An Independent Look at the Election

The biggest disappointment of last Tuesday’s election, as I opined in an article by the San Antonio Express News, is that on Wednesday the national political landscape still looked a lot like it did on Monday.

I tried to write this week’s column about business lessons from election marketing, but it was weak and didn’t say anything that hasn’t been said a million times already. I need to take this space to discuss what happened, and what has to happen next.

I feel that the American people spoke clearly. The fact that it seems to be a mixed message is due to an inability by the decisive swing voter, the 40% who identify themselves as independent, to enunciate anything that can be heard above the din of the warring factions.

We reelected a President who seeks new taxes and an expansionist role for government, while simultaneously giving him a House of Representatives (which originates all spending decisions), that is opposed to both. Even more revealing, however, were the results of the elections for statewide offices; those for Senator and Governor.

The Democrats took every Senate election that was even remotely in reach. At the same time, the Republicans seated an all-time record number of Governors. Indiana voted for Romney, and sent a Democrat to the Senate. Wisconsin also chose a Democrat for Senate and committed their electors to President Obama, while Republicans simultaneously swept both houses of that state’s legislature. What’s going on?

At the almost certain risk of scathing remarks from the true believers on either side, I think both parties failed to convince the plurality of voters in the middle that they could follow sensible paths, that they would be willing to move to the middle to get things accomplished.

The problem is plain. For almost a century, the United States Congress had a balance, regardless of which party was in power. If the Democrats wanted to expand social programs, they needed the assistance of moderate Republicans from New England, the Middle Atlantic and the Great Lakes (blue states). Those Republicans would say “I like the idea, but we have to be careful about the spending. Scale it back a bit and I can support you.”

Similarly, when Republicans wanted stronger defense or looser market regulations, they had to approach conservative southern Democrats. Those “red state” Dems would say “OK, but not enough to let Wall Street or the generals run amok. Let’s keep some oversight in place here.” The laws that came out weren’t so much compromises as they were the agenda of the party in power, tempered by the others they needed to get it through.

Over the last 15 years, both parties have purged those “moderate” members from their ranks. The socially liberal Republican has gone to the boneyard to lie down next to the fiscally conservative Democrat. To make up for those lost votes, the parties have wielded their fundraising muscle to force 100% adherence to the party line, making razor-thin majorities into a bloc on every issue.

I’ve collected multiple stories about threats and ostracization on both sides against those representatives who dare to vote the party line only 96% or 98% of the time. Younger representatives say frankly that they don’t know members of the other party well, and that even conversation with them is discouraged.

Thomas Jefferson was adamantly against political parties. He said that if parties became powerful, then inevitably elected officials would owe allegiance to their party over the country. The parties today, with their ability to direct the billions of dollars needed for television advertising, are more powerful than ever before. Thomas Jefferson’s fear has come to pass.

The 40% of Americans who don’t buy into either party’s platform entirely are desperately trying to find a solution using the only tool they have, a split ticket at the ballot box. We can only hope that some courageous statesmen and stateswomen respond.

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2 Responses to An Independent Look at the Election

  1. Jim Marshall says:

    In Wisconsin and many other states the GOP got re-elected partially because of the redistricting (read “gerrymandering”) they did. The Dems would have done the same to their benefit if they had been in power.
    I think another factor affecting both parties in the state (local) elections is the familiarity the public has with their incumbants. In some cases its “even though he/she votes the party line” they are “nice guys”. In others it’s “the devil we know is probably better than the devil we haven’t gotten to know”.
    I think the concusion I have reached from the above and from what you have written and the obvious power of the corporations and their lobbyists (as well as labor and its lobbyists) is that we live in an ungovernable country. I hope your conclusion (election of courageous statesmen and women, comes to pass….but with the cost of campaigns and the need to depend on large donors remains and grows….I don’t know how that will happen. Or whether a public that thinks only in black and whites would accept them
    Cleo and I just returned from a European trip including Greece. People we talked with referred to the disenchanted students and others being satisfied for the present with expressing themselves through graffiti and mostly peacful demonstrations against their incompetent and corrupt government officals. They fear for when that will not be enough.
    Here at home I fear for the same, as the gap between the haves and have nots grows so fast and far…and the feeling of helplessness and frustration grows among just about everyone.
    So, Mrs. Lincoln, other than the shotting….how was the play?

  2. Bill Seelig says:

    Unfortunately, “neither” party dared take on the banks, the large corporate givers and the unions; those that sponsor most electiced officials for their own gain. While those outside this inbred system are beginning to be heard, it will take a monumental effort to successfully challenge the current way of doing business and return to a heathly, more balanced approach to our economy and the people they serve.

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Sales: Do You Have Customers or Clients?

Whether you have customers or clients is more than a matter of semantics. Some businesses use the term “clients” in an attempt to class up their image. Attorneys usually have clients. Kentucky Fried Chicken doesn’t, regardless of what they might say. Nordstrom? …We’ll see.

I am loath to fall back on the hackneyed “Webster Sez” device in writing (try reading some high school essays. It seems about one in three start that way), but here is the dictionary approach, mercifully shortened.

A Customer is one who purchases goods and services

A Client is one who uses professional services.

I’m sorry, but those definitions are both weak and useless. The type of services (or goods for that matter) have little to do with whether you seek customers or clients for your business.

Customers are buyers who establish a relationship for the purposes of conducting a transaction.

Clients are buyers who conduct a transaction based on a relationship.

So a storefront attorney who offers cheap wills, incorporations and other standard form-based serviced has customers, despite the fact that he is a professional. An attorney who creates detailed estate plans has clients.

Costco has customers. They go there to buy stuff at good prices. Nordstrom has clients. Going to Nordstrom is their buying decision. What they buy depends on the need of the moment, but whatever it is they are buying it at Nordstrom.

eBay has customers. Amazon has clients. Ah Ha! You disagree? I argue that Amazon has proven that they can attract buyers who are looking for power tools and skiwear, pet supplies and perfume. I have clients that sell those things through their own web presence as well as through Amazon. The numbers Amazon can produce for any retailer are breathtaking.

They don’t promote power tools, they promote how Amazon serves its clients. Amazon has extended their client relationship to other vendors as a substantial profit center of its own. In fact, how much of Amazon’s profits are still from selling books? They sell clients.

How about your company? I hear many owners say “Our business is based on relationships. Our clients work with us because we have long-term relationships with them. Of course, that S.O.B. down the street who is cutting prices is taking a lot of them away.”

News flash- those are customers, and they aren’t buying on relationship. They may be buying because they see value in what you sell, and there is nothing wrong with that, but that doesn’t make them clients.

A very few high-class call girls have a strictly limited client list. The rest have customers.

Perhaps the world’s greatest curmudgeon, George Bernard Shaw, once argued at a society party that everyone had their price. A well-dressed woman demurred, to which Shaw reposted “Madam, would you consider sleeping with me for a thousand guineas?” She allowed that for such a large sum she would have to consider it. “Well then, how about sleeping with me for a shilling?”

Certainly not!” she exclaimed. “What do you think I am?

Shaw’s immortal comment “We’ve established that, my dear. Now we are just haggling.” is a classic. Like most classics, it endures because it is so true.

Clients or customers? The answer is what you want it to be, but regardless of price, customers aren’t clients just because you say they are.

Posted in Marketing and Sales | Tagged , , , , , , | 2 Comments

2 Responses to Sales: Do You Have Customers or Clients?

  1. Clint Moar says:

    Ha! Love the Shaw comment…
    Thanks John.
    This is one that I’ve always wondered about as well…I never liked the word “client”, felt like those using it were trying to sound important…I’ll never be a lawyer so they’ll always be customers (buying something)…
    Clint.

  2. John, thanks for your article. I agree with your distinction between the two. Perhaps, though, it does not go far enough.

    It seems to me that “customers” purchase goods and services which have been commoditized; that is, items for which little value derives from an ongoing relationship with the supplier or intermediary providing the commoditized goods or services.

    “Clients,” on the other hand, purchase some goods, and more often services from people or businesses whose approach, advice and supplementary services they trust and value. Therefore, the elements of “trust” and “value” figure into the distinction between the two.

    Finally, those of us who have clients need to recall that the meaning of “trust” and “value” must be based on the buyer’s personal perception … not our own. Too often, we focus on what we believe is valuable rather than focusing on “value” as defined by the client/buyer.

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Employee Confidentiality: Circles Within Circles

The father of a friend, a rancher in South Texas, conveys confidential information by preceding it with the following caution.

“Now I’m going to tell you a secret, and you have to swear not to tell another soul. And when you do, you have to make them swear not to tell another soul.”

Keeping confidential information within a company is often a pipe dream. We regularly tell employees of plans and changes that we don’t want to become common knowledge. Yet almost inevitably, another employee will refer to the secret with a knowing wink within a few days.

People tell secrets because they want to feel special. Sharing a confidence serves that need on two levels. First, it says “I am more important than you, because news was shared with me before it was shared with you.” On the second level, they are saying “Our relationship is important to me, and I want you to feel special too.”

After all, what is the point of being special if nobody knows about it?

Sometimes, there is impending news in a company that has to be available to some, but could create huge problems if it were known to all. This is usually game-changing confidential information, such as a planned merger or an impending reduction in force. Key employees need to prepare for the change, but the consequences would be dramatic if the secret became widespread.

You can utilize the psychology of being special by employing what I call concentric circles of information. First, you share the information with a core group of trusted employees. Bring them together for the news. Knowing who else knows is important. They can share the pride of being special. The other people in the group know who else is in on the secret, and know that the others see them on that level as well.

If they feel an absolute need to discuss the news (and they probably will) then they know whom they can safely talk to.

When it becomes time to spread the confidential information more widely, you choose another group for the same process. The second circle is informed as to who is in the first circle (e.g. executives to managers to supervisors.) At each level there is a recognition of the employee’s individual importance, as well as identification of a “safe” group to discuss things with.

The purpose of sharing in concentric circles goes beyond mere information control. As you tell each circle, get their buy-in on the company explanation. They are your advocates when the next circle comes to them with concerns or questions. Let them know it is their role. “When we inform the managers, we will tell them that you already know. They will come to you with questions, and we are depending on you (because you are more special than they are) to support and explain this.”

Sometimes the news is so huge that you can have little hope of it staying within planned bounds for long. In a company of a hundred people, I’ve used the concentric circle method in as little as one day. The 3 executives were informed in the morning, the 5 branch managers in the afternoon, and the 8 supervisors (who were most likely to blab), after the close of the business day. The general announcement was made the next morning. Each group was assembled from our branches at a central location. When they returned to each office, they informed the next level that they needed to attend a special meeting later that day.

It worked. When we made the general announcement (our acquisition), we had multiple advocates in each branch who could say, “Yes, I knew about that (because I was in on the secret). Everything is going to be OK.”

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Business Value: Do Your Numbers Add Up?

Most small business owners don’t understand how to value their companies. For some, misunderstanding the way that buyers look at the value of your business can be very costly in the long run.

The fourth of our Rights and Obligations of a Business Owner says that you have the right to a company car, travel and other perquisites. However, these come out of your profits, and so out of your pocket, and both you and your spouse are obligated for all of your personal assets to guarantee everything.

Most business owners take advantage of tax laws by giving themselves at least a few benefits deductible as business expenses. Taking a company truck home at night or tacking a family holiday onto a business trip are widely accepted perks of ownership.

Usually, small businesses are organized under IRS rules that allow profits to be passed through to the owner without a separate level of taxation. Lenders recognize this when they rely on an owner’s personal financial statement to determine creditworthiness, and when they require a personal guarantee for a loan. This is their tacit admission that the actual monetary impact of owning the business is frequently more than what is reported on the profits line of its tax return.

Because personal assets underwrite the business, many owners feel that the business should bear as many of the owner’s personal expenses as it can. In lieu of allowances, family members are put on the payroll. Spouses and children receive company cars, with gasoline, insurance and repairs included.

Clothing becomes uniform expense.  I once knew an owner who spent tens of thousands of dollars annually for cowboy boots in exotic leathers, which were then deducted as work shoes.

When it is time to sell the business, valuations are based on a multiple of profits. How can an owner realize the full value of his or her company after years of keeping the profit numbers as low as possible?

If your business is small enough to be purchased by an individual, simple documentation of how you draw value out of the company is often enough. Business brokers will calculate your Seller’s Discretionary Earnings (SDE) as part of their workup for marketing the business. Any savvy buyer can understand that the same or similar benefits will be available to him once he takes ownership.

Larger organizations, however, may not be quite as understanding. If the business is substantial enough to require outside financing, the lender has more stringent rules regarding what can be considered “profit.” You might be able to explain a family member on the payroll, or an extra vehicle. Too many such items though, will make a lender wary of the accuracy of your books.

If your company is large enough to attract a major buyer, like a publicly traded company or a private equity group, they will usually base their valuation strictly on the results reported for tax purposes. Personal expenses cleverly hidden in the operating costs are disregarded in bigger acquisitions.

When you begin to think about selling your business, consider minimizing your personal expenses at least three years before starting the search for a buyer. Showing better profitability may cost you some added taxes in the near term, but getting 3, 4 or 5 times those profits in a sale more than compensates for the short-term sacrifice.

Posted in Entrepreneurship, Exit Planning | Tagged , , , , , , , | 3 Comments

3 Responses to Business Value: Do Your Numbers Add Up?

  1. Jeff Thomas says:

    Jon,
    Where can i find more on SDE evaluation?

    Jeff

    • John F. Dini says:

      Jeff,
      Pratt’s Stats, among others, will show historical and conparative valuations using SDE measures. To calculate your own SDE, I am sending a worksheet I created directly to you.

  2. Larry Amon says:

    John,
    I agree that most business owners take advantage of personal perks while running the business and I think most buyers realize that. When it comes to selling the business I have business owners recast their financials to deduct their perks and add back in a salary for the new owner. It reflects the true value of the company and the buyer can make their decision based on the recast numbers without the tax burden for the owner for the previous three years.
    Larry Amon

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Atlas Shrugged and the Imperial Presidency

“Atlas Shrugged – Part II” was released on Friday. Those of you who read this column regularly know that I’m a fan of Ayn Rand, although I place myself far short of devout Objectivism. I’ve sported “Who is John Galt?” license plate frames on my cars for years, and given dozens of copies of the book to business colleagues as gifts.

Few of those who receive the book from me actually finish it. I can understand why. It is very long, and it’s shortcomings as a novel become emphasized in film. There are no real subplots, and character development is limited. Pretty much what you see is what you get. The good guys are good and the bad guys are bad, and they all make that plain within a page or so of being introduced.

Part II follows closely on the heels of Part I (2011) so it is a bit jarring to have all the characters and settings change. Not only have Dagney, Francisco, James and Hank aged (all played by different actors) but Wesley Mouch, while still portrayed by someone known for nasty characters (the dependably dislikable Paul McCrane) is a stereotype, but a completely different stereotype. Minor characters like Phillip Rearden, Paul Larkin and Orren Boyle have simply disappeared.

The impact of the world situation remains the same, however. Protestors picket corporate headquarters, carrying signs proclaiming them to be part of the 99.8%. Gasoline is scarce, and a full tank costs $800. New laws flood out of Washington, progressing from the normal-sounding (The Equalization of Opportunity Act) to the fanciful (The Anti Dog Eat Dog Act) to the terrifying (The all-powerful “Directive 10-289”).

Coming this close to the presidential election, Ms. Rand’s 55 year old story rings with the themes of conservatives today. Business is good. Those who create jobs are the engines of society. Their ethical quest for profits is a noble motive, and wealth is just the way that the benefits of their creation are spread through the rest of the population.

Any business owner has to feel a chill when the Director of Economic Planning proclaims the “New Capitalism,” where all business must work under the guidance of government to benefit society as a whole.

It is easy to draw parallels to the regulatory approach of the Obama administration, but Rand would see our current government as a logical extension of all that came before. Research on Presidential “Czars” for example, leads to some interesting findings.

Franklin Roosevelt was the first to appoint people with direct authority for government action without getting prior approval from the Senate. He did it 17 times. Following FDR’s Presidency, the number of such unvetted appointees ranged from 9 (Truman) to zero (Eisenhower and George H.W. Bush). The practice really accelerated under George W. Bush, who named 28 Directors, more than triple the number of any President since FDR, without legislative approval. Barack Obama is only slightly more fond of imperial appointments, with 33.

The problem isn’t that government continues to intrude on the business process, it is that business people only protest when that intrusion interferes with doing business. If the Imperial Presidency expands during strong economic cycles, or is done in a way that they find appealing, it is generally ignored. Only when that power is turned against free markets do they speak up against it.

The message in Atlas Shrugged wasn’t just against a conservative or liberal social policy. It was against the sacrifice of individual freedom to expanding executive authority. Business owners need the foresight to oppose such expansion even when an administration seems to favor them, or else face the inevitable consequences when one doesn’t.

Posted in Thoughts and Opinions, Uncategorized | Tagged , , , , , | 1 Comment

One Response to Atlas Shrugged and the Imperial Presidency

  1. Government is a business, albeit a monopoly on certain items like defense but it too has all the charateristics of an operating business. No surprise if it should also devour competition to be the sole provider.

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