Case Study #29: Replacing Yourself

Replacing YourselfSome years ago, Jim Brown started a software company called TerrAlign. This Sales Territory Management Software designed the best possible territories for sales representatives. They started in pharmaceuticals, but quickly entered into the consumer goods and medical products sectors as well. They would eventually be acquired by a fellow software company, but that couldn’t have happened if Jim hadn’t started the process of replacing himself.

Enter Ken

Ken Kramer had helped design some of the earliest versions of TerrAlign’s software and kept having good interactions with them as a vendor. So when the opportunity came for him to join the company, he took it, and started in partnerships and marketing. He was soon promoted to sales and marketing, and not long after that, was one of three employees that Jim chose to replace his functions as an owner/operator.

This is, of course, the best case scenario: promotion from within of those who have risen through the ranks on merit. They’ve had a chance to build relationships across the company which will only make taking on the new responsibilities easier.

Creative Tension

But, while an owner may be willing to delegate tasks, he might not be willing to let go of profits and cash flow. Ken wanted to use profits to invest and grow the company, while Jim focused on maintaining profitability. Ken had negotiated shadow equity as part of his promotion into the job of president, so while he was frustrated with Jim’s desire to keep things status quo, he knew that circumstances could always change.

Soon enough the ground started to shift. A competitor was acquired after it had been taken private by a VC some time prior. This changed the competitive landscape and led to MapAnything making an acquisition offer. MapAnything was also a software company, but focused on route optimization, so it was a sensible companion product for TerrAlign’s core competencies.

Transition

Ken led the transaction team, though he says if he had to do it all over he would have brought in help (like a banker or broker) to cut his learning cycle down and help him make better decisions. It also (naturally) took away his time from helping to run the business. In the end, his focus was on making sure the TerrAlign team all kept their jobs or had opportunities for new positions post-sale. The terms of the sale weren’t made public, but 1-3X revenue is a normal multiplier for slow-growth software companies.

What Ken couldn’t expect or predict was Salesforce acquiring MapAnything just a few months later. Most of the team was surprised, but given that it wasn’t their company anymore, they could hardly do anything other than try to continue on with Salesforce, which many of them chose to do.

Key Takeaways

  • As we’ve said before, apart from having a solid manual in place of how to run the business, demonstrating that the company can run without you by having a president in place makes it very easy for an acquirer to make an offer.
  • Even if you’ve had the foresight to plan for your own succession, you also have to plan for an acquisition. Jim had brought in Ken to do the former, but stifled him as he tried to do the latter, by growing the company aggressively.
  • Consider getting a broker (we’re a bit biased). As we saw with Ken, we help make the process easier, more educational, and often  more profitable.

Remote Work and the Business of the Future

Remote WorkEven five years ago, most people would not have known a single person who worked remotely. Now, many people know at least one person who has either a location independent job or business, or who has some kind of flexible work arrangement with their employer.

It’s clear that remote work is not a passing fad but a trend that will only grow as technology includes more of our world in building prosperity. That means employers need to realize that remote work is very much the future and figure out how to adapt their businesses to accommodate that.

Nothing Replaces In-Person Interaction

There are some companies that are entirely remote, like Automattic, the company that powers WordPress, and as a result, powers a third of all websites on the public internet (including ours!) They’ve discovered that whatever the joys are of location independence, there’s nothing to replace the camaraderie that comes with in-person interaction. This might mean annual, or even semi-annual or quarterly retreats, whether it be for certain divisions or for the entire company.

We are humans, after all, despite all the talk of self-driving cars and refrigerators that will tell Amazon what needs to be ordered. Whatever steps you take towards allowing remote work, remember that employees need to be together at least occasionally to build the camaraderie that every functioning team needs to perform. Technology doesn’t change human nature.

There are Savings All Around

Just as employers no longer need to take as much office space to accommodate remote workers who no longer need it, so too workers no longer need to spend money on commuting or on business attire expected to be worn in the office. The savings can be reinvested in other areas to help the company grow.

Resilience and Diversity Develop

It’s no secret that remote work requires more discipline than the in-office equivalent. No one is “supervising” you and the couch and television, should you be working from home, can issue never ending siren songs for you to join them.

Remote workers will develop more discipline or lose their jobs. This means your staff who go remote will get an upgrade you can’t get in an on-location employee. The newly developed skills of time management and task focus will spill over into other areas of their work and provide you, after a trial period for the first-time remote worker, with a more resilient team member.

For you as the employer it also means you have more avenues to find potential employees. There are many workers distributed around the world now who are willing to take less pay for equivalent positions in the United States. This is because they’re remote and working in a country in which 50% of the salary they would normally command lets them live at 150% of the lifestyle they did in the United States. This seems too good to be true, but websites like Dynamite Jobs consistently feature Inc. 5000 companies hiring remotely, and sometimes hiring the lower-priced of two candidates because of this gap.

Pay More Attention, Not Less

While it’s true that “out of sight is out of mind,” it’s important to remember that however resilient remote workers may be, they can still feel isolated and lonely. Ultimately unable to reap the rewards of personal and managerial development that can come from a traditional workplace. This requires employers to lead the way in setting aside time to catch up apart from regular virtual work meetings and to make sure their team members know they have an open door to communicate. Remote employees, like on-site employees, want to be valued. Thoughtful and intentional communication is one of the best ways to show you value them.

An Exit Interview for Sellers

Exit Interview for the SellerIn the due diligence process, a lot of documents and statements have to be delivered. What are sometimes forgotten are those crucial discussions about the heart and soul of a business. The information that is difficult to put into even the best owner’s manuals of the most systematized businesses. It’s also true that not all buyers and sellers develop the kind of rapport where an easy discussion about challenges and mistakes can organically happen.

In this article, we’ll offer four possible questions you could ask in a hypothetical exit interview for an outgoing seller as you undertake to replace him or her. The hope is that you can learn key lessons that will help you take the business you are buying to the next level.

What would you have done differently?

Very rarely will this question result in a quick, “Nothing.”  There are people who are either extremely intentional with what they did and proceeded along that line or those who are totally blind to self reflection. Most sellers will take a deep breath, exhale, and pause to think or just as quickly say, “Lots of things.”

The goal of this is not necessarily to capture every single thing that the seller could have done differently. Hopefully you will see a pattern that can help you avoid those potholes or make improvements that the seller couldn’t have. These discussions can also lead to broader philosophical conversations about the business. It’s an opportunity to introduce key questions for the buyer to fire his/her imagination and problem solving skills.

One of our sellers told the incoming buyer that he’d had personality and management style differences with one of the staff. This caused her to resign. But that the seller found her to be remarkably professional and dedicated to clients. He thought she would probably come back to the firm knowing there had been a change of ownership. He happened to be right and the employee returned to the benefit of the buyer, herself, and their clients.

What skill(s) do you wish you had that would have made a difference?

Some skills people are born with. But many can be acquired with diligence and patience.

If a seller confesses a weakness in a skill set that you also share, that doesn’t mean you’re doomed. Obviously, he/she didn’t possess that skill but still managed to build a sell-able business. But it does offer you additional insights and guidance from someone who has been in the position you are aspiring to. It gives you a head start so that rather than realize, “I need to be able to work better in the early evening, when a number of clients check in with us” a few months into the sale, you are told ahead of time by someone who has been doing it for years.

Sometimes, owners were too blind to hire their weaknesses, convinced of the “up by your bootstraps, do it yourself” attitude that parades as humility but is actually (and ironically) a very subtle form of pride. If an owner identifies a skill he/she wishes that you had, that’s a great sign. If something is missing, however, you can begin to brainstorm how to deal with it, including perhaps delegation to an existing employee or a new hire.

Can you share some war stories of experiences with clients or employees?  How you handled it well and/or how it might have been handled differently?

This is perhaps the most controversial question you might ask and one that is taboo in our “we are all scared of lawsuits” society. And the seller is always free to refuse to answer. But this again is part of the honest, goodwill effort for a smart transaction to occur and for a business to continue to grow, and indeed, thrive.

The new owner should be warned about a problematic client or an employee who created a bad atmosphere at the office. Likewise, the owner should be proud to share some times when a big risk was taken in client or employee relations and it ended up very positively for all involved.

We know of a client who had made personal deliveries to their clients on Mother’s Day. Some of those mothers were key factors in his company’s success. While it had been noted in the operating manual as a key part of marketing operations, it was important to share the reactions from those grateful clients. Many had probably never received Mother’s Day flowers from any business they had ever worked with (much less, the seller was told, even their own children!) This personal context is valuable and should be saved and shared.

Who is the most important staff member in the company at the moment? Why?

All sellers dread the loss of staff during a transition period. Sometimes the staff leave for no reason directly related to the incoming owner. A sale just signals a “change” in life and that can trigger a number of things related to their own career trajectory and plans, leading them to believe that perhaps it’s time for a change for them too. Where you have to hope to make the opposite case is with the most important member of the team.

Find out from the owner who this person is, what makes him/her tick, and what’s his/her “why” in relation to the company. After the acquisition, have a heart-to-heart conversation with this person as soon as possible and find out what his/her vision for the future of the company is, and if there are any ways you can incorporate that vision into yours. If so, you’ve just guaranteed a major factor of success for yourself in any business endeavor: retention of key staff.

We have other exit interview questions we’ve developed over the years to help you successfully acquire a new business. Ask us about them today.

Cautionary Tale #4: Waiting for the Next Best Offer

WaitingSome time ago, we had a seller who had a wildly profitable business in medical equipment. He was one of the first to market, and as such had a great competitive advantage and enviable cash flow. In fact, when we first took on his business, he had several serious offers, one as high as $12M.

Unfortunately he was always looking to trade up. Instead of seeing the offer for what it was, which was more than fair given the circumstances, he kept thinking he could get more. He never really got serious with any of these offers. Despite having engaged with us as brokers, he also hated the idea of paying a commission, and so was looking to make his own deals so he wouldn’t have to pay us. We can tell you from experience that doesn’t usually work out well for the seller.

And then…reality happens

The market knows. That’s why it’s the market. Any time someone is making a lot of money, competitors are going to be attracted to the opportunity.  Competitors mean slimmer margins and the end of complacency.

Worse, the technology improved and what he was selling was no longer the newest/best. He hadn’t prepared properly for the upcoming changes and got a bit left behind. When he did end up selling some time later, it wasn’t for the $14M that he wanted or the $12M that he could have had if he had taken our advice. It was for less than $4M. That’s not shabby, for sure, but it was $8M less than he could have had.

To review:

  • When you hire a broker, you’re hiring a professional who has a vested interest in helping you sell your company. Yes, we will get paid for doing so, but that’s part of the deal. If you want to sell on your own, you’re welcome to try, but it’s going to be a lot more work than you expect, and not nearly worth what you think it will be in “savings” of your time or money.
  • Be aware that sometimes you’re making money hand over fist not because you’re special, but because you’ve hit optimum market conditions. Unless you’re going to dig in and make a career of it, it’s wise to take great offers when they come your way instead of chasing the mythical “next best offer.”

The Value of Goodwill

The Value of GoodwillGoodwill is part of many transactions we do here at Apex. The best businesses have it in spades, and they are able to incorporate it into their valuation and their final deals. But like company culture, it is created in many different, not easily traceable ways. In this article, we will talk about some of the more obvious paths to goodwill in your business.

Reputation and Name Recognition

Many new business owners dream of the day when someone they don’t know will say, “I’ve heard of your business” when they speak to a stranger. It means that the business is a reference point in the community. It’s a barrier that competitors have to deal with and one that you control.

Good location

Location isn’t the most important thing for every business, but no one ever says, “I wish I had a worse location.” Visibility matters.

Custom-built factory/tooling/designs

Another barrier for your competitors to surmount is designs and tooling that cannot be easily or quickly duplicated. It gives you an edge with clients who don’t just want a generic looking product and it can allow you to command a premium price.

Loyal Customers and a Mailing List

When we say mailing list, we mean both postal and email. They have come back and become valuable as our society has shifted in the way it communicates for business and personal motives. The lists are not just valuable for the people you reach, but a mailing list can tell you where your customers live (and where you don’t have any customers) so that you can think more critically about your marketing and product offering.

As for loyal customers, there’s really nothing like them. They often are just as attached to the brand as to the owner, and as long as the new owner continues the best practices the old owner put in place, they will continue to spread your name around town.

Contracts

Recurring revenue is a good thing… having a contract for it is even better. Contracts are trust personified. It shows you are someone that people feel comfortable doing business with.

Great Staff and a Supplier List

Customers will often be loyal because you have a great team who deliver a good experience. Great staff who are doing work they enjoy will often very happily stay on and work for a new owner. A good supplier list is helpful as well. Often, business owners learn the hard way and have to remove bad vendors over time. A new owner has the comfort of knowing the list is vetted.

Trademarks, Copyrights, and Trade Secrets

This could be a great web address, a smart slogan, or the special herbs and spices that make what you have something that people have to have. Very often they are just best practices that an owner insisted on until it occurs to him/her just what a differentiator they were in the marketplace. In an ever more service-based economy, intellectual property (and legally securing it) really matters.

Curious about the goodwill in your business and how it can relate to a valuation of what your company is worth?  Give us a call today so we can chat about it!

3 Stupid Tax Mistakes

Tax MistakesIt’s that time of year in America when taxes are on our minds. When we get to pay the government for the privilege of providing fellow citizens with jobs, supporting the economy, doing something that matters to our community, etc. However you might feel about the tax system in general, one thing you shouldn’t do is make stupid tax mistakes, especially with your business. We can tell you we’ve seen them all, multiple times, and they will usually bring any sale to a screeching halt.

Not paying taxes

Small business owners have cash crunches at times, and it can be tempting to take money from any available source. One of the most obvious places is the withholding for your employees. Many small businesses don’t use a payroll service and  are responsible for paying the withholding to the IRS on a timely basis. Instead of doing that, they “borrow” the money that isn’t theirs. This never, ever works out well.

Worse, if you do have a payroll company that files timely reports, the IRS will be immediately notice the discrepancy between the filings and what has been deposited and you’ll get some lovely new fines and penalties to go along with what was already due.

Other small business owners don’t pay their estimated taxes, or fail to even regularly file taxes. If they’re thinking the government won’t notice… they will.

Inventory games

Inventory is only deductible when you sell it, and sometimes people want to make their balance sheet look better, so they fidget with the value of their inventory to “create” tax savings. Then they change inventory values back the following year. Sometimes they lose track of what they’ve done, and now the books don’t just look bad in the case of an audit, any potential buyer will be confused as well. Their suspicions will be rightfully aroused as to what else might be not quite right in the business. Check the new tax law to see if you’re eligible to treat inventory differently. Some businesses now are.

Have Low Revenues or Consistently Poor Profitability

We often say we’ve “seen it all” here at APEX, but the IRS has truly seen it all. The difference is that they have the legal power to make you pay for your mistakes, whereas we can only cringe around the office.

Suspiciously low revenues or consistent significant pass-through losses, especially in S-corporations, are blinking red lights that say, “Come audit me!” There are better ways to make tax savings than using a corporation beyond the limits of the fairly generous tax allowances that we get in the US.

Every business is different and has its own set of challenges. But they all answer to the IRS. And the lesson we’ve taken from dealing with so many businesses and transactions year after year is that taxes are what Mark Twain said they were years ago: as inevitable as death.

Have you made some of these mistakes but are hoping to sell your business?  We can connect you with the right people to get these issues handled so we can help your business go to market. Give us a call today.

Cautionary Tale #3: The Answer You Want Isn’t Always The Answer You Need

Questions and AnswersThis is a continuing series of stories we want to share with our clients so they don’t make the same very costly mistakes.

One of the many reasons you hire a business broker to help guide you through a sale is because we will tell you important truths without fear. We want a successful transaction and that can’t be done by hiding things or not being fully truthful. But that sometimes means that a client will want an answer you simply can’t give.

One of our clients had retired from a twenty year career in a field, and had decided to get into a food franchise. The first location that he picked was about thirty minutes from his home, so he had a general manager in place. The location wasn’t losing money, but it wasn’t making money at the rate he expected.

He also bought a second location of the franchise much closer to his house, which he had great expectations for. He wanted to get rid of the old location so he could focus all his energies on the second location. There was a problem, though. He didn’t have a sellable business.

There are many reasons to buy a franchise, but once you’ve committed and bought one, you simply have to put in the work.

Because the business wasn’t in a strong position, the sale price wouldn’t clear the debt that already existed. This meant that the deal couldn’t be financed. Worse, he still had an existing lease obligation that had some strings attached.

We told him the numbers had to be better so that we could help him sell his business. He disagreed.

Not only did he disagree, he went around asking for second and third opinions. Word kept coming back to us from friends and colleagues that he wanted someone to look at his business and give him the answer he wanted. We couldn’t give him that answer because it would have been a waste of everyone’s time.

Any business owner starts with dreams about possibilities. But once the business starts in earnest, those dreams meet with reality. Once you are ready for a sale, that reality has to pass the smell test of our team here at Apex before we will put it out on the market with our name behind it.

Sometimes, having a broker serves the purpose of telling you that you don’t have a business that’s ready to sell…yet. But if you take our advice about what to improve, you can have one sooner than you think. But that means you have to be willing to hear the answer you need, not the answer you want.

Want to avoid being part of a cautionary tale?  Give us a call so we can discuss implementing better systems in your business so you’ll be in a position to sell when you want.

Cautionary Tale #2: No Systems in Place

PlanThis is a continuing series of stories we want to share with our clients so they don’t make the same very costly mistakes.

We’ve discussed before that if you do well in one industry and decide to come back to it after a non-compete has ended, that there’s every likelihood you will do well again. You’ve already have a good position in knowledge and network against your competition. One of our recent clients had a seven figure exit from an equipment company over a decade ago. Once his non-compete ran out, he got back into the same business and in only six years he had grown the company from zero to $100M in annual revenue, against a 20% net profit.

That sort of business and that kind of profitability gets a lot of attention, and before too long he had an offer for a cool $100+M on the table from a serious buyer.

There was only one problem, the seller wasn’t serious. The reason we know he wasn’t serious was twofold.

Firstly, he wasn’t responsive. There was a period of eight weeks from when the offer came in before he even responded.

As we’ve said numerous times in various articles, successful transactions aren’t born, they’re made from cooperation, communication, and responsiveness to requests. If he was serious about selling the business and not just testing the waters, he would have reacted more appropriately to an offer that paid such respect to the hard work he had put in for the last six years (and even longer, as he didn’t mentally start from zero, but was building on previous experience, when he started the second business.)

Second, his lack of responsiveness didn’t come from a lack of seriousness alone. The reason he was gone for weeks at a time was because he was very busy working in the business instead of on the business.

He had a “management team” but it was really more for show than for go. He had a stranglehold on operations and no systems in place. This had already spooked the buyer early on, but the buyer thought about requesting an extended transition time, perhaps over a couple years, in order to ensure a successful handover.

Multiple Buyers

We encourage having multiple potential buyers looking at your business at any given time so that we don’t have to bet on one candidate.

In this case, the seller refused to allow us to market his business more broadly. He put restrictions in place about who could be shown the business. Also, he had to pre-approve every person we wanted to show the business to before we could move forward, waiting weeks for an approval. When the buyer withdrew his nine figure offer after a lack of responsiveness on the part of the seller, as well as an unanswerable fear about inability to transition, we had no other buyers we could offer to the seller… even if we believed he was serious, which we had come to realize he wasn’t.

This all goes to show that a successful build and exit in an industry can and does put you in the driver’s seat to do it all over again, but with that increased success can sometimes come a detachment from hard truths:

1) A business that can’t run without you is just a job you own. It’s not a sellable asset.

2) Your actions, not your words, dictate how serious you are about selling your business.

3) Your best chance of selling a business comes by having it be available to the largest number of serious buyers.

Want to avoid being part of a cautionary tale?  Give us a call so we can discuss implementing better systems in your business so you’ll be in a position to sell when you want.

Cautionary Tale #1: No Transition Plan… Ever

Time for ChangeThis is the first in a series of stories we want to share with our clients so they don’t make the same very costly mistakes.

Look, maybe it’s not time, let’s talk in another 4 months.” This is a quote we’ve heard many times before, and in itself, it’s totally neutral. But once you understand the context, you realize how strange it really is.

The call came from someone we had been speaking to for the last three years, who has a printing business in the Midwest. He’s in his early 80s, as is his wife. He has a daughter who is on the board of the business, who was only told about the idea of a sale in the last year. She has expressed a lack of certainty as to whether she would want to take over the business. But even if she did, there is no transition plan in place.

This is a failing that is common in family businesses, but in this particular case, we had been talking about a possible sale for three years already.

Because we’ve been doing this for many years, we can tell you the likely ending of this story.

We will get a call from a family member or from the client from a hospital bed, informing us that we need to sell the business quickly, or worse, that the client has already passed. Unfortunately, we will be working with a probate court to sell the business. It’s not our place to tell this client what to do with his life. If he thinks, in his early 80s, that with no transition plan, no clear family succession, and a wife who just had a second major surgery, that it’s “not time to sell,” then clearly it isn’t.

What we can do is use his story to caution our clients: have a plan or plan to fail, and don’t think you have guaranteed time. Every moment in this life is a gift. Take opportunities and options when they come your way.

Want to avoid being part of a cautionary tale?  Give us a call so we can discuss your transition plans.

Real Estate Gives You More Options

Commercial Real EstateOne of the challenges we sometimes face in putting together the sale of a business is real estate that is intertwined with the assets of the company.  Sometimes that’s the perfect way to run your company and you shouldn’t change it. Other times, the circumstances are such that rearranging things would be too costly and ineffective.  But given time, deliberation, and good advice, you can use the real estate that’s involved in your business to great advantage.

Control the Lease

We can tell you that we’ve seen deals that were on the way to the bank crash and burn because of mishandled landlord/lease situations.  This is why a lot of businesses situated in key real estate will seek to acquire the property and hence control the terms of the lease themselves.  Depending on how the property is being acquired (perhaps it will be with partners who are unrelated to the business) it could make sense to form an entity not related to the company that you’re operating so that there is a separation of assets, yet an alignment of interests.  By creating a different business entity, you’ve not only created a smart hedge against changing market conditions – either for your business or for real estate – but you’ve simplified a possible future sale of the business for a buyer.

Sell Either

The reason separating your real estate from your business makes things simple is that it provides more options.  You are free to, at any time, sell only the real estate and not the business, or only the business and not the real estate. Such a move allows you to take some money off the table right away while still watching how things play out.  It also means that a buyer interested in relocating the business can do so, since he/she no longer has to commit to buying real estate with your business.

Sell Both

But you may have an acquirer who seeks to have the same comfort you’ve had in owning these separate entities.  Because you’ve taken the time to separate them and keep them separate via responsible bookkeeping, accounting, and timely tax filings, now the real estate no longer becomes an “of course” part of the sale, but an option that can carry a premium.

There are many times in business when someone will say in retrospect, “I wish I had done it that way the first time.”  We know that business doesn’t always happen the way that it’s described in business books (or even blogs!) but real estate is one of the oldest and smartest forms of investment.  There’s every reason to put it to work for your business as a partner, in a separate entity.

We have a lot of real estate experience in our offices.  Give us a call to see if we can help offer some advice on your situation.