Apex Success Stories #3: Just Do the Work

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ImplementSometimes we see that new owners do better than the former ones not because they have any more skills, but simply because they do work that the former owners refused to do. This isn’t necessarily groundbreaking, difficult, uphill work.

Often it’s the simplest of things.

One of our clients provided seeds to farmers and growers. However, he wouldn’t ever fully fulfill the orders. Someone might order 15,000 seeds and he would send 5,000. Customers enjoyed dealing with him, as he was friendly, but he never took the business seriously and just ran it himself. Even so, he managed to take in $1.8M in top line revenue each year, keeping $300,000 of profit for himself. Within one year, the new owner took the business to $6.3M in top line revenue, with $840,000 of net profit.

The big difference? Total fulfillment of orders, instead of just partial fulfillment.

In addition to owners not doing basic tasks, we often see them prey to fatigue.

One of our brokers was speaking with an owner of a group home that was running at about 70% capacity. As we looked at the overall numbers, we saw that getting closer to 100% capacity would significantly increase his net profit. His response? “I’m tired of babysitting.” In this case, the fatigue would cost the owner more, as not running it at capacity meant the business was undervalued. Conversely, this would spell a good opportunity for a new owner: bring it up to capacity — the infrastructure already exists — and there’s some found money.

Sometimes doing the work isn’t as simple as fully fulfilling orders or running your facility to capacity.

Sometimes it involves paperwork that the previous owner didn’t want to do.

One of our clients found this out when he bought a business that provided supplies to independent convenience stores (things like cups, straws, etc). The previous owner didn’t take the rebates from the big soda manufacturers. As you might guess, those companies aren’t just willing to hand out money easily, but if you do take the time to document that you sold at least X amount of their fizzy drink by filling out the paperwork they ask for, you’re eligible for some rebates.

How much, you might ask? Well, the client paid $800k for the company, but now, only two years later, can sell it for $1.5M, having changed almost nothing in the business apart from doing the work that the previous owner was unwilling to do or delegate.

While of course there are “failures” by previous owners, the reason we see these as “successes” is because you can see how often that line between good and great hinges on little things like filling out rebate paperwork or being willing to “babysit” so that you can make a final push to get a great valuation for your business. We’d love to take a look at your business and see where you might have some opportunities to find money as well as share resources to help you capture it.

Should the Buyer and Seller meet in person?

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While we do a fair number of transactions locally between buyers and sellers, quite often neither buyer nor seller lives in the same state. Often, they don’t meet until closing, and sometimes even then they don’t meet. In-person meetings can sometimes close a deal, but other times they can break one. It all depends on the level of communication and what was said prior to that meeting.

The Whole Truth

Buyer and Seller Meeting in PersonA seller who worked in home improvement had a lot of his team out in the field, but he worked out of his home, mostly dealing with customer-facing issues. He had represented to the buyer that he worked roughly 50 hours a week. The buyer was coming from corporate America and didn’t mind “buying a job” that he could systematize over time so this seemed reasonable to him.

He came over one day to see the setup of the home office and walk through some routines with the seller. When chatting with the seller’s wife about the work, they were surprised to hear her say, “Oh he’s down there all the time!” The seller remarked that 50 hours a week wasn’t really that much time, which she corrected by saying, “It’s way more than that!”

The buyer, as you might guess, walked away from the deal. Not because the seller’s wife was candid — she had every right to be — but because the deal had been misrepresented. Fifty hours a week is an entirely different commitment than eighty.

And Nothing but the Truth

But if there’s been honesty and transparency before an in-person meeting, a face-to-face can go a great way towards alleviating concerns.

One of our clients was buying from a husband and wife team out of state. The husband ran the customer-facing side of the business and the wife managed the back office. The buyer began to get anxious about some delays during the due diligence period. In this particular instance, we thought it best for him to meet with the seller and work through some of those issues together. They ended up meeting for several hours and everyone walked away delighted.

The buyer was more comfortable: he now had context for the delays he had been experiencing.

The seller was more comfortable: he got to know the buyer even better and felt more comfortable selling the business to him.

The process accelerated, including a segment of having the titles for 24 vehicles included in the sale. The improved buyer/seller relationship made that go even smoother. When the deal closed, the buyer flew in and they all went to happy hour together to celebrate.

We think that, overall, a face-to-face meeting, if it can be easily arranged, is a major plus in a transaction. It gives faces and voices to emails and contracts, and can help to give personal context that may smooth deal points later in the process. The only time it might undermine you is if you weren’t transparent in the first place. In that case, whether a spouse is present or not, you might unintentionally reveal what you should have shared in the first place, and (understandably) have a buyer walk away as a result.

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.