When You’re In Over Your Head…

AB InBev, which makes one out of every four beers sold worldwide and owns hundreds of brands is selling assets in Australia, Asia, and Central America. Why? Because an acquisition spree got them to the size they are but also saddled them with massive amounts of debt And there’s a lesson here for small businesses and individuals.

Many things can derail a business’s value (customer concentration, owner dependency, etc.) and there’s nothing wrong with manageable debt. But the beer market is struggling, both in emerging and mature markets, and that threw AB InBev’s debt coverage out of whack, i.e. not enough profits to cover debt payments the way they wanted to.

Growth is great. We all want to grow. Business buyers especially want to grow. But growth for growth’s sake can throw things off kilter. It doesn’t matter if it’s beer, widgets, aerospace, or something else, manageable growth with attention paid to margins and cash flow is what you want.

The key is to understand what you do best and do more of it. When you want to expand your product or service offerings make sure there’s a market. Don’t be trying to sell beer when customers are moving to other beverages.

And, whether personal or business, manage your debt, your cash flow, and your growth so you don’t fall off the cliff.

“Insanity is a relative. It depends on who has who locked in what cage.” Ray Bradbury

 

Are You Ready for a Storm Surge?

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:

  1. 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.
  2. 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.
  3. 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

The Goal of Independence and Unexpected Consequences

July 4 is a holiday just about everybody celebrates. Political and other differences tend to get overlooked when enjoying friends, family, and fireworks. Our nation’s independence means something to most of us.

What the US has is a reason so many people want to get into this country. And factors we don’t think of influence this, including when life gets in the way. At this time we have a lot, and I mean a lot, of people wanting to immigrate from Guatemala. (This is a business memo not a political one.)

Why? One big reason is the dramatic drop in coffee prices. Yes, a drop in coffee prices (although not at Starbucks and other shops). Guatemala grows some of the best coffee in the world and there are thousands and thousands of small coffee farms. And they’re all hurting.

It seems Brazil has invested in equipment that makes the cost of harvesting coffee beans much lower. This has caused the price of coffee beans to drop and it’s no longer sustainable to have a small, labor intensive, coffee farm.

Every action has a reaction (Newton’s Third Law) and the solution (for many), is to get out. Go where there’s more opportunity, which sounds a lot like what happened centuries ago and lead to the Declaration of Independence.

A business decision and improvement in one country led to a recession in another country’s top industry, and finally to a border crisis. I am willing to bet nobody thought of, much less predicted, anything close to this when Brazil modernized their coffee production.

It’s hard enough to forecast and predict what will happen in our day-to-day businesses. Much less when you see the ramifications of something as “simple” as modernization.

“The United States is the only country with a known birthday.” – James G. Blaine

 “Independence Day: freedom has its life in the hearts, the actions, the spirit of men and so it must be daily earned and refreshed – else like a flower cut from its life-giving roots, it will wither and die.” – Dwight D. Eisenhower

“I like to see a man proud of the place in which he lives.  I like to see a man live so that his place will be proud of him.”  – Abraham Lincoln

Do You Listen?

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

Build a Stronger Business Foundation

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

 

A Variety of Vendors is a Must

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

Stagnant Industry, Stagnant Company, What To Do?

Recently the Bellevue Breakfast Rotary Club had a recap meeting following our very successful fundraising event, the All in for Autism 10K-5K run and walk. One of our members wondered what we have to do to breakthrough our participant plateau, as we’ve been at about the same number for years.

One of our event consultants from Orswell Events told us we should be happy and proud about what we’re doing because at most post-run meetings these days the organizations are asking, “We’re down 500 people, what should we do>?

So, we’re putting on an event in a saturated market (runs, walks, bike rides, etc.) and holding our own when others are struggling. Something to be proud of and concerned about.

What should a business do when facing the same situation? Let’s look at what we did.

  • We rallied around a cause, in our case, autism and the autism community. A business can’t grow as easily via a non-profit connection, but they can create a community of loyal customers, do things for those customers, and help solve their problems. (I do see more and more companies mentioning how they give back; one new restaurant has a saying, “You Dine – We Donate.)
  • We really picked it up on the social media marketing. While we still had posters and rack cards around town, we also used email blasts, Facebook, Google AdWords, and more to constantly be reminding people about our event. In other words, marketing consistently and constantly.
  • We promoted teams with our sponsors, beneficiaries, and the general public, especially the autism community. And those teams will be featured in future marketing.

I’ll compare the last bullet point to a business growing by acquisition. Team organizers went out and got others to join them. A business can grow market share, even in a stagnant industry, by buying other companies or their customer list.

And if you’re not in a stagnant industry, do the same things. Create a community, market, and acquire.

“You can have friends or you can correct people’s grammar.” (Author) Mary Norris

If Only It Were So Easy

My wife has been a hummingbird fanatic for years. We have two feeders off our deck, one at the cabin, she’s diligent about keeping them full, and we get hummingbirds.

Recently we expanded into having a regular bird feeder, seeds, nuts, etc. I am amazed at how quickly it’s become a magnet for birds. Red wing blackbirds, blue jays, yellow finches, and many more. They swoop in, eat, play, fly around, and repeat.

If only it were so easy to find customers. Just hang out a “feeder” and have them fly to us. But it’s not, which is why we market our companies and ourselves, advertise, network, distribute IP by writing and speaking, etc.

Those things we do are our “feeder,” aren’t they? It’s just that our potential customers are a bit more skeptical, have more noise in their world, and are busy with their businesses (versus the birds whose life is eat, drink, play, and sleep).

Every time I see something like the above that’s a great analogy to business it reminds me to do the things I need to do and do them regularly, which is why I have white board on the wall and a list of marketing things to be doing along with the frequency for each.

“The social contract between humans and dogs might be the best bit of business we have ever done.” (Irish journalist) Paul Howard

Are You a Doer or a Manager? One is Much Better

I was at an educational event and ended up talking to someone in a completely different industry than mine. When he heard what I do his comment was how one of the toughest things about small to lower middle market businesses is they have owners who won’t let go, i.e. the owner is a dependency. So true, and we all know many owners like this.

It reminded me of a recent meeting with an owner who said, “I manage the managers. I get called when there’s a problem.” He’s over having to be responsible for everything.

What a difference between the above two stories. And this isn’t just with small companies. I’ve recently seen a few middle market businesses with the same issue. As the business grows the owner(s) keep doing what they did, which may be improving processes, having the important customer relationships, or having (too) many direct reports.

Do you see yourself in the above example? Do you see clients of yours? If so, realize the value of the business is higher if the owner manages the managers. Recently a very qualified buyer walked away from a deal because the seller was so important to the business, and the buyer didn’t have expertise to replace a departing owner (who didn’t want to stay for more than 90 days).

So, how do you determine if the owner’s a dependency? It’s not hard. Often the owner will brag about all they do. Or, ask what they do on a daily, weekly, and monthly basis. If it’s a consumer business check the reviews and see if they mention the owner or the company or a variety of employees.

An owner should do as little as possible below their pay grade.

“Truth is confirmed by inspection and delay; falsehood by haste and uncertainty.” Tacitus (a Roman Empire Senator)