Taking Action – Maybe Tomorrow?

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

Priority: Make Customers Feel Special

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

Vaping and other Naïve Actions

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

Three Important Buy-Sell Lessons

This is something I sent to our clients recently and realized it has good lessons for all.

I’ve been involved in a real estate buy-sell transaction as over the last 18 months we’ve been trying to sell our family cabin in the Midwest. In this part of the country it is not a red-hot real estate market, with only one exception and the exception is places on a chain of lakes, which our place is not. 

Bottom line, it’s been slow. About one year ago we had a verbal “offer” about 25% below the asking price. Our agent told them not to even bother writing it up, which was the right decision. 

All of a sudden, this fall, after no serious interest all summer, we got two offers. One was another lowball offer, which definitely hurts one’s feelings. The other was in the negotiable range, so we negotiated, and reached agreement.

Lesson one: lowball offers destroy all faith and trust. You don’t even want to deal with the person.

After hundreds if not thousands of online views, scores of people looking at the place in-person, two lowball offers, and one negotiable offer, we came to realize the following, which business sellers often don’t want to accept:

Lesson two: the market was speaking to us about what the value really is.

At the same time, we realized, and this applies to business buyers:

Lesson three: no buyer (maybe a very naïve one) makes an offer they expect to be accepted. 

In fact, if a seller accepts the first offer a buyer makes the buyer should wonder what’s wrong. Because rarely is the asking price what a seller really wants and rarely is the first offer the limit of what a buyer is willing to pay.

Summary, in business deals it’s very much about relationship. In business and real estate, emotion and feelings play a big part.

“Promises only bind those who believe them.” Jacques Chirac

Fantasyland

I was recently talking to a business buyer about what he was looking for in a business. What he said all made sense; a B2B business, logical size range, wide geographic area, etc. 

Then he said he needed a business on which he could pay off the debt (SBA, 10-year term loan) in half the time. That’s 25% annual growth, from day one. And yes, 25% can be achieved. A recent client grew 25% the first year. But over five years? If it takes one year to figure things out, all of a sudden, it’s about a 33% growth rate. But then came the kicker:

“And I don’t want to have to make any investment in the business (to achieve the growth).”

No new (additional) equipment, vehicles, marketing, or people. All the earnings go to debt reduction. This is fantasy land. And it makes me wonder what other fantasies are out there. Some that come to mind are:

  • A business seller believing his or her business is so special traditional valuation methodologies don’t apply to their business.
  • Owners thinking it’s easy to find good salespeople.
  • Advisors (and salespeople) figuring because they know what they’re doing the phone will ring.
  • Business buyers thinking an owner with no family in the business has no good options, other than selling to them with a low down payment (actually this owner has all the options).
  • Company founders believing a bank will lend them money based on their great idea.

I’m sure you’ve seen many more fantasies. 

“We are living in a world today where lemonade is made from artificial flavors and furniture polish is made from real lemons.” Alfred E. Neuman

What is Your Real Income

I’m working with a private equity firm to find add-on HVAC, plumbing, electrical, or refrigeration companies for their plumbing construction firm in the Seattle area (so if you know of any doing at least $5 million in sales who want an investor let me know). The founder of the PE firm has a distinct term for the earnings/income of a company.

He calls it “real income.” What this means is, it’s the income after allowing for all the expenses required to run a business. This means expenses for:

  • A CEO at fair market salary.
  • A CFO type, not just a part-time bookkeeper who doesn’t know what a KPI (key performance indicator) is.
  • Anticipated capital expenditures.
  • Operating interest (a working capital line of credit).

About 15 years ago I started using the term “free cash flow,” which is pretty much the same as what’s above. I would add together profit, owner salary, depreciation, and interest and subtract fair market owner compensation, anticipated capital expenditures, and operating interest.

What I didn’t include was the CFO/controller role and compensation, even though I’ve seen hundreds of businesses with crappy financial systems and crazy financial statements. Not to mention no management reports, no metrics, KPIs, etc. It took a while, but I now understand that’s a role we need to account for when adjusting earnings.

I like the term “real income.” It conveys trust, non-fantasy, and sincerity. It’s now my go-to term.

“The trouble with having an open mind, of course, is that people will insist on trying to put things in it.” (Author) Terry Pratchett

Do Your Customers Know You?

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

Scams in buy-sell deals

On September 8, 2019 the Buzz column in the Seattle Times was titled, “Seattle Cider sues founder, former CEO” and dealt with a lawsuit against the founder of Seattle Cider and Two Beers Brewing initiated by Agrial, a French company that acquired them. In simple terms, the plaintiff alleged the books were cooked to increase the price.

More about the above later and it fits with a quote I saw this summer from Richard Parker, “Numbers don’t lie, sellers do.” I wrote him and told him how I had seen a case where the owners/sellers (creatively) made the numbers lie, at least temporarily. Richard’s response was something like, it’s amazing how creative people can get with this stuff.

The Seattle Cider case involves the seller supposedly doing “channel stuffing.” He allegedly had his top distributor accelerate orders, so sales looked stronger than they really were and then, post-sale, orders declined because the distributor had months and months of product. Oops, the buyer is now getting no orders and had the privilege of paying the seller an inflated amount (again, alleged).

It seems so easy, but this stuff always comes out (at some point). For example, a seller ripped a letter off a bulletin board as she gave the buyer a tour of the business. Turns out the letter was from their top (30%) customer informing them a change in strategy meant they were ending the relationship. The buyer later found out from an employee.

Or many years ago when a buyer sabotaged himself by letting the seller convince him he couldn’t talk to the customers because the industry was so tight word of the sale would somehow get out. Even though his attorney and I told him to “kill the deal,” he agreed (to not do customer research, even as a reference check). Turns out the top, 25%, customer was doing a “test kitchen” of new systems without inviting their current provider (the seller’s firm) to participate. No wonder the seller didn’t want any customer related due diligence. (By not talking to the customers a buyer risks not knowing about damaged relationships. If the customer has already stopped doing business and is still disclosed in the purchase and sale agreement as being an active customer there should be protections in the representations and warranties in the agreement, although it’s still deception and a major hassle.)

And this is not confined to the small business and lower middle market. Just look at what’s in the headlines about We (WeWork). 

When it comes to integrity and ethics, 99% of business owners have a high level (unless you count blending the personal and business checkbooks). But the other 1%…

“Don’t look back. Something might be gaining on you.” Satchel Paige

Knowing Your Market

“Millennials are less loyal, so service agreements are on the decline. Will need to create “clubs” for them to join, with a monthly fee to be a member of the club.”

The above is from a research site to which we subscribe for industry and buy-sell deal information. This line is about the HVAC industry, which has long thrived on service agreements to maintain heating and air conditioning equipment (often mandatory on commercial properties). 

I’m not saying go out and have your business start a “club” to attract younger customers. The lesson here is, know your market. Social media is huge, popular, and many businesses really don’t understand it. So they either don’t use it or they use it incorrectly. I use it some and have come to realize LinkedIn is far and away where my business network and prospective clients are most active.

An example of knowing your market is that people have asked me why my blog doesn’t have comments. It’s because after briefly allowing comments I realized three things:

  1. Most of the businesspeople I associate with don’t have the time to write a lot of comments (I don’t have time either).
  2. I was getting bombarded with robot comments, mostly scams.
  3. People who do leave comments do it mainly for themselves, not for the benefit of other readers.

It’s tough trying to reach prospective customers who can be a moving target. So, understand where your customers hangout (figuratively not the specific restaurant, bar, coffee shop, etc.) and be there for them. The same holds true for those who can refer customers to you

“Different strokes for different folks; And so on and so on and: Scooby dooby dooby.” Everyday People by Sly and the Family Stone

Non-compete Agreements Become Almost Worthless (in Washington State)

This is a little different than our regular memos, but I feel it’s an important subject for Washington business owners.

I recently sent past and present clients a fantastic summary of Washington State’s new non-compete law, taking effect January 1, 2020, which I received from Jeanette Adams Gorman with Socius Law Group in Seattle.

I received a lot of “thank you” and “interesting” comments but the best was, “Wow! this is distressing.” I was a bit surprised so many business owners hadn’t heard much about this.

I won’t get into the details (and I’m glad to send you Jeanette’s report) but will give you my top takeaways.

  • Non-competes will only be applicable to people earning $100,000 or more with the threshold for independent contractors is at $250,000.
  • Non-solicitation agreements and non-disclosure agreements, including sharing of trade secrets, are not affected.
  • Non-competes when the business is sold are still valid (the seller is bound by it).
  • There may have to be compensation to a terminated employee if the company wants to enforce a non-compete.

I encourage business owners to get professional advice on this, so you’re prepared for 2020. Advisors, make sure your clients are aware of this.

“An ounce of prevention is worth a pound of cure.” Benjamin Franklin