are my take-aways from them, in no particular order.

  • Make a great first impression, including on social media. Be polite and appear better than others.
  • The best thing to do with employees is communicate and make them feel comfortable. More communication than ever as it will create trust.
  • Ask your employees! And don’t use language of war and fear.
  • What would you do different if starting your business now?
  • It’s important what business buyers say to sellers and brokers (first impression). It’s equally important what business sellers and brokers say to buyers, especially qualified ones.
  • We all need direction not conditions. You have to be for something (which reminds me of the verse from Hamilton, “If you stand for nothing, Burr, what’ll you fall for?”).
  • Be a sounding board and authentic.
  • There’s more “checking out” others than ever. What do people see when they Google your name?
  • People are terrified and scared.
  • Be a resource; write a lot of content.
  • Internet marketing will stay strong.
  • What’s going on should make us willing to look at different ways to do thing.
  • An upside to Zoom, Teams, WebEx, etc. is you get to see people as they live, not as they present themselves for business. Their kids, dogs, cats, etc. let you get to know them better.
  • We (our clients, customers, and ourselves) seek validation.
  • Any company can do well in a boom.
  • Ask, what will change forever?
  • Some owners won’t have the stomach to keep going (and will want to sell).
  • If you’re not changing your marketing be prepared to do so.
  • You will recover.
  • Errors are seldom fatal.
  • People crave confidence.
  • Don’t use this situation for procrastination.
  • Be present online with 60% tips and 40% sales related.
  • Block people on LinkedIn who ask to connect and then try to sell you something.
  • From an insightful PE guy before it really hit the fan – expect GDP to decline by 10% or more, unemployment to hit 15% or more, and it will be really tough for many people for 18-36 months.
  • He also said entertainment won’t return soon and as an example noted Taylor Swift cancelled her tour even though 15-31-year old people don’t seem to care about anything (like the virus).

* Thanks to Marvin Gaye for the title. J

Buy-sell Earnouts, Litigation, and the Changing Landscape

On May 12, 2020 GeekWire reported Seattle company Porch is being sued by Kandela, a company Porch acquired in April 2019. The basis of the lawsuit is Porch did all they could to stunt Kandela’s growth and profitability in order to avoid paying an earnout. If you’re not familiar with an earnout, it’s similar to a salesperson’s commission in that payment is based on performance.  

The Porch lawsuit alleges they (and this is from GeekWire), “have engaged in a stunning and systematic pattern of fraud designed to prevent Kandela from achieving any earnout” for hitting certain milestones, according to the complaint. They went on to say Porch withheld resources, refused to sell Kandela products (to Porch’s customers), and more. 

It’s why lawyers will joke and say the only winners with an earnout are the litigators. That said, in our pandemic world, everybody I’ve heard from believes earnouts will be more prevalent. And as much as I don’t like them, other than for special circumstances, I agree with this and have a business buyer client making an offer with a significant earnout component as the business has been hurt by the pandemic, and nobody knows how fast it will come back or at what level.

My advice to my client was: 

  • Keep it simple.
  • Make sure the seller can easily get to and see how he can get his full price.
  • Emphasize your goal to make the recovery as fast as possible (it’s in the buyer’s best interest anyway).

There are a lot of people out there who think there will be “deals” on business acquisitions. There will be on damaged companies (a deal meaning a lower price albeit for a company with less profit), there won’t be on solid companies, and earnouts will play a part in more deals than before (as will more seller financing). The objective is to have it be fair to both sides and be easy to figure out.

“Don’t gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don’t go up, don’t buy it.” Will Rogers

More Information Than Ever

Like a lot of you I’ve been on more webinars the last six weeks than I usually go on in six months to a year. And, there’s actually been some good ones.

An interesting one was put on by Salesforce and featured Mark Cuban. A few of the things he said were:

  • Now is the time to amplify your brand.
  • Connect with people, don’t sell.
  • Everybody is scared (at some varying level).
  • The disaster recovery programs from the government are like automatic overdraft protection.

A really good webinar was put on by Business Brokerage Press (BBP) and the points the experts made are valuable for more than just the buy-sell industry. Here are the ones I noted with my comments in parentheses:

  • We all need to do a better job of screening potential clients and customers to make sure they’re serious, what they have is viable, they’re viable. (Not just now, always.)
  • Most owners are concentrating on core business functions, not exit planning. (Many are concentrating on survival.)
  • For new clients, now is the time to get paperwork in order and be ready to go when the time is right.
  • Baby boomers are not getting any younger. The tsunami of exiting owners predicted over the last 10-12 years hasn’t hit yet. Maybe this will push it over the top. (I agree, there’s been no spike of exiting owners, just a slow increase.)
  • To business sellers, set a firm expectation of value and cash at closing. (They emphasized the word firm as we know people remember what they want to remember.)
  • To owners who have been coasting – watch out! (Yes, a culture of coasting will be hard to change to one of urgency.)
  • Good people will be available to improve your team. (On my Zoom Happy Hour on April 16 Joe Fugere said they’re looking at all the good people let go by other restaurants.)
  • Show you can bounce back. (Not just for those selling but for those wanting to reassure customers, employees, and vendors).
  • Business buyers will be expecting deals and consider using an earnout.
  • This will push up bottom feeder (business buyers) and it’s way too soon to get freaked out over value. (I agree, I’m seeing the bottom feeders out there, going after businesses in industries hit hard.)
  • Business buyers who want to pay based on the last 12 months of earnings for businesses hurt by COVID-19 won’t want to pay based on the last 12 months for those companies that got a spike. 
  • The reverse is true of sellers.
  • Buy-sell experts are going to have to figure out how to mitigate the situation. We could see deal structures change (more seller financing), more earnouts, buyers will be more cautious, etc. (And, we don’t know how banks are going to look at all of this.)

On the other end of the spectrum, I was on a Zoom meeting with a bunch of corporate people and corporate consultants. Talk about heads in the ozone. These people had no idea about the “real world.” One lady actually said that nobody will want to own a car anymore now that we know we can all work from home. Okay, other than those people delivering things to her home, working in stores, on construction sites, installing furnaces, cutting hair, etc. Or, those who like the freedom of getting out, hauling their boat, going skiing, and other activities.

Conclusion

Regarding the points from BBP, I can’t argue with the points made and I also think you can take out the business buy-sell specifics and apply most of these points to business in general. Businesses shouldn’t coast, we don’t know what banks will do regarding lines of credit and other non-transaction loans, and many of us will have to mitigate numerous circumstances.

One Bad Apple

In college basketball there are players known as being, “one-and-done,” as in playing one year for the college team and then going off to the NBA (because of rules preventing them from going to the NBA straight out of high school).

As a casual fan, I’ve come to appreciate the job certain coaches do with these players (aka prima donnas), not to mention their parents. Most of these players don’t want to be in college, it’s only a steppingstone, and often they tend to be culture disrupters. This appreciation comes from seeing all the other teams where these one-and-done players cause the team to underperform.

It’s just like in business, isn’t it? You strive to build a culture for growth, profits, advancement, and an enjoyable workplace and yet one person can damage, if not destroy, this. In an owner group I’m in I’ve heard about employees who:

  • Refuse to cooperate with others, it’s their way or no way.
  • Exhibit inappropriate behavior, sexist (sexual) in nature.
  • Bully co-workers.
  • Leverage special-class status (threatening that any action towards the employee would result in a legal action based on said status).

The above and other situations are why there’s constant interest from owners and managers on culture, employee relationships, managing all the HR regulations, etc. It’s a balancing act whether you manage single digits of people or hundreds. Unfortunately, there’s no easy, quick-fix solution; it takes patience and skill.

“Anything can happen, but it usually doesn’t.” (Humorist) Robert Benchley 

Factories and Their People Get Smarter

Fact: Politicians, all politicians, from both parties, promise more jobs, better jobs, increased pay, and anything else they think will garner them votes. 

Fact: None of the politicians have any idea what’s really going on or what to do.

Help wanted is very common

It’s a fact of life these days that a majority of businesses can’t find enough good workers with the emphasis on the word good (as in skilled, competent, will show up for work every day, etc.). Not just in big cities like Seattle but in small towns I’ve been to over the last couple years. Signs abound seeking workers. 

In December 2019 the Wall Street Journal had an article titled, “American Factories Demand White-Collar Education for Blue-Collar Work.” The article summarizes what I regularly see, an increase in advanced machinery, more production with fewer workers, and the need for smarter workers. The article is filled with statistics, which I won’t repeat here, and the bottom line is, from large firms like Honeywell, Caterpillar, and Harley-Davidson to small businesses, more is being done with less, as the following graphs from the article show.

A close up of a map

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Education

My mother was a teacher, many of my parents’ good friends were educators, so I grew up in a culture of education (you can imagine the repercussions when I misbehaved in school, i.e. disrespected a teacher). So it’s no wonder I’ve given a lot back via my Rotary projects in schools.

Want people to have better paying jobs, give them the training and education to get them. A couple years ago we had a speaker at the Bellevue Breakfast Rotary Club whose organization was (is) trying to get our educational system to emulate the European system by getting kids who aren’t going to go to college into a trade program sooner versus later. An alternative to graduating high school with no interest in college and no real job skills. It’s why I admire companies like Dick’s Drive-In and Starbucks that pay for higher education for their workers, even though they may use that education to get a different job.

It’s a technology world

Technology is really what it’s all about. Not just code writing or playing games but knowing how to use technology on the job. The WSJ article states not only has the manufacturing industry dramatically increased the ratio of capital to labor, but they’ve had double-digit growth of jobs requiring “complex problem-solving skills” versus a decline in jobs requiring the least amount (of complex problem-solving skills). In fact, over 40% of manufacturing workers now have a college degree, almost as many as those with a high school diploma or less.

One of the members of my Rotary Club is with a company using technology (artificial intelligence actually) to match people, employers, and careers. When you get people doing what they like (love) they’ll be better employees, change jobs less often, and be more productive. As the WSJ article said, in a quote from a plant manager, “If you want to be one of those people [who want to just punch in and punch out every day], you won’t be successful here.”

Conclusion

This is why I added “Show you can attract and retain great employees” to my list of what business owners should do to make their business more attractive to buyers. It’s why one of the important skills a buyer can have is to be successful at team building. As I often say and have repeatedly written in my newsletters, business buyers aren’t really buying the company, they’re buying the people.

A Great Team Equals Success

We’re in Antigua, West Indies, on our Rotary project, working in the schools. Over the course of the trip I’ve had 12 meetings (in seven business days). They’ve included:

  • Government – meeting the acting Prime Minister, the Board of Education, and the Director of Education (really the COO of the school system), the Minister of Information and Technology, and the Director of Education.
  • Funding – a (great) meeting with our top non-Rotary funding source.
  • Media – appearing on Good Morning Antigua and a morning radio show.
  • Rotary – attending the Rotary Club of Antigua’s meeting.
  • And a few others.

This project is like business, there are partnerships everywhere. In business you have partnerships with customers, employees, suppliers, advisors, and more. In addition to the above Rotary, funding, and government partnerships my Rotary club also partnered with:

  • The Bellevue School District’s technology department, to provide the people to install computers and Wi-Fi networks.
  • Our trainer, who we hire to instruct the teachers on how to more effectively reach their students using technology (lesson plans, exercises, interactive, etc.).

Just like a business, we couldn’t do it in a vacuum. We need all of the above. And the result has been we’ve had an extremely successful trip, probably our most productive.

“We learn from history that we do not learn from history.” Georg W.F. Hagel

Has COVID-19 Derailed Your Planning? Tips From a Crisis Management Expert

For most business owners I’m guessing your strategy is off track and any exit planning is on the back burner given our minds are on the ramifications of the COVID-19 virus. What is probably on the minds of many is, “How and when can I get out as I don’t want to rebuild it again?”

It comes down to choices. Here’s one of those choices: 

Is the pain of rebuilding your business greater than the pain of selling at a discount? If it is, once there’s stability it’s time to sell. If the pain of selling at a discount is greater, then do what you can when you can. And depending on your industry, it could be a quick rebound or a long, slow process.

We should all realize there is nothing most of us could or can do when something like this wallops us. Customers can’t buy if your business is (forced to) closed. You can’t make sales calls when ordered not to. But that doesn’t mean you go into hibernation mode.

For tips on how to minimize damage I interviewed my friend Dan Weedin, who is a crisis and disaster management expert (you can see more about Dan at www.danweedin.com). Here are the questions I asked Dan and his insights, followed by a few pieces of information from me:

What were you telling clients 6, 12, and more months ago about crisis planning?

Business owners should create a written business continuity plan that covers who’s in charge of a crisis, what are your continuity paths with employees, customers, suppliers, and the community. Know your emergency preparedness procedures for things like loss of power, loss of water, damage, etc.

What about pandemic preparation?

“This caught me by surprise given it’s been 100 years since we’ve had anything of this magnitude.” He said if he had told clients to prepare for virtually the whole economy shutting down, he feels they would have thought he’d gone crazy. The biggest problem with this situation is the uncertainty as it’s different and scary. With other crisis’s (fire, tornado, flood, etc.) we have an end point, so we deal with it, and recover.

What about recovery?

Be worried about your supply chain. Your area and your firm could be back to work but if your suppliers are in other states or countries and they aren’t back to full speed you’re still treading water. Look at options now.

What are you telling clients now?

First, it’s different than what I would have said a week or two ago. My top things are:

  • Stay educated. There’s a lot of data out there. Know what’s happening with governments and their policies.
  • Employee safety is number one. What can you do to keep them safe?
  • Innovate. What if this is our normal for three months?
  • You can’t over communicate. Communicate to create community.

What are some examples of what businesses are doing?

  • A gym is holding virtual training sessions. They want customers back when they’re allowed to open instead of buying Peloton’s, building fancy in-house gyms, etc.
  • A bar is doing online cocktail making classes as they know they’re customers will remember them and be back.
  • A shared work facility is doing a virtual happy hour to keep front-of-mind.
  • A winery, not able to do tastings, offered their club members free shipping if they added three bottles to their order. They’re delivering the wine so the customers don’t get it at the store.

In the future he will do pandemic training as part of disaster planning and his final words to me were, “Talk about things other than COVID-19 and be a distraction to others.”

I (John) also realize we’re in the middle of something we never thought would happen, much less planned for. So, we have to move forward from where we are. Here’s my advice, most of it good for all times not just during a crisis.

Take care of your employees and customers. They are tied for number one on any list you have. You don’t have a business without your people and those who buy from you. Do what you can to keep your employees, have them come back if you had to let them go, etc. Stay in touch with all customers, even if they’re not buying now.

Be wise with your cash and at the same time work with (take care of) your suppliers. You want them around in the future. If you have a line of credit, consider using it to get cash on your balance sheet.

Do not “hunker down.” Be as large a marketing machine as you can be (as Dan said, you can’t over communicate), especially if you can do it for little or no expense. Use social media, emails, phone calls, etc. Besides regular messages, one thing my company did was send a request to lot of business friends to help a family my wife is assisting. The mom escaped an abusive situation and is trying to get her kids and herself back on their feet. We got some donations of things they need and kept my name in front of people for a great cause. A win-win.

The Robots Are Taking Over

The title of this memo is a line one of my son’s likes to say regarding technology in cars, homes, and everywhere else. We see and hear about it every day. Robots in warehouses, manufacturing, Alexa and Google Home, toasters with Wi-Fi, AI doing medical diagnosis, and more.

I’m amazed at all the ideas for using technology where it hasn’t been used before. It works for customers in the Uber/Lyft industry but not so much for the cash-draining companies, so far. If you pay attention, you’ll see a lot of these ideas don’t make it. And it’s because some things need the human touch. Almost 40 years ago John Naisbett wrote Megatrends and stated the more high tech we get the more high touch we’ll want.

As I’m always asked about good and bad industries, I pay attention to this stuff. Walking through an airport it struck me that food will always need the human touch. Sure there’s automation but watching someone pushing a cart of food boxes through the airport made me realize people will always be involved with growing, moving, cooking, and especially eating food.

The key to a good business is to blend technology with people. A mechanic uses computer devices but still has to hook up the machine, turn the wrench, etc. Heating systems may be very automatic, but someone has to clean them, fix them, install them, and haul away the old ones.

What are you doing in your business to blend technology with people? Over the last two weeks I met an owner still doing the books on paper (no QuickBooks) and an owner who modernized the company, dramatically reducing overhead by using technology and its systems. 

The more you can integrate technology into the business the more time you’ll have to meet clients and prospective clients, which is how you grow most businesses.

“True terror is to wake up one morning and discover that your high school class is running the country.” Kurt Vonnegut

Details, Details, Details, and Ambiguity

The attorney looked at the audience and said, “Make sure you understand everything in your agreements. If there are any ambiguities, they will come back on you, not your attorney.” This was many years ago when said attorney and I were on a panel together.

Wise words, aren’t they? I will never forget them. I thought of this the other day when an exit planning client told me about a dispute over a distribution agreement with another company. And, it seems the other party also ignored this advice, thus a mess.

Without giving away any details, my client signed an agreement that gives the other side an out. The other party signed it including a clause that gives additional control to my client. How does this happen you may ask? Here’s how.

  • My client got to the point where he told his lawyer he didn’t want to spend any more money on legal fees. The lawyer had mentioned the out clause, but the client was mentally more concerned with fees than anything else. However, the lawyer should have said something like, “There’s no charge for this conversation as you need to realize the other side can get out of the agreement at any time, leaving you with expenses and no recourse.”
  • The other party said, when it was pointed out there was a clause giving my client ownership of the brand (versus distribution rights), “An employee of ours put that in there and we didn’t notice it.”

In both cases, not paying attention to the details, not noticing ambiguity, and being cost conscious versus results conscious. In the buy-sell world there are more details, more intricacies, and lot more words to read and understand than in the above example. 

In all cases, don’t ignore the advice above.

“A little alarm now and then keeps life from stagnation.” (Author) Fanny Burney

Even Adults Need Adult Supervision

Running a small business is easy. Having a small business as an absentee owner is a piece of cake. The employees can operate the business without adult, i.e. owner, supervision. 

The above are all myths of small business and here’s an example:

In the mid-1990’s at a Chamber of Commerce meeting I met the owner of a new auto service center in Kirkland. We hit it off, started taking our cars there (as did numerous family members and friends), got great service, honest pricing, etc. They did little things right like saying you’ll need brakes in about six months versus wanting to do them immediately. Or giving the car a once-over look for no charge.

Unfortunately, the owner died a couple years ago. His wife sold the business to a technology executive who bought it as a passive investment. I hope the wife got paid in full at closing.

We started noticing little things like the phone not being answered and messages not returned. Our only needs were oil changes, the (recently promoted) service manager knew us, and all was good (for us). But obviously not for other customers and definitely not for the employees. It went from a family-business culture to one where the manager said to my wife, “It’s now just a job. I work my hours and go home.”

Guess what? Now the phone isn’t answered at all, the blinds are down, and the doors are locked. About five years ago I started using the term “adult supervision” to describe what an owner needs to bring to the business. This business used to have adult supervision and thus the employees were happy, the customers were happy, and the business thrived.

Don’t think this only applies to very small, consumer businesses like a garage. I’ve seen business with sales of $5-15 million suffer similar issues when the owner decided to take his or her eye off the ball, spend more time vacationing than working, or just clipped coupons (taking a huge salary or distribution as the business grew stagnate).

“The universe if full of magical things patiently waiting for our wits to grow sharper.” (Author) Eden Phillpotts