Cautionary Tale #5: “I’m an Owner – You’re an Operator”

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One of the key pieces of advice we give to all our new owners is: “Don’t change too much too quickly.” In fact, you should guard against any kind of changes in those early days. You should be soaking up everything you can about the business, learning why it’s gotten so successful such that a person like you has come along to buy it in the first place. But as you might guess, not everyone takes our advice.

A recent cautionary tale came in the form of a business that was open for sixty years. It only took eighteen months for the new owners to put it out of business.

Attitude

CautionAs brokers, we can dispense business advice but often we have to give life advice as well. We could see that the two incoming owners had a “know-it-all attitude”. You can gently try to offer some correctives, but at the end of the day, it’s their life and their business to do with as they wish. But from the get-go, the outgoing owners and the entire company saw that attitude on display.

It started in the morning. The owners would be in at around 7:30 each morning, usually slightly before any other staff arrived. This allowed them some quiet time to do work before the office got busy, but it also allowed them to demonstrate to their team that they took this at least as seriously as everyone else did.

Not so with the new owners. They made sure to get to the gym — not an early morning session — but one that allowed them to roll into the office around 10 or 11. When they did arrive, they didn’t ask for training or orientation, they were just happy to assume the title of management without earning the mantle of leadership.

A perfect example happened when the new owner called out to a staff member to come into their office. When the employee came in, he was handed a sheet of paper: “Please fax this to so-and-so.” After the employee left, the old owner leaned over and said, “We usually do those sorts of things, no need to bother the staff.” Without skipping a beat, the new (and soon to be former) owner replied, “That’s the difference between you and me.  I’m an owner – you’re an operator.”

Departures and Decline

As I’m sure you can guess, that sort of attitude wasn’t confined to private remarks in an office, but leaked out to how the staff was treated, and before long, people started leaving. The front line staff were the first to go, almost all of them left within 90 days. Some months after that, the management team followed suit. As the cash flow dried up, the new owners couldn’t take a salary and worse, had to take high interest loans (without their bank’s knowledge or permission) to stay afloat. From that point forward the death spiral accelerated and before long they had crashed, largely because of their own hubris.

Perhaps being an operator so that you could learn how to be an owner of that business might have been in order?

Whether you consider yourself an owner or an operator, you’d be wise to pay attention in those early days at the helm of a new business. Continue to write down and note exciting ideas you may have for change and growth, but wait until you have a real sense of the business, instead of relying on perhaps your (too healthy) sense of self, before making any changes at all.

You bought the business for a reason. Give yourself time to understand the business completely.

An Exit Interview for Sellers

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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.

Four Things to Keep in Mind When Buying a Food Service Business

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Food Service BusinessFood businesses have never been more popular. At a basic level, food, as something we consume every day, is always on our minds. But the celebritization of the industry via competitions, the Food Network, and wildly successful concepts has brought a new level of interest to this marketplace. Food service businesses have some particular things you need to keep in mind when doing your due diligence.

Lease

Every lease is different and every landlord is different too. A restaurant’s location is intimately tied to its value so if you can’t retain the location, there’s no guarantee that the business will survive. You need to make sure that the lease can transfer to you, and sometimes there is a long vetting and qualification process before such a transfer can be affected, so don’t delay the application process. If given the proper attention, this is rarely a problem, but we can give you plenty of stories of deals that got held up or actually torpedoed because of problems with the lease.

Equipment

If the equipment is leased there will often be maintenance records that go along with them, but if the equipment is owned, find out what the maintenance record is.  Find out what condition the equipment is in. Look under the hood. Kick the tires, gently.

Liabilities & Licenses

There are certain charges that follow the business, not the owner. This can include unpaid sales taxes and health code violations. Have your attorney check with the relevant agencies. It’s not about not trusting the seller. It’s about trust, but verify.

Non-compete

If it’s a chef-owner, this should be a given. These people have often (rightfully) earned a following and if they don’t sign a non-compete, they can decide (not even spitefully, but just because they want to) to open up a restaurant (similar or otherwise) near you, which could seriously hurt your business. A non-compete shouldn’t be a deal breaker, and it’s not meant to bury the seller, but rather to protect the buyer. The seller should want the buyer to succeed, so this makes sense all the way around.

Food service business can be tough, but rewarding in their own ways.  If you are serious about buying into one, or selling one you’ve cultivated, give us a call.  We’ve got the experience to help you.

Buy a Business or Buy a Job?

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Buy a BusinessNot everyone has the same goals when buying a business. In fact, many are quite happy to buy themselves a job. If we see total owner benefit (owner’s salary + discretionary earnings) of $75-100k and a workload of 40-60 hours per week, you will indeed be your own boss, but you’re the boss of your job, not of your business.

But that’s not a bad thing!

There’s nothing wrong with buying a job. There are various reasons why people might choose to do so.

  • Passion: they are crazy about manufacturing, or cookies, or manufacturing cookies, just to give some examples. They love the idea of working in something they care about. Many people have spent decades of their lives in the workforce not doing anything even close to this.  Don’t underestimate this as a motivation.
  • Want autonomy: After years of being a version of Milton on Office Space, they are tired of being told that it would be great if they could um, yeah, come in on Saturday. The allure of being your own boss often outshines all the caution in the world about, “You’ll have to stay up late,” or “Guess who doesn’t get paid if payroll is short?”
  • Dislike their current gig/industry: this can often be a complement to the passion for something else.  Often “anything but this” is not only perfectly valid, but a great way to transition into something new.

Buying a job can pay the bills and even pay down the bank loan if you needed one in order to buy the business. For those with minimal savings or ownership experience this may be the perfect way to get started in the world of entrepreneurship.

Room to Grow

Many businesses started with someone who just had a passion, or wanted autonomy, or wanted to do something new (or all three!).  The good news is that a job can always grow into a business.

  • Generate more sales from existing products or services: Very rarely do we find businesses that are doing all they can in every channel to promote and sell.  There are always opportunities to be found. Smart execution here often leads to more discretionary earnings.
  • Delegate responsibilities and bring on staff: one of the first things you can do with those extra earnings is start to build a team that can help you execute and remove yourself as the single point of failure.
  • Create new products or services: Creating new income entirely allows you even more discretionary income, which can increase the long-term value of your business and put some more money in your pocket in the short term.

Whether you want to buy a job, buy a business, or buy a job you want to build into a business, we are here to help! Give us a call.

Last Minute Jitters before Closing the Sale

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JittersIt’s late at night, you can’t sleep, and you’re hearing negative thoughts.  You’re only weeks away from officially buying a new business, and questions like:

  • Should I do this? (perhaps you’ve got a great and secure job)
  • What if I lose everything? (you’ve spent many years saving and scrimping)
  • What if I fail? (what will your loved ones and friends think – you can’t bear to let them down)

come into your mind. The questions are not unreasonable, but should you listen to them or ignore them? We say do both.

Listen

Write down these questions and systematically go through what has brought you this far.  This can result in counter-questions:

  • Did you do the due diligence thoroughly and properly? Do you have any more questions you need answered?
  • Is the financing lined up? Are you clear on the details?
  • Is your legal situation settled? Do you have the structure in place that suits your accounting and tax goals?
  • Do you understand the business? Have you been a student not just of the products and services, but of the DNA of the company itself?
  • Do you have a plan for the first 100 days? Do you have what you need from the owner in order to make a great start?

Then, Ignore

You’ve taken the time to re-answer these questions, and so now it’s time to put these doubts in context and see them for what they are: totally normal. The jitters are a psychological reminder that you’ve got skin in the game. But use the jitters to guide your energy and excitement. Don’t let them dominate you or the transition.

What are questions you have about buying or selling a business that you’d like to have answered?  We’d love to help!

Apex is actively searching for top quality candidates to join our team of Advisors. If you’re interested in a career helping people buy or sell a business, think you have relevant experience, and want to find out more, please call Doug Hubler, President of Apex, at (913) 433-2303.

Key Questions to Ask Any Seller

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QuestionsAs brokers, we don’t often have to prompt buyers with questions to ask sellers.  They often come with their own lists, developed from curiosity and perhaps articles like these.  While each broker has different questions they like to ask sellers, there are a few that everyone who is interested in buying a business should ask.

Why?

There are many answers to why someone wants to sell their business, and there isn’t really any “right” answer.  There may be some “wrong” ones, though. There may be changes in the market which may make the future seem less bright for the industry.  There may be staffing issues. Perhaps a new competitor has moved in and sapped the last of the owner’s resolve. These are “wrong” only insofar as they aren’t the best reasons for the seller to sell.  But they represent great opportunities for the opportunistic buyer who has his/her eyes open but is also willing to put in the work if the business isn’t being handed over in ideal circumstances.

80/20 Rule

Tim Ferriss popularized and put into business context what had previously been known only to scientists and researchers as Pareto’s Principle: what are the 20% of activities that lead to 80% of the business income?  Or framed another way: what 20% of customer service issues take up 80% of your time?  There are many ways that a functioning business deals with these ratios. An informed seller has thought through these implications, though perhaps not in this ratio, and should be ready to give some answers (and corresponding strategies) to this question.

Staff

What is the cycle of acquiring and keeping good staff?  All seasoned business owners know that even the best, most aligned employees can move on after a number of years of good service. But there should be a history of employment that can give an incoming owner a roadmap to acquire new staff should the current employees move on with the outgoing owner.

If Not This, What?

If you didn’t sell the business, what would you do for the next two years?  Again, this might give you more insight into the personal life of the seller than the business, but good chances are that you’ll see an indication of either continuing on or push for growth.  If a business is in a position to sell, that means it’s healthy enough to support (or adapt to) an owner’s desire to work in more of a relaxed, lifestyle capacity or his/her desire to double or triple down and grow the business.  Follow up questions of why in either of these veins should give great insight into the fundamentals of the business.

The Daily Challenge

It’s often said that some business owners go to sleep with their businesses in their mind and wake up to those same thoughts first thing in the morning.  Even if a seller doesn’t think about his/her business this way, there’s a fundamental challenge to running the company. What is the most challenging aspect to running this business on a daily and ongoing basis?  The answer to this question should go right to the heart and mind of the potential buyer: do I have what it takes to do this?  Or even better, am I perfectly qualified to do this?

Now, enough of the questions, you might say, how about some answers?  We’ve got plenty of those here at Apex. Give us a call and give us a chance to answer!

Three Things Buyers Need to Make a Great Start

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threeBuyers have different reasons for buying businesses and even more varied ways they wish to operate them once they take over.

In this article, we won’t be discussing those businesses that will be near 100% absentee or will require a complete tear-down and reboot. 

Instead, we’ll be talking about the sort of business that we see very often. One that is running fairly well and can benefit from new ideas, energy and direction from a buyer humble enough to engage with the process.

1. Knowledge

No matter how well a buyer knows the industry, he/she will not usually know your business inside and out.

In those early days, and even towards the end of due diligence when it looks like any obstacles towards a successful closing have been dealt with, it’s important to learn everything you can about a business.  

This doesn’t just include information from the seller, but whatever you can read or discover: books, articles online, blogs, videos on YouTube, quiet conversations with people in the industry who you’ve networked with, etc.

Don’t be that unfortunate buyer who thinks he’s got nothing to learn and will be doing all the teaching. We can’t think of any circumstances where that worked out well in the end.

2. Employees

Confidentiality, as we consistently point out here, is key, and so a buyer will in all likelihood not have had the chance to get to know them or hear their future plans before the transaction closes.  

Therefore, after the sale is officially completed, the new owner should take every opportunity to get to know the employees, especially the key personnel, as well as possible.  

During this phase there should be a lot of listening and a lot of asking for feedback. “What is one thing you would change if you could?” or “What’s a way we could save money/earn more money?”

There’s literally been a regime change so there’s no better time to get a frank and honest opinion, and that can only be done if you come to them with a spirit of trust and openness.

3. Now, Plan

Once a new owner has had the chance to know intimately the business and the people who help run it on a daily basis, he/she can start to put together a plan that goes deeper than “cutting costs” and “new marketing.”  

Every business, no matter how old and established, always has opportunities to grow and make even more income. But those opportunities always become clearer with knowledge and time.

In a certain sense, the financial investment in the purchase of the business is the least expensive and least important part of the process. It only cost you the money and it’s only the beginning.

Now comes the part where you will be asked for your time, which, unlike money, you can never make more of. And now the journey begins where it’s not enough to simply stay in place but to grow, and that comes with risk.

But it’s that risk and that investment in time that makes the journey so rewarding. It’s also why the seller of these businesses is much less likely to go off and swim, Scrooge McDuck-style, through his/her gains. And it’s why he/she is probably going to go through this same process all over again before too long.

Have you been thinking about starting a business journey of your own?  Give us a call. We’d love to share our centuries (literally) of experience with you.

Why Buy a Franchise?

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WHYIn a previous article, we’ve made the case for buying instead of building.

However, you may be interested in buying a business run by a franchisee who has multiple locations in place. Every franchise is different as to what they expect from someone who is buying from an existing franchisee. 

Our goal in this article isn’t to explore those, but rather to discuss how running a franchise-type business is different from running an independent one.

Start with the Good News

We have discussed previously how important systems are to any business. In a franchise, those systems haven’t just worked one time…for one person…in one place.

They’ve literally been “field tested” many times, with many people, in many places.

They have extensive manuals for “how to run the business” which are written in the “for dummies” format.  You’re primed to open multiple locations in the future, thus expanding your cash flow against an existing back-office infrastructure.

You also have the power of an established brand and the ongoing publicity-spend pushed by the franchisor. Sure, you have to pay for part of that, but you often get a disproportionate benefit for this spend because of the lower costs. With many franchisees participating, better rates can be secured.

The “Bad” News

The “bad” news is that you have a limited sphere in which you can be creative. Unlike an independent business, in which you’re free to pursue new business opportunities or avenues of marketing, you generally have a rulebook which tells you what you may and may not do without consulting with the franchisor.  

This is only “bad” for those very creative entrepreneurs who buck at even the idea of running something by someone else in their own business. Whereas those who favor collaboration or who want ownership, but with a lot of help and guidance, can find great comfort in knowing they aren’t simply throwing spaghetti up against a wall.

However, these systems do come at a cost. You won’t be able to circumvent the obstacles the original franchisee went through just because you’re buying a mature, multi-unit operation.  

You will likely have to pay an upfront fee, demonstrate net worth, and pay ongoing royalties, the last of which you’re unlikely to have to do in an independent business.

What Matches You?

Ultimately, buying a franchise involves many of the same questions all potential buyers must answer. You need to begin with the end in mind and consistently ask yourself why you’re doing what you’re doing (in pursuing the purchase of a business) and how well this particular opportunity (the businesses you examine and screen) will aid you in accomplishing your why.

Our goal isn’t just to counsel you on the paperwork and financial questions, but on questions about personality as well. We have the experience to advise you on franchises vs independent businesses.  Give us a call!

Why You Should Buy Instead of Build

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buy a businessThere is an inordinate level of romance associated with building a business from scratch.  Shows like Shark Tank and The Profit only exacerbate the issue.  

Though such shows do show the struggles that these business owners face, the very appearance on television creates aspiration:

“I want to do that too.”  

First-time entrepreneurs looking to get into business see building from scratch as a great option. Seasoned entrepreneurs know better. They know it’s always easier (and often better) to buy than to build.

Why make it hard?

When you start from scratch, you have to build a customer base, market a new business (with a brand and logo you’ll need to come up with), hire employees, and oh yes, generate cash flow during the runway (the financial amount you can survive on during startup) you have to build the company.  Not so with an established business.

They have customers, they have employees, they have procedures, marketing and a brand in place. And yes, there’s cash flow from Day One. It’s even easier to secure financing from a bank, which views an established business as a much safer bet than an untried startup – even more so if the owner has never run a business before.

Lots of choices

You think you know what kind of business you’re interested in, but the truth is, you’ve often not even scratched the surface beyond some daydreaming.  Not only are there businesses out there you’ve never even considered existed, but they’re often for sale – and sometimes, in your price range.

If there’s a type of business that you have your heart set on and it’s not listed, we as brokers can go in as a trusted intermediary to see if maybe there’s an openness to selling.  

Rather than confine yourself to one specific idea that has to work, you can examine dozens of possibilities and see what really ticks the boxes for you.

Take your time

Buying a business isn’t something that most people do overnight.  It’s a process that begins with financial qualification – putting together your assets and seeing what you can afford.

It then continues on with meetings with businesses and owners who truly interest you. And it culminates in an exciting ending: you getting the keys to a business that already works!  

Your concern isn’t keeping the lights on, but deciding what to do next.  

Will you keep it as is?

Convert it to a lifestyle business?

Scale it to the moon?  

A bought business gives you that luxury. A business started from scratch never does.  The failure rate among started-from-scratch businesses compared to bought businesses isn’t an apples-to-apples comparison. Heck, it’s not even a galaxy-to-galaxy comparison.

Are you thinking about becoming a business owner?  Let us help you as we have helped so many before you.  Give us a call today!

Five Sobering Questions to Ask Yourself Before Buying a Business

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fiveIn everything we do, often the sheer excitement of an event, experience or a purchase pushes out everything else, including good judgment.

That’s to be expected, and sometimes, can’t be avoided. But buying a business is such an important event that has the potential to affect so many other things in your life.

Because of that, it’s important to put euphoria and excitement in their proper places and ask some sobering questions of yourself on your business-buying journey.

1. Am I interested in this business solely for the cash flow or prestige?

Both cash flow and prestige are perfectly legitimate reasons to be interested in a business. Money is important, as can be the feeling of being affiliated with something of value or class.  

But on their own or even combined, they’re not enough to keep someone building a business in the medium to long-term. There needs to be at least one other thing that attracts you, be it a fascination with the industry, interest in the city in which a business is geographically sited, or a desire to challenge yourself with something new (just to name a few).

An additional reason beyond money and prestige will make sure that this new business adventure is a long-term play.

2. Do I really want to do this all day?

In his book Restaurant Man food mogul Joe Bastianich goes a long way to disabusing people of the “glamor” of the restaurant business by discussing the realities of the hours (18 a day), and the days you’ll work (weekends and holidays), and how much money you’ll make (20% blended margin even on the high end).  

He does this to discourage the dilettantes who like watching Food Network and think getting into the industry would be “fun.” If the business requires an active owner/operator, are you willing to sleep/breathe/dream about the business during a large part of your waking hours?

If not, you should probably pass.

3. Will demand exist in the coming years?

If you’re interested in growing a business, not just in maintaining cash flow based on a product that is headed for legacy country, you need to ensure that demand will continue to maintain, and even better, grow in the years ahead.  

Look at regulations, the competitive space, and your own costs of capital as part of a blended approach (that includes examining news and reports and talking with veterans of the industry) to get a solid answer to this question.

4. Why is the seller selling?

There’s nothing wrong with someone being “tired” – either in the sense of working in this particular business or industry or working in general. It will happen to all of us at some point. What we want to be wary of are sellers making decisions to sell for abrupt reasons.

Sometimes a family illness or personal emergency will precipitate just such an occurrence. This doesn’t mean a good transaction can’t take place.

It just means that because it was unexpected there are necessarily things that might have been missed, and both buyer and seller (but particularly the buyer, who will be left with the business when all is said and done) need to ensure that the business can indeed not just survive, but thrive with a new owner.

5. How much does the business depend on him/her?

At APEX we’re advocates of Michael Gerber’s famous phrase: “Work on your business, not in your business.”  This flows from a desire to transform a business from a handful of people who are relying on hustle and willpower to a well-oiled machine that relies on processes, not personalities.  

Ensure that the business isn’t overly reliant on the owner. If that’s the case, and the owner isn’t willing to make changes before the business sale to address the issues, consider negotiating a longer transition period or additional seller financing.

One of the reasons we exist is to help people navigate these and other key questions when preparing to make the life-changing decision of buying a business. We’re always here to answer your questions. Give us a call today at 913-383-2671!