Dependents Save on Taxes; Dependencies Reduce Value

Here’s an exchange I recently had with a supposedly seasoned businessperson, growth consultant, and business broker:

Me: “There are a couple issues with this business, one in particular seems serious.”

Him: “Oh, what are they?”

Me: “The main issue is the top two customers are 60% of sales.”

Him: “I don’t see why that’s an issue.”

Really? He doesn’t see it’s an issue? Two customers dominating, the top one at 37%. And this in an industry with larger players, low barriers to entry, and the number two customer moved over from a competitor three years prior (and probably would move again to save a few bucks).

It reminds me of a story in my books about a call from a desperate owner who wanted a buyer for his business. He had helped his 80% (of sales) customer get started (as a contract manufacturer), the customer’s owner brought in a new management team, the new CEO had a friend whose company made the same products, and the rug was pulled out with no notice. Bye-bye big customer, bye-bye business.

Ours advice to one and all (especially owners planning to exit at any time):

Get rid of your dependencies.

  • No dominant customers.
  • No key employees (who would be hard to replace).
  • No major supplier (with limited options other than this supplier).
  • No owner dependency. The less the owner does day-to-day the better. It might be tough on the ego but it sure builds value. Strategy, vision, and growth (including by acquisition) should fill the owner’s calendar.

“I guess a man is the only kind of varmint who sets his own trap, baits it, and then steps in it.” John Steinbeck

Knowing Your Customers

The recent meeting of Seattle U Family Business Exchange (companies with multiple generations in the business) two of the presenters showed there are multiple ways to please your customer base and keep them loyal.

Aakanksha Sinha and her husband are the owners of Spice Waala, a fairly new Indian restaurant in Seattle featuring Indian Street food. They have an everchanging menu, with new items daily. It is their way of showing off the different types of Indian food.

On the flip side, Jasmine Donovan, president of Dick’s Drive-In, has a menu that has barely changed in decades. When she asked us to put our favorite Dick’s menu items in the Zoom chat the overwhelming favorite was the Dick’s Deluxe, which Jasmine said is a relative newcomer to the menu having been introduced in 1974. Dick’s customers love what Dick’s has and love the familiarity.

Being new, refreshing, and innovative is great, and highly popular. But being steady and knowing what your customers want is equally important. It would be business suicide for Spice Waala to keep the same menu for extended time periods as their customers want to try different things. It would be even faster business suicide if Dick’s started introducing new (and short-term) menu items like the fast-food chains do.

It’s knowing what your customers want, and don’t want, that matters. And what your customers, employees, suppliers, and all others want is, among other things an end to Covid (and a Happy Holiday season).

“God bless us, everyone.” Tiny Tim (a great story)

“Santa, I know him.” Buddy the Elf (one of the best and funniest Christmas movies ever)

Check out our new podcast series by clicking here https://www.buzzsprout.com/1546882

Hangout with Smart People

I was watching some football over the weekend and some post-game interviews. One question to a quarterback was about why a certain player has made such a big jump this year. The answer, “His intelligence.”

One of my friends and client is Fred Barkman, owner of Spectra Labs. If I’ve heard Fred say it once I’ve heard him say it a dozen times (the old standard), “A people hire A people, B people hire C people.” It’s the same as a boss saying they want to hire people smarter than they are. Or a sales manager stating they want all their salespeople making more than they do.

I’ve been on numerous boards, both for for-profit and nonprofit organizations. There are always a lot of smart people, which is needed because none of us have all the answers (and it’s tough getting through to people who think they have all the answers). I know firsthand as my dad figured there were two ways to do just about anything, the wrong way and his way.

Most importantly, it’s utilizing the smart people you know. For example:

  • In a recent online presentation, a person who recently sold his business advised the audience to use their advisors to help drive the deal.
  • Your team. They often have the answers and need to be encouraged to contribute.
  • Friends and family can add value, as long as you give parameters versus getting unsolicited input on any and every subject.

Bottom line, there’s a reason collaboration works. It turns 2+2=4 to 2+2=22 (or more).

“I love playing with smart players.” Aaron Rodgers

“Intelligence is quickly seeing things as they are.” George Santayana

It’s Yours – Think Long Term

I recently got a newsletter from my friend Lisa Nirell with Energize Growth. She works primarily with middle market CMOs. The newsletter shared the following:

“An obsession with short term results continues to haunt CMOs and undermine their ability to prove value. With an 82% spike in IPOs this year (compared to 2019), this systemic problem persists. (source: stockanalysis.com)”

When your bonus is tied to short term growth or you want to sell shares at a high price you focus on this month not next year. When you own the business, you want to do well now and make sure the future is rosy, because that’s your equity. And other than avoiding taxes by making December purchases of vehicles and equipment not really needed most owners think long term. When you think long term, you do things like the following, which are especially important during the current virus crisis and recession:

  • Find and retain the best people possible even if they get paid more than others. A client recently said the business’ financial performance was down because he’s kept everybody working during Covid. He doesn’t want to lose any good people (for when his business is fully recovered).
  • Invest in marketing even when business is slow (like during Covid). We’ve done more than ever during Covid and it will pay off (and is already).
  • Take care of your customers, especially your best ones. Even if they aren’t buying as much as normal, having their own issues, etc. Be there for them.
  • Implement growth strategies when others are hunkering down. This could mean buying a competitor or complementary firm, hiring great people even if not needed right now, or accelerating your growth plan.

It just makes sense when you are the one you answer to.

“Through others we become ourselves.” (Psychologist) Lev Vygotsky

Random Holiday Season Thoughts and Information

Here are some thoughts and information as we head into a weird Christmas and New Year’s season.

Have you noticed the low winter produce prices? I saw a supermarket ad insert and realized while the supply chain has adapted there are still demand changes. With limited restaurant dining, there’s less produce being sold to restaurants, meaning there’s more supply for shoppers. Take-out meals usually doesn’t mean breakfast so that means suppliers sell less fruit to restaurants. I’m also guessing many people don’t order salads for take-out as often as they would if dining in. 

I haven’t worn a watch since mid-March. Really nice.

I know people whose businesses are thriving, others who are getting by, and some who’ve been decimated. One client had her customer base shut down by the closures, all over the country and internationally. Can’t sell product if your customers are closed.

Over the weekend I read two complementary articles on the virus and it’s spread. First, in the New York Times “The Morning” email the journalist gave three tips based on a survey of 700 epidemiologists plus conversations with other experts. The three tips are:

The top behavior to eliminate is: Spending time in a confined space (outside your household) where anyone is unmasked.

The behavior to minimize is: Spending extended time in indoor spaces, even with universal masking. Because masks aren’t perfect.And what’s less risky (the good news)? You don’t need a mask to go for a walk, a run, or a bike ride. Great advice on how to judge all of this: “If I had a birthday candle in my hand and you’re too far away to blow it out, I can’t inhale whatever you exhale.” Ninety percent of the epidemiologists had recently visited a grocery store, pharmacy, or another store.

On the opposite end of the political spectrum, Holman Jenkins, Jr. gave some similar advice in the Wall Street Journal. He summarized recent virus occurrences by noting all the hubbub about mask wearing has got us away from paying attention to safe distancing. Two of his best statements:

“it doesn’t matter how many of us wear masks if the young, who have the least to fear from Covid and are most likely to spread it unwittingly, aren’t wearing them.” 

“If you need to wear a mask to participate in an activity, consider not participating in that activity. Much of life and business can proceed normally while keeping 6 feet apart from those we love and those we don’t.”

I hope teachers are right behind health care workers when it comes to the virus. Kids need to be in school, they miss the interactions, many are falling behind, and it’s hurting families if a parent has to reduce hours or quit their job.

Online meetings are here to stay, especially for routine type meetings, but won’t replace in-person meetings where relationships need to be forged. I can see organizations like Rotary having a hybrid of in-person and online meetings. Not so sure about it for networking groups that thrive on getting to know each other.

Christmas will be strange (as will other seasonal celebrations). No big dinner with wrapping paper all over the floor. No post-dinner game sessions. No going from one house to another for morning presents.

I’m sure we’ll survive.

“One thing a person cannot do, no matter how rigorous his analysis or heroic his imagination, is to draw up a list of things that would never occur to him.” (Economist) Thomas Schelling

Covid Entrepreneurs

The November 19, 2020 Wall Street Journal had a front-page article titled, “New Entrepreneurs Emerge From Wreck of Covid Economy.” Some of the highlights from the article are:

  • A lot of people are turning their skills into a business and it’s their job “in” the business. Skills like personal training, hair styling, freelance chefs, and more.
  • New business licenses are up 32% over the first nine months of the year compared to 2019.
  • Between 10% and 11.2% of workers are self-employed.
  • People are realizing the new normal will be much different than the old normal.

But what about those people who don’t have a “job” skill? These are the people who know how to manage people, processes, money, and enthusiasm. For them, it’s buying a mature, profitable, and fairly priced business.

Why? The most common answers audiences have given me on this include:

  • To take control of their life, career, and finances.
  • To benefit themselves not shareholders from their smart and hard work.
  • Having fun!
  • Letting their creativity shine.
  • Flexibility – if they want to go to their kid’s game or recital they can.

But it’s more than the above. There’s an inner satisfaction to not be beholding to a corporation, a boss, or a boss’ boss. Yes, you have to take care of customers and employees, which is important, and that brings us back to the reasons – to do it your way. Whether it’s a job or your own business happiness and having fun is crucial. It’s like the character Michael Burnham on Star Trek Discovery who states how much she loves what she does and doesn’t want to anything else.

We’re going to see more and more of this. And, for owners whose companies have been hurt by Covid, these buyers aren’t your answer because they want a non-distressed company, but other firms looking to grow by acquisition are your exit. 

“Reality is that which, when you stop believing in it, doesn’t go away.” Phillip K. Dick

Lingering On

I’m writing this on November 16. The headlines and stories over the last two days are filled with President Trump tweeting, “I concede NOTHING,” how his administration is not cooperating with the Biden administration on a transition, and his people are saying they expect to be in their same jobs after January 20. Not the graceful transition from one party to the other we’ve had every other time  this has happened, is it?

What does this have to do with small business and business in general? When “uninvited guests” overstay their welcome it leads to stress, a deteriorating culture, and less productivity.

Every, and I mean every, time a business owner brings up the subject of a problem employee and wonders what to do the answer from those who have “been there; done that” is, get rid of them ASAP and you won’t regret it. I have one client who sat on it for five months. Not too bad compared to another who took four to five years. The result is usually a breath of fresh air.

There’s some logic to the SBA rule requiring business sellers to not (officially) be part of the business (as an employee or consultant) for more than one year. I’ve seen instances where the seller staying on worked great, because the seller loved the job and/or the project but hated running the business. I’ve also seen instances where the seller said they wanted to stay and do sales or design products and absolutely couldn’t stand working for someone else. A couple times the seller sabotaged the business by creating conflict within the employee ranks. In one case it was constantly making snide comments about how he (the seller) wouldn’t do things the way the buyer was doing them (implying the buyer didn’t know what he was doing).

A change of ownership requires cooperation. Bringing in a new employee, especially replacing the bad apple, means teamwork. My advice is to have a plan, make the decision, and take action. Don’t stew over it, do it.

“Television is an invention that permits you to be entertained in your living room by people you wouldn’t have in your home.” David Frost

Make it Complicated or Keep it Simple?

Apple and Microsoft are trillion-dollar companies, very successful, have lots of smart people so why can’t either of them figure out how to have an email program without glitches? Email has been around for a few decades, so you’d think they’d have figured it out. 

Apple mail stalls on my laptop when getting new messages. Sometimes to the point of having to close and reopen the program. It slows down my desktop to the point I don’t use it anymore.

Therefore, I use Outlook on my desktop (and Jessica uses it for business email). We agree, it has a horrible search function, you can’t drag emails from one folder to another, and it keeps refreshing itself. Most annoying is when all of the emails in the Inbox disappear and you get a cheerful message about how nice it is to have an empty inbox. Then they reappear, sometimes with new date and time stamps. Sometimes with duplicate copies. Friends have shared they have issues also, some the same, some different. 

Outlook is over 30 times as big as Apple Mail, Contacts, and Calendar combined. And when things get that big, they’re like how battleships can’t maneuver fast, like an attack boat. Are both companies filled with people trying to make things perfect?

Just like in business. Small businesses should be able to move faster and have more flexibility than large ones (Amazon maybe being an exception). It’s one reason why people want to own a business; so they can make decisions and see the result of their actions.

And now is a good time to buy a business, or buy another one. Any time there’s a catastrophic event, like Covid or the recession (or both), it pushes owners thinking of exiting over the tipping point. To take control and benefit themselves from their hard and smart work.

“A marriage is always made up of two people who are prepared to swear that only the other one snores.” (Author) Terry Pratchett 

When it’s Yours You’re More Passionate

Recently we had the last real harvest from our garden as we picked tomatoes, arugula, lettuce, figs, beets, zucchini, and spaghetti squash. Then we got our first frost (the zucchini bit the dust). There’s nothing better than a salad you picked that day. The marinara sauce from our tomatoes puts to shame anything from the store. Just a little example of doing something yourself and loving the results.

Business ownership is alluring to many people because they feel they can do it better. When those people realize they don’t have a revolutionary idea for a startup, they often decide to buy an existing (mature, profitable, and fairly priced) business. It’s the pride of it being yours. Your decisions, control, creativity, etc.

I get it. We all have things we do that give us satisfaction beyond having someone else do it. Those things may be sewing, woodworking, tearing apart an engine (and getting it back together), and more.

When it comes to business, whether a one-person firm or a company with hundreds of employees, it’s freedom and success. Expect it to be more popular in the next few years. Why? It’s the economy, stupid (thanks to James Carville for the line).

Recently someone asked me if the economy is driving a lot of people to entrepreneurship. My answer was, yes, slowly, and every economic downturn pushes people over the entrepreneurial tipping point. Recessions push buyers to the market, many of them just waiting for an excuse, and it also pushes owners to sell. My guess is that in today’s market, owners of good businesses who’ve been contemplating selling are moving on it. They’ll stand out in the crowd of damaged companies and they know it.

“The most difficult thing is the decision to act. The rest is merely tenacity.” Amelia Earhart

Ask the Right Question or Get the Wrong Answer

Here are a couple questions reporters asked (the wrong way.

  • Reporter (to football QB): Do you think other teams have figured you out?
  • QB (rolling eyes): Based on one game? It’s the only game we’ve lost all year.
  • Reporter (to President Trump): Why have so many more Black people been killed by police than White people?
  • President (correctly answering the question that was asked): More White people have been killed by police than Black people.

In the sports Q&A the reporter made an assumption based on (at the time) an isolated incident (and the future showed it was an isolated incident). He should have asked an open-ended question like, “What happened today (to cause the bad performance)?”

In the political case, the reporter meant to ask about why a higher percentage of the Black population versus the White population, not about an absolute number. But she didn’t phrase it correctly. She got the right answer to the wrong question.

When I teach my class on growing a consulting business at the Seattle SBA/SCORE office I make a point that sales is asking questions, and asking the right questions is an important component of the process. Sales is not what we imagine happens when we think of a used car lot.

Good lawyers, good consultants, good interviewers all ask good questions. On the flip side, those being interviewed for a job need to ask as good or better questions about the position and the company. Business buyers and sellers both need to ask the other party good questions, open-ended ones to get insights.

Asking the right questions is just one of the topics in my upcoming book, Getting the Deal Done, which is now at the designer. It is 61 short chapters, each a strategy to get a buy-sell deal successfully closed. I wrote 50 of the chapters and 11 deal making friends each provided their expertise via a chapter.

“All humans are stupid, but the smarter ones at least have a handle on their own ignorance.” John Cleese