Don’t Drive (Your Business) Over the Curb

Owners travel a road every day and their road has curbs. The wider the road the better. Last month I wrote about customer concentration, a dangerous curb that significantly narrows the road (decreases value). Another important one is growth, or the lack thereof. What are some of the common reasons for a lack of growth?

The industry is shrinking – as in the product is dying a slow death. Forget about 100 plus years ago and the buggy whip analogy, go back five to ten years and look at what happened to CDs and DVDs, and the jewel cases they come in. Possible solutions: buy other companies in your industry or buy a company in another industry to diversify.

There’s a restrictive territory – if you can only sell in certain counties, zip codes, or even metro areas you may reach capacity. Possible solution: get other territories or product lines.

The people can’t handle any more volume – often it’s the owner whom the business outgrows but it can be the whole team. It’s tough managing 50 people instead of 15 or handling cash flow at a level beyond what the line of credit allows for. Possible solution: hire a CEO or COO who can manage a larger firm (and work with them, don’t just turn it over to them).

The owner doesn’t want to grow – this is the most important itemon the list when it comes to decreasing value and I see this all the time. The owner makes a lot of money (it’s all relative), the employees are looking for career advancement, and the owner won’t take the risk or make the investment to act on (good) ideas. So the business coasts. If it goes on long enough the great employees leave and there’s a second-rate team that doesn’t have good ideas and can’t handle growth. Solution: don’t fall into the coasting trap. As in the section in my book If They Can Sell Pet Rocks Why Can’t You Sell Your Business (For What You Want?), show growth, know why it happened, and keep it going. You’ll be rewarded in more ways than one.

You can’t look at the write-up of any business for sale without seeing the word potential. It resonates a lot better if the company’s been growing at 10% a year instead of being flat. Flat sales (and therefore decreasing profits) narrow the road.

“Mystique is 100 times better than publicity.” Michael Ovitz

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

When Sports, Kids, and Relationships Collide

This is not about sports, but it’s based on the April 5, 2019 Wall Street Journal’s sports page, which had an article about former UCLA and NBA player Earl Watson and his goal to coach college basketball, preferably at his alma mater.

He’s done some coaching, including the NBA, and is now back at UCLA getting his degree. A former player thinks he’d be a great college coach and said, “These days it’s less about the X’s and O’s and more about relating and getting kids’ attention. UCLA continues to hire outsiders that can’t connect with the players.” Watson was quoted saying, “These kids’ stories are truly amazing. Their brands are amazing.”

Pay attention to the following from the above and my comments below:

  • It’s more about relating (than operations)
  • Get peoples’ attention
  • Stories, as in we all have stories
  • (Young players) brands are amazing

Business is about relationships. You get clients or customers and referrals to them based on relationships. Business buying and selling is a relationship game first and foremost.

You have to get the attention of those with whom you want to reach and connect. There’s a lot of noise in the world today and more, easily accessible, information than ever before. How do you stand out in the crowd?

Stories sell because stories are remembered. Working with a client the other day I told him he had fascinating stories about what he’s done in his career and he looked enthusiastic when he told them (he leaned forward, spoke forcefully, etc.).

Brands are so very important. The article mentioned some incoming players (coming out of high school) have larger social-media followings than their (future) school’s athletic department. For some it’s in-person, for others it’s via social-media, and no matter what your mechanism your brand needs to be built, nurtured, and constantly reinforced. It’s what I trademarked, The Escape Artist™ for the work I do helping people escape their job, business, or plateau.

No matter what business you’re in, it’s a people, marketing, and relationship business.

“Knowledge is power, if you know it about the right person.” (Author) Ethel Watts Mumford

Early Retirement, Forced Retirement, What Retirement

There was a column in the Seattle Times Sunday business section a few months ago titled, “Early Retirement Can Be Hazardous.” This was a financial column, so the focus was on running out of money. It triggered the thought about what exactly is retirement and why there is so much focus and advertising about it.

The government created the concept of retirement as we know it when Social Security was started in the 1930’s. At the time, the typical life expectancy of a male age 65 was age 68-70. It was also the middle of a long depression, which really didn’t end until the start of WW II. By giving citizens a retirement stipend, it was a way to get older people out of the work force and create job openings for younger people.

Now the life expectancy of a 65-year-old male is about 18 years and for a female it’s about 20 years (from the Social Security Administration website). We also have a shortage of qualified workers so there’s no need to push people out of the workforce.

If the government created the concept, then the financial services industry popularized it. Radio ads, TV ads, print ads, workshops, webinars, etc. tells me there’s a lot of money to be made helping people retire. (And studies say most people don’t save much money.)

So it was refreshing to hear an owner say, “I don’t buy into the concept of retirement as most people think of it. I’ll always want to be doing something.” My dad retired as soon as he hit age 62 because he hated, and I mean hated, his big corporate employee (he and many others had been let go 8-10 years earlier and won an age discrimination lawsuit, which got him his job back, but lost the company his loyalty).

When it comes to business owners contemplating selling, the most important question to ask is, “What will be your next great adventure in life?” Many haven’t thought of it. Something triggers the desire to sell but there’s been no planning.

Often it’s one of the following (assuming none of the 3 Ds, divorce, death, or disability/health issue):

  • They started the business to work on the widget and now are managing a few dozen people, and they don’t like managing people.
  • They’re burned out because they haven’t built a management structure, i.e. they don’t delegate. *
  • They’re bored and want a new challenge.
  • They’ve lost the battle at home, i.e. their spouse wants them out.

It’s funny how we want our favorite authors to keep writing, musicians to keep playing, actors to keep acting, and yet people always ask others when they’re going to retire, as if it’s a badge of honor to stop contributing.

“I don’t believe in retirement. Everybody who retires too early dies too early.” (Sportswriter) Dan Jenkins

* As per my friend Allan VanderHamm’s recent newsletter, a dependency on the owner reduces the company’s transferable value, meaning when the owner leaves too much of the business leaves. (and the price is lower).

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)

Networking and Friends

In her March 16, 2019 Wall Street Journal column, Kids, Don’t Become Success Robots, Peggy Noonan wrote about the recent college application scandal. Her emphasis was about how when parents cheat the kids believe cheating is normal and will have regrets doing so.

She told a story about speaking at an Ivy League school and being surprised because the students didn’t want to talk about any subjects or doing high-quality work (to succeed in life0 but about networking. Not networking as we think of it, but as “how can I use other people to benefit me.” She tried to explain it’s about the quality of the work you do and asked them, “Why don’t you just make friends?”

She came away disillusioned and felt the students had been trained to be shallow and see others as commodities.

So, what does that have to do with you and me? We think of networking a way to have a win-win relationship. It’s not taking advantage of others, it is making friends in order to help each other. It’s pretty easy to spot people who care more about themselves than their clients, their referral sources, or anybody else. I look at my referral tracking list and realize the vast majority come from people I consider friends. People with whom I would enjoy having a cup of coffee, a beer, or a meal.

My takeaway from this is if your objective is to get to know others better and understand how you can help them, you’ll end up being rewarded in the long run.

“Do not network. Make friends. Learn about the lives of others.” Peggy Noonan

Lipstick on a Pig; Homes and Businesses

Buyer Beware: Hollywood Special Effects Now Permeate Property Listings” is a headline in the Wall Street Journal’s March 5, 2019 edition. The gist of the article is sellers and their agents to doctor images of the house for sale. The article states, “The technology allows sellers to green browned out lawns, stage rooms with virtual furniture and even perform full-blown HGTV-style makeovers with the click of a mouse.”

Of course, this is a huge risk to buyers, especially when a Redfin study says up to 35% of buyers made an offer sight-unseen. I’m surprised this took so long! Home sellers are way behind business sellers when it comes to putting lipstick on the pig.

As in the video below and the article “Add-backs, Adjustments, and Assumptions” are prevalent in the buy-sell world. Which is why I was pleasantly surprised when a friend, who recently sold his business to the number one player in his industry (and the only truly strategic buyer) told me he handed his financials over to them with no adjustments, recasting, or anything else.

A big part of what made his business attractive was he paid attention to the details, which I espouse regularly:

  • His business wasn’t an extension of his personal checkbook.
  • He paid close attention to the numbers and their accuracy.
  • There was (and still is) a strong management team, and highly paid, which is why his employee retention is so good.
  • Because of the above point there’s no dependency on the owner.
  • The company’s been steadily growing.

It’s not hard but too many owners focus solely on the short-term, as in, how can I reduce my taxes this year? If my friend had only concentrated on current taxes (write off personal expenses, buy things not really needed, or expense inventory) his price would have deflated like a tire hitting a nail. Or, the buyer would have passed on the deal.

“If something can corrupt you, you’re corrupted already.” Bob Marley

Getting Comfortable With the Uncomfortable

“You have to get comfortable with the uncomfortable if you want to grow.” I heard this recently and it hit home. It reminded me of our Partner On-Call member who had a hard time picking up the phone, until he picked it up, and the call went great. Of course, he deliberated again for 15-20 minutes (his estimate of time) by staring at the phone before making another (successful) call.

The other day I asked Jessica to make a list of the top three things she’s uncomfortable with after one year in her job. Her list was:

Writing – not surprising, is it? As I tell groups, if you can write a few paragraphs people are impressed because most people can’t write a decent sentence. So, she works on it weekly.

Asking for referrals – this is tough, isn’t it? To actually ask someone for something. It takes confidence in yourself, which was another issue with our Partner On-Call franchisees, being at the desk where the buck stops is a lot different than running a middle-market company or a large department.

Follow through – again, it’s easy, for 80% of us, to get distracted. Start five things, finish none, repeat the next day. An accountant friend recently told me she’s not organized (yes, surprising coming from an accountant). It’s why I short list tasks, number them, and don’t start the next one on the list until the previous one is done.

What are your uncomfortable things? (We all have them.) It takes effort to get comfortable with them, but it’s worth it.

“You have to get comfortable with the uncomfortable if you want to grow.” Matt LaFleur

What, You Only Have Six Customers?

For the foreseeable future once a month this memo will be on a topic to increase value in a business, which is exactly what business owners should want and is definitely what business buyers are looking for.

I’ll start with one I’ve seen a lot of lately, customer concentration. Here are three examples:

  1. Seventy percent of sales to one customer.
  2. Seventy-five percent to three customers.
  3. Eighty percent to three customers (one being a middleman buying for their clients).

This should scare owners, but usually they feel their relationship is so tight all is okay. To a buyer, with acquisition debt payments, it scares the bejeebers out of them. To spin this around, I’ll repeat something I wrote about years ago because vendor concentration can be as deadly as customer concentration. A past client had about 70% of his sales from one vendor, he lost the line, built up his business, and again was with one vendor at 65%. Lost that vendor when the vendor’s competitor took sales in-house and his vendor went to my past client’s larger competitor.

This stuff happens, all the time. It’s not make-believe or fantasyland. I talked to an owner recently who lost his top customer. Why? Because his salespeople (I’m using the term loosely) made contact once a year. The rest of the year they took orders and cashed commission checks.

So, what happens when it’s time to sell? One recent deal had a price 30% of what it would have been three to five years ago, which was before the top customer changed focus and sales reduced significantly. One of the examples above is a company close to selling and the facts include:

  • The price is 50-60% of what it would be if there was no customer above 10% of sales.
  • There’s a claw back provision for 20% of the price (if sales drop below certain levels).
  • The seller has to stay for (at least) one year to maintain the relationship.

So much for exiting with style, grace, and more money.

The real problem is no matter how often their CPA, banker, consultant, and M&A professional tell them to fix this problem the owner is “fat, dumb, and happy” riding the top-customer wave. It’s why the Wall Street Journal published statistics showing 90% of small to mid-sized businesses are not ready to sell for maximum value.

“There is more stupidity than hydrogen in the universe, and it has a longer shelf life.” Frank Zappa

Are You Making a Difference?

“We can’t measure what you’ve done for us over the years. We are so far ahead of where we would be without your help.”This is one of those statements that sticks in your brain, at least it stuck in mine.

The above was said by the Director of Education of the island country of Antigua as we reviewed our Rotary service project and planned for the future. No matter what business you’re in, look at your testimonials; do they sound like the above? i.e. we’re better off with you (or your company) than without you? This being one of Partner On-Call’s tag lines.

When I teach my class at the SBA on “Dynamically Growing a Consulting Business” I use the “better off” line at least half a dozen times. I want to drill it into the students head you have to offer value, not just be an expert in your field. It doesn’t matter if you offer advice and counsel, make widgets, rent money, or anything else, your customers must feel they can’t live without you.

There’s not much more I can write on this subject without being redundant by filling more space.