When the Fever Hits

The fever can hit anybody over just about anything. It’s called “Buyer Fever” when we want something so much we throw logic out the window. It could be a car, a house, a job, an employee to hire, a spouse, and in my day-to-day world, a business (or to get out of a business).

Recently we were referred to a business owner who had the fever and desperately wanted out. Why? Because a couple years prior he got buyer fever and desperately wanted in. He loved the company’s services so much he had to have the company.

Unfortunately, the fever got in the way of logic and due diligence. The business seller had the experience, and more importantly, the required licenses to operate the business. The buyer had to hire someone with those licenses (there goes $100,000 out the door the seller didn’t have to pay).

Let’s be realistic, you have to have the desire for what you’re buying and in the case of businesses there’s a huge difference between, “I can see myself going to work there every day, adding value, and enjoying it” and, “I must have this, at (just about) any price.”

More realism – business buyer fever doesn’t happen that often. Most buyers are overly fussy and skeptical. With my clients I can only think of a few over the last 20 plus years. But I know it’s out there because every year I meet multiple owners who got buyer fever and are digging themselves out of it. It’s usually a good business bought the wrong way (meaning they paid too much).

It will be a hard lesson for the above owner, hard as in money-losing. Given it’s a specialty, licensed service I referred him to an industry expert because it needs work. Maybe the owner should have asked “The Magic Question,” described in the video below.

“Beauty is always transient, which is why it is so interesting. Ugliness lasts longer.” Stephen Bayley

 

The Goal of Independence and Unexpected Consequences

July 4 is a holiday just about everybody celebrates. Political and other differences tend to get overlooked when enjoying friends, family, and fireworks. Our nation’s independence means something to most of us.

What the US has is a reason so many people want to get into this country. And factors we don’t think of influence this, including when life gets in the way. At this time we have a lot, and I mean a lot, of people wanting to immigrate from Guatemala. (This is a business memo not a political one.)

Why? One big reason is the dramatic drop in coffee prices. Yes, a drop in coffee prices (although not at Starbucks and other shops). Guatemala grows some of the best coffee in the world and there are thousands and thousands of small coffee farms. And they’re all hurting.

It seems Brazil has invested in equipment that makes the cost of harvesting coffee beans much lower. This has caused the price of coffee beans to drop and it’s no longer sustainable to have a small, labor intensive, coffee farm.

Every action has a reaction (Newton’s Third Law) and the solution (for many), is to get out. Go where there’s more opportunity, which sounds a lot like what happened centuries ago and lead to the Declaration of Independence.

A business decision and improvement in one country led to a recession in another country’s top industry, and finally to a border crisis. I am willing to bet nobody thought of, much less predicted, anything close to this when Brazil modernized their coffee production.

It’s hard enough to forecast and predict what will happen in our day-to-day businesses. Much less when you see the ramifications of something as “simple” as modernization.

“The United States is the only country with a known birthday.” – James G. Blaine

 “Independence Day: freedom has its life in the hearts, the actions, the spirit of men and so it must be daily earned and refreshed – else like a flower cut from its life-giving roots, it will wither and die.” – Dwight D. Eisenhower

“I like to see a man proud of the place in which he lives.  I like to see a man live so that his place will be proud of him.”  – Abraham Lincoln

For the Right Price…

“You can’t afford to buy the business” dad said to his kids, who were running the business as he enjoyed retirement. Not to insult dad, but if it’s priced right it’s affordable. Dad obviously feels the business is the cutest puppy or most adorable baby there is – so of course his kids can’t afford it.

Well, sentimental feelings don’t count for much when valuing a business, a car, a house, and many other things. These things aren’t like a piece of art where beauty is in the eye of the beholder. When there’s a raft of comparable sales and/or financing limits there are built-in pricing guidelines (with limited exceptions).

When we’re attached to something it’s hard to let go and especially hard to believe it’s worth less than we feel it is (the key word being feel, as in feelings or emotion versus logic or evidence). We can put an emotional component on a lot of things as in:

  • I’ll take a smaller salary to work here because I don’t have to commute, the culture is great, or I’m learning skills I can leverage in the future.
  • I’ll buy the red convertible because it makes me look cool, even though there’s no room for the car seats.
  • I’ll pay more for (fill in the blank) because I love it.

In other words, business buyers – be careful you don’t let emotion cause you to pay what “dad” wants for the business.

“Clothes make the man. Naked people exercise little or no influence on society.” Mark Twain

 

What’s Worse Than an Owner Dependency?

The company does $15-20 million in annual sales and the owner has taken a fancy to being “one of the guys.” He thinks it’s fun. And I’ll bet it is fun. The problem is a top customer commented to one of the management staff about this, as follows:

“We’ve never seen anything like him. We’ve never seen an owner making deliveries, stocking, or pushing a broom from a company big enough for a project like this.  If he’s doing that, who is running the company?  Based on that and other things I don’t know if we can recommend using your company again”

So let me repeat the headline, what’s worse than an owner dependency? Well, maybe an owner who doesn’t impress his customers (or his staff). An owner who should be seen as a leader, not a doer. An owner who should be keeping customer relationships tight, managing cash flow, motivating his people, etc.

When I and others say owners should reduce their dependency it means they should concentrate on growth, vision, and strategy not doing menial tasks.

“Self-righteousness feels good for a moment, but only in the way that peeing your pants feels warm for a moment.” (Author) Nadia Bolz-Weber

Do You Listen?

The workers at Vale, the Brazilian iron-ore giant, predicted the dam holding mining waste would fail. It did.

Boeing workers complained there were shortcuts taken on the 737 Max. They were right.

Both sets of workers comments fell on deaf ears. It could have been their managers didn’t want to take bad news up the corporate ladder, or they feared they’d lose their bonus if deadlines or metrics weren’t met, or perhaps some other reason. But in the end, they didn’t pay attention to the warnings.

I’ve met quite a few business owners who started their company because their employer wouldn’t act on their idea. I’ve seen firms who’ve lost employees because the employees wanted career growth and the owner was content to keep the business at the same level.

This last point raises the question, do you listen to your people? Business buyers often find out more about the workings of the business from the staff than from the owner. They get more ideas regarding growth from the employees.

Do you listen to your customers? What about your vendors? I’m sure most people would say yes although I wonder if it’s true. One of my former clients has employees and customers encouraging (nagging) him to upgrade equipment and offer more modern services. But he can’t make a decision. He’s at an age where he sees the end of the line and is happy with the money he’s making and the amount of time he works.

So, the question is, who will he lose first – his customers or his employees? (Or will they leave at the same time.)

“To pay attention, this is our endless and proper work.” (Poet) Mary Oliver

The Pitfalls of Absentee Ownership

Absentee ownership is a dream of many would be business owners. Imaginations run wild when thinking of having a business where all you have to do is check in every so often and have money transferred to your personal bank account.

After a recent meeting with the managing member of an absentee ownership group I realized there are (potential) pitfalls, both ongoing and when it’s time to sell. Here are three I noticed:

  1. If it’s not yours, you don’t take as good care of it compared to if you own it. In this case the employees went about their jobs but the building was filthy, the equipment area was a mess, and there wasn’t the pride of ownership. The offices needed a coat of paint, carpets replaced, bathrooms scoured*, and some general upkeep. Given the owners are thinking of selling the business one would think they would spiff it up to make a good first impression.
  2. The above is part of a larger issue and that’s the overall culture. The saying, when the cat’s away the mice will play, is very true. I’ve said for years small to lower middle-market companies need the adult supervision only an owner can provide. I’m not saying the employees won’t do a good job. I’m saying it’s often the little extra that’s the difference between profitable and very profitable, bonuses or no bonuses, career advancement or no advancement.
  3. Finally, unless the business is large enough to attract a strategic buyer the market is limited, at least at the price the owner(s) want (based on the company’s earnings). A financial buyer will have to figure out how to get a salary plus pay for the company. One of the worst things the buyer can do is come in and replace a loyal employee (in order to justify his or her salary).

As the saying goes, it’s always something. Planning and preparation can prevent many issues, like what this memo is about.

“Happiness is not an absolute value. It is a state of comparison.” (Author) Zadie Smith

* This reminds me of a deal many years ago. The closing was at the company’s office, the offices were well taken care of, especially for an industrial business, and the buyer’s wife proclaimed the first thing she would do would be to clean the bathrooms. It’s all a matter of perspective. Industrial office bathroom cleanliness is different than luxury hotel cleanliness.

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