Proactive, Preventative Sales

Sometimes a topic rises to the top of my long list of candidates because it seems to come up repeatedly. It may be a coincidence (probably is), but a single business ownership issue is raised in multiple coaching sessions or Board meetings in a period of days or weeks.

I work on the theory that for every business owner I know who is dealing with an issue, there are three more in my circle who haven’t discussed it, and 300,000 out in the world who are dealing with it as well. So it becomes a topic.

I have several members who are wrestling with personnel changes in a large customer. They are all vendors to businesses that are many times larger than themselves. In a few cases the customer is an 800 pound gorilla- the single largest account in their portfolio. In others it is merely a good account, not a game changer, but certainly not one you’d want to lose.

People change jobs. The myriad of reasons that they do so aren’t important here, let’s just accept that as a fact of life. Unless you are dealing directly owner-to-owner (and sometimes even then), the employee of the customer with whom  you’ve carefully cultivated a relationship will eventually move on.

Sometimes that is positive. One client of mine admits that the bulk of his new business is generated by buyers who have moved to another employer, and come to his company as soon as they are established elsewhere. That’s great, but he also admits that most customer attrition is due to other employees who come into his customer’s organization and reach out to their old vendors. It’s something close to a zero-sum game.

Another client has a product that is frequently enhanced with new features. They work diligently to tell customers about the many things their product can do, and how each improvement fits in with the whole system. Yet they regularly lose customers who move to another product, citing their need for a feature that his product already provides! The information disconnect almost always traces to a change in personnel. The feature or benefit wasn’t needed at the moment of knowledge transfer, and so was lost.

The most obvious preventative for this situation is to build knowledge depth in the customer. When I sold auto parts, I frequently increased my business by having a parts manager move on. He went to a new dealer and remained a customer, but I had made sure that the assistant manager who took his place knew me well, and was happy to do business with me. Paying attention to the second in command was one of my most effective business development techniques.

In a lot of cases, however, the second leaves and you don’t know about it, or the lead person you work with says they will do the training themselves, or they feel they know the product and it isn’t necessary to have someone else up to speed. Then that lead person moves on, and you are left hoping that his or her replacement learns fast.

Every company needs a regular process for stepping into a customer knowledge gap. It starts with regular checks to make certain your contact is in place, and maintaining a record of who your contact’s boss is. When a contact moves on, you should be offering training to a replacement, enhanced support, or even a fill-in temporary if the customer warrants it.

The alternative is to let the customer work through the change on his own. That just puts you on the list of old relationships to be reviewed.

By the way, I’m making one of my regular visits with Jim Blasingame on his  Small Business Advocate radio show tomorrow, 7:00 AM EDT. Listen in!

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One Response to Proactive, Preventative Sales

  1. Mike Pattillo says:

    Some excellent points. I can see where I was short-sighted in thinking I was locked into a company, when it was really a personal relationship I had — and when that person left, I was starting all over. Thanks.

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The Road Less Traveled

Somewhere ages and ages hence:
Two roads diverged in a wood, and I,
I took the one less traveled by,
And that has made all the difference.

Perhaps Robert Frost’s famous poem isn’t a perfect expression of what I am trying to convey, but the idea he expressed has been ingrained in us (the Boomers- I think Maya Angelou has replaced Frost as required poetry reading in schools) enough to serve my point.

Some thousands of business owners have heard my presentation on the inevitable issues of selling Boomer businesses. Hopefully, even more will  hear it in the future. Many have read my column, caught me on the radio, or bought my book on selling a business. Even so, they represent a small fraction of the estimated 6,000,000 Baby Boomer entrepreneurs with employees in the US.

If you are reading this, you are better informed than 99% of your peers. Whether you are a Boomer preparing to exit, or a gen X or Millennial thinking about becoming a business owner, you know more than almost all of your competition.

I can’t do anything about the birthrates of 65 years ago, or of 45 years ago, or of 25 years ago. Neither can you. From 2018 onward we will have a dramatic, decade-long imbalance between 60 somethings and 40-somethings in the workforce. That has implications for the economy, politics and general business, but it will have a special impact on retiring small business owners.

The Boomers will retire. Some have done so already, some will wait for as long as possible, but sooner or later they will all leave their businesses. We’ve discussed how “the curve” of Boomers entering any given age bracket exploded markets in home building, college graduations, franchising, fitness and so much more.

We could expand the discussion to other industries, from motorcycles (Harley-Davidson has been caught without a product for middle-aged Xers) and cars (Ford recently said that they had sold as many retro Mustangs to 55 year olds as that market will absorb), to garden homes and second-career counseling.

America has grown, and 78 million Boomers in  country of 320 million obviously won’t have as much impact as when they were 40% of a country with 190 million people. But it is a generation exceptionally oriented towards being successful, and working very hard to own the material indicators of that success. Their passing will still create huge ripples.

If you’ve read this series, you are armed with knowledge; the realization of an inevitable glut of small business sellers, and the coming shortage of buyers. You understand why the generational traits of Boomer sellers have made many of their businesses undesirable to their prospective buyers. You should also have a pretty good idea of what needs to change in your business, and how to start down the road of making those changes.

But tomorrow your business will still require the same attention that it does today. You will be just as busy, and making long-term changes will be just as easy to postpone until you have “more time.” Investing time, energy and money in a Second-in-Command or a Successor-in-Training is easily left for another day.

A few business owners will choose the road less traveled. They will begin to shift their perspective from the immediate issues of competing in the day-to-day marketplace, and instead start to focus on competing for a successful end game.

Those are the owners who will beat the Boomer Bust.

 (This is the tenth and final installment in a series about “Beating the Boomer Bust.” Previous installments are The Approaching Tidal Wave, The Pig in the Python,  The Brass RingWork-Life Balance, Outsourcing America The X FactorThe Gen X Business Buyer , Beating the Boomer Bust and Choosing a Buyer for Your Business.)

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Choosing a Buyer for Your Business

You may be questioning this title. After talking in depth about the shortage of buyers over the next 10 years, the differences in values and work habits of Generation X, and the competition for ambitious people from better financed and better positioned Corporate America, you might consider yourself to be lucky to find any buyer at all.

Certainly luck has something to do with it. Surveyed on a choice between a hypothetical business partner who was skilled, and one who was consistently lucky, the vast majority of experienced business people chose lucky.

But Seneca, the first century Roman philosopher, said “Luck is what happens when preparation meets opportunity.” If you prepare your business for the right seller, the odds of getting lucky will increase exponentially.

Remember, your competition is any other small business owner trying to sell his or her company. Most of them, unfortunately, believe that preparation for a sale consists of calling a broker and waiting for someone to fall in love with their business. We’ve already discussed why that is unlikely to be the case.

For most owners, selling the business will be the biggest single financial transaction of their lives. What if I called you with an opportunity to present your product or service for the biggest sale of your life? You will have an exclusive interview with the CEO of a Fortune 100 company, who is interested in buying as much of what you sell as you can supply. Would you just walk in cold, and hope for the best?

I doubt it. You would research the customer, and determine why he is interested in your product. You would try to find out what he has bought before, and why. You would review his likes and dislikes, and prepare your presentation to appeal to his preferences.

You may not be able to choose your buyer on an individual basis, but you can choose the general characteristics of your buyer, and start tailoring your business now to fit both his and your objectives.

External Sales

The majority of “main street” businesses, those that earn less than $1 million before taxes, expect to sell to a third party. Owners often ask me “What can I do to make my company more saleable?” Than answer is simple. You should do the same things that you should always be doing to make your company successful.

Ask yourself what you would want to see if you were buying your company. If you are a Boomer, especially one who was born before 1960, would you want a business that required long hours, no vacations and little income? Of course not.

Approach your business from a buyer’s perspective. Are employees in place who are dependable, appropriately compensated and happy in their jobs? Do they have clear duties, and documented procedures? Are your management systems well defined? Is your technology current?

These things may sound obvious, but we all slide a bit when everyone just “knows” how to do their job. As entrepreneurs, we become too accustomed to being the font of wisdom. Most of us have little realization of how many things we decide in a day.

I recommend having this tattooed somewhere not too obvious on your body. Perhaps you should do it backwards, so you can read it in the mirror.

The more I work in my business, the less it is worth.”

It isn’t rocket science, nor is it new advice. In the coming competition for buyers, however, it is more important than ever. As Boomers had to compete in school, competed in work, and competed as parents, so they will be forced by their numbers to compete for buyers in selling almost 6,000,000 small businesses.

Internal Sales

Even if you position your business for sale, there will still be a shortage of buyers. Remember, we are only 5 years from when the ratio of retiring-age owners versus buying-age prospects enters the five year dark ages, the worst ratio between the two in history. If you are prepared, you are more likely to get lucky. A better solution, however, might be to eliminate luck as a factor entirely.

Most small companies can be sold to employees, if they have been trained and qualified to run them. (For our purposes, we will assume “employees” to include qualified family members where appropriate.) It usually takes between five and seven years, but there are substantial payoffs.

First, you can dictate your price, within reason. You avoid the adversarial process of an arms-length buyer who low-balls your value, nit-picks over minor faults, or presses you to take onerous terms.

Second, you get to drive the process. With an internal sale, you can be more flexible about when and how you choose to move on. You can even sell and remain in a part time or advisory capacity. After all, you know that the new owner and you will get along.

Perhaps most importantly, you avoid the distraction of the marketing and sale process. The pace of transfer is more relaxed. Both you and your buyer are working side by side to make the company more successful, because you have a common interest in its success.

Most owners raise one of three objections to an employee sale. The most common is “My employees don’t have the money.”

Given time, most businesses with decent (at least $500K) cash flow can be transferred using stock compensation incentives to give the buyer(s) sufficient stake in the company to allow a financed, or leveraged, buyout. While the employees are working to earn their equity, the seller is taking the increased  profits as part of his ownership value.

The second objection is “I don’t want partners. I’m accustomed to making the decisions.”

While it is clearly advisable to help the new owners learn to make good ownership decisions, you don’t have to surrender one bit of control. There are common and easily implemented legal structures that allow you to drive the bus right up until your last day of work .

The third objection is “I don’t have any employees capable of taking over my business.”

Only you can fix that one.

Well, what are you waiting for?

 (This is the ninth installment in a series about “Beating the Boomer Bust.” Previous installments are The Approaching Tidal Wave, The Pig in the Python,  The Brass RingWork-Life Balance, Outsourcing America The X FactorThe Gen X Business Buyer and Beating the Boomer Bust.)

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Beating the Boomer Bust

We’ve looked at the coming generation of business buyers, and many things about that picture aren’t pretty. When I present to business owners about the Boomer Bust, this is around the time that someone in the audience says “So, are we just screwed?

No. There are things you can do to make your business more transferable, and more appealing to those buyers who will be looking for an opportunity.

First, remember that my generalizations about a generation are just that. Both words derive from the Latin root genus, which meant both “birth” and “type.” A historical comment: it’s interesting that one word meant both things, because it was an era when your birth determined your type, or your role in society for life.

Not every Boomer is a workaholic. I know plenty of slacker Boomers, although none that are successful business owners. I also know plenty of hard-charging X’ers. So the first thing to remember as  Boomer business owner is that Generation X buyers for your business aren’t nonexistent. They are just far fewer than the number of sellers because of their numbers, values and choices.

Second, every business problem is better tackled with planning and preparation. Positioning your business for a successful sale is like putting timers on your lights at home. Any experienced burglar will tell you that he can case a house for a few nights to determine whether there are timed lights, but why should he? There are far more houses that don’t have any precautions at all. Most privately held businesses aren’t planning for transition, and won’t be ready when the time comes.

A third reason not to be depressed is remembering who you are. If you recognize yourself in our profile of the hard-working, driven Boomer business owner we’ve presented here, then your competitive nature should kick in as you think about being one of the winners in the transition.

After all, selling your company is probably the most significant financial event of your lifetime. Why wouldn’t you approach it with all the energy and problem-solving ability that you possess?

Any successful transition of your business is a sale, whether it is to a third party, to employees or to family. We will use sale as a generic term synonymous with succession, transition. merger or acquisition just to keep things simpler. When I am speaking about a specific approach, I will differentiate between an internal sale (to employees or family) and an external sale (to a third party).

I’m also focusing on the transfer of a business from an individual, or a few partners, to another individual or partner group. Many small business owners approach me looking for a third party sale to a “strategic buyer.” All they know is that they’ve heard a strategic buyer pays far higher multiples than other buyers, so that’s the kind of buyer they want.

Very few companies selling for less than $10,000,000 are sold to strategic buyers. It is more frequent in technology and in some distribution channels than in other industries, but it isn’t common at all. If you are a typical small business providing services on a local basis, a franchisee, a retailer, or a professional firm; there is little likelihood that you offer the kind of strategic differentiation required to attract a large (and wealthy) corporation to your door.

Understanding your prospective buyer is a key part of the selling process, but it isn’t the only part. before we discuss how to position for the next generation(s) of buyers, we have to step aside to talk about where you begin.

The Starting Point

Preparing for a successful sale to a typical small business buyer begins with an honest assessment of where you are today. What is your company really worth?

Most business owners have a very subjective approach to valuing their business. They talk to colleagues at trade shows about rumored prices for sales in their industry. They ask other business owners in their local area about the sale prices of unrelated companies. They read stories in the news about publicly traded acquisitions. Then they pick the number they like the best. “After all,” they say, “my business is as good as anyone else’s.”

I see too many cases where owners become emotionally committed to that number, to the point where they are highly offended by any other. They tell their personal financial planner to use the number in their retirement planning. They put the number on their personal financial statements to the bank. After a while, that number becomes fact, whether it originally had any basis or not.

Your planner or your banker isn’t qualified to verify the value you place on your business. For many owners whose net worth is 50% or more dependent on their business asset, picking a number based on hearsay or second-hand information is tantamount to insanity. It is your biggest asset, don’t you want to know what it worth?

There are a number of valuation specialists who can appraise your company. Any qualified professional will look at comparative sales, the market, your industry and the current  cost of financing.For most small businesses, a reasonable appraisal can be purchased for a few thousand dollars. (A side note: “free” appraisals or those generated in one-day seminars are often worth what you paid for them.) Once you have it, you can use the logic and multiples to track your approximate value for at least several years.

The Target

Once you know what your business is worth, targeting becomes much simpler. You take your net worth today (without your business), determine what you will need at retirement, and the sale price of your company has to make up the difference. A Certified Financial Planner has the ability to help you project your retirement needs, as well as the software to calculate tax implications and inflation.

With the company’s real present value documented, and a target amount based on realities of the market, you can set a date for your exit.

Setting a date is much, much more than just a theoretical exercise. Every plan must start with a goal, and your goal has to be both time and amount sensitive. “I’ll keep working until my business is worth $5,000,000.” isn’t a plan. “I’ll quit when I am 65 years old, and just hope that I have enough to live on.” isn’t a plan.

Setting your exit date doesn’t mean you have to stop working. It doesn’t even mean you have to leave your business. It’s just the target for when you can leave your business. Once you are there, the actual timing is up to you.

If you have a plan, you can start positioning for the sale. That’s where understanding your buyers’ market begins.

(This is the eighth installment in a series about “Beating the Boomer Bust.” Previous installments are The Approaching Tidal Wave, The Pig in the Python,  The Brass RingWork-Life Balance, Outsourcing America The X Factor and The Gen X Business Buyer.)

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The Gen X Business Buyer

Generation X’ers aren’t mini-Boomers. Raised in a rapidly growing economy by parents that approached child rearing as a competitive activity, they saw more, did more, and were given more than their parents could have dreamed of.

I took my first commercial airline ride when I was 25 years old (and before my mother’s first flight). My two sons had each boarded planes over 50 times before they were in high school.

I was not an athlete, and have no hardware to display testifying to any athletic prowess. My youngest son made varsity in one sport, for one year. Yet he has a bookcase full of trophies.

I received a couple of piano lessons from a neighbor who played. My children had paid instructors for martial arts, gymnastics, baseball, piano, viola, singing, and math. They are far from the most-coached kids I know.

The challenge of selling a business to a small and disinclined group of prospective buyers starts with their lack of numbers, but it is just as much about how they were raised by their Boomer parents. Generation X has different values and many more choices.

Values

The numbers are just the most obvious (and the most inevitable) factor impacting Generation X as buyers. The second factor is values. Every Boomer owner I know, and there are hundreds, has complained about the expectations and the lack of a decent work ethic among Generation X. This isn’t caused by a special laziness gene. It is a matter of values.

Boomer “super parents,” driven by their competitive  approach to everything, raised children who expected to be accepted for who they are, and to have things done for them. Boomers created the children’s ball team where everyone got a trophy just for participating, regardless of the team’s success. X’ers watched their parents struggle with a breakneck pace and the concept of work-life balance and, like every generation of offspring, saw their parents’ approach to life as stupid.

So Generation X, by and large, doesn’t equate material comfort directly with work. Their “balance” is oriented towards separating work and life. Unlike most Boomers, who live to work, the X generation only works to live. Work isn’t their identity, it is merely the thing that permits them to finance what they really want to be.

For Boomer entrepreneurs, who accept a 50 or 60 hour work week as simply part of the cost of business ownership, that isn’t good news. The next generation of buyers doesn’t agree with you, and isn’t interested in subordinating their lives to the quest for success.

Choices

I know five local CPA firms that have sold to regional or national competitors in the last 3 years or so. Each had the same problem. They had built a model where the retirement of the Boomer founders was dependent on the profits to be generated by the next generation of partners. Unfortunately, that generation wasn’t interested in assuming the required work load. In several of the cases, a younger partner was invited to a meeting, where the senior partners announced that he or she had been selected as the next leader of the firm. To their shock, the annointee turned them down flat.

Corporate America is aware of the coming shortage of educated, hard-working, middle-aged executives. They are recruiting them with far greater benefits and perquisites than a small business can afford.

Since the 1970’s, a flood of regulation and increasing liability connected to business ownership makes the entrepreneurial proposition riskier and more tedious. The Boomers have only themselves to thank for that.

The retirement of the Boomers is placing a crushing burden on Medicare, Social Security and pension funds. The likelihood of greater taxation, and lower benefits for those who follow, detracts from the attraction of working hard to make a lot more money.

Finally, technology has vastly expanded Gen X’s choices. Flex time, telecommuting, job sharing, family leave and home-based businesses make the traditional model of sitting in a business all day look far less appealing.

The bleakest future is for a small business that has few factors, other than the owner’s personal reputation, to differentiate it from its competitors. It depends on the ongoing efforts of its owner to produce revenue. It has a number of employees who are only trained on the job, or who possess few distinctive skills that make them an integrated part of the business. It has no incentives that lock the best performers into long term relationships.  It lacks middle management, or anyone who can run the business indefinitely without the owner around to make decisions.

If that describes the business you own, it is time to start making changes. The generation that is reaching business-buying age has more choices for earning a living, and many more choices that better fit their values.

This series is focused on Boomers who are preparing to exit their businesses. For owners who precede the Boomers (currently in their 70’s), there is still a market of younger Boomers (in their late 40s and early 50s) to sell to. We are describing a problem that is only going to accelerate in the next 5 years. It is unavoidable, and the numbers are irrefutable.

There is some good news. You can do something about it. Most small business owners will remain oblivious to the realities of the market until they try to sell, and even then probably won’t understand the reasons why they can’t.

Like the hiker running from the bear, you don’t have to be faster than the bear. You just need to be faster than the other hiker. Simply reading this puts you ahead of the pack. We next turn our attention to what it will take to successfully exit your business in the toughest selling market in history.

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(This is the seventh installment in a series about “Beating the Boomer Bust.” Previous installments are The Approaching Tidal Wave, The Pig in the Python,  The Brass RingWork-Life Balance, Outsourcing America and The X Factor.)

 

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3 Responses to The Gen X Business Buyer

  1. Spot on John…well written.

  2. Mike Cronin says:

    I’m enjoying this series, and I follow your arguments and outlook. From my perspecitve, it is essential that business owners grow their business large enough to have middle managers, that gives them freedom and opportunity. They also have to invest to build value in their business, such as trademarks and solid, active, productive websites. I look forward to the rest of the series.

  3. Nice article John. I have always said today kids are spoiled, but that does not mean they are not better off. What kid would not be happy being spoiled? I would had been.
    I will try to come back to read more.
    Russell

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