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.

What do You Wish For?

We were watching Star Trek Discovery, during one scene they fired off some pods to a planet’s surface, and to describe what they were doing they used some words I don’t think make sense but sounded good. Don’t you wish you could make things up and have them solve your problems. And let’s face it, beaming from place to place instead of driving or flying would be pretty cool.

So, what would you “wish” for? Would it be:

  • A shield to protect you from your kids’ teenage years.
  • As a business owner, something that would get your employees to think about the business almost as much as you do.
  • For business buyers, a less inefficient market (this will not happen given business sellers are so worried about a breach of confidentially, and justifiably so).
  • An education system benefiting all, including those geared for the trades.
  • When selling a business some magic dust that would fix all the blemishes like customer concentration, poor financial systems, owner dependency, erratic growth, etc.
  • More customers like your best customers who want value not just the best price (for lower quality).
  • Peace throughout the world, opportunity for all, and no more Zoom meetings.

Look, none of the above are going to happen, which is why life is so interesting. But we get up every day to do our best for ourselves and others and that in itself is interesting and worthwhile.

“One of the penalties for refusing to participate in politics is that you end up being governed by your inferiors.” Plato

Why Work for a Small Business (or Own One)?

There are reasons why people want to own (and buy) a small business. I’ve gone over the reasons why people want to buy and own a company a few times before and a lot of those reasons are why employees choose a small business instead of a huge company to work for. Let’s start with some names in the news recently.

  • Major League Baseball’s collective bargaining agreement ends after this season. It will be contentious over a few issues. Keep in mind, baseball players have the best deal compared to all sports as all contracts are fully guaranteed (thanks to Marvin Miller, head of the players association from 1966-1982).
  • The NCAA is in the midst of turmoil over NIL (players getting paid for their name, image and likeness) and the disparity of conditions for male versus female players.
  • Amazon just had a union vote, I’m sure there will be more, and they are now pledging to improve workplace conditions in warehouses.
  • Boeing employees in the transportation division and Teamsters Union vote to authorize a strike. All Boeing unions are upset over outsourcing, moving jobs out of the Puget Sound area, and downsizing while stating executives got bonuses while slashing jobs.
  • The teacher’s union dominated the talks of getting kids back to school. I saw a survey saying the vast majority of teachers wanted to return but the union stuck up for the vocal minority.

Contrast that with some of our past and current clients that have people who could easily be called “The Minister of Enthusiasm” for the company. They live, eat, drink, and breathe the company culture. It creates a contagious buzz throughout the firm.

As we see people return to the workplace, look at the contrast between the five bullet points and the preceding paragraph. Not the specific organizations but the theme of us versus them compared to, “We love this place.” Why do people like working for small companies? I think the reasons are pretty much the same as why people want to own one, with one difference, that being they probably won’t have as rich a salary plus benefits package. But the following seven reasons make up for it:

  • Creativity – there’s a lot more opportunity for it in small business as small business is always looking for better ways.
  • Rewards can be earned by good work versus given in mass to all because a contract says to do it that way.
  • Freedom to do things outside the box.
  • Listened to when they have value to contribute (or even when they don’t).
  • Flexibility to go to the dentist during the day, start early so they can leave early to see their child’s game or recital.
  • Advancement of their career is possible without selling their soul.
  • Fun whether it be “Beer Fridays,” retreats, family events, or just the general atmosphere of enjoying oneself while working.

Our business is centered on helping clients exit with style, grace, and more money and helping people buy the right business the right way. I write the above because nothing is more important to a business than its people. One may say profits are the most important item but without the right people there are no profits.

It all comes down to the fact that if you have a great team your company is more valuable and when it’s time to exit the value will be higher. As my past client Bob Gordon said, as he looked a seller in the eye, “You may think I’m buying your business but what I’m really buying is your people.”

There is nothing better an owner can do than have happy and productive employees. You don’t want the employees to say the new owner (buyer) is a “Breath of fresh air.” You want them to say, “Thank goodness nothing changed.”

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

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

Questions, Questions, and More Questions

I was talking with (helping) a person who has a very small advisory firm about a recent conversation he’d had with a prospective client. He wasn’t able to articulate the situation very well so I asked him things like:

  • What’s their objective?
  • Did you ask about timing?
  • Why are they talking to you (what are the issues)?

Obviously, he didn’t ask these questions, or many others, or I wouldn’t be writing about this. All I got was they had a nice conversation and got along well.

Contrast that with a meeting I had the other day. At one point, my prospective client said, “You ask really good questions.” This was after he had opened up about his business, his future plans, and family issues (which I didn’t ask about but sharing them showed a high level of trust).

High pressure sales is so 1960-70’s. Nobody wants to be sold, especially younger people who grew up in an age of information everywhere on everything (like our video podcast on this subject). For example, want to buy a car? Go online, find out what the dealers are paying, get competitive bids, etc. A lot different than even 10 years ago.

When we solve problems it’s because our clients know the what, they just don’t know the how. As in, how bad is the what (problem), how do we fix it, how much will it cost if we don’t fix it? You don’t have to paint a picture of doom-and-gloom, you only have to ask the right questions so they realize you know how to solve the problem.

“To achieve great things you need a plan and not quite enough time.” Leonard Bernstein

Who is the Face of Your Company?

There’s the old question, “Who’s the most important employee at a hotel?” and the answer is, the doorman (or doorwoman). They’re the first-person guests see and from whom they get their first impression.

I thought of this recently when I was at the grocery store and Starbucks. At the store I made sure to avoid the checkout line with the person Jan and I call “Chatty.” He just doesn’t stop talking. And he’ll say things like, “I’m not a sports fan but the Seahawks really need to do the following…”

Our local Starbucks has a barista who makes coming into the store enjoyable. She’s cheerful, remembers people, and it’s not overboard. I actually went to the Starbucks website and put in a good word for her.

So, who’s the face of your company?

  • Is it chatty or the enjoyable barista?
  • Is it a salesperson who responds to customer calls promptly and is helpful or a receptionist who acts inconvenienced when people call (or worse yet, an auto attendant that takes a few minutes to let you know they can’t direct your call to the right person)?
  • Do service people in the field make the impression the owner wants conveyed to customers?

There’s a story in If They Can Sell Pet Rocks Why Can’t You Sell Your Business (For What You Want?) about when an associate and I visited a client’s business and noticed how filthy the entry way was. We then realized the reason the employees were eating lunch in their cars was because the lunchroom was dirtier than the entry.

Compare that to a manufacturing business we had previously visited and commented, “You could eat off the floor here.” That’s the impression every business should want to make.

“After I’m dead I’d rather have people ask why I have no monument than why I have one.” (Roman historian) Cato the Elder

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 

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