Cautionary Tale #13: Open Mouth Syndrome

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Cautionary Tale #13: Open Mouth SyndromeWe’ve engaged with a bakery seller several times in the past, and the deals have not worked out for one reason or another. But the reason for the most recent failure was entirely on the buyer, who lacked self-awareness and accountability.

Confidentiality Matters

We understand that it might not instinctively occur to everyone that the possibility of a sale should not be disclosed. This allows employees to potentially flee, competitors to excitedly circle, and customers to get concerned. This can all be avoided by just keeping quiet about all goings-on. In any case, it’s not a done deal until it’s a done deal, so no need to have to manage a rumor mill while you’ve got your heads down in due diligence.

That is unless you love the attention.

Word Gets Out

Before too long, pretty much everyone in the community around the bakery knew a) it was for sale and b) who the potential buyer was. The buyer had spoken to a niece she wanted to hire who had told (her potential future) employees at the bakery about it, who then asked the seller if it was true. The buyer had spoken to many people: friends, family, insurance agents. She was assuming that it was a done deal and not realizing how much damage she was causing to the deal by talking about it everywhere she went.

No Accountability

While the sellers were upset at the situation, it wasn’t enough for them to pull out of the deal. For her part, the buyer couldn’t seem to understand why there was now a lack of trust from the sellers. But that was part of a pattern. She wouldn’t listen to our advice or the banker helping with the deal. She was consumed with her desire for the business and saw the whole exercise as a formality.

The Bank Drops Out

While finances play a big role in getting deals done, banks also have to look to the future. If we give this person this money to buy the business, will the business continue and grow and thrive so we can be made whole and earn some money for this risk? The banker had heard some of the buyer’s future plans for the business, which didn’t seem to make any sense. After talking to her about these things and not perceiving any remorse or accountability, the banker decided to pull the approval for the loan.

As we’ve discussed elsewhere, losing a bank approval is not the end of the world. You can try again with another bank. But by this time the sellers were convinced that not only was the buyer not a trustworthy counterparty, she just wasn’t built to be a serious business owner. They took the business off the market, resulting in a lose/lose/lose for everyone who had invested many hours of time in the project, and the expenses associated with selling a business.

Key Takeaways:

  • Confidentiality isn’t just important in life in general, it’s absolutely necessary for business deals. While it may be difficult to keep something so momentous a secret from your team and those close to you, they will understand after the deal closes.
  • Business ownership, particularly when you’re a buyer, isn’t about how much you know and how great you’re going to be. It’s about humility and taking the time to see what worked so well such that someone like you came along to buy the business. If the existing owners tell you they don’t think something is a good idea, it’s worth stopping to listen and give their words some credence.
  • Bankers are not just ATMs. You are being watched for your character and conduct and bankers will not hesitate to pull an approval should you conduct yourself in an unbecoming manner.

Do you have a business you want to sell and are worried about how to keep it confidential? We have all sorts of ways to assist you. Give us a call.

Cautionary Tale #12: The Supreme Court Decides a Business Valuation

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Cautionary Tale #12: The Supreme Court Decides a Business ValuationWhat happens when the IRS tries to get more money from a small business owner and loses in the lower courts? They appeal to the Supreme Court. In the case of Connelly vs. the United States, they won, and won unanimously, leading to an additional tax bill of $889,914. So, how did this happen?

The Facts of the Case

The “Connelly” in the name of the case above referred to Michael and Thomas Connelly, two brothers who owned Crown C Supply Company. They had taken the time to create a buy-sell agreement to make sure that the business stayed in the family when one of them died. In this particular case, upon the death of one brother, the other would have the option to purchase the deceased brother’s shares. If the brother declined, the company (Crown) was required to buy the shares.

The share price would be determined either by a Certificate of Agreed Value executed annually by agreement of the parties or through two or more written appraisals. The agreement also authorized Crown to purchase life insurance on the lives of the shareholders, the proceeds of which could be used to pay for the purchase. Michael Connelly took out $3.5M on his life and assigned the policy to Crown, and Crown took out a policy on Thomas Connelly for the same amount.

This all sounds good and we would have been applauding as business advisors up to this point. The catch? Michael and Thomas did not appraise the business at the time of the execution of this business and they did not execute a Certificate of Agreed Value every year. And as we always say, if you don’t do a key part of the paperwork at the time of an agreement, the chances of you doing it down the line decrease exponentially.

What Happened Next

Michael died in 2013 with a majority interest in Crown. Thomas declined to purchase the shares. Crown then used $3M of the $3.5M in insurance proceeds to purchase the shares from Michael’s estate. Thomas, who was also the executor of Michael’s estate, filed an estate tax return reporting the value of Michael’s stock at $3M, which was an amount agreed to by Michael’s son and Thomas.

The IRS audited the estate tax return and noted that this $3M was not supported by a qualified appraisal. This led to a report submitted to the IRS by Thomas valuing Michael’s shares at $3.86M. This included the $500k of life insurance proceeds that were not used for the redemption of Michael’s shares, but also excluded the $3M that was used to purchase stock from Michael’s estate.

Stay with us here: this procedure was itself advised by a case called Estate of Blount v. Commissioner in which insurance proceeds were properly deducted from the value of a corporation when “offset by an obligation to pay those proceeds to the estate in a stock buyout.”

The IRS concluded that the entire $3.5M of insurance proceeds needed to be added to the value of Crown. That put the value of the business up to $6.86M, of which Michael’s shares were worth $5M, leaving the estate with a fresh additional tax bill of $889,914.

The Court Rules

The Court held that the obligation in this particular buy/sell agreement was not a liability that decreased the net value of Crown by the amount of the life insurance used to purchase the shares. The Court concluded that a corporation’s obligation to redeem shares at fair market value does not reduce the value of the shares, hence any buyer of Michael’s shares would expect to receive the fair market value of those shares, which in this case included an extra $3.5M.

New Rules, New Practices

So, now that we have a new Supreme Court ruling, we need to adjust our planning accordingly:

  • Get a valuation of your business sooner rather than later. Do not wait for a health event or death.
  • Review any of your existing buy/sell agreements in relation to share price for estate tax purposes.
  • Consider other options than the brothers used, for example a “cross-purchase” agreement in which each shareholder owns a policy on the other, with proceeds used to buy a shareholder’s interest, or a special purpose LLC, which could be owned by the shareholders and used to hold the life insurance policies.

Surprised by this Supreme Court ruling and wondering if your buy/sell agreements are up to snuff? Give us a call. We’d love to look them over with you.

Cautionary Tale #11: Counseling Sellers

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Cautionary Tale #11: Counseling Sellers“You’re working with the buyer!” It’s not the first time a seller has accused us of such a thing. The implication was that somehow, in building a relationship with the buyer to keep the deal moving forward, we were compromising our job in representing the seller. This narrow-minded view can’t be held by anyone serious about a successful sale of a business.

Something we say over and over is that delays can kill deals. One of the most obvious ways those delays happen are buyers who are not convinced of the importance of momentum. As brokers it’s our job to be helpful and friendly (we’ve often been called coaches) and that helpful and friendly attitude isn’t just for our clients, it’s for everyone in the transaction, including accountants, lawyers, and spouses.

A business transaction is not a sprint, it’s a marathon, and those who’ve run marathons can tell you that a big part of the mental battle is trying to stay on an even pace the entire time. Run too fast early on and you might hit a wall early too. Run too slowly, and you end up bleeding time off that you could easily have banked into a better run time. The emotion involved in a business transaction, often one of the most monumental of anyone’s life, requires a general calm friendliness all the way through.

If brokers are “too friendly” with a buyer, it’s not because they are trying to cheat you. It’s because they’re trying to get you to the finish line. After all, the price of the sale has been fixed, as has the commission.

***

A bank recently rolled out an advertising campaign: “Surprises: great for parties, bad for banks.” We agree, though we would say that surprises are not just bad for business transactions. On more than one occasion a last-minute surprise has killed a deal.

A close call we had in the past year involved a seller who had really screwed up the tax planning part of the transaction. He had:

  • Put two different businesses within the same entity
  • Had not bothered to keep the separation clean and efficient
  • Failed to disclose this problem

So he brought it up just prior to the closing day. Needless to say this surprise focused everyone and because the business was solid (despite the seller being incompetent on this issue) the buyers were willing to pay up to $200k of the anticipated tax liability to get the deal over the line. This compromise was able to happen in large part because of what we alluded to above: we had developed a relationship with the buyer as well as the seller. The seller could see we had been surprised as well and knew that we wanted to work in good faith toward a solution that worked for everyone.

This particular surprise didn’t end up crashing a deal, but it very well could have.

As we say early on in the transaction process: tell us everything, even if you don’t think it’s important. And the important stuff? Tell us that first.

Thinking about selling a business but not sure you’ve got the right mindset for it yet? Let us walk you through what you need to do to prepare so that when it is time, it’ll be smooth sailing.

Cautionary Tale #10: Sinking Sales with Selfishness

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Cautionary Tale #10: Sinking Sales with SelfishnessIn our Cautionary Tales series we try to alert buyers and sellers to pitfalls we’ve witnessed in business transactions. We’ve discussed not allowing attorneys to run deals, why PPP money shouldn’t be considered “income,” and how a poor attitude can wreck a business just after the sale. But did you know that a selfish attitude can make sure the sale doesn’t even happen in the first place? Today we are going to talk about two examples that we’ve seen in the last 12 months: one that was a near miss, another that blew up.

“That’s Not My Job”

There are many unwritten courtesies that come along with a transaction. For example, it doesn’t need to be written up in a purchase agreement that an incoming owner should be nice to the employees. Or that an outgoing owner should try to make sure that there are no major disruptions before the deal closes. One of those unwritten courtesies is helping an incoming owner with some of the backend stuff.

For example, you may have a payroll company you use and love, and want to give a warm handoff to the representative of that company. Or you may not like it, have been thinking about making a change for a while, but didn’t want to do it in the midst of a business sale. You can pass that information on to the incoming owner. It’s not going to do you any good to hold on to it.

We recently had a situation in which the incoming owner wanted some information on payroll companies, insurance, office supplies, etc. The seller was adamant: “that’s not my job,” he said. “He (the buyer) can figure that out himself.” As one of our brokers tried to advocate for the buyer, the seller accused the broker of “working for the buyer.”

Clearly, to most rational beings, this is not “working for the buyer.” It’s actually known as “common human courtesy.” But business sales are often not rational: they are highly emotional. 

So this is an example of how a broker earns his keep and has a calm conversation with the buyer explaining why it’s unreasonable to have such an attitude, reminding him that ultimately the transaction is about everyone winning and being successful. While we can’t claim to have reformed the seller’s attitude towards life in general, we can say he got on board with helping the buyer beyond the explicit terms that were spelled out in an offer to purchase. 

“You Need Me”

A situation in which we were less successful was with a business that was going to sell under the new SBA rules, which allow an outgoing owner to retain some stake in the business. In this particular case the seller held a license that the buyer could not easily obtain on his own. The seller knew this and managed to work in a corresponding “you need me” attitude into almost every communication. 

At some point, the buyer got spooked. “How do I know he won’t leave after the deal closes?” the buyer asked. When we went back to the seller and let him know his attitude was causing friction, he (unsurprisingly) crossed his arms and reiterated how important he was.

Well, that attitude won him the prize of getting to keep his business instead of selling it. The buyer, understandably concerned at closing one of the largest financial transactions of his life with someone determined to hold something over his head, backed out.

Selfishness can sink sales. As we said, business sales can be very emotional. And if you let that emotion rule, you’ll put yourself in severe danger of not having a sale go through at all.

Need some help staying objective during an emotional business transaction? That’s what we’re here for. Give us a call today.

Cautionary Tale #9: Manage Your Attorney

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Cautionary Tale #9: Manage Your AttorneyWith a title like “Manage Your Attorney” in a series called “Cautionary Tales” you might wonder if we are teeing up that line from Shakespeare’s Henry VI, Part 2: “First thing we do, let’s kill all the lawyers.” Not at all. Some of our team here at Apex are married to attorneys, or were raised by them. We work with attorneys on every single deal. 

What we want to make sure is that buyers and sellers remember that ultimately, it’s their deals that are on the lines, and that attorneys are meant to be advisors, not parties, to these deals.

Remember that part of the skill set that any entrepreneur has to gain if he/she doesn’t already have it is risk management. Entrepreneurs look at given situations, sometimes with incomplete information or risk assessments, and make decisions. Up to the time of that decision you want to gather all the information you can, but then you have to move forward on your own.

Not Signing an NDA

One of the first things new clients do with us is sign a non-disclosure agreement. We are going to be sharing confidential information, including a private company’s financials and tax returns, and sometimes other sensitive information. We have to have the assurance that you will not make this private information public.

We didn’t make up our NDA on our own. We had lawyers help craft it and it’s the same NDA we give to all our clients. It’s not negotiable.

On more than one occasion, we’ve not even got out of the starting blocks. “My attorney told me not to sign this,” we’ve heard. Well, then there’s nothing to talk about. 

We are not going to share confidential information with someone who won’t sign a confidentiality agreement, period. If you find yourself in this situation, you might need another lawyer or you might need to ask yourself if you’re serious about buying a business.

Not Negotiating Franchise Agreements

One horror-story variant of refusing to sign an NDA was one time when a client racked up $10,000 of changes to a franchise contract.

Now think about this. Franchise contracts are meant to apply to dozens, hundreds, possibly thousands of franchisees. What is the likelihood that they are going to make the changes you requested for your contract? And that others won’t find out and demand expensive redrafting of their existing contracts?

The attorney who dealt with this was not someone skilled in M&A but happened to be the equivalent of the “wife’s brother’s friend’s uncle.” Do not pick an attorney for a business transaction based on anything other than someone’s experience and expertise in M&A and business transactions.

Whatever money you “save” or relationship you establish with this individual is not going to help you with the relevant goal in this situation: a business transaction. Choose wisely, or risk the chance of large bills with no payoff.

Not Acting Nimbly On a Deal

On more than one occasion a client has expressed interest in a deal and we’ve called them to let them know other buyers are putting in offers and that the clock is running down. Sometimes we get the answer: “my lawyer’s still working on the LOI.” While that’s certainly one way to go about things, here at Apex we use a signature service called Offer to Purchase (OTP) that speeds this part of the process along. 

While an LOI might be fine, there’s no need to reinvent the wheel (and pay the billable hours necessary to reinvent said wheel). Our OTP covers the major elements of an offer and is easily amendable with additional details as needed.

With delays, deals die, and if you are stuck worrying about the precision of your LOI you might miss out on a great deal. In the meantime, those clients who use our no-charge OTP service have already submitted and are on to other things.

Final Thoughts

In all these cases, attorneys were doing what they were trained to do: flag up risk. But that’s not what entrepreneurs are trained to do or what they execute on every single day. They look at the risk assessment and make decisions. For them, attorneys are assets/counselors who empower them to make decisions, not jailers who tell them what to do.

Manage attorneys in a business transaction or they may manage you out of one.

Need an attorney with M&A experience as opposed to your wife’s brother’s friend’s uncle? We have a whole list of them. Give us a call and we can share them with you.

Cautionary Tales #8

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Cautionary Tales #8Often 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.

PPP Money Isn’t Income

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.

PPP Funds Aren’t Slush Funds

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:

  • PPP funds classified as income (like our first example)
  • New company cars (including, in one case we saw, a company Rolls Royce)
  • Home improvement (no kidding, we saw $250,000 spent in this manner)

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?  

CapEx Won’t Always Be Part of Your Sale Price

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.

7 Ways for Sellers to Avoid Wrecking a Deal

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Avoid Wrecking a DealThere’s obviously a lot more than seven ways to wreck anything in life, not just business transactions. But over the years, we have seen some particular situations come up over and over again that need to be highlighted.  We’ve divided them into things to keep in mind before the transaction begins and during the transaction.

Before the Transaction

1. Price appropriately  

One way to pre-wreck a deal is to price inappropriately so that you don’t get any lookers, much less any offers.  Remember that you’re rarely objective about anything you’re personally invested in, and as a business owner, you also probably don’t have the skillset or experience to know what your business is worth in a particular marketplace.  Even if you’ve done some valuation calculations yourself, for best results, get a certified valuation.  It makes the deal bankable and much more likely to go the distance.

2. Keep confidentiality

Loose lips sink ships.  There’s a reason that saying has come down to our present day.  Confidentiality means your employees don’t get scared off and your vendors don’t let something slip to the competition.  It’s an exciting and momentous period in your life, no doubt, but you can talk about it to your heart’s content when the deal is done and the check has cleared the bank.

3. Be prepared

One of the more tiring but perhaps most necessary aspects of a business sale is the due diligence. We’ve talked about how important it is to have your company financials in order and your taxes up to date (and we’ve also shared stories of what happens when you don’t). You should have up to date paperwork because it will help you run your business better anyway, so get in the habit and you won’t have to do much more when it comes time for a sale.

4. Encourage competition

While ultimately you can only ever sell your business to one buyer, that’s no reason to only have one buyer competing to buy your business.  Some of the best outcomes for everyone occur when there are multiple buyers battling for a business.  As the seller you then get to evaluate the qualities of the buyers for fit with your business and the amount of their offer.  

During the Transaction

5. Stay flexible

You should have your deal breakers clear in your mind throughout the process, but remember to think expansively and creatively about solutions when the buyer is making a demand.  It doesn’t always have to be a binary “this for that” swap.  Sometimes you can ask for something in the future or work out something with the real estate, or ask for a royalty.  That doesn’t mean settling for a bad deal – it just means thinking positively rather than negatively about deal points.

6. Don’t lose momentum

It’s very simple: with delays, deals often die.  Part of our jobs as brokers is to keep the ball rolling, making sure questions are answered, concerns are addressed, and technicalities are noted.  Just as before the transaction begins you need to have your paperwork in order, when you’re in the transaction you need to keep the paperwork going.  It can feel infinite at times, but we promise it’s not: see the light at the end of the tunnel.

7. Stay focused on your business

One of the advantages of having a broker is the chance for you to stay focused on your business instead of pouring all your time and resources into making a transaction happen.  Remember that a buyer wants to see the business as a going concern from start to finish with you, and if your business deviates from the norm during the transaction that can often cause you to take a haircut on the closing price.  You’re the owner until you’re not, so act appropriately.

The most successful sellers keep all seven of these ways in mind from the start to the conclusion of a transaction, but if you even have four of them clear in your mind when we get started, you’re well on your way to success.  

Concerned about one of these in particular?  Give us a call and let us know how we can help.

Cautionary Tale #7: Excess Inventory Blocks a Sale

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Excess InventoryWe all make mistakes in business. Sometimes it costs us money immediately, other times in the long term. In the worst cases, all the way through and including the sale of your business. Particularly when an owner is ready to sell and is in the mindset of “cashing out”.

Not that long ago, we were working with a Main Street interior design/contracting business with $800k in annual revenues. The total owner benefit was $300,000. He had $1.8M in real estate and $1.5M of inventory tied up with the valuation of the business. The problem was, not only was that 4 years of inventory… But more than $1M of that inventory was a particular type of natural stone that the owner loved and had “gotten a deal on” some years ago. But never really moved.

When we asked him about it, he responded by saying he “wanted more display options” and that “it would sell eventually.”

While the latter might be true, it may be across an unacceptable time horizon for the buyer. The display options statement was a smokescreen to avoid dealing with the embarrassment of a bad call. The reality was as the years continued on, this type of stone would only be more out of style with current trends, making it even more difficult to move. He was right that it would give “more display options,” but the reality was the obsolete inventory in the display made new stuff look that much better!

There were a few options here:

  • Liquidation of the outdated stock wholesale in a one-time event. This would result in some tax-loss harvesting benefits for the current owner and could be easily demonstrated as a one-time write-off for a potential buyer. This would also serve as a useful “cautionary tale” about operating that particular kind of business.
  • Drastically mark down the pricing to make it attractive for buyers. This could lead to more cash on hand for the current owner as well as demonstrate that at a certain price the inventory can move.
  • Exclude the obsolete inventory from the business. If the current owner really believes the inventory will move, then he can strike up a deal with the buyer in which the stone would be sold on a consignment basis over a fixed period of time.

It’s no failure to make mistakes in business. The real failure is in not admitting those mistakes or dealing with them so they don’t cost you yet again. In this case, it could obstruct an exit.

Don’t be that type of owner. Own your mistakes so that you can move on to what you’d like to do next.

Cautionary Tale #6: Accounting Woes

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Accounting WoesWhenever we discuss commonalities in successful transactions, inevitably “clean books” will be one of the first three things mentioned. Numbers don’t just matter for your valuation, or for tax purposes, or just to track where the money has gone: without clean books, a buyer can’t know whether he/she is looking at a solid business.

Here are three examples of people who came to work with us who didn’t accept that basic premise:

Bad Books, Buyer Balks

We had a seller who was looking to sell a car wash, but had inconsistent and sloppy books. The buyer understood this and was willing to wait as the books got cleaned up. For some reason, the seller had been using a tax attorney to do the accounting. $20,000 and some months later, the seller had clean books and was square with the IRS. But in the process, the buyer had long since flown the coop because of the time lag and lack of responsiveness from the seller. To compound his woes, the previous accountant/attorney was suing him for non-payment of previous bills.

Don’t put yourself into this situation. Startup owners do it all the time by handing a shoe box of receipts to their new accountant/bookkeeper. Don’t do that. Start on the right foot from the start.

Full Disclosure Matters

In another situation similar to the one above, a seller was not as responsive as she could have been with her books, and the buyer started to get uncomfortable. At some point, it came out that there had been a $180,000 bad debt write-off from an old account. The situation was completely explainable as a one-time occurrence that shouldn’t affect the value of the business, but the seller had already been slow in responding. The buyer saw this disclosure as only the first in what might be more shocking disclosures, even though the reality was that this was the only real accounting issue to discuss.

The seller had created an atmosphere of concern and doubt, so it didn’t take much more to dissolve that confidence entirely. Always show and tell all the warts of your business to your broker. We’ve seen them all, and one thing we can say for sure; when you lead with honesty, you create and foster trust with your buyer.

Lying to the IRS

Another time we had a seller with a business that took in $2.2M in annual gross revenues, which led to $400,000 of declared owner benefit. But the owner also took $200,000 of unreported cash for himself, which was obviously not declared to the Internal Revenue Service. When we told him that he couldn’t get what he was asking for for the business since the books didn’t back the narrative, he insisted that we list the business anyway. “I’ll get audited if I go back and fix it now, anyway,” he said. While that has happened in certain circumstances, we told him that this wouldn’t be attractive to buyers.

Unsurprisingly, he got precisely zero offers, for the simple reason that potential buyers thought, “if he’s willing to lie to the IRS, which will run over your grandmother to collect what it’s owed, what else is he willing to lie about… to me?”

Honesty is the best policy. It is one of those lifelong bits of wisdom our mothers taught us long ago.

We all make mistakes – if you haven’t been straightforward with your books in the past, there very well may be ways to fix them and prepare your business for a successful sale.  Call us and let us connect you with people who can help you do precisely that.

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.