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

Are You Experienced?

Headline in the Wall Street Journal, April 23, 2019: Help Wanted: Hitting Coach.

Question from (many) business sellers: Does the buyer have experience in my industry?

Question from business buyers: Do I need direct industry experience?

Let me answer the two questions by giving you the gist of the abovementioned article. Hitting a baseball is hard, good hitting coaches are even harder to find, 19 current major league hitting coaches played less than 100 games in the majors, 13 didn’t even play in the majors, and four never even played in the minor leagues.

In other words, being a good hitter is exactly what you don’t need to have been to be a good hitting coach. Baseball executives have realized there’s a lot more to it. It’s about understanding data analytics, teaching, mechanics, etc.

Business buyers rarely need direct experience. They need management and leadership skills. They need to be able to manage people, processes, money, and systems, with people being the most important (in most cases).

The most successful buyers are those who see the big picture not just how to “make the widget.” They’ve developed their skills in the corporate world or through previous business ownership. They’re willing to teach and train employees, delegate, see trends, and seek growth opportunities.

“When we are no longer able to change a situation, we are challenged to change ourselves.” Viktor Frankl

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

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