Grow or Go Workshop

When is it time to ride into the sunset, and when is it time to step on the gas?

Upsize and Club E recently convened a panel of experts to sort it all out before an avid audience.

Rick Brimacomb, moderator, Club E and Brimacomb + Associates: Please take three to five minutes each and dive into the topic: Should you grow or should you go?

Peggy DeMuse, Sunbelt Business Advisors: It’s interesting that often times business owners come to us and they don’t know what their business is worth. They’re not sure if they want to sell, but it’s the first step in the conversation.

For some people it’s a personal reason. For others, we work with a lot of younger entrepreneurs and they come in and say I’m bored, I just want to do something different. It’s understanding what’s motivating that particular business owner and what’s going to be a success for them.

Sometimes that valuation is fine and it’s time to find buyers. Other times, they need a $3 million valuation and it’s only $2 million. So we help them do things to get to that number.

It’s very common for the business owner to be integral to their business, so helping the business owner step away a little bit and give power to the team is important, so when a new owner comes in the business doesn’t collapse.

That might take three months, six months, and sometimes it takes a couple of years. Our goal is to stay in touch with them and help them sell and move on.

Dan Moshe, Tech Guru: I’ll start with the first lens, as CEO of Tech Guru. What we’ve done to build enterprise value really falls into five buckets. The first is automation, so using technology and applications to take care of those mundane, repetitive aspects of maintaining technology, so we can have our people freed up to help our clients

. At the end of the day, we may be a technology company but we’re a customer service company as well. We’ve invested in apps, innovative and new things that help automation, that could be attractive to a potential buyer down the road.

Two, we invest in great technology for our people. We buy the greatest, latest hardware they want. And that said, we let them get whatever they want.

Three, we encourage seamless collaboration on our team, so we use Slack. We’ve just exceeded 10,000 messages over the last year and a half, and we’re a team of eight, so that helps us ease communication.

We have two internet connections, and we pay for blazing fast internet in our employees’ homes.

Finally, we invest in security. Safeguarding our clients’ data and information is paramount. As you’ve seen with Yahoo, everything else is for naught.

Now switching gears from the grow to the go lens, I put myself into what we look for when acquiring. From a tech standpoint, we look at what apps they’re using.

What scares us away is companies using homegrown or outdated software. If at all possible we want companies that run software similar to ours and they’re using automation as well.

Second, are they investing in modern hardware. The more they’re taking care of employees,  that’s a marker that shows they’re going to fit into our culture.

Also, if we find a way they’re using tech in a nuanced way that can be a competitive advantage to them, we really want that.

The last thing is, that they have a focus on security and security best practices, so we know if we were to join forces we would not be dealing with a hot potato of a data breach about to happen. It can really quickly erase enterprise value.

Terry Sandvold, Sandvold Financial Group: If you’re a business owner, you’re a very busy person. One of the things as a business owner that we want to make sure, is that you have team members to help you with that.

You only have one financial future. Prioritizing how you grow your business is very important, and how much you grow your own financial future is very important too. If you’re going to win or lose only with the business, that could be a negative situation.

An example would be the printing business. Twenty or 30 years ago, it was a big business, and now you might be able to put something on your phone that does the work of some of the printing companies. We want you to surround yourselves with strategic partners.

Sometimes a business owner might have an ultimate price, and they might think the company is more valuable than the market thinks, so we emphasize, are you growing, are you staying flat, or are you going the wrong direction, and if it’s not going onward and upward, what are you going to do about it.

Grow vs. go, I’ve had a lot of people sit across from me to try to make that decision, and it may not be just a financial decision. When you have to convert all that time into income and walk away, it’s a very hard thing for people to do. We help you go through that process, and evaluate how you’ll take that income, too.

The retirement income distribution side, that’s an area we’re dealing with more and more because people are living longer.

If your business isn’t sold for the right value, or it’s sold and you have a high taxation at the time of sale, we have to make sure you have enough money for your lifetime. It’s important to crunch through all these numbers.

Tom Siders, L. Harris Partners: I met one of our clients speaking here three years ago. His business had grown 40 percent year over year. He was starting to feel overwhelmed. We did a diagnostic, and at the end of the day he was doing everything at his company.

We sat down and said, put down everything you love to do on the left side of the page, and everything you hate to do on the right side of the page, and that’s who you’re going to hire.

He hired a CFO, a director of HR, a day-to-day operations person. Now his company has doubled again, and also his cash flow has grown.

A smaller client, referred to us by an attorney, he said I’ve had it. All these minutiae and details, I want to sell my business. I said, your business is worth X, and he said that’s not enough.

So I said you have a choice, you can sell and get yourself another job, or you can hire someone to take care of these things, and now the business is going well and he wants to buy another company. We help them achieve what they want with their business.

Mary Stoick, Highland Bank: On the growth side, I have a client in the restaurant industry who chose to open two new locations within 45 days of each other. Two different concepts, really, really hard to do.

Top-line revenue growth is great, but profitable growth is way better. Their ability to respond quickly to the changes in their business and manage their cash has been really critical. In the long run it will be critical to even survive. So we help them to address things they need to do right away.

On the sales side, we often help owners when they want to sell their business. In one instance, I helped a new owner with equipment loans and lines of credit. That company has grown 20 percent since he bought it from the owner.

Rick Brimacomb: Many people in the audience, Terry, have a one-time situation here, so how does one plan for their own future and the future of the company?

Terry Sandvold: It is a challenge because you only have so much time. You spend most of your time for your business. We make sure that individual side is taken care of. We talk with every client on a quarterly business, so we do a check in on the investment side and the insurance side, both on a personal and business basis.

The big emphasis on a business owner is they get up in the morning and only are thinking about their business. What you do best, do it, and what you don’t do best, get help. But balancing it, we have to have a plan, and having a plan just on the shelf doesn’t work.

As the world changes business-wise and individual-wise, it’s important to make sure your menu is complete, and our job is to go through a thorough checklist to make sure you keep on track

Rick Brimacomb: Mary, when is the right time to get a banker’s decision on whether to go or grow?

Mary Stoick: The short answer is all the time. If you don’t have a relationship with your banker, you should seek one out. If you plan to grow and need capital to grow, where could you gain it?

The other thing to think about is, your business is protean, it’s always changing. Your ability to react quickly to changes is critical, and your banker can help you.

It’s one thing to put together an income statement, but it’s another to forecast how much cash will be in the beginning of the month and the end.

Rick Brimacomb: From a technology perspective, Dan, what kinds of things are a good spend in terms of return, and what things could be pushed off?

Dan Moshe: It always depends on the timeline in your horizon. If you want to make investments that are 12 months or less that increase productivity, make sure they have the latest, fastest gear and it’s going to give you a six month return on investment or less, based on how much of an improvement in productivity you can provide.

On the other hand, if you’re looking out further, and are considering a massive infrastructure improvement, that’s not something to do if your horizon is less than 12 months.

Peggy DeMuse: Often we’ve talked to business owners and I’m sure you’ve heard, know what your exit strategy is, no matter what stage you are in the business. It’s good to know where you sit, what your current market value is. What are the things you can do to improve that market value?

I worked with a client, came up with a current market value, and some components were recurring revenue, and that’s something that buyers look for, so we talked about making a bigger part of the revenue be recurring. Something like that will certainly drive up the value of the business.

Rick Brimacomb: The topic is grow or go, but are there other options? What can each of you add to broaden the potential choices?

Tom Siders: When I looked at the topic, I thought, why are there just two options? Look at Ray Kroc, the McDonald’s legend, he was growing and going.

If you have two identical businesses, and one owner spends every minute in the business, and the other spends the summer at the lake and some time in winter in Florida, which business do you want? The one where the business owner has built a team that can run the business.

Everybody talks about they want to leave. You’ve heard there are 50 ways to leave your lover. There are eight ways to sell your business, or you can do what that one business owner did, and build the team and keep it.

If you think of all the relationships in business, who has more invested than your banker? Your lawyer doesn’t, I don’t, the CPA doesn’t. The banker is a big investor in your business, and your banker ought to be that adviser.

Rick Brimacomb: From your perspective, what are the top considerations business owners should take into account when growing or going?

Peggy DeMuse: Do I have the gas in the tank? A lot of times people come in and want to get out. If they’re at that point, what happens is the business starts declining. Don’t wait until it’s beaten you up too hard.

Mary Stoick: I have a client in the healthcare segment, and the owners were nearing retirement, and they realized they didn’t have the knowledge to take it to the next level. So they sold to private equity. So that’s a critical conversation to have with your partners.

Terry Sandvold: Are you self motivated to keep on growing? If you’re not, and you go into your office and the employees are more motivated than you are, it may be time to think about it.

Dan Moshe: We’ve been approached dozens of times from people who want to buy the company. We have this conversation a lot, why would we sell? A couple of things we ask are: Is the business an engine that is getting us to where we want to go? And the second thing is, what’s the market for a company like ours?

The fact is, a small company like ours, there’s a lot of high due diligence costs and transactions costs, so we need to grow the company significantly more, to get to the point where the company is really marketable, and the buyers will provide us with a more optimal exit.

The last thing would be, to your point Terry, we have created a situation where we have systems and processes, so my COO and I are very much able to do the things we enjoy, and spend times doing things other than working in Tech Guru.

So that’s another thing to consider. We start thinking about ourselves as portfolio entrepreneurs, so we can hold and grow several companies.

Tom Siders: The question is: Would you fire yourself? If that’s the case, it’s probably time to go.

From the audience: We’re in a tight labor market, and there’s a huge shortage of mechanics. Are we going to enter a paradigm where businesses look for growth via acquisitions not necessarily for products or services but for people?

Dan Moshe: It’s already happening. They’re doing talent acquisitions, especially in technology.

Peggy DeMuse: I’ll echo that for anything in the trades.

Tom Siders: We just did it. We acquired a small firm because they had three great people. It doesn’t matter if we get their business or not.

From the audience: It sounds like you have a strategy to keep people. What do the rest of the panelists say about keeping people?

Terry Sandvold: The thing we’re always looking at is what do we need to build next to retain people: what type of profit-sharing plan, for example. You can only stack that so high.

In a small company it’s really important to have a small core of people, so if the business owner is gone for a month, I want to be sure the company is still moving at the same speed. You do pay for those people. You can’t get them on sale.

Tom Siders: There’s clearly generational differences in the workforce. I still haven’t figured out millennials. But apparently they’re not motivated by money or fame.

They’re motivated by feedback. I advise going to a seminar and finding out about these generational differences. If a buyer comes in, they will go through the employee roster, and the more stable your employee base is the higher the value of your company.

Dan Moshe: Here are a couple things we do to attract and retain our fantastic people. The first thing is, they’re very involved with the direction of the company, they’re involved in weekly leadership meetings.

This friend of one our employees was just floored that this employee’s idea was not only heard but they’re actually acted upon.

We also do monthly one on ones, where we have a conversation about values and accountability, and we help these individuals talk about their career. Then of course we do the other stuff too: we bring food in the office.

We have five people who are as productive as 10 and we compensate them as if they were eight.

Rick Brimacomb: What’s the common theme you hear when people are making the decision should I grow or sell?

Peggy DeMuse: One of the most common things that we ask people is: what are you going to do next? As far as questions I hear, it is, how much is my business worth today?

Tom Siders: I hear, what will it take to grow this business, and if they say I haven’t grown in five years, then you’re going to have to do something different.

Terry Sandvold: I ask, are you happy at work, and will you be happy away from work? It needs to be a balance.

Tom Siders: You have to ask the spouse, too.

Terry Sandvold: And are you going to be happy seeing each other 24 hours a day, too? That’s an important question.

From the audience: Looking at this from a broader lens, what are the market conditions now. Is it a good time to sell a company?

Mary Stoick: From a banking perspective the answer always is it depends: on the local market, your financial statements. As a seller of the business from a financing perspective, you’re gong to have to have some skin in the game after it closes.

Tom Siders: But there is money out there. Carrying some paper is typical, especially if you are the business and you want to leave.

Peggy DeMuse: Yes, it absolutely is a seller’s market right now. There are way more buyers out there than there are businesses for sale. We’re absolutely seeing some seller carry, meaning sellers lend to the buyer, and a big factor is how integral is that owner to the business.

Terry Sandvold: Once the owner gets that number, we help to look at how that converts into income. We have one client who was very ill, and he sold his business to pay his wife over 10 years, and he’s now in his 15th year after being ill.

The point is, make sure all these things are protected, so the insurance in this case is on the other side, so they can keep making payments.

Rick Brimacomb: I would add, private equity has a lot of cash, and those firms are for the most part coming downstream. For folks trying to sell their business there’s a lot of cash looking to buy.

From the audience: Are buyers more intrigued with market share, processes, technology vs. leadership culture and people?

Peggy DeMuse: All of the above. Buyers are looking for a business they can sink their teeth into and grow it. If it’s stagnated and it’s hard to figure out how to grow it from here, that’s a much tougher sell.

Rick Brimacomb: What do you see as the one thing people overlook when deciding to sell?

Tom Siders: Taxes. They see that number and they get very excited. They always get disappointed when the buyer comes in and lowers the price. Now, with just 1 percent GDP growth, it takes forever to grow your company.

You can’t grow your business, the government is taking more of your money, and then trying to get a return on your investment with your after tax dollars—it’s tough out there.

Terry Sandvold: It’s what you get in net return, not gross return. What you get in your pocket.

Peggy deMuse: The structure is important, to minimize tax burden. Also sometimes sellers don’t know how long it takes to sell the business, and they need to stay engaged. It could take nine, ten, 11 months, so you have to make sure you’re in there and are staying engaged.

The other part of this is what not to spend money on. It’s really important if you’re looking at selling your business that you stop making unnecessary spending in order to reduce your tax bill. Pay your taxes, and you’ll get it back in your valuation.

Tom Siders: Business owners should get themselves some confidantes with this whole decision-making process. Trying to do this on your own is very, very difficult because you’re so biased as an owner.

Mary Stoick: Find a mentor or maybe another CEO that has sold a business. Access to somebody who has been through the process is invaluable.

Terry Sandvold: Surround yourself with the best strategic partners you can: financial, legal and tax. Don’t forget to plan out your company’s financial future and your individual financial future.

Dan Moshe: The best things I’ve done: One is committed to a system, for us it’s been EOS, and implementing that system. Second, joining a peer group has been immensely helpful for me.

It’s lonely at the top and I thought I was the only one who had these challenges, and it turns out a lot of people have had the same challenges.

Peggy DeMuse: If you want to sell, this is not the time to start talking to your employees about it. You don’t want your employees getting nervous.

CONTACT THE EXPERTS

 Rick Brimacomb is managing partner at
Brimacomb + Associates and Club E: 612.803.3169;
ri**@*******mb.com; www.brimacomb.com

Peggy DeMuse is a broker
with Sunbelt Business Advisors: 651.288.1627;
pd*****@************st.com;
www.sunbeltmidwest.com

Dan Moshe is founder of Tech Guru: 612.235.4895; da*@********it.com; www.techguruit.com

Terry Sandvold is CEO and founder of
Sandvold Financial Group: 952.544.2837;
mo********@********fg.com; www.sandvoldfg.com

Tom Siders is a partner with L. Harris Partners: 952.944.3303; to********@*************rs.com;
www.lharrispartners.com

Mary Stoick is a vice president at Highland Bank: 952.858.4541; ma*********@***********ks.com;
www.highlandbanks.com.