Exit Planning Tools for Business Owners

small business

The Brass Ring

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A long, long time ago (I’ve actually ridden only one such in my lifetime) Carousels had a spring-loaded sleeve of brass rings protruding near the innermost (and least popular) track of horses. A bigger kid could lean out and yank a ring from the sleeve with considerable effort, and be rewarded with a free ride.

Today, of course, we can’t even read the description of such an ill-conceived device without cringing at the thoughts of fallen children, their bodies horrifically mangled in the giant gears of the turntable, and the litigation and public outrage that would follow. Times change.

“Reaching for the brass ring” has become a metaphor for chasing success. As I discussed in last week’s column, the massive number of Baby Boomers would have affected the economy regardless of their other tendencies, but their commonality and competitiveness raised that impact by an order of magnitude.

If you are a Boomer business owner, I defy you to say that you’ve never complained about the work ethic of the younger generation. From the mid 70’s to the mid 90’s (prime time for Boomers in the workforce) American white-collar workers saw the rise of an average work week from just over 40 hours to almost 54. This while our European contemporaries were  campaigning for (and winning) 35 hour weeks and ten weeks of vacation. What made American Boomers so competitive?

Our numbers. There were simply too many of us to accommodate at every stage of our lives. Just as the impact of ageing Boomers leaving the workforce will come as a surprise to most, so the flood of people into schools, homes and jobs took the majority of businesses (and governments) by surprise.

I attended public schools in the 1950’s where 45 or 50 children were the norm in a classroom. It had nothing to do with unenlightened teaching methods or weaker unions. There simply weren’t enough classrooms. Between 1945 and 1957 the annual number of new births in the country increased by 53%, from 2.8 million to 4.3 million. They couldn’t build schools fast enough.

When I started college in the late 1960’s, they were pulling trailers into muddy fields and calling them community colleges. There weren’t enough universities for all those who wanted to attend. And when I graduated and applied for a position in corporate America, their hiring offices were like the Department of Motor Vehicles, with group testing and rows of interviewing offices.

It was a time of plenty in America, but there wasn’t enough of what the Boomers were seeking. The “Spock Babies,” as we were called, had been raised to believe that every one of us could, and should, succeed. We all expected the corner executive office, but there weren’t enough places for everyone.

(An aside: I’ve always been curious about Gene Roddenberry’s selection of a name for the First Officer of the Starship Enterprise. Was there some subliminal appeal that helped make Star Trek one of the most popular Boomer shows in history?)

From 1966, when the first Boomers turned 21, through 1975, the rate of college graduations in the United States tripled on an annual basis, from just over 600,000 to nearly 1,700,000 a year. (See the timeline at The Boomer Bust)

Baby Boomers competed for the better places in schools and for admission into the better universities; and then competed fiercely for jobs when they graduated. Once employed, they were part of a glut of other qualified Boomers; roughly the same age, and with similar qualifications. The brass ring went to the ones that worked hardest, longest and smartest. An entire generation accepted competition as a way of life. It was a numerical inevitability.

But many Boomers were squeezed out by the numbers, or were disinclined to engage in a battle for promotions and raises. They still wanted the gratification that Dr. Spock said they should have. They still expected the brass ring.

They went into business for themselves.

From 1975, when the first Boomers turned 30, until 1986, the formation of new businesses in America jumped from 300,000 to 700,000 annually. By 1990, when the oldest Boomers turned 45, the number of new business formations had fallen back to 600,000. It has remained there since. As our population has grown from 190 million to 310 million, the number of business start-ups has been flat.

The massive number of small businesses in the United States, the source of 67% of all new job creation since 1995, is clearly the product of millions of Boomers who sought success outside traditional wage-paying jobs. For the first time since the industrial revolution, (when production consolidated into large enterprises) America became a nation of shopkeepers again.

These are the businesses that are beginning to be sold. Whether there are enough buyers is another question.

Picture Credit

The Pig in the Python

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The title of this section refers to a well-known biological phenomenon. The python family of snakes have hinged jaws that allow them to swallow animals much larger than their heads. These animals are gradually consumed as they pass through the snake’s digestive system. If the prey is very large, you can plainly see the shape of the animal as it moves through the snake.

It is just as easy to identify the progress of the Baby Boom generation through the American population. Whatever stage of life the Boomers were experiencing, the country was experiencing. And we all experienced it together. (see my timeline at The Boomer Bust) Although the pure size of the Boomer generation underlies a lot of its impact, there were two other factors, commonality and competitiveness, that greatly enhanced it.

I grew up in the industrial Middle-Atlantic Northeast. “Ethnicity” in my world meant Polish, Italian, German or Irish. Of course we had discrimination, bigotry and ghettos. I cringe at some of the racist nursery rhymes I was taught by my friends. (Thankfully, if I recited them at home my parents quickly explained why those words were bad.) But we didn’t have Jim Crow laws, or poll tests, and although my schools were largely white, it was as a reflection of the neighborhood, not of the law.

I had no idea what rhubarb or okra were until I was an adult. I had never heard of ice fishing. Iced tea came in one flavor; if you wanted it sweet you put sugar in it. When I was 20 or so, I remember reading a debate in a restaurant industry magazine about whether America was ready to accept a regional ethnic food as mainstream…pizza! I had a pizza parlor on virtually every corner. It shocked me to realize that everyone else didn’t.

Like most early Boomers, I grew up in a culture that was defined by regional and ethnic dominance. Children had for generations grown up with roughly the same attitudes, the same ideas, and the same habits as their parents. They just hadn’t experienced much else.

Then came television. The first stations broadcast in the late 1930’s, and television was a huge hit at the 1939 World’s Fair in New York, but WWII had put a stop to production of TV sets. Returning GIs were ready to spend on consumer goods, and factories built for wartime electronics production were more than ready to deliver. In 1948 the first networks began broadcasting syndicated content, and in 1951 color televisions first became available. The oldest Boomers were 6 years old.

Unlike almost every other country, the United States developed television as a private enterprise. As in radio, content was paid for by commercial advertising. In fact, many of the consumer brands that made radio so successful were the first to move headlong into the new medium.

Thus people watching television became “consumers.” The success of a show was determined by the number of products it sold. How long do you think it took for these advertisers to figure out that two out of every five people in the country could be targeted as a distinct audience? For the first time, a generation was identified as a market, and sold to by age, not by the regional or ethnic orientation of their parents.

The WWII generation had already proven their willingness to spend on their kids. Scarred by the Great Depression, they focused on working to give their kids got the things they had lacked. They started by making Benjamin Spock’s 1946 book, The Common Sense Book of Baby and Child Care a huge hit, buying 500,000 copies in its first six months.  Children’s toys, books and shows quickly became an entire segment of the marketing industry.

For the first time, children were growing up encouraged to perceive themselves as children. They weren’t little adults in training. They weren’t just future farmers, or future factory workers. They were taught by parents and advertisers to think of themselves as children first, and as the life successors of their parents second.

And, for better or worse, 78,000,000 of them were all being raised pretty much the same way, at the same time.

Commonality made the Boomers a cohesive force in the American culture and economy like no generation before them. But sometimes that commonality took on the aspects of a school of fish, where thousands of individuals all turn in the same direction at the same time. This happened again and again and, as you will see, not least in the transformation of small business in America.

When it was combined with Boomer competitiveness, it changed everything. Next week, how the American Baby Boomers became the hardest workers in modern history.

Lifestyle or Legacy – Part 4

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Last week a client told me “You are wrong. I have a lifestyle business that is ALSO a legacy business.” Sorry, but that doesn’t fly.

He has built a good company, and continues to improve it. Be he is not driving to make it into something that carries on beyond him. His objective is to (eventually) make it large enough to be acquired, and for enough money to live in luxury for the rest of his life.

That is a lifestyle business. It’s only purpose is to fund the financial aspirations of the owner. There is no larger purpose, no overarching vision of something beyond his quality of life. I’ll grant that his personal ambition extends beyond his current, very comfortable existence. But it only extends to a more comfortable existence. That is a matter of degree, not direction.

When I started to think about this series, the term “lifestyle” was easy. The second term was originally “entrepreneurship.” That didn’t communicate the concept well enough. Thinking through the topic, it reduced the definition of “lifestyle” to more of just making a good living, and of “entrepreneurship” to building something larger than merely a decent living.

What I am talking about encompasses ANY lifestyle you choose. Whether it is a nice house in the ‘burbs, or sailing around the world in a yacht, that is still lifestyle. We all have different targets.

Legacy is when it moves beyond you, when the company becomes a vehicle for accomplishing something larger than your personal quality of life. By that definition there are probably legacy businesses that don’t provide a luxurious lifestyle, but they satisfy the owner’s desired level of creature comforts and support that bigger vision. Perhaps something that allows an owner to go on missions to Africa for half of each year might qualify. For the most part, however, owners have to reach a pretty comfortable lifestyle before legacy comes into the picture.

Most legacy businesses were lifestyle businesses first. The owners scratched and pushed (or were incredibly lucky) to build a level of security and sustainability. Once they got here, however, they looked around and said “This isn’t enough. Mere wealth doesn’t fill the need I have inside of me.”

Another owner said to me ” I want a legacy business. I want to go visit my outlying offices and not fix problems. I’d fly in, give awards to the top performers, and take a major client out for golf.”

That is also a lifestyle business. The legacy owner wouldn’t be coming in to fix problems either. He or she might be looking for an acquisition in that market, or communicating new goals. He might be upgrading personnel; not because they were failing, but because he was constantly looking to do better. The numbers are still important, but they aren’t going towards improving his lifestyle, they are being used to build the legacy.

Before you start worrying about the lifestyle vs. legacy decision, let me make something plain. Some 80% of small businesses fail in their first few years. Of those that survive, probably 90% never achieve the lifestyle level of success. There are very, very few owners who reach a point where they can work as little as they want and make as much as they want.

Some do, and a few of those think “OK. Is that it?” Some of those can’t envision anything else. Some start building a legacy.

To quote Nancy Barcus: “The closer one gets to the top, the more one finds that there is no “top.”

Hunters and Farmers

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Several times monthly, I interview entrepreneurs who are considering membership in The Alternative Board® as a means to improve their business. Part of the process is asking each one what his or her core skills are – the things that made them successful.

Many, and perhaps a majority, start the answer by lowering their voice a bit. “Well first of all,” they say, “you have to understand that I think I’m a little bit ADD.”

No kidding? You started a company because the job you had wasn’t moving fast enough for you. You wanted to have greater say over your environment. You kept looking at other areas that weren’t under your control, and decided to put yourself into a situation where you could control everything. (OK; we’ve all found out that isn’t true.)

You began your business playing all the positions. You were the utility outfielder, plus pitching and then running faster than the ball so you could be the catcher too. You spent, and probably still spend your day caroming from finance to sales to operations, and you think you might be ADD? It’s time to stop acting like we’re handicapped, and start recognizing that some “conditions” have a purpose, and are part of our advantage in owning a business.

A decade ago I found a book called “Attention Deficit Disorder- a Different Perception” by Thom Hartmann. It has been a huge help to me in understanding not only my own behavior, but that of my two ADD-diagnosed sons.

Hartmann’s premise is that ADD isn’t, as it is so often described, a disconnect in your brain’s wiring. It is a group survival trait in the human race, but one that has become less important to the tribe as time passes.

The ADD folks are the hunters. In tribal times, they were the ones who brought in the food. They can focus on a single task, adapt on the fly, sacrifice themselves by going for long periods without rest to accomplish the objective, and ignore obstacles in their way. Without the hunters, the tribe starved.

Eventually the human race learned agriculture. The ability to eat shifted from hyperactive focus on finding food to extended, steady attention to tilling, planting, reaping, and tilling again. In fact, until the 18th century most common people had no way to track the years. Their calendar was merely focused on the seasons of the growing cycle.

But evolution doesn’t move that fast. The hunters didn’t turn into farmers. Doing the same thing year after year is stifling to them, regardless of the necessity of it. There was less room for the hunters in the tribal organization; so they became entrepreneurs.

In the last 15 years hunter behavior has been stigmatized by the farmers. “Good” students sit quietly at their desks. Children shouldn’t run in the house. No yelling. No rough housing. Memorize your lessons. Manage what you measure. Develop systems. Pay attention. Be ISO 9000-, Total Quality Management-, Balanced Scorecard-consistent, every day, every month, every year.

Booooring.

Managing isn’t nearly as much fun as creating. When I ask business owners what they would do if their company was running perfectly, most answer “Something new.” It’s not that they don’t want a perfect business. It’s that they don’t see any fun in running a perfect business. That’s farmer work.

This is a call to entrepreneurs to stop feeling guilty about what they are, and to start recognizing what makes them successful. The tribe only needed a few hunters to feed everyone. That’s why only 3% of us own businesses, and yet we create 62% of all the jobs in America. The farmers are still dependent on the hunters. They just think that they aren’t.

Small Business can Sell in a Recession

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This was an article I had published in the San Antonio Express News yesterday.

Guest Voices: Small businesses can sell in recession

Many business owners think that the current recession has ruined their exit strategy. While the climate may be more daunting for budding entrepreneurs, there are still plenty of buyers around for small businesses.

For Main Street businesses (those selling for less than $3 million), buyers chiefly are driven by personal economics. They are seeking a business as a way to make a living. Their main objective is cash flow, the amount of discretionary income the business generates to cover bank debt and an owner’s salary.

In a recession, the most common economic buyer is an executive who has lost his or her corporate job. These buyers usually have good management skills and substantial savings, along with enough net worth to make a lender comfortable.

Be aware, however, that former corporate executives are also very cautious shoppers. The concept of going it alone can be terrifying enough in the best of times. As a buyer gets closer and closer to closing, the idea of working without a safety net looms larger.

In a giant organization, missing your budget means a poor performance review. In a small business, it could mean closing the doors. Executive buyers need extra assurance that they will succeed. If you are an entrepreneur who has risked it all for years, their concerns may generate little sympathy, but they are a fact you have to deal with.

Harsh economic times also bring out the bottom feeders. These are buyers who shop incessantly for companies that can be bought at bargain basement prices. They frequently will use the economy as an excuse to make a low-ball offer, claiming that your business will not be able to sustain its historical profitability going forward.

Unless you’re actually seeing a decline in revenues and profits, there is no reason to entertain an unfairly low offer for your company. Most small businesses have a minuscule market share and can thrive in any economy if they are careful and aggressive. Unless you are focused in an industry that is especially hard hit by the current downturn, there is no reason to think that general economic conditions will have a proportionate effect on your company.

Of course, your expectations of what constitutes a reasonable price are critical. When buyers are already nervous about financing and the future, an inflated price can scare them away quickly and permanently.

Many business owners price their companies beyond achievable expectations based upon multiples for public companies, industry rumors, their own financial needs or simple misunderstanding of the profitability measurements used in mergers and acquisitions.
There are several national databases that show actual sale prices of small businesses in relation to the profits and size of the company. Though the opinions of your accountant or attorney may be helpful, they may vary widely from the actual pricing that is being achieved in the marketplace.

Just because times are challenging, that is no reason to put your life plan on hold. Like every other aspect of owning a business, the sale of the company will be much more successful if you start with good information, plan carefully and have realistic expectations about the outcome.

John F. Dini is president of MPN Inc. He also operates the nation’s largest franchise of The Alternative Board. He can be contacted at jdini@mpninc.com.