No Saturated Markets, Please

A recent Wall Street Journal has an article on how cellphone carriers are back to giving away phones with a contract or financing phones with no down payment. This is a saturated market. Is there any way to grow besides taking customers from other carriers? Maybe more kids getting phones and at a younger age?

Note to business owners (and buyers): Don’t get stuck in a market that’s pretty much at capacity. I’ve yet to meet a buyer who didn’t want to grow the business they acquire. It’s a serious issue and limits the company’s value when a buyer can’t see how they can grow the business.

Flaunting the Rules

We got back from a week in Scottsdale and on the outbound flight, as we landed, the pilot asked us to stay in our seats as there was a law enforcement issue. At the gate, two airline employees came onboard to escort a young couple off the plane.

As we left, I overheard employees say the issue had to do with drinks and not wearing masks. The couple was being “interviewed” by the police as we crossed the gate area. Later I was walking out behind the couple and the cops and heard one of the cops say they don’t enforce mask wearing but passengers have to adhere to airline rules. The young lady commented she thought they were going to be arrested.

On the radio Monday morning I heard an announcer say how on a flight over the weekend he got admonished by a flight attendant for not putting his mask back on after eating (he said he was putting it up to his face when she snarled at him).

So, what does this have to do with business? Masks are like other rules and guidelines. Some are overbearing about them and others flaunt them and in business, I see the following.

  • Owners who overly blend their business and personal checkbooks, making it hard to determine exactly how much money the business makes. 
  • One could add here the CPAs who get their clients so obsessed with reducing taxes they do stupid things (like buy new stuff they don’t need just to reduce taxes).
  • Business buyers who think they deserve perfection when there are no perfect businesses or perfect deals.
  • Business sellers who don’t think valuation methodologies apply to their business, because their business is so different and special.
  • On the flip side, attorneys who dig in on minutia and lose track of getting the deal done (which sounds like a great title for a book).

What this means is actions about masks are no different than what people do all the time.

“Why is it a surprise to find that people other than ourselves are able to tell lies?” Alice Munro

Overleverage is Why Banks Shouldn’t Think Like Investors

Last year it was Deutche Bank and Trump. Now it’s Credit Suisse with Archegos and Greensill. These large banks seem to have forgotten the Five C’s of banking (capacity, character, capital, collateral, and conditions). And corporate execs take a lot more risk than if they had to stand behind the loans. A sixth C could be added, check (and double-check) as Credit Suisse “admitted” they didn’t know Archegos was also borrowing (to the hilt) with other banks.

On April 5 the Wall Street Journal had a frontpage article titled, “Small-Business Owners Feel Weight of Personal Debt Guarantees.” While it wasn’t all about bank loans, a large portion of the article was about lease guarantees, as I’ve previously written personal guarantees are common with small-business bank loans. 

The article made it appear banks are more willing to work out things than landlords and others. Here’s a quote from the article, “Banks don’t want to pursue guarantees,” said Alan Thomes, a managing director in charge of SBA lending at Cadence Bank N.A., noting that the process can be costly and messy. “It’s our desire to work it out,” he added.

Makes sense given another recent headline I saw, “Office-Space Subleases Flood Market.” I get what landlords are going through. When mega-companies are subleasing space it decreases the landlords leasing abilities, and they have mortgages to pay.

What this all means I really don’t know. But I do know that business buyers and business owners who are borrowing money can’t overleverage themselves. Some banks will allow borrowers to have a very low (1.1:1 or 1.2:1) debt coverage ratio (the first number is free cash flow and the second number is debt service payments). Good bankers will want their clients to have at least a 1.5:1 ratio and if it’s a small buy-sell deal a 2:1 ratio.

Prudence is a wise course of action when borrowing, and personally guaranteeing. Don’t emulate corporate types playing with other people’s money.

“Throughout the world the more wrong a man does, the more indignant is he at wrong done to him.” Anthony Trollope

“What sane person could live in this world and not be crazy.” Ursula K. LeGuin

Bad News Sells

As was predicted, news outlet ratings have fallen, especially those that are anti-Trump. People want to see, hear, and read negative news. In the first month since the Inauguration:

  • CNN was off 45% (down 16% in prime time in Q1 2021)
  • MSNBC down 26% (down 8% in prime time in Q1 2021)
  • The Washington Post 26% fewer unique visitors
  • The NY Times was down 17%
  • Fox News was down 6% (down 32% in prime time in Q1 2021)

Say good or bad things about Trump, he was a boon to all media (and I’m guessing Fox News went down when Trump replaced Obama, for the same reasons).

Bad news sells. Look at the headlines. Recently it was headlines about how the ship stuck in the Suez Canal would take a month to be dislodged and by then the world economy would collapse. It was freed in six days. When it comes to news and day-to-day business here are some thoughts in three areas: 

  • When a business is for sale, there is no bad news. Everything is rosy, no warts, no issues, and a very bright future. Two percent growth the last five years, no matter, it will be 10-15% the next five years. Look, the previous is a bit of hyperbole but you get my point.
  • On the flip side, all businesses have something wrong with them and some buyers think it’s their job to ignore the profits and pick apart every little thing. These buyers rarely get a deal done because nothing is good enough.

And did you ever hear outsiders talk about what a company can do in three easy steps to be more productive and profitable? My favorite was hearing two government employees discuss what the $100 million dollar firm where one of their wives worked should be doing to be better. Really?

I tell my clients there are no perfect businesses and no perfect deals. But their business, or the one a buyer is acquiring, have figured out how to be successful and profitable. Perfection is for brain surgery. 

“All things are so very uncertain, and that’s exactly what makes me fell reassured. “ (Author) Tove Jansson

Business Drivers that Decrease Value

The other day Jessica was saying how she’s come to realize we and others say about the same things when it comes to what makes a business more salable and a buyer more attractive to a business seller or intermediary. She’s right and here’s an example of a trifecta of issues one owner had.

Regular readers of this Weekly Memo know I stress the following.

  • Buy-sell is a relationship game.
  • There are four main things every owner should do in order to exit with style, grace, and more money.
  • I have three questions I ask owners when they’re thinking of selling.

Don’t think the above is just theory, it’s not as the following illustrates.

  • I asked the potential seller if he’d worked with a financial advisor to see what he needed for his next great adventure in life. His answer was no and “just about all my wealth is in the company.” This is not uncommon and he’s looking to diversify his assets by selling all or part of the business.
  • My four areas of action for sellers are to have good financial systems, show you can grow (don’t just say if a buyer hired a salesperson the business would take off), attract and retain great people, and reduce dependencies, especially any owner dependency. This owner had been approached by a large firm and, “they beat me up on price because the business was too dependent on me.” To his credit, he’s been working on not being involved in the day-to-day.
  • Then a couple years ago a buyer made an acceptable offer that he turned down. He told me, “I didn’t want my employees working for him.” He went on to say the buyer was a young guy from a rich family, had a degree, but no good experience. The buyer flunked a big test when the seller asked him some questions about possible problems (which all businesses face) and there were no good answers.

This stuff is not from a textbook. These issues are prevalent in too many small businesses when the owner is too tied to the day-to-day operations plus thinks their business is so special buyers will line up with huge checks when it’s time to sell. They only will if the owner pays attention to those things buyers want in a business.

“I don’t need time. I need a deadline.” Duke Ellington

Don’t be Greedy – Be the Best

The New York Times reported on a “little-noticed court ruling in December (2020).” The ruling was against the former board members of the Jones Group, an ownership group of apparel brands including Gloria Vanderbilt, Anne Klein and Nine West. In 2014 the Jones Group sold to Sycamore Partners in a highly (one might say overly) leveraged deal. 

The court ruled the “officers and directors had better think twice before agreeing” to deals with this type of structure. Duh! If it sounds too good to be true it probably is. It’s why good bankers (for our clients’ size of deals) won’t let a buyer have the bare-minimum debt coverage ratio. There needs to be a cushion because “things happen” and one of the best and worst things is fast growth. Growth sucks cash and that’s where the cushion comes into play.

Here are some related situations where the best:

  • Business buyer has the whole package including price, abilities, relationship building, and more. As many in the buy-sell world know, the best buyer is not always the one offering the highest price.
  • Business to acquire is not always the one that’s the best deal. It’s the company the buyer can grow, add value, and see themselves going into every day with a smile on their face.
  • Customer doesn’t always pay the most. But they’re loyal, work out issues, and refer others to you.
  • Job isn’t necessarily the highest paying job; it has the whole package including culture and career advancement opportunities. 
  • Employee to hire isn’t the one who will work for less. It’s probably the one who expects, and is warranted, a higher salary because they’ll have higher productivity.

It comes down to looking at the whole package, not just the shiny stuff (like the money).

“If I had to live my life again, I’d make the same mistakes, only sooner.” Tallulah Bankhead

“It’s funny. All you have to do is say something nobody understands and they’ll do practically anything you want them to.” J.D. Salinger 

The Challenges of Buying (and Selling) a Business

A month or so after a business buy-sell transaction the buyer said he had found some challenges but was making his way through them. Finding a business to buy is much different than finding a house to buy. There’s no MLS, the seller doesn’t want anybody to know the business is for sale, there’s a lot more information to verify, and comparable sales information is limited.

Similarly, moving into a house is easy, especially compared to taking over a business. The house is clean, it’s been inspected so you know what to fix or upgrade, and it’s really about unpacking and getting settled. 

When taking over a business you have to deal with customers, employees, operations, culture, cashflow, and more. Here are three things owners should do to make it smoother for buyers (and increase the ease of selling and the price).

Run it as a business, not a lifestyle. Run it as if you’re not selling but are in it maximize growth and profit. Realize the little things you know how to do in your sleep from 37 years as an owner (as an unconscious competent) aren’t second nature to the buyer. There not second nature to your staff, which is why a business plan, job descriptions, and delegation are so important.

As I’ve written many times before, the buyer is buying your people as much, or more, than they are buying your “company.” Employees are the lifeblood of any business so treat them well, pay them well, let them grow, and trust them.

Financial people will tell you to measure everything. Those numbers are the buyer’s (and the bank’s) insight into your business. The abovementioned buyer bought a good business that didn’t follow normal accounting practices (not even GAAP, just normal). This is a project-based business and work in process was not being recorded on the balance sheet. How do you know how profitable a project was if you don’t track things correctly? This means have a good accounting system and pay attention to it.

I could go on but you get the point. Take the little extra time it takes to do things right, not just run from project to project.

“If the highest aim of a captain were to preserve his ship, he would keep it in port forever.” Thomas Aquinas

Hobbies of any kind are boring, except to people who have the same hobby.” Dave Barry

Questions and Confidentiality When Exiting

By Jessica Martinka

There’s an old song that starts out, “Signs, signs, everywhere a sign.” What about, “Questions, questions, everywhere a question,” when it comes to planning to exit a business?

  • Why am I thinking about selling my business and do I really want to sell? 
  • Will it be enough money?
  • What does my spouse think about it?
  • Who do I let know? Is it employees, vendors, customers?

Jim told his two (very) key employees he was planning to sell to a company in the same industry. This was all of a sudden, they panicked, and within days both turned in their two-week notice. Yikes!

Owners are scared because a confidentiality breach will scare employees, vendors, customers, and competitors. And potentially drive down the value of the business.

Last month I wrote about what happened when corporate took over the company I was working for. I didn’t give notice, but should have. I can tell you all the worry affected my productivity, especially once I found out I was training my replacement.

At the management level, consider letting your team know about a potential sale as you’ll need them during the process. Have them sign an NDA and consider giving them a retention bonus, post-close as an incentive to stay. 

Customers finding out can create problems. Competitors finding out can be a disaster. Even suppliers, as they may put you on C.O.D. But it’s mainly about the employees because buyers are buying the people not just the business.

I was naïve when corporate took over. Most people will look for a way out which is the number one reason why owner’s keep the potential sale of their business quiet. And a business buyer doesn’t want to come into a business with no management team or missing employees. Hiring an advisor familiar with buy-sell deals who understands the importance of confidentiality will be beneficial through the process.

A good place to start planning your exit is with our book: If They Can Sell Pet Rocks Why Can’t You Sell Your Business (For What You Want?)

“The size of a planet doesn’t strike you until you start looking for something.” David Sedaris

Texas Energy Screw-up and Small Business Impairments

The headlines about the Texas freeze and energy disaster caught my attention. I read two long articles, one in the Seattle Times and the other in the Wall Street Journal. Both had the same conclusion; Texas took the easy way out (again) and paid for it.

The bottom line is Texas officials had been warned many times over the last 30 years about their energy infrastructure not being winterproof. They ignored the advice because deep freezes rarely happen in Texas and by ignoring it they kept their electricity rates the lowest in the country. But enough about those details, let’s discuss how too many businesses are like Texas electricity and wishful thinking.

A lot of business owners are like Texas and ignore the planning part of exiting their business. They flip the switch and say they want to sell. Like the Texas utilities, there’s no preparation for the actual event. So here are some thoughts on the subject.

Mr. or Ms. business owner, your company is not the greatest thing ever. There are a lot of other businesses out there, all wanting the best buyer possible to buy them. I mean, who wants to sell to someone who won’t be successful. That means you have to look at your business like a buyer will look at it. Better yet, get an independent set of eyes to look at it. Perform a mock due diligence (self-promotion here: as in our book If They Can Sell Pet Rocks Why Can’t You Sell Your Business (For What You Want?). Have a banker who does buy-sell loans look at it also, because they’re the ones who will provide the money.

Once you’ve done this 30,000-foot overview it’s time to put a plan in place so you can exit with style, grace, and more money.

Don’t try to do everything at once. There’s a reason experts say start this three to five years in advance. Things take time. And three to five years allows you to show the results on your financial statements.

Have a list of tactics, whether it’s for growth, margin improvement, expense reduction, process improvement, an improved culture, or something else. Know what you are going to do.

Get into the details.

Implement the darn thing. Don’t have it be a shelf plan, make it an action plan (see my blog for my ACTION™ plan to sell a business).

Get your team involved. Everybody wants to do better and they don’t have to know it’s exit planning. They’ll think it’s a growth strategy at work.

Cover the basics first, and as I’ve written many times, the basics include:

  • Solid financial systems and accurate financial statements. Don’t emphasize minimizing taxes. Show profit because banks and buyers like profits. Don’t blend your personal and business checkbooks.
  • Grow. Prove you can do it versus saying how it can grow in the future.
  • Shed your ego. Get to the point you do as little as possible with the day-to-day operations. Concentrate on strategy and vision.
  • Hire and be able to retain great people. Buyers are buying your people as much as anything else.
  • Like searching for customers, you have to keep doing the things you’re supposed to do. Do so and good things will happen.

Don’t be like the Texas utilities and ignore all the preparation until it’s time to exit. Because “things” happen, as per the example below.

Lesson: A client lost a deal to sell his company (for more than it was really worth). He wasn’t prepared to provide the buyer what the buyer needed, which was the usual and customary information. While regrouping, the company got hit by a cyberattack, closed operations for days, lost customers, and now his business might not be worth much of anything. And he’s got a handful of leases on which he’s obligated (in a tough office real estate market). 

Tip: He thinks the cyberattack was like what happened with Solarwinds, via a third party. His attackers got in through his previous managed service provider that had not deleted access to his system. Do disaster planning on anything that can interrupt your operations, and cyber is on the top of the list, way ahead of any natural disaster.

Our podcast channel has discussions on cybersecurity, disaster planning, and much more.

A Job Disguised as a Business

We’re working on a client grow-by-acquisition project and have found the industry is not only very fragmented, with a lot of small companies, but too many of them are “A job disguised as a business.”

These owners are so busy bidding, selling, designing, installing, doing service work, etc. they don’t have time to pay attention to the business itself. They can’t answer basic questions every owner should know, and it overwhelms them to fill out a short questionnaire that should take no longer than 10 minutes (most are check the box type questions).

A big question is, “Is there value and if so, how much?” The only (real) buyers for these businesses are companies in the same industry who can handle all the functions the owner is doing. There’s not nearly the equity there would be if the owner worked on the business versus in the business.

My advisory business doesn’t have much value. A CFO for hire, on his or her own, doesn’t have much value. A firm with multiple advisors (of any kind) has value, either to an outside buyer or via an internal succession like law firms, CPA firms, construction firms, and others. It comes down to an owner doing the basics:

  • Create a capable team.
  • Delegate responsibility not only tasks to them.
  • Realize your employees might not do it as well as you, or as fast, but three people at 80% is better than just you at 100%.
  • Let them grow so the business can grow.
  • Be organized with processes and especially with the financial systems and statements.

In a recent deal the business buyer said while he’s never managed 50 people before he feels comfortable because of the middle-management team. That’s a heck of a lot better than when the owner has their fingers in every aspect of the day-to-day operations.

“If you attack the establishment long enough, they will make you a member of it.” Art Buchwald