It’s 2020. Another year, another decade. Doesn’t seem that long-ago people were worried about the world collapsing on 1-1-2000 because of computer clocks, does it?
As Jessica and I talked last week about getting back in the swing of things after the holiday break, one word we used a lot was urgency. Urgency on our marketing, urgency with our clients, and just keeping things moving.
Seattle football fans know the Seahawks would have had a home game in the playoffs if they had shown some urgency on the one yard line instead of getting a delay of game penalty.
Urgency doesn’t mean rushing into things without a strategy or good tactics. To me it means when the starters gun goes off you move at the appropriate pace. By this I mean, in marketing you can move fast. Making changes to your processes or culture are done at a different pace so you don’t trip and fall. It’s different for all of us.
Think about three areas in your business where you can pick up the pace. And then move on them now, not next month or next quarter.
“Few things are harder to put with than the annoyance of a good example.” Mark Twain
Goals are an ongoing task, not just for a calendar year.
Many years ago I was a regular at a pretty cool restaurant in Minneapolis, when I traveled there about once a month on business. I remember the manager telling me, as he propped up my wobbly table, unstable tables have always been, “The bane of the restaurant industry.” And he’s right. Invent a table that doesn’t wobble and you’ll have quite a business.
So, what’s the bane of your business? Is it:
Marketing – this is a common one. I’ve talked to so many owners who say something like, “If only we knew how to market better.”
Sales – too often there are more order takers than true salespeople. And, finding a good salesperson is one of the toughest hires there is.
Inefficient operations – growth, and I mean profitable growth, can mask a lot of problems. But if there’s not growth or when it stops, it’s time to get an expert in to improve productivity. Improve gross margin by 2 points in a $5 million business and it’s $100,000 to the bottom line.
Poor culture – let’s face it, most problems have to do with the people. Don’t believe it? Just look at all the articles, podcasts, etc. on management, leadership, culture, and similar. I always find it amazing when we do “focus group” type meetings with employees. Very insightful (and usually the owner is surprised by the results).
A dependency (key customer, an employee who if they left would create a huge problem, or you, the owner, can’t get away without risking catastrophe) – easy to spot, tough to fix (quickly). But when it comes time to sell, a large dependency will scare buyers away or reduce the price.
It’s time to figure out the bane of your business and deal with it (or them).
“The main dangers in this life are the people who want to change everything – or nothing.” Nancy Astor
This was originally written for the blog on www.ibainc.com.
An interesting title of an article about how the author helps his company’s clients, isn’t it? Immediately telling readers the subject might not be for them. It’s because I’m not a salesperson, one size doesn’t fit all, etc. In fact, I start out speaking engagements on buying a business by telling the audience (usually management and executive level people0 there’s a good chance it’s not for them.
But when it is for you, be sure to do it correctly. And that means don’t jump in without a plan and when it comes to growth by acquisition that means know why you’re doing it.
In my book, Company Growth By Acquisition Makes Dollars & Sense I have a list of 19 reasons to consider growing by acquisition. I’ll list them here and go into detail on six of them.
The cake – 16 solid reasons (in alphabetical order)
Acquire great talent, including the seller
Assets are cheaper as a package
Competitive Advantage (fill a weakness)
Diamonds in the rough
Diversify your product offerings
Integration is easier
Location, location, location
Make a competitor go away
Psychology – Employees like to be part of a winner (growing firm), just like sports bandwagons
Risk, it’s a lot lower
Overhead the same, volume higher
Vendor relationship strategies
The icing – the top three
Customers (efficiency vs. make more calls)
Yes, we can!
The bigger you are…the better
Acquire great talent
Good employees are hard to find and often are not in the job market. Just talk to any executive recruiter. While all buyers want capable employees, most strategic buyers (that’s you) also prefer to see a solid management team in place.
Great employees with industry knowledge and experience are in the job market even less. When you are looking for great salespeople, I believe this is amplified. They won’t change if they’ve got a good thing going. Here are some statistics from an executive recruiter, which explains why it’s tough to find good people.
82% of people aren’t searching for a job.
Leadership, or the lack thereof, is the top reason management people switch jobs (not money).
46% of millennials left their last job because of the lack of career growth.
If you acquire their company and create an atmosphere of growth, those employees will want to stay. While I can’t comment on the culture in all companies, I do know that many small family-owned businesses have owners who are coasting. They are doing very well, they aren’t working too hard, and they don’t want to disrupt the nice moneymaking system they have.
Dependencies are a huge issue in most small businesses. By being larger you can reduce most or all of the following:
Not too much explanation is needed. More customers over your expanded revenue base, more employees, deeper management, less product concentration, and most importantly, there’s more talent to take a load off the owner. And an owner dependency is often the brightest red flag for most profitable small businesses. Of course the owner has to be willing to take advantage of the deeper bench by delegating to them.
Psychology – Be part of a winning team
Employees want to be part of a winning team. They want to feel they’re contributing to a winning effort. It’s very much like sports, the more the team wins, the greater the number of fans it has.
I’m thinking of a young man in his early 20’s whom I know. He took a while to figure out some things in life and is now steadily employed and has been for the last few years (with the same company). He’s proud of his job, his contribution, and showed disdain when a new, younger employee (whom he called “the kid”) flaunted the rules and wasn’t dedicated. (But let’s be honest, some employees at this level don’t care, but they’re not the ones who are important anyway, like “the kid.”
Now elevate this to the more experienced people including the management team. In one company there was some doubt about the general manager accepting new ownership. However, this doubt was unfounded as he’s leaped at the chance to implement quality controls, better processes, and accountability.
The icing – the big three
Now here are the top three reasons to grow by acquisition.
“This would be a great business if it wasn’t for those darn customers” was a semiserious comment someone made to me years ago. Of course it’s the annoying (bad) customers he was referring to. It’s good customers we all want more of—customers who are loyal, steady, in good financial shape, growing, pay their bills on time, appreciate the value you offer, and consider you part of their team.
An ideal situation is where there are some overlapping products, so there is some continuity and synergy to be achieved. The figure below shows this. Your salespeople now have an easy transition to discussing, and selling, their products, and their salespeople have an easy transition to discussing, and selling, your products.
In simple terms, if your primary motivation is acquiring a customer base, you are acquiring market share. You may have many other reasons (above), but the bottom line is you are buying customers, and that means top-line growth.
Yes, we can!
This is not about ego; it is about building an exit strategy in order to get a higher selling price. Buying another company, assimilating it into your operation, and showing that the combined profits are greater than the two individual companies’ profits demonstrates to potential buyers that this can be done. It proves you have the team that can integrate one operation into another.
This integration could be their assimilating your firm into theirs or it could be a signal that growing your business (or now a division of theirs) is possible by further acquisitions. A management team that can successfully integrate other firms without major disruption and with immediate efficiencies is a valued team. Too many big mergers and acquisitions fail. Up to 95 percent of public mergers do not live up to expectations. A savvy buyer will appreciate this talent and experience associated with past integrations.
Why larger firms sell for more than smaller ones (all other things being equal)
The bigger your business is, the more it will sell for, all other things being equal. A $50 million (revenue) company with 10 percent earnings will sell for a higher multiple (of profit, earnings, free cash flow, or whatever metric you use) than a $25 million company with 10 percent earnings, which will sell for a higher multiple than a $10 million company, and so on.
There are generally accepted ranges for multiples of earnings based on the range of companies’ revenue. However, too many small business owners see in the Wall Street Journal that a $300 million company in their industry sold for ten times earnings and assume their small business will also sell for ten times. That won’t happen; there’s more risk in smaller businesses than larger, so the desired return on investment is higher.
The fastest and safest way to grow from $5 to 15 million is by acquisition. Buy another firm in your industry—a supplier, customer, or unrelated company that provides diversification—to have an immediate revenue increase and a larger platform from which to grow organically. See more profit and a higher multiple when you exit.
“It’s not bragging if you can do it.” (Dizzy Dean, 1934)
A lot of business owners talk about their company’s potential or the growth that will occur if the buyer just “does some marketing.” Of course, most of this is just talk. Business buyers of all types and sizes are a skeptical lot. When buyers hear too much about potential they think the seller has tried every conceivable way to grow and can’t.
So prove you can do it. Grow organically and also go out and buy another company. Show that you can integrate the people, processes, financial systems, customer service, and everything else into your operation. Private equity groups and large corporations make multiple acquisitions. If you can buy another firm and successfully assimilate it, you become more attractive to these buyers. They will assume you can do it again and that your management team is capable. Strategic buyers and equity group buyers highly value management teams—it can even increase the multiple (compared to having the same size company that has not made acquisitions).
We’ve covered just six of my 19 reasons on why it makes sense to grow by acquisition. I realize most may not apply to your business. It’s the few that do apply that are the reasons why this strategy may make sense. Heck, your catalyst may be a reason not mentioned here. The point is this has worked for many companies and you should always have your eyes open looking for opportunities as there are a lot of good reasons to do so.
At the same time I must acknowledge there are pitfalls you need to avoid, but they can be avoided if handled correctly. How you handle the cultural integration makes a huge difference. Letting (most of) the employees, with both companies, know their jobs are safe is important, as with any acquisition. And you will be taking on debt, but this debt comes with good things like customers, good margins, cash flow, etc. If it makes sense to buy another company these pitfalls are easily overcome. As a very wise executive once told me, “Growth hides a lot of operational warts.”
Gazing out the window of a high-rise I saw workers on scaffolding on a building across the street. My first reaction was, “That looks like fun. It must be exciting to work above the city.”
My second thought was hanging from a building is a lot like entrepreneurship. It’s risky, thrilling, and can be very rewarding. It may not be your life at risk (like hanging from a building) but rather money, respect, and sanity. And the odds of an entrepreneur failing are much greater than a cable, with multiple redundancies, snapping.
Within a business the scaffolding reminds me of what too many businesses have, and that’s a dependency. The workers suspended above the ground are dependent on the equipment, the maintenance, and other people. If any fail the result can be catastrophic.
The same is true in business, especially small and mid-sized businesses. Too often there’s a dependency on one, two, or three customers, a key employee or two, or the controlling, unwilling to delegate owner.
Often it works out in spite of the dependency. But then it’s time to exit and the buyer worries the cable will snap leaving him with acquisition debt payments but a missing key customer or employee or the (previous) owner, who has too many secret sauce recipes in her head.
Lesson: high-rise scaffolding has redundancies to prevent a disaster and a business’s redundancies are having a diverse customer base, knowledge spread amongst numerous employees, and an owner who’s built a team he delegates to. This is what leads to a high reward.
“The three most harmful addictions are heroin, carbohydrates, and a monthly salary.” (Statistician) Nassim Nicholas
The Wall Street Journal had an article titled, “New Ways to Battle Procrastination.” So, I tore it out to read later.
Seriously, I did tear it out and did so because I was about to go into a meeting and wanted to get rid of the rest of the paper. Like a lot of people, I have a list of things I need to do. And I love checking off those I complete.
But, and this is a big but, when it’s something I can quickly do, I do it right way. Unlike some people I know who say, “I’ll put it in my book.” As we head into 2020, what are the things you want to get done before yearend?
My advice is, get everything you can get done in the next two weeks so 2020 is dominated by new initiatives, growth strategies, and enthusiasm.
“Nothing so needs reforming as other people’s habits.” Mark Twain
It’s common knowledge cable and satellite TV companies have been losing customers to cord cutting, i.e., people using only online streaming services for their in-house viewing entertainment. So it has to have been a balancing act for these firms on how to keep customers, advertisers, and content providers happy.
For years it seemed customers were at the bottom of the list with an example being watching recorded shows on a DVR. Yes, you could fast forward but it’s a game. Watching On-Demand often didn’t allow you to fast forward through commercials (although we figured out you could jump forward and rewind back a little).
But now, at least on Xfinity, many shows have “smart resume.” There’s a colored bar showing where the commercials end. I’m not sure how the advertisers or content providers (who often charge advertisers) like it, but we sure do.
So, how do you make customers feel special?
Sometimes it’s saying, “no.” If you’re not the best option, refer a potential customer to someone better suited to help them. We do this at least once a month.
Solve their problem! This is really sales 101. No band-aid solutions, no one size fits all, provide a solid, long-term solution.
Communicate, regularly. When things are going well, be in touch because when there’s a hiccup (maybe not even your fault) it will benefit you tremendously.
And by the way, the above philosophy applies doubly to your employees.
“Children see magic because they look for it.” (Author) Christopher Moore
There was a recent news story about a Seattle area law enforcement officer suing for about $11 million because of a health condition caused by vaping (a CBD product and something else to relieve his stress and pain). Am I missing something?
He heated a chemical concoction, inhaled it, and figured all was good? He couldn’t imagine burning chemicals could cause bodily damage.
I also see a lot of naivety in business and in the buy-sell world. A lot of it reminds me of some old sayings like:
“Build a better mousetrap” (and the world will come to you).
“If we build it, they will come” (Field of Dreams).
“Our product is the best on the market” (but the competition markets better).
In the buy-sell world what I see the most is:
It’s easy to find a good buyer (they’ll all be standing in line for my business).
Finding a mature, profitable, and fairly priced business is easy (it’s the mature, profitable, and fairly priced part that adds the complication as there’s no shortage of lousy and/or overpriced businesses).
I (buyer) can fix this business (turnarounds make headlines for a reason, they’re rare).
There’s a lot of discretionary cash to cover my debt (are your mortgage, car, tuition, utility payments discretionary? To cover debt you need “real” cash flow after a fair market salary).
Our competitive advantage is we’re the cheapest so pay us a lot for the business (someone will figure out a way to undercut you; value is when people pay more for a great product and service).
Don’t vape yourself into trouble in your business, the one you buy, or the deal you want when you sell.
“They always say time changes things, but you actually have to change them yourself.” Andy Warhol
As we experience the holiday season with Peace on Earth, Goodwill to All, Thanks(giving), and the meaning of all this, I want to share my thoughts on what I consider to be one of the best codes of ethics around. It’s Rotary’s 4-Way Test and how I see it applying to politicians and businesspeople.
The 4-Way Test is:
Is it the truth?
Is it fair to all concerned?
Will it build goodwill and better friendships?
Will it be beneficial to all concerned?
Is it the truth?
Politicians – I think I could stop here because we all know they all lie, about everything. We have a President who sets the standard with over 12,000 verified false or misleading claims. Politifact states Obama made about 14% the number of “pants on fire” lies as Trump (yes, Democrats and Republicans, they all lie). Here in Seattle a Seattle City Council member, on the Berkeley “ban natural gas” bandwagon, stated a natural gas stove poisons the air in the house. A University of Washington scientist debunked that one pretty quick.
Business – My experience is most businesspeople are pretty truthful, other than owners who blend their business and personal checkbooks. They may write off some personal expenses but do report their income. When it comes time to sell, most care about their legacy (they want the buyer to succeed) and really care about their employees thriving with the new owner.
Is it fair to all concerned?
Politicians – Again, pretty simple as they only care about getting re-elected and the people who can help them accomplish that. This means donors and lobbyists not you or me.
Business – Most really care about their employees and customers. Yes, some (way less than 50%) are greedy, pay low, don’t provide benefits, etc. One telltale sign is often the retirement plan. If it has 95% going to the owner, you have to watch out for that person.
Will it build goodwill and better friendships?
Politicians – Yes, if you’re a donor, a donor’s business, or a donor’s cause. Otherwise, you’ve got to be kidding.
Business – Small business is relationship business. You can’t succeed if there’s not goodwill between employer and employees, the business and its customers, vendors, and service providers. Face it, customers usually have options. In today’s labor market employees have a lot of options (on my list of the top four things an owner can do to prepare the business for sale is, “Show you can attract and retain great talent.”
Will it be beneficial to all concerned?
Politicians – You know my thoughts on this. See the above three sections. If it’s beneficial to the politician they’ll do it (often meaning they’ll do what the Party tells them to do).
Business – If you’re in business, large or small, you must be able to solve problems, meaning beneficial to your customer, your vendors, and you. Try making a promise like a politician and not delivering on it (we’ll have your order out by the end of the month but when it’s two months late you’ll lose the customer). Things must be beneficial to employees also, or they’ll leave. Most want career advancement and want to be able to take pride in their work.
It’s the holiday season and this is a fun essay. I’m sure you picked up on the general theme, we businesspeople have a higher ethical standard than those we elect. As you give thanks on Thanksgiving, wish friends and family Merry Christmas, Happy Hanukah, and Happy New Year, realize it’s best to carry all those feelings throughout the year, not just in December.
On October 23 we had our 12th annual Getting the Deal Done Breakfast Conference at the Bellevue Club. As always, our sponsors and expert panelists (beside myself) were PRK Law (Greg Russell), Hutchinson Walter (Marc Hutchinson), Columbia Bank (Bill Barclay, and Chinook Capital Advisors (John O’Dore). Of course, we couldn’t have done it without our ~175 attendees (I don’t have the exact count yet, but Jessica told me she counted three empty chairs).
As I welcomed everybody, I quipped that regular attendees might think we’re a food industry conference given over the last half dozen years we’ve had Renee Behnke (Sur la Table), Joe Whinney (Theo’s Chocolate), Robbie Bach (owner of Manini’s Pasta), and Joe Fugere (Tutta Bella). I explained it made sense to have all of these food industry people because the food industry is a tough and competitive business so it takes really good business people to succeed in it.
Which brought us to the introduction of Bob Donegan, president of Ivar’s, who spoke on “Lessons our flounder taught us that allowed us to thrive for 82 years.” In recapping Bob’s talk, which received nothing but rave reviews, I won’t steal his talking points but will summarize for you. Bob concentrated on what I’ll call the big three non-financial factors all businesses deal with:
Employees are on the top of Bob’s list, as they should be. His opening remarks on employees were centered on finding and keeping good people. One of his lessons was, hire for enthusiasm, train for skills. And, keep employees happy. They keep them happy by constantly recognizing their people and making it fun.
The results include, while industry turnover is 250-400% Ivar’s turnover is 18% for management and 100% for staff. Given it costs over $2,000 to train a new staff member this is huge (with over 50 locations). This leads to better customer service, lower L&I claims, reduced food waste, and higher pay. In addition, it allows the company to give every employee medical, dental, counseling, a 401(k) and meals.
Customers are second on Bob’s list and directly tied to the employees via the customers service provided. Ivar’s does a great job of knowing their customers, and I mean really knowing their customers. Again, Bob shared some statistics (he’s big on measuring being a former CFO). Three of the most interesting categories of metrics, for Ivar’s seafood bar business division, are:
Ivar’s customers visit 3-4 times as often as the national average for a fast serve facility and will travel five times as far (on average).
Their customers average age and income is 50% more than the national average customer while the average purchase is almost triple the average.
The average customer satisfaction score is 50% higher than average, over 90%.
Vendors are also important to Ivar’s and Bob told a story about taking care of a preferred vendor during a time of crisis. They kept paying them even when not getting deliveries. He also told of a partnership with a Native American tribe that gets them high-quality Yukon River salmon. This is why they refer to their vendors as partners.
He closed his talk by discussing how they always think long-term, not quarterly profits. This shows in all of their metrics. And, he emphasized they always want to have fun (which is what I tell business buyers needs to be on the top of their list of reasons why to own your own business).
I don’t know about other cities so maybe this isn’t unique, but the Seattle area has quite a few, well known restaurants putting people first. Not only Ivar’s but Tutta Bella, Dick’s Drive-In, and Mod Pizza. They offer (one or more of) second chances, benefits, tuition programs, career advancement, and more. And it pays off.
We’ve been working on an ongoing project with Pacific Software Publishing to locate acquisition targets of companies doing website hosting. Many moons ago I came to the conclusion a lot, and I mean a lot, of businesses would be shocked to find out how and where their websites are being hosted. Here’s a handful of what I’ve seen (and my client has many more examples):
A common refrain in business is to get to know your customers. But what about your customers getting to know you, in specific:
Unlicensed server software
Servers in a house basement without climate control
Antiquated hardware and software
Hosting as a minimal and (pretty much) ignored part of the business
How you work – using the above example this would include reassuring customers about your equipment, software, facility, support, etc.
Your processes – letting customers know the best way to do just about anything with you including ordering, problem solving, service, etc.
Your people – who are your people, who’s the client liaison for support, logistics, and, most importantly, the following point.
Problem procedures – what happens if there’s a problem with service, delivery, quality, or anything else. In a small business the owner should let it be known they will get involved and help solve any problem.
In buy-sell deals I say one of the three key factors is education (on what it takes to get a deal done). The same with customers. The more insights you share, the better the relationship.
“If things were simple, word would have gotten around.” (Philosopher) Jacques Demida