Last week, Andy and Doug talked about Value Drivers. This week they are flipping the conversation to talk about how those same things that can drive value, if not done correctly, can ultimately discount the value of the business potentially to the point of Zero.
Not too long ago we reviewed Gary Vee’s Crushing It!, which is all about helping business owners understand how social media can help them win in the ever-digitizing world of business. His newest book, Twelve and a Half: Leveraging the Emotional Ingredients Necessary for Success, is another in his series of business books that are unlike anything else in the marketplace. While perfect for business owners, it’s also a great gift for recent high school or college graduates.
In Part I of the book Gary offers the dictionary definition of twelve traits he feels strong in, as well as one “half” trait (kind candor) that he feels he continues to develop in. These chapters are short but consistently reference Gary’s own life experience and why he thinks proper and consistent deployment of these “emotional ingredients” (as he refers to them) leads to success in business.
For the record the twelve ingredients are:
It might be jarring to see humility and ambition side-by-side, but Gary resolves this by saying:
“I love talking about my ambition publicly, in front of the world, because it holds me accountable. Doing so also gives the whole world permission to laugh at me if I fail.”
At the end of his chapter on patience, Gary notes:
“Almost every time I put out content about patience, a stunning amount of the comments say, ‘Easier said than done.’ I want to remind you, as you uncover your halves, that all great things should be hard.”
Part II of the book is full of examples in which deploying an ingredient makes all the difference. Here’s one of them:
When your manager or client gives you unexpected negative feedback, how you deliver the following line determines what will happen next:
“Hey, Olivia, can you give me more clarity on your feedback?”
I want you to read that line out loud…the emotional ingredients you deploy in this situation can change your tone of questioning and potentially the outcome of this meeting.
The importance of tone in a textual exchange will not be lost on a recent graduate, but imagine how much more powerful the example can be if it were posed to a relative or family friend, “Have you ever run into a situation like this?” Now, instead of only having Gary Vee’s example, the recent grad will have the feedback and example of someone close to him/her.
The book is chock-full of scenarios worth considering.
The third and final part of the book has challenges related to the twelve and a half ingredients, some of which call for vulnerable sharing on social media, which is probably not for the faint of heart, but still worth considering. While business owners may be used to getting out of their comfort zones regularly, graduates may not be, and this book provides the opportunity and nudge to do just that.
Did you enjoy this review? We’ve got dozens more for you to check out.
In this week’s episode, Andy and Doug discuss the characteristics that drive value when selling a business. They touch on the importance of industry, location, organization, and financial records and how they impact the amount you can command for your business.
Courtesy of SAM_4973 on Flickr (https://www.flickr.com/photos/websummit/38208166026)
Rand Fishkin started an SEO blog in 2003. His work became so popular that he was asked to speak and consult and before too long he realized there was a business to be had and by 2006 Moz was up and running. He then went on a venture-backed journey that led to some great highs for his team, but many missed opportunities and mistakes as well. Rand’s book Lost and Founder captures much of what went right and wrong during his Moz journey.
Rand dropped out of college to help his mother with the digital size of her marketing business. Despite helping their customers, they managed to get into sizable debt which only got taken care of as Moz, a totally separate venture, took off.
To deliver important SEO data to its customers, Moz had created internal software. As Rand made his way around the speaking circuit people kept asking about it and he decided to make it available to the public for a recurring monthly fee: $39.99. After six months that revenue stream alone was worth the same amount to the company as the consulting. The Moz team realized the future was in software and pivoted accordingly.
That’s also when VCs came calling and one particular group funded Moz to build a new version of the software that would reintroduce some key data that used to be publicly available for free from Google, but which the search engine had removed for various reasons.
While the new software launched in October 2008, around when Bear Stearns blew up, before too long the new version of Moz was doing very well, leading to 100% growth year on year for several years.
Rand went on to pitch 150 firms, almost all of whom said no, but one invested $18M, which ended up being a mistake, Rand claims.
This is due in part to the mystique around venture capital, in part driven by the Shark Tank phenomenon. Rand asserts that 99% of companies should not take VC money. His own large VC cash infusion led Moz to take their eyes off the SEO ball and chase down other shiny objects. From 2012-2014 as they spent this cash infusion their market share of the SEO software market was ceded to their competitors. Instead of the 60-70% of the market they had in 2012, seven years later, they had around 14%.
Still, at the time, Moz was an attractive proposition for a company looking to make a strategic acquisition, and Hubspot was just such a company. They offered Moz 5X their revenue, which at the time was a $25M cash and stock offer.
However, Rand was confident in Moz’s growth curve and countered with 4X what he projected next year’s revenue to be, $40M. Hubspot refused and a few years later, they went public. Rand estimates that the $25M could then easily have been worth $200M, to say nothing of what he and his team could have learned working with a brand like Hubspot for a few years after the first exit.
Rand has recently left Moz and has gone on to found SparkToro, which is aiming to be a search engine for audience intelligence, helping businesses find the best places for them to be in front of their clients. Apart from collecting the lessons of the journey in the book we mentioned above, he says his biggest gift from this missed opportunity was the gift of humility, something he thinks all founders need a good dose of, whether they want it or not!
Rand didn’t lose his shirt and did eventually profitably exit the company he founded, but his story offers so many lessons. Let’s focus on three:
Worried you’ll miss a good offer when it comes your way? That’s what a solid business advisor is there to help you navigate. Put one of us on your team.
One of the most common calls we get from buyers is looking for an absentee owner business. Today, Andy and Doug discuss the pitfalls to avoid when seeking an absentee-owned and operated business.
Often in this series we only have one cautionary tale to share, but sometimes we have more than one, so this article will have shorter stories about three different real-life scenarios we’ve seen around the office recently.
While we don’t expect business owners to have forensic financial savvy, we do expect them to be able to look at their books and see irregularities. One such irregularity happened because a fractional CFO had convinced a business owner who had become one of our clients that he had M&A experience. Yet that experience missed the fact that a significant amount of the reported earnings for the previous year (more than a third) were not earnings at all, but were PPP funds! Needless to say, that meant that the multiple and the price for the business had to fall significantly, and for some reason, both the business owner and the fractional CFO seemed upset about this.
But there wasn’t any reason to be upset. A business is worth some multiple of real earnings. A government bailout is not only taxpayer-subsidized, but it has nothing to do with the value of your business. Adding it to your earnings and thinking that a serious buyer won’t laugh or that a serious bank will offer financing for inflated numbers is not a serious way of thinking about selling your business.
Some businesses who had no need for PPP funds received them anyway and ended up spending them on personal desires. Since the loan forgiveness program had no real auditing or certification process, businesses who treated PPP funds as lottery funds now have books strewn with irregularities:
This is going to trigger distrust on the part of the buyer. If you’re willing to be so cavalier with government funds in the last two years, what else has happened in the previous four or eight?
Sometimes the specialized equipment needed to deliver your product or service won’t figure into a sale. This can happen when an acquirer already has better equipment than you and excludes them from the purchase, leaving you to liquidate them at whatever the market will pay. Other times, there is no market to sell your equipment.
This happened recently with a client who is in beverage systems and has their equipment in restaurants, event venues, convenience stores, etc. all around the Kansas City metro, totaling almost $1M in capital expenditures. The problem is, the business only has $250,000 in cash flow. So not only is the buyer unwilling to add another $1M to the value of the business, it’s unlikely that even if a buyer were willing to, that a bank would finance at that “valuation.” Using capital expenditures to justify a price can only work if there’s a ready market to dump that equipment (at fire sale prices, if necessary). But there’s simply no local buyer who’s looking to buy a bunch of this specialized equipment on its own, unattached to a business.
The client had always thought of these capital expenditures as effectively loans that would get paid back to him, but in this particular case, that wasn’t true, and led to a 4X devaluation of what he felt entitled to, price-wise, for his business. It’s a tough pill to swallow, but it’s reality, and one that should be accepted by other owners in similar situations with their CapEx.
We don’t take any joy in sharing these cautionary tales. We only do so to make sure that future buyers and sellers don’t repeat the same mistakes. Need advice on dealing with one of these situations above? We can help. Give us a call.
On this episode of the Apex Business Advisors podcast, we talk about Non-Compete agreements. Our topics include the reason for a non-compete, what makes a good non-compete agreement, reasons why we won’t work with a seller that won’t sign one, and our favorite geographical markings.
A minority-owned business enterprise (MBE) or woman-owned business enterprise (WBE) is a powerful certification to have in certain industries. They can connect you with larger corporations and government agencies (at the federal, state, and local level) that set spending goals and targets for businesses owned by minorities and/or women. But what happens when it’s time for those businesses to sell?
Before we talk about exits, let’s review what it might take to get one of these certifications in the first place.
These are for-profit businesses, regardless of size, physically located in the US or one of its territories, that are owned, operated, and controlled by minority group members. Those members are US citizens who are:
Ownership is defined as at least 51% owned by such individuals. In the case of a publicly-traded company, that means 51% of the stock must be owned by one or more such individuals.
Like MBEs, these are for-profit businesses physically located in the US or one of its territories, that are owned, operated, and controlled by women who are US citizens or Legal Resident Aliens. The same ownership, operation, and control rules are in place.
There are a couple more business designations worth knowing:
There are two clear strategies for exiting a business with one or more of these certifications.
If the majority of the business of the firm comes through contracts that are tied to these certifications, you will probably want to find buyers that can retain this certification. That means if you have a WBE, you’re going to have to sell to women only, or find a buying group that will make sure that magical 51% threshold is occupied by women. Same for an MBE.
You’ve heard us talk before about the importance of having as wide of a buyer pool as possible. More buyers means more interest means more offers means more leverage. But this path is only worth pursuing if you’re willing to take a valuation haircut.
You can prepare two financial projections leading to two different sale prices, a higher one that a buyer that can qualify for one of the certifications would pay (because he/she would hold on to the business/contracts that are tied to that certification), and a lower one that assumes the certification will be lost and the business will have to continue on without it.
We would go for “continuity” if more than 20% of the business is tied to a certification and for “break” if 20% or less of the business is tied to a certification. The “break” option is nice in that it still offers continuity should such a buyer show up.
Do you have a MBE or WBE or other certification and have been procrastinating on an exit because you don’t know what to do? We can help (because we’ve helped in these cases in the past). Give us a call.
On this episode of the Apex Business Advisors Podcast, Andy and Doug discuss strategies and tactics for a new owner’s first days. They share stories of owners that made “minor” changes that resulted in massive consequences. A must-listen for anyone contemplating buying a business.
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