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.

Leadership – In Rotary Projects and Business

Some things are the same everywhere. I’m writing this on the flight home from Antigua, following our Rotary project. Last week we were at one of our favorite schools, a prestigious private primary school.

We had some issues with the Internet, so I talked to one of the non-teacher employees about it and asked if the principal, Mrs. Pringle, was still there that day. He replied that she no longer worked at the school and said if she did still work there these issues wouldn’t be happening.

Leadership is leadership whether it’s a large business, small business, non-profit, or a school. Good leaders keep the situation under control when “things happen.” And, the employees know (a good leader from an ineffective one).

Here’s a different example. Because we didn’t do this project last year all of our students were first timers. So, no experience. While the teacher assigned team leaders, after a few days we could see changes. On one or two of our teams the natural, take charge kids stepped up and very quickly we had the real leaders. They were the ones who not only knew what they were doing but did what needed to be done and instructed others on what to do.

In your business do you see people stepping up? Business owners, do you allow this to happen (employees taking charge)? I ask because a dependency on the owner is something I’ve seen a lot of lately and it usually means a lack of delegating. Combined with customer concentration issues (the owner has the relationships with the few customers totaling 75% of annual revenue). It’s a huge issue, it scares business buyers and banks.

“One of the hardest things in life to learn are which bridges to cross and which bridges to burn.” Oprah Winfrey *

* Owners, burn the bridge where you control everything and cross the delegation bridge.

Developing Versus Developed (Countries)

I’m writing this from the island of Antigua where we’re here on a Rotary service project, “Improving Education Through Technology.” We have 10 Bellevue school district students from the technology program working on computer networks and installing Wi-Fi networks.

There are similarities and differences between Antigua and the US. Some of the similarities include:

It doesn’t matter where you are, people are people. Some are different colors, different sizes, have different customs, etc. But they all (pretty much) care about each other, their country, their friends, and families. We are warmly greeted here by not only the local Rotarians but people at the car rental place, hotel staff, restaurant staff, and others. It’s like we’re old friends.

There’s a lot of growth in both countries. Seattle leads the US in cranes and Antigua has numerous new buildings, businesses, and restaurants since we were here last year, just not as high.

The roads suck in both places and traffic stinks. We saw a bumper sticker here today reading, “Not Drunk, Avoiding Potholes.” Not enough capacity, poor upkeep, limited planning – it seems to be universal – with road construction everywhere.

Some of the differences are:

There’s a lot more respect for leaders and authority here. Imagine this in the US: at a planning meeting Sunday one of the local Rotarians was talking about a meeting we had Monday with the Prime Minister. Even though the Rotarian is in the “other party,” when questioned he said how he would respect what the PM said as he was “my country’s leader.” Imagine a Democrat saying that about Trump or a Trump supporter saying that about a Obama or any future Democrat President.

The US, and especially areas like Seattle, are fortunate to have a lot of growth, capital to grow, and money in general. Things are pretty good all across the country. In Antigua, there’s a lot of impoverishment, menial jobs, and limited opportunity. If some think there’s a huge divide in the US they should check out places like Antigua.

We’re here because there’s a great need. The Ministry of Education has pretty much said they won’t support the primary schools with technology. This includes helping the teachers improve themselves so they can teach better using technology and the many applications now available. The students know more about tech devices and how to use them than most of the teachers – and they want to learn via their devices, not via the old blackboard.

“Human relationships are vast as deserts. They demand all daring.” John Ruskin

Fussy Buyers & Naive Sellers

My friend Dennis Hebert with CFO Selections called recently regarding a client of his who is thinking of selling to his COO/GM. The holidays got in the way and then Dennis told me he felt they didn’t have a good understanding of what it takes to do a deal, so he gave them a redacted purchase and sale agreement. It caused them to pause and think.

Business sellers often underestimate the complexity of what’s involved in selling a company. It’s their cute little puppy so they think everybody will think it’s adorable. Even when others find it adorable there’s still a lot of work. The amount of detailed information requested by the buyer, bank, and attorneys can be overwhelming. Deal fatigue is common.

Most business people are optimistic, it’s a necessary trait, and sellers are no different. The complexity of a buy-sell deal can be extremely high and reduce optimism. It’s not like selling or giving away a cute puppy.

On the flip side, most business buyers are too fussy. I remind all buyers there are no perfect businesses and no perfect deals. Watch out for anything that looks too good.

No small business saves the world or changes western civilization. But these businesses do create jobs, wealth, and a lifestyle, for both the employees and the owner. In fact, boring is often best. Buyers need to answer the following three questions:

  • Can you see yourself going in there every day?
  • Can you add value?
  • Is it a viable business model that doesn’t violate your values?

The rest is analysis, due diligence, negotiation, etc. And, on the flip side to the seller underestimating the complexity of the process, the buyer needs to realize they can always ask another question, and they need to get over that impulse, and make a decision. As I write in the preface to Buying A Business That Makes You Rich, buyers will make a leap of faith and it needs to be off a chair not the roof.

“How desperately difficult it is to be honest with oneself. It is much easier to be honest with other people.” Author Edward E. Benson

What Sets Business Owners Apart

What’s the difference between being a manager and being a business owner? Let me use a sports analogy. I recently read the following about new NFL coaches (as it’s that time of year where there’s job turnover).

“If there’s one thing I’ve heard from new head coaches, it’s dealing with all the things he’s not anticipating, and still devoting the proper time to the things he was.”

In other words, there’s a lot more responsibility. You don’t have just your silo of duties, you have everybody’s silos. It’s like the owner who told me he came to realize while he didn’t have to know how to do everything in the business, but he had to know what needed to be done, who needed to do it, when it was to be completed, and what it looked like when done (correctly).

And then there’s the unanticipated. I learned many years ago, the hard way, you can’t budget the whole day because something will sneak in the side door and disrupt your schedule. It could be a client situation, a great new prospective client, a negotiation item, etc. But something will disrupt your day and the tighter your schedule the increased odds this will happen.

Similar is scheduling meetings too close together. Especially in today’s world of smartphones, giving yourself enough time between meetings is smart. Because the tighter our schedule the more likely Murphy’s Law appears by having the first person we’re meeting show up late.

Coaches strive to become a head coach; many executives strive to be owners. It’s often more work but with higher rewards, financially and emotionally.

“Success is relative: It is what we can make of the mess we have made of things.” T.S. Elliott

Technology is Changing Unexpected jobs

Can you think of many industries not affected by technology?

You might think construction as people still pound nails, drive screws, lay flooring, etc. But plans are now downloaded, iPads are prevalent on job sites, communication is by text, etc. Cars are nothing but a computer on wheels. Kitchens have become high-tech with Wi-Fi appliances, Amazon Echo or Google Home devices providing recipes, being a timer, and more.

I mention this because of a Wall Street Journal article from last year titled, “Technology Spells End Of Roughneck Boom.” It seems automation and artificial intelligence are replacing high-paying blue-collar jobs in the oil drilling industry. One expert said jobs like measuring well conditions thousands of feet underground could decline by 25%. Also, efficiency is improved, inspectors now get their efficiency-driven schedules determined by a computer algorithm, they use augmented reality glasses that send real-time feeds to the office, and get back data via those glasses showing him how to perform complicated tasks.

This improved efficiency reminds me of one of my favorite stories. Bill bought a company that, in simple terms, sold blocks of service time. A good analogy is a hotel; if they don’t rent the room today, they can’t rent it twice tomorrow. The company’s website was a brochure and within a couple months he converted it to an ordering system, almost eliminating phone calls and phone tag. The good news is he didn’t get rid of the employees he had them do productive marketing work to grow the business.

We’re going through something similar. We just upgraded to Salesforce. We’ll use 10% of its capability but if it does the one primary thing we want it to do it will more than pay for itself in saved time – and everything else will be a bonus.

Like most things, there are good and not-so-good implications from new technology, new processes, or anything else. It’s using the good changes to overcome bad changes that makes a difference.

“Perfection is like chasing the horizon. Keep moving.” (Author) Neil Gaiman

When “Word of Mouth” Isn’t Enough

I’m talking to an owner who’s pretty darn proud of the fact he doesn’t do any marketing or have any sales effort because it’s all “word of mouth.” He tells me this knowing I know his friend (with the same type of business) in a noticeably smaller market that has two to three times the revenue he has.

My first thought was, maybe if you did some marketing, you’d be making more money, and more importantly, have a more valuable business. By his own admission, this owner spends a good amount of time working “In” the business. He’s working well under his pay grade when he does this and probably works more hours than he would if he grew the business.

Word of mouth is great, especially for businesses like mine where referrals are the platinum standard. But those referrals only come as the result of marketing. But for a more traditional B2B or B2C firm (like this one that sells to businesses, government, and consumers) there needs to be marketing plus some sales effort.

A salesperson should be calling on the businesses and government buyers letting them know about new offerings, building the relationship, etc. As consumers, what’s the first thing we do when we need a new product or service? Right, we Google it. Some SEO or AdWords is sure worth a try.

Marketing is what creates customers, which creates buzz, which leads to the word of mouth phenomenon, and even more customers.

“I don’t always follow my own advice.” Edith Wharton

Getting Culture Right

In November I had the pleasure of attending the all-staff dinner as part of the Farallon Consulting retreat (Farallon is an environmental consulting firm on whose board I serve). It was an exhibition of culture at its best.

While I only heard reports about the day’s activities (and happy hour) I witnessed a group of people on the same page. While there’s an endless supply of “bad” stories about managers, culture, etc. a good way to start the new year is to consider what a good culture means, whether you have a few employees, dozens, scores, or hundreds.

  • Realize even companies with the best culture still have issues, but those issues are at the other end of the spectrum from the shenanigans on The Office. It’s simply because people are people.
  • A good culture means better collaboration to achieve goals, whether it’s increased revenues, better productivity, reduced costs, or anything else. When employees work well together the boss (business owner in small companies) spends less time refereeing and more time strategizing.
  • When employees enjoy their work environment they want to work there, will do extra, will not be job switching and that means higher employee retention. Given the costs of replacing someone, this is huge.

There are a lot of people who help companies improve their culture, and it’s worth it (when done correctly). This month is a good time to assess your culture and do what it takes to improve it.

“Every day on Earth is another chance to get it right.” Steve Earle

We recently went through another election cycle, or should I say, a continuous election cycle. The recounts are over and now it’s time for good, old-fashioned political arguing.

The results are interpreted based on one’s perspective. A Democratic leaning business writer wrote how the Democrats picked up seats in the House in spite of the gerrymandering issue. The Wall Street Journal editorialized that the gerrymandering issue isn’t real because the Democrats picked up seats.

The Democrats are glad because with one chamber of Congress under their control they can influence some legislation. The Republicans are glad because the Democrats don’t have both chambers and therefore can’t revise recent legislation.

What about in your business? Isn’t is also all about perspective?

  • The owner worries about cash flow and the employees wonder about bonuses and raises. The same amount of money is coming in and there are different perspectives about where it should go as it goes out.
  • Is the economy at a peak? A lot of people think it is. Some business sellers want to base the valuation on the last 12 months. Buyers and now banks want to look at multi-year averages.
  • With the economy where it, is and to use a sports analogy, do you play to win or play not to lose? In other words, do you take aggressive but smart moves to grow or hunker down waiting for an economic correction, which may be soon or in many years. FYI, in my opinion, in sports, teams who play not to lose usually lose.

Tough decisions all and our individual perspectives are what influences us.

“I don’t think we all have to take the same coordinates to reach the same destination.” (Singer) Janelle Monàe