Dec 20, 2013

Are You Growing Grain...or Growing Men?

If you want a year of prosperity, grow grain. 
If you want ten years of prosperity, grow trees. 
If you want a hundred years of prosperity, grow men 
-- Chinese Proverb



At times, it may seem I'm not very involved with the various businesses that I own.  I'm not what some would call an "owner-operator" in most cases.

I believe my work isn't specifically the technical or process-oriented tasks involved in running a company.  My role is to find good men or women to build my companies, and then build them.

The only way to grow people is to:

1. Allow them autonomy and some freedom to make decisions,

2. Ask more questions, to pull out, rather than dictate and push down orders,

3. Recognize in them the goodness that is inherit in all people,

4. Recognize in them the specific talents and abilities that they alone bring to the enterprise.

I love the people I'm helping to grow. 

And I love them, not just because they help build the companies I own, but because I'm truly vested in and investing into their development and personal growth.

In most situations, if you're investing into someone or something, it's because you believe in the prospects.

I believe in my people, and so I invest in them by empowering them to find the solutions to the problems they'll invariably face as operators of a company.
 want 100 years of prosperity, grow people. - See more at: http://quotationsbook.com/quote/32845/#sthash.wilIqW8g.dpuf
oblem, craft a solution and sell that solution to others. As an interesting side note, it’s a common misconception that the word crisis and opportunity mean the same thing in the ancient Chinese language. This misconception initially gained momentum when John F. Kennedy incorrectly cited it in a sp - See more at: http://juniorbiz.com/40-chinese-proverbs-for-entrepreneurship#sthash.NYz8y1xq.dpuf
oblem, craft a solution and sell that solution to others. As an interesting side note, it’s a common misconception that the word crisis and opportunity mean the same thing in the ancient Chinese language. This misconception initially gained momentum when John F. Kennedy incorrectly cited it in a sp - See more at: http://juniorbiz.com/40-chinese-proverbs-for-entrepreneurship#sthash.NYz8y1xq.dpuf
oblem, craft a solution and sell that solution to others. As an interesting side note, it’s a common misconception that the word crisis and opportunity mean the same thing in the ancient Chinese language. This misconception initially gained momentum when John F. Kennedy incorrectly cited it in a sp - See more at: http://juniorbiz.com/40-chinese-proverbs-for-entrepreneurship#sthash.NYz8y1xq.dpuf
oblem, craft a solution and sell that solution to others. As an interesting side note, it’s a common misconception that the word crisis and opportunity mean the same thing in the ancient Chinese language. This misconception initially gained momentum when John F. Kennedy incorrectly cited it in a sp - See more at: http://juniorbiz.com/40-chinese-proverbs-for-entrepreneurship#sthash.NYz8y1xq.dpuf
oblem, craft a solution and sell that solution to others. As an interesting side note, it’s a common misconception that the word crisis and opportunity mean the same thing in the ancient Chinese language. This misconception initially gained momentum when John F. Kennedy incorrectly cited it in a sp - See more at: http://juniorbiz.com/40-chinese-proverbs-for-entrepreneurship#sthash.NYz8y1xq.dpuf
oblem, craft a solution and sell that solution to others. As an interesting side note, it’s a common misconception that the word crisis and opportunity mean the same thing in the ancient Chinese language. This misconception initially gained momentum when John F. Kennedy incorrectly cited it in a sp - See more at: http://juniorbiz.com/40-chinese-proverbs-for-entrepreneurship#sthash.NYz8y1xq.dpuf
oblem, craft a solution and sell that solution to others. As an interesting side note, it’s a common misconception that the word crisis and opportunity mean the same thing in the ancient Chinese language. This misconception initially gained momentum when John F. Kennedy incorrectly cited it in a sp - See more at: http://juniorbiz.com/40-chinese-proverbs-for-entrepreneurship#sthash.NYz8y1xq.dpuf
If you want one year of prosperity, grow grain. If you want ten years of prosperity, grow trees. If you want one hundred years of prosperity, gr - See more at: http://juniorbiz.com/40-chinese-proverbs-for-entrepreneurship#sthash.NYz8y1xq.dpuf
“If you want one year of prosperity, grow grain. If you want ten years of prosperity, grow trees. If you want one hundred years of prosperity, grow p - See more at: http://juniorbiz.com/40-chinese-proverbs-for-entrepreneurship#sthash.NYz8y1xq.dpuf
“If you want one year of prosperity, grow grain. If you want ten years of prosperity, grow trees. If you want one hundred years of prosperity, grow p - See more at: http://juniorbiz.com/40-chinese-proverbs-for-entrepreneurship#sthash.NYz8y1xq.dpuf

Mar 25, 2013

7 Strategies For Turnarounds



When evaluating the business opportunity, know in advance what your exit will be, and what improvements you will be implementing in the company.

There are 7 ways to turn a company around, in order below from most-preferred and profitable to the least preferred and least profitable.

  1. Resurrect – Make changes to the company from within: a new sales contract or perhaps re-calibrating the marketing campaign, or a new innovation or disruptive technology. It’s easier said than done.  If you can improve the company from the resources within the company, you’re more likely to successfully turn the company around under your own terms.  When considering any business purchase, consider what opportunities are within the company that aren’t being tapped into or could use further development and attention.  With personnel for example, often the expertise and ability you’re looking for already exists within the company.  Peter Drucker famously stated,  “Because its purpose is to create a customer, your business has two purposes and two purposes only: Marketing and Innovation. Marketing and innovation make you money, generate sales, produce profit. Everything else is an expense...”.  Keep in mind that Innovation may come in spurts and with flashes of insightful breakthroughs.  But Marketing requires steady, consistent application of conveying a cohesive message often.  Have something good to say, say it well, and say it often.

  1. 2.  Recruit – Similar to a resurrection, if you’re recruiting top-talent from the market or from competitors, who have the experience and domain knowledge you’re needing for the company, you can often dictate the terms and conditions under which those talent-infusions come on board.  Whenever you consider buying a company, also look at the competing environment to find out who you might be able to recruit away and re-insert them into the company you’re looking to purchase.  The biggest challenge with recruiting or promoting from the outside, especially in top-level positions, is that these individuals will not have the specific cultural upbringing as those already inside the company. Still, if the company is struggling, it likely needs help from the outside, including new ownership, new management, and new employees.

  1. Refinance --  Often times the target company is encumbered with debt that can be refinanced under a new loan.  The new loan may offer a lower rate or a longer amortization period.  Taking out the old loan with a new loan is another way to make the company cash positive. 

  1. Re-equitize – Similar to a refinance, only you’re employing equity instead of debt capital.  Equity can come from existing managers or employees, recruited, to-be-hired managing partners, the broker involved in the deal, friends and family, private equity groups, wealthy individuals, investors, or your own pocket book.

  1. Re-amortize – This typically involves changing the amount owed or the timing of the payments to the creditors.  Often, if the company is struggling or encumbered with debt, the creditors will take a voluntary haircut on the amount due, or will stretch out the payments or lower the rate, if they know there’s a plan.  In the extreme cases, if the company has been more or less forced into bankruptcy, the bankruptcy judge can actually force the creditors to take a cram-down on the debt, which basically means the creditor takes a substantial haircut on the debt to align more realistically with the underlying assets’ actual, current valuation. 

  1. Re-sell – Selling the business as a going concern is far preferable than simply shutting it down or liquidating the assets of the business in a forced manner.  If you find that you’ve purchased a business that you’re not cut out for, or you simply aren’t driving the business like it needs to be driven, it’s far better to put it in the hands of someone who can and is willing to make it work.  If the company has value in the hands of someone else, sell it.  If the company is doomed to failure, (for example a flawed or no-longer relevant business model) do not sell it: it’s better to shut it down and pull the plug than to sell a broken, can’t-be-fixed business to someone else.  Refuse to sell refuse. 

  1. 7. Refuse – If the company you bought cannot or should not be sold as a going concern, if there’s simply no way the company can be saved as it is now, begin selling whatever assets you can that have real value.  In one of the biggest mistakes I made, I bought a company that was similar to another successful business I’d bought in the past.  I had made 10x my investment on the previous one, and thought this one would be similar.  I was overconfident.  I hadn’t done my due diligence as thoroughly as I should and after 3 months of owning this company decided it was actually better to shut it down completely rather than try to sell it to someone else or try to fix it (it was not a ‘fixable’ company by the time I bought it; and it would have been wrong for me to try to sell it to someone else as a going concern business).  When you buy a company, it’s easy to get sucked into the cashflows from the income statements and not take a good hard look at the balance sheet – the assets that can be sold should something go south.  As Warren Buffet says, the first rule of investing is don’t loose money.  Easier said than done, but a good follow up rule to this is to make sure your purchasing enough hard assets that you can cover your downside should the business go south.  One of the biggest problems I see buyers make is they buy too much goodwill and not enough hard assets. 

Mar 19, 2013

The 6-6-6 Rule of Thumb for Buying a Business


Before I met my wife, I dated (or went on a date with) over 823 different girls.  Patience pays off: I married the woman of my dreams and she's the total package.

In looking at my numbers for the last 12 months, it seems it takes 6 initial views of a business for me to create 1 offer.  I have to have 6 offers, to get 1 to accept.  Of those that accept my initial offer, only 1 out of 6 actually ends up selling me his or her business.

I’ve looked at 200-plus businesses, of which I’ve put offers on 36 (7 of these offers were revisions of offers, or re-offers on the same company); of these 36 offers, 6 have accepted, and only 1 of them actually successfully closed. 

Why didn’t I put offers on all 200-plus that I initially looked at?  Because after receiving the financials, it was apparent that many of these companies were simply not worth owning, for any price, or there were few creative ideas I could employe to improve the company once purchased, or I wasn’t able to find the right managing partner to joint-venture it with me.

Of the 36 offers I put in, most did not accept.  Anyone in business knows this: rejection is part of the game.

5 out of 6 refused my initial offer.  I rarely offer a 2nd offer unless I get something reasonable back from the seller that leads me to believe that creating a revised offer might produce a favorable deal.  Still, of the 6 that did accept my offer, only 1 of those 6 actually ended up in a purchase.  Why?  Because if you do your due diligence properly, you’ll almost always find skeletons in the closet.  How the buyer and seller negotiate for concessions once those skeletons are discovered is another area for further consideration and negotiation. 

You don’t want to be looking for excuses to modify your initial purchase price.  But you do want to hold the seller accountable for any deviations between the representations the seller made (of which your offer was based) and the actual truth.  If there’s a gap, then there needs to be a compensation for that gap.

For example, I made an offer for a manufacturing company that represented sales of about $1.2M and a net income of $180K.  I made a fair offer based upon the rules of thumb for this industry, which were a percentage of the equipment and inventory plus a multiple of SDE (seller’s discretionary earning) of 1.5x.  It’s been almost a year, but I believe the assets were represented as being worth $50K and the SDE was represented as $200K with the addbacks ($180K net income + $20K in seller’s personal expenses).  My offer of $350K was reasonable and fair, assuming the seller’s representations were in fact accurate.  

Turned out however that during due diligence, the net income figure was actually a loss on the tax returns, and the amount of addbacks didn’t come anywhere near $200K; it was more like $100K.  I had to revise my offer to accommodate that gap, adjusting the offer to reflect the actual SDE.  The seller refused, and last I checked, his business still hasn’t sold.  He’s still representing to the market the inflated numbers he’s already been called out on, hoping someone will pay a higher price for numbers that don’t actually exist.  

This process can be frustrating.  It may take you 300-600 hours to find one deal that works.

Moral of story: it's a numbers game.  As in dating and marriage: don't buy the first business you fall in love with. 

Feb 25, 2013

Buy a Business with Good Economics First, Passion is Secondary

In the landmark book, “Good to Great”, Jim Collins identifies what he calls the Hedgehog concept, which is the sweet spot for companies who’ve successfully identified and practice doing 1) what they’re deeply passionate about, 2) what they believe they can become the best in the world at, and 3) what drives their economic engine. 

In your search for a business, you may focus much of you attention on what you’re passionate about, at the expense of what truly makes good economic sense. 

Case in point: you’re creative, and you love journalism and writing.  You decide to apply your number one passions into the public relations or marketing fields.  You’ve neglected to view the market as a whole however, and you wonder why the first few years in business (enjoying what little work you may actually receive) are a complete financial failure.  There are millions of people who love that type of work.  Could you be the best in the world at it?  Hopefully you believe it before you set out upon that well-worn path to mediocre wealth.  But the truth is, it’s a crowded space. 

Compare with the entrepreneur who sees an opportunity in the market, such as picking up dog crap, or managing property, or digging big holes for home-builders needing basements.  These are not attractive businesses most people are normally intrinsically drawn towards (passionate about), but the truth is, all three of these businesses typically do very very well financially.  Being the best in the world at these activities may not be as challenging as you’d think because, there’s not a lot of people competing in these spaces.  Go where people hate to go, to do a job that needs doing that nobody else wants to do, and you’re on the right course from a financial standpoint. 

Most people start with what they’re already passionate about, and using that narrow list to then work backwards towards what will procure them the most decent living (this is the typical strategic buyer).  My suggestion is you start from the end and work backwards.  Start with the companies or types of business that make good economic sense, and then find a way to love the business that will serve you well.  Be a financial buyer first.