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

Business – It’s Not Rocket Science

I have never worked with a business buyer who didn’t want to grow (aka scale) the business they buy. I don’t know if I’ve ever met a buyer who only wanted to keep it where it is. So I found a Bloomberg article in the February 14, 2021 Seattle Times interesting when they quoted Pierre Poignant who is running Branded, a VC back firm that has acquired 20 houseware and leisure brands. He said:

“We want to be a multi-billion-dollar company” and acknowledged, “buying businesses is one thing. Scaling them is another.”

My initial takeaways from this are:

  • It takes more than energy to grow a business. It takes a plan, the skills, and the resources. When buying one, a little luck is often involved. Luck often being defined as finding a company whose owner is “coasting” while making a great living. Some may say the seller is “leaving money on the table” by not fully exploiting their competitive advantage.
  • Sellers really need to up their game to show how the business can grow. This means grow the darn thing instead of keeping it stable and saying something like, “You can easily grow it, I just don’t want more employees.”
  • It takes a team. That’s why owners/sellers need to show they can attract and retain great people and let those people flourish. This is really what any buyer is buying.

Some may say about growing a business, “It’s not rocket science” and maybe they’re right. Given how many business failures and struggling businesses there are it might be tougher.

“The greatest and most important problems of life cannot be solved. They can only be outgrown.” (Novelist) Frank Herbert

“You want me to do something – tell me I can’t do it.” Maya Angelou

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

Tech and Our Lives

At the end of 2020 The Wall Street Journal had a feature article, co-authored by their four technology and related columnists, titled, “The Tech That Will Change Your Life in 2021.” The three topics that caught my eye were:

Death by Subscription: Yeah, pretty obvious. Every consumer company wants to be a SaaS model. Every search fund business buyer has the same criteria, which includes, “Recurring revenue.” Robbie Bach spoke at my Rotary club last fall, asked us to think about all the subscriptions we have, and guessed most of us would be at 20. I can easily get to about 15 in a couple minutes as I consider Office, Internet, Cable TV, Prime, Netflix, our CRM, Constant Contact, Beachbody, etc. Will it end? Will consumers revolt and scale back? We’ll find out, won’t we?

Return of the Trust Fall (as in the team building exercise where people fall backwards depending on their co-workers to catch them): The title is a metaphor for remote workers wanting to get back to the office, collaborate in person, and the offsite retreats, especially for companies with workers around the country or world. I agree. Once the vaccine is out en masse people are going to want to see each other, talk in person, get fodder for gossiping, and head out for coffee or lunch together.

E-commerce ‡ Amazon: Amazon disrupted a lot of industries, especially retail. But what’s next? Walmart, Shopify, Target, and others were slow to catch up and then found the barriers-to-mimicking were low. This is similar to a newsletter I recently read about how companies get complacent when all is going well (and I know Amazon is not complacent). The newsletter gave a few examples of middle market firms that thought they were on top of the world and didn’t see the competition leapfrog them. Always wonder how you can innovate, adapt, and stay fresh.

Even if you’re not a tech company you need to keep up with technology and how it can improve your business. And also realize no matter what the technology is, it still comes down to people. People have to create technology, implement it, learn it, use it, etc. A robo-dialer won’t get you customers. A good salesperson will.

“There are two things that can destroy a family business: the family and the business.” Leonard Lauder (former Estee Lauder CEO)

“A common mistake that people make when trying to design something completely foolproof is to underestimate the ingenuity of complete fools.” Douglas Adams

It’s Bad, but Not All is Bad

Covid has been wicked to a lot of people. It’s been a business boom for some. It’s changed everybody’s life in some way. And we’ve learned from it. We’ve learned there might not be as much travel for business “check-in meetings” given Zoom, Teams, WebEx, etc., that remote work is possible for some, that people do need the comradery you can’t get online, and people are creative.

We’ve recognized remote learning, especially for younger kids, is an unmitigated disaster. But a hybrid of remote learning may be the wave of the future for older students. Just imagine the best lecturer at a school doing the lectures for all the students and other teachers do the hands-on work.

This last point is something I’m working on for our Rotary projects in Antigua. Every project has budget constraints that limit the number of teachers we can train. With a hybrid model of online, in-person, and peer groups we figure we can triple the number of teachers we train every year. This is huge and a win for the teachers and especially the students.

When it comes to business, we’ve had to become more forward thinking given there have been no events like our Getting the Deal Done Breakfast Conference, association meetings, lunch and learns, etc. Even one-on-one networking meetings are scarce. Jessica and I did a lot of walking meetings during the nice weather but those are way down in the winter.

I’ll share our new marketing activities and ask you to think about what you’ve changed in the last year. Besides things like this Weekly Memo, we have:

  • Started a podcast channel featuring conversations with business owners and other professionals (we just got approved for Apple Podcasts and are now on Apple and Spotify).
  • Make sure we have something on social media at least twice a day.
  • Published a new book, Getting the Deal Done, with chapters from 11 other deal pros.

We did some short term things like our Zoom Happy Hours and YouTube interviews about business during Covid, that were very well received. I expect the above to be long-lasting. Sometimes it takes a slap in the face to do something new. It shouldn’t, but it does.

“What would life be without coffee? Bt, then, what is life even with coffee?” King Louis XV of France

“Start every day off with a smile and get it over with.” W.C. Fields

An NFL PR Machine

Don’t you wish you could have a PR machine like Russell Wilson? For the last couple of weeks he’s been a regular story in the Seattle Times, on radio stations, TV, online, and the mayor of New Orleans did a video encouraging him to get a trade to the Saints. All he did was complain about the Seahawks offensive philosophy and how he gets hit so darn much.

Now, none of us are as well-known or popular as him but it shows what “Word of mouth marketing” can do. Especially when you offer value like a business tip (not a cut and paste from someone else). One of the things I’ve recently realized is, more than ever (this is my tip), it’s tough to overdo marketing, especially online. There is so much clutter (much of it from large corporations) that you have to be constant and consistent. I have a tough time finding posts from those I know and respect so I know it’s tough for others to regularly find me.

When Football, Covid, Protocols, and Systems Collide

The NFL is down to the final four teams. On at least one of the games this past weekend the announcers talked about how successful the season has been. They said, and I paraphrase, back in July when training camps started nobody knew if they’d get the season in, but they did, with no cancelled games and only a few rescheduled games. They did much better than college football, which was a mess.

This newsletter is not about Covid, but it’s Covid that sets the tone for the business message below. The NFL did it by implementing some protocols we all can follow. They state high-risk close contact as:

  • Less than six feet of proximity.
  • For five minutes or longer in duration.
  • Indoors.
  • Unmasked.

Things we all can’t do are:

  • Daily testing.
  • Having players wear trackers and then investigating any potential close contacts.
  • Using surveillance video.

What it shows to me is diligence can suppress Covid. And before you think I’m in agreement with the Governor of Washington (New York, California, and others) on all the shutdowns, I’m not. My friend Pete McDowell sent me a University of Oregon study saying people don’t catch Covid in (reduced capacity) gyms (I agree based on my going to the gym last fall). I’ve followed contact tracing results a bit and there’s no way people get the virus in (reduced capacity) restaurants.

It makes me think that following the right protocols and having proper systems works, with Covid and other areas in our lives, including:

  • Business buyers who have a plan, set up systems, and follow their protocols will do better at locating, analyzing, and closing a deal on the right business at the right price.
  • Business sellers who take the time to think about what they’ll do if they sell and also get professional input on if the net price of the business is enough for their next great adventure in life will have less seller remorse.
  • Employees who follow the proven plan will advance quicker and be more productive. And if they show how to add value to the current plan all the better (instead of thinking they know more than anybody else and get disengaged).
  • Owners who are willing to listen, act, and delegate have better businesses with more value. It’s not how important the owner is to the day-to-day, it’s how little are they needed in the day-to-day.

It really is pretty simple. If you have a plan that works, and you follow the plan, you’ll be successful. In business, health, and life.

“We are pathetically eager to believe that, if human affairs are managed right, nothing unpleasant need befall anyone.” (Journalist) Max Hastings

Happiness, Dogs, and Culture

Let’s start 2021 on a happy note. On January 2 in the Wall Street Journal there was a column by Susan Pinker titled, “Dogs Really Do Make Us Happier.” Ms. Pinker did research to see if she could prove the “rumors” about dogs making people happier, especially during the pandemic. The results: yes, dogs make people happier and she quotes Lauren Powell, a postdoctoral researcher at the University of Pennsylvania, “Basically we found that the loneliness in the group that got a dog decreased by 40% and stayed at that lower level at eight months.”

What does that have to do with business? Well, if you’re happier you’ll be more productive, creative, and enthusiastic (and for business owners’ enthusiasm is one of the four things I believe an owner needs to be good at managing and/or leading, along with people, processes, and money). 

If your employees are happy, they will be better employees. But you can’t get them a dog or mandate they get one. You can create an atmosphere of happiness, which is called culture. I’m not a culture expert, there are plenty of good ones around, but do know if you cover the basics, you’re 80% there. The basics, to me, include:

  • Respect
  • Listening 
  • Delegating (so they can grow professionally)
  • Fair compensation
  • A great environment

Are you and your company 40% happier, as those people who have a dog are?

“Chance favors the prepared mind.” Louis Pasteur

“Another belief of mine: that everyone else my age is an adult, whereas I am merely in disguise.” Margaret Atwood [Ed: and dogs help you maintain your disguise]

Dependents Save on Taxes; Dependencies Reduce Value

Here’s an exchange I recently had with a supposedly seasoned businessperson, growth consultant, and business broker:

Me: “There are a couple issues with this business, one in particular seems serious.”

Him: “Oh, what are they?”

Me: “The main issue is the top two customers are 60% of sales.”

Him: “I don’t see why that’s an issue.”

Really? He doesn’t see it’s an issue? Two customers dominating, the top one at 37%. And this in an industry with larger players, low barriers to entry, and the number two customer moved over from a competitor three years prior (and probably would move again to save a few bucks).

It reminds me of a story in my books about a call from a desperate owner who wanted a buyer for his business. He had helped his 80% (of sales) customer get started (as a contract manufacturer), the customer’s owner brought in a new management team, the new CEO had a friend whose company made the same products, and the rug was pulled out with no notice. Bye-bye big customer, bye-bye business.

Ours advice to one and all (especially owners planning to exit at any time):

Get rid of your dependencies.

  • No dominant customers.
  • No key employees (who would be hard to replace).
  • No major supplier (with limited options other than this supplier).
  • No owner dependency. The less the owner does day-to-day the better. It might be tough on the ego but it sure builds value. Strategy, vision, and growth (including by acquisition) should fill the owner’s calendar.

“I guess a man is the only kind of varmint who sets his own trap, baits it, and then steps in it.” John Steinbeck