Posts made in July 2020

A flood always begins with a single drop of rain

The Denver Post | BUSINESS

By Gary Miller | gmiller@gemstrategymanagement.com | GEM Strategy Management.com

PUBLISHED: July 26, 2020 at 6:00 a. m.

Larry, the owner of a wholesale food company, had not felt good for over a year. He was consistently tired and losing weight. His wife Christi urged him to get a checkup. Last May, Larry was diagnosed with pancreatic cancer and was given four to six months to live.

Unfortunately, he passed away last September. He was survived by Christi and their two sons who were well established in their respective careers. Christi was not involved in the company at all. She was at a loss as to where to begin and what to do next with their wholesale food business. A flood of problems began to emerge.

Mark T. Osler

Gary Miller

She called a meeting of the senior staff as a starter but found that no one had a complete handle on how the business operated. Larry had made all the major decisions. The flood of problems continued.

Revenues were declining and cash was tight. She asked their accounting firm and their personal attorney to help her review the business operations. After several weeks of analysis, both their accountant and their attorney recommended that Christi sell the business. A few months later, a major competitor purchased the business for a fraction of what it was worth.

A year ago, Ben and his partner were managing a successful events planning firm serving major clients throughout the U.S. While the company performed well last year, COVID-19 caused most of their clients to cancel their upcoming events for the year. As a result, most of their revenues disappeared overnight. Ben and his partner laid off over 80% of their staff. But they were still bleeding cash at an alarming rate. And the flood of problems escalated.

In addition to the company problems, Ben’s marriage was on the rocks. He was served divorce papers last November. The divorce was contentious but was finally settled with Ben owing several hundred thousands of dollars to his ex-wife.

Ben had no choice but to try and borrow the money personally — but that failed. So, Ben pleaded with his partner to apply with him for a business loan. His partner refused. He didn’t want to have to personally guarantee a business loan for non-business purposes. With COVID-19 drastically affecting their business, Ben and his partner had to close the company last month. Ben declared bankruptcy this month.

Two years ago, Charlie decided that he was burned out and wanted to retire. He had built a successful marine sales, service and storage business over the past 23 years, but he wanted out. Charlie wanted to spend more time with Lily, his wife, and do some traveling and spend more time with the grandkids.

Last year the business was generating about 23% net income on revenues of $11 million. But last December, he lost both his service manager and sales manger to a major competitor. He was depressed as he began to see that the quality of his service center declining.

More of his customers were returning their boats claiming their mechanical problems weren’t fixed. The service department personnel was not adequately trained resulting in service mistakes.

In addition, sales revenues of new and used boats were declining. After reviewing the sales figures over the past two years, he found that about 65% of the sales were being made by the sales manager — the one that he had just lost. His problems did not end there.

One of his former employees was suing him. Her suit claimed that she had worked in a hostile work environment. With the loss of two key employees, declining revenues, a lawsuit and Charlie being burned out, he had a flood of problems.

In the end, Charlie could not sell his business because no buyer wanted a company with declining revenues, a lawsuit that had not been resolved, and a lack of bench strength in both service and sales departments.

These three examples reflect a number of individual problems (rain drops) that collectively turned into major problems (a flood) that could not be reversed.

In the first example, Larry’s wholesale food business did not have a strategic business plan, a certified valuation, or a succession plan addressing unanticipated events — such as insurmountable health issues. There was no delegation of authority, or a plan for unanticipated problems. The casualty of this flood was his wife Christi.

In the second example, Ben and his partner did not have the business acumen to address unanticipated events — like a divorce and its potential effects on the business. Financially, they had not created enough retained earnings from a profitable business to address Ben’s divorce settlement. Because the company had no certified valuation, there was no way that Ben and his partner could formalize the true value of the company. A formal valuation of the company may have saved Ben a significant amount of money — particularly with the effects of COVID-19.

In the third example, Charlie did not have a business plan or an incentive bonus and an employee retention plan in place (such as phantom stock) or other incentives to reward and retain his two key employees. Further, Charlie had not taken the steps to weed out poor sales performers by hiring more qualified sales personnel and employing higher skilled service personnel.

These three examples demonstrate inadequate management acumen and ineffective business planning. Also, they demonstrate why companies need adequate working capital, retained earnings, up-to-date business plans, succession plans and third-party certified valuation conducted annually.

Remember, a flood always begins with a single drop of rain.

Gary Miller is CEO of GEM Strategy Management Inc., a M&A consulting firm that advises small- and medium-sized businesses throughout the U.S.  Reach Gary at 303.409.7740 or gmiller@gemstrategymanagement.com.

In every cloud there is a silver lining

The Denver Post | BUSINESS

BY GARY MILLER | GEM Strategy Management, Inc.

PUBLISHED: June 28, 2020 at 6:00 a.m.

The old cliché “In every cloud there is a silver lining” rings true today. Clichés always contain seeds of the truth. While the results of the Covid-19 pandemic has had a devastating effect on many large, medium and small businesses, opportunities are emerging as the U.S. economy slowly reopens.

Unquestionably, the beginning of 2020 was the right time to sell a business.  Coming off of a decade-long boom of mergers and acquisition (M&A), sellers were in a position to command high premium for their businesses and buyers were willing to pay. Debt-markets were ready and willing to lend freely for most M&A activity. Then the world turned up-side-down in March. Debt markets became stressed. Today, lenders are demanding more security and stronger loan covenants.

As a result, M&A activity came to an abrupt halt. Deals fell apart. Others were postponed. According to Bloomberg, M&A activity dropped more than a third to its lowest level since 2014.

So where is the “silver lining”?  Some of the conditions pre-Covid-19 and the current business environment are similar. For example, a lot of capital (dry powder) is still on the sidelines waiting to be invested.  According to David Ludwig, Goldman Sachs Group, “Once investors are more confident that negative tail outcomes are unlikely, we expect significant public activity across all sectors and product classes.” “And we expect that to occur in a reasonable period of time.

According to Bloomberg, “While private equity firms have their hands full for now managing struggling portfolio companies, they’re still sitting on a $2 trillion war chest that could be put to work as valuations stabilize.”  “Some of the hardest-hit industries – from energy to tourism and restaurants – might provide the biggest bargains”.

However, according to Patrick Ramsey, global head of M&A at Bank of America Corporation, “Sectors like technology and health care will be at the front end of the recovery.”

No no one really knows what the “new normal” will be when the economy fully reopens. Many businesses are failing, or barely hanging on.  At the same time, many companies are looking to join other businesses as part of their survival strategy while defending themselves against opportunistic bidders.

Five “silver lining” survival strategies and growth opportunities for small businesses:

  1. Stay Solvent. When business owners are in the market to sell, buyers will closely examine how well the cash was managed during the Covit-19 period. Strong cash management is a good indicator of how future cash flows will be managed when the economy returns to normal.  Higher valuations can be attained through strong cash management which further indicates the bench strength and discipline of senior management.

 

  1. Focus on current customers. They are your lifeline and the best opportunity to generate additional revenue. Develop loyalty programs to increase the number of customer interactions. Communicate often with them during these volatile times. Look for ways to improve your customer service. Loyal customers can become strong references for you as you reach out to new customers. Look for ways to service customers remotely without sacrificing quality customer service experience. Ask your most loyal customers for ideas to help better serve them. No one knows better what your customers want than your customers. Build an “idea” tab on your website so that customers can make suggestions online. Personally, respond with a quick “thank you” – regardless of the quality of the idea.

 

  1. Examine “high tech vs. high touch” with customer interactions. Everyone is dealing with social distancing differently. This is an opportunity to examine new ways to interact with your current and potential customer base. Develop and update your electronic data base and customer profiles. Examine your automated attendant systems to determine if the user options are still relevant given the current business environment. Review your website for its accuracy; develop virtual customer interaction opportunities. For example, allow your customers to log on your website to review their invoices, payment schedules and current balances. This is an efficient, cost-saving use of “high tech” without sacrificing “high touch” customers interactions. Examine cloud-based technology to help reduce costs. A careful balance between the use of technology and the use of in person contacts will build loyalty faster than using either high tech or high touch alone. A serious mistake that many business owners make is over reliance on high tech solutions because there can be significant savings when substituting technology for human interaction. The challenge is striking the right balance between the two.

 

  1. Expand your customer base. Become aggressive and go after your competitors’ customers. Make personal calls to them. Ask them for the opportunity to serve them.  Describe your customer service policies and how you are different from your competitors.

 

  1. Evaluate your business practices. During good times, we often neglect what we should be doing all the time. Re-examine your strategic business plan – if you have one.  If not, develop one. If you need help hire a professional to assist you. As the old saying goes, “If you don’t know where you going, you will never know when you get there.” Consider outsourcing functions to decrease fixed costs.  During tough times, outsourcing will give you flexibility in your operations today and in the future.

 Summing it up.

The five strategies above will not only help your survive this pandemic recession but will provide more opportunities to grow your business as the economy reopens. It will give you an opportunity to outperform your competitors and strengthen your senior team. Potential buyers will perceive your company as having strong bench strength and are capable of operating in the most adverse conditions.

More importantly, as you embrace the five strategies above, you are in essence preparing to sell your business – something that many business owners fail to do. If and when you decide to sell, it will sell quicker, at a higher valuation, with more favorable terms and conditions and, at a higher price.

This is the “silver lining” that awaits you during these unsettled times.

 

Gary Miller is CEO of GEM Strategy Management, Inc., a M&A consulting firm that advises small and medium sized businesses throughout the U.S. He represents business owners throughout the transaction process from preparing them to go to market, selling their companies, acquiring companies and raising capital. He has been a frequent keynote speaker at conferences and workshops on mergers and acquisitions. Reach Gary at 303.409.7740 or gmiller@gemstrategymanagement.com.