Bethenny’s Dealmaking Rules

Bethenny Frankel’s one of my favorite entrepreneurs. Inc Magazine’s too.

Inc recently published her rules for dealmaking on new projects, which I thought were rather good. We’ve repeated them below, with some editorializing:

  1. Establish your own code; do you think the deal will be enjoyable for you? If not, think twice about it.
  2. Pick the partner that moves at your own pace. Have shared values and have partners that work at your own speed.
  3. Be upfront with your own flaws and weaknesses. Outline your own deficiencies in any negotiation. To which I’d add, all negotiations have got to be a win/win/win for everyone.
  4. Define what you will do, and what you won’t do. Self explanatory, but IMHO, when money starts flowing, misunderstandings proliferate if not in writing.
  5. Master the care and feeding of your partners. Again, self explanatory, and make sure you take their concerns into account. It’s not your way or the highway. Celebrate successes. IMHO, behind the scenes figure out what happened with failures.

The Cavalry is Coming?

This is a favorite phrase of my favorite TV host, Larry Kudlow, on his daily show on Fox Business.

But, for those of us in the small business community, what does it mean?

First, I think Larry would say that the House and the Senate revert to Republican control.

But, but, but, to use Larry’s favorite phrase, what does that mean? We’ve still got Biden in the White House.

I think we could say there will be a reduction in oil drilling impediments, which will lower gasoline and other petroleum costs, which will slowly take some of the pressure off those costs continuing to rise. Crude prices have dropped a bit in just a week after we announced a cessation of buying oil from Russia.

If you depend on your goods from China, as many retailers and drug companies do, you might continue to have problems; most of our clients have sourced formerly China-produced goods into other countries, such as Thailand, India and Mexico.

I think there will be some decrease in silly regulations, but Dems are still running the agencies such as FERC, EPA, OHSA and DHS that impact your business lives.

What will happen to the millions of unfilled jobs? I find that number rather illusory, since we did a hiring campaign for 12 security guards, and got all the positions filled in two weeks, albeit by offering a somewhat higher wage than others. We’ve written elsewhere of using Indeed and Zip Recruiter, and the fact that we thought the latter was better. There’s another online job board, Monster, from which I’ve received some solicitations to be President of this or that, and that seems to work for higher level positions.

But, you will probably see some unavoidable increases in your raw materials costs, or your service costs, which you might not be able to recoup through price increases, despite what the pundits say. We’ve also written in this blog about how you can mitigate price increases.

So, and we will probably update this blogpost down the road, as we’re updating the one on stagflation, as the way becomes more clear.

 

 

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Gotta Know Your Limitations

To paraphrase the Clint Eastwood movie, ‘A man’s gotta know his limitations’.

What does that mean for you, as an owner of a company?

It means don’t get ahead of your organization’s ability to execute what you want to do.

It’s fine to have buy-in from your organization on your plans (we recommend it), but you might task your organization with more than it can do in the time frame you’d like it done.

An example: in one of my companies, we were adding production capacity, expanding eastward in the United States, and adding English and Australian distributors, and I and my plating manager got the idea for a completely new metal coating process for our exhaust parts on a Friday afternoon.

We were also improving our shipping times, which required a fairly major commitment to more inventory.

I discussed the new pr my partner, who had blessed the idea previously but who had expressed valid concerns about going beyond our capacity, So Monday, I and my partner held an all hands meeting with my staff, front office and warehouse, as well as production. My CFO missed the meeting, but she would have asked me what additional strain I would be putting on our financial resources.

Frankly, I didn’t know, and I admitted as much. My name was on the building, but I discovered it was ok to not know something. At Wharton and Ford, you were expected to know the answers.

So, we kept implementing the other expansion plans, and I started the process of doing market research and actual testing of the parts in the worst climates where we had discrete distributors. I might have otherwise skipped the market research test because the initial response from a couple of key distributors was overwhelmingly positive.

We digested the plans already in the works, and then tested the parts in places like Seattle, Houston (for marine uses) and Denver. All positive.

The tests took about six months, during which time our competitors might have found out what we were up to, but they didn’t.

So, we stayed within our limitations, kept the financial wheels on the business and had a very successful product launch.

And the staff was happy, because they didn’t get pushed beyond their limits.

Financially, we added nearly 30% to our sales in a year in the middle of a recession, which we didn’t think we could do, but it worked.

Gotta know your limitations so you can exceed them

 

Know When It’s Time to Pass the Torch

I have two clients where the founders are struggling with passing the torch to the next generation.

In one case, the founder was ready to pass the torch: he had worked leading the business for close to 30 years, had brought two of his three children into the business at a relatively early age and knew what he wanted to do after he sold the business. We helped him develop his kids and did reviewed the MOU for the transfer (the legalized transfer was done by the lawyers after the fact), so this transfer went smoothly.

In the other case, we’re somewhat stuck on what one child will do after assuming the Presidency. He will run the company differently, but all the other kids agree that he should run the company, since he’s been the operating head for the last couple of years. The problem is the founder is having a hard time accepting that there might be more than one way to run his business. And one division has been somewhat neglected, but we’ve got a plan to fix it. We’ve proposed a unique stock  ownership structure where at least two of the kids, and the founder, have to agree on a major decision. And it’s actually in the buy/sell that the company has to remain in Solutions Forum.

The answer, in our opinion, is to leap off the bridge, go ahead with the buy/sell and see how it works.

Nothing is irreversible.

Pass the torch!

You’re Launched: Now What?

At this point, you’ve launched and you’re either profitable, or you have a plan to become profitable.

If you’re working on a plan to become profitable, you have to first make sure that you have enough money to last until you become cash flow positive.

For example, when a partner and I took over a restaurant from one of my clients because he’d run out of money, we had done a plan that would get him from where he was to profitability in about a year. However, the plan required about $150,000 of additional capital which, it turned out, he didn’t have. I and a partner did.

So, we assumed the lease staffed it the way that we thought it should be, and kept going. And, we lost about $150,000 before we became cash flow positive. But, we largely stayed on plan.

We had to redo our promotion plan, because we discovered that, with a tough location and a cuisine no one had heard of (Modern American) we had to really promote by word of mouth. However, our patrons loved us, and a couple of influential magazines loved us, so slowly traffic picked up.

We also discovered that our patrons thought of us as a supper club which was a concept that no restaurant in Maricopa county was doing, but we have a lot of Midwestern and Eastern transplants, it was a matter of getting the word to them. We did all sorts of promotions to get patrons in the door, because we knew once we did, that there was about a 75% chance that they’d return. And we really listened to what the patrons were saying, because we discovered that word of mouth really worked. Eventually we got word of mouth up to about 95%.

So, we sort of pivoted.

Seldom does your original plan go as planned.

So, you have to consider changing what you’re doing to some extent. Your customers will tell you what they think is good and not so good about what you’re doing.

Your employees will also tell you what could be done better, because they’re on the front lines, making product, serving customers, etc.

I have done in several businesses, and have urged my clients to do, listening sessions, which might be on Friday afternoon after the trucks have been loaded, or they might be on Sunday afternoon in your restaurant before you open for Sunday evening.

WHY SHOULD ANYONE BE LED BY YOU?

One of the things you discover in growing a business is how good a leader you are or aren’t.

You have to communicate your vision of where your business is going, and be prepared to take (hopefully) constructive criticism about what could be done better.

I and my business partners have always liked the concept of ‘management by walking around’ which was popularized by a management consultant named Tom Peters in the 1990s.

You can wander around your shop or warehouse floor, or your front counter, or, as I did on many nights, sit out in front of our restaurant and talk to passersby. It was a rather hokey, but very effective, tactic. It was so effective that a couple of our neighboring restaurants complained (there were four of us in a row, all different styles of food).

The tactic you might use is just taking orders from your customers for an afternoon a week. Or go to industry trade shows.

I wasn’t particularly good at running a business (you can find key people for that), but I have been very good at leading others to run segments of the business, figuring out market niches and how to exploit them.

HOW DID YOU HEAR ABOUT US?

This is a rather corny old practice, but it works, particularly for business-to-business companies.

This phrase is good because all of your people who are interacting with customers should be writing down on customer records how each customer heard about you, so you can determine  which of your promotional methods work.

Somewhere in your startup phase you should have put in a budget for promotion, which includes sales, magazines, coupons, whatever you had in your original plan.

Let’s assume that you planned for 10% of your sales to be spent on promotion of various types. You can measure the return on each promotion method by figuring out how much was spent and how many customers in produced. You should have positive results for all promotion vehicles, but some will be better than others, and gradually you’ll winnow out the less productive methods.

I’m always amazed at how many promotional sales people don’t have that information available.

Regardless of whether you’re business is retail or wholesale, these practices apply. I’ve used them in six different businesses and one civic organization, and they work.

ARE ALL CUSTOMERS GOOD CUSTOMERS?

In your startup phase, possibly.

However, as you grow, you will discover that some customers are literally more trouble than they’re worth.

Given the state of computer systems, and data mining, you can figure out how you’re doing on each customer.

If you have customer profiles on everyone, the challenge becomes how to weed out, say, the least profitable 10%. In our restaurant, after we became pretty strong in our execution, and our word of mouth was strong, our waitstaff would politely put a handwritten note in the check; I would back them in their decisions (this only happened a few times in three years).

If you are in a business to business situation, I’ve trained some of my clients’ counter people to put people on hold and then raise prices a little on them. If they complain, counter people can even suggest the competition as in ‘that’s the best we can do’. If you’re quoting for business, various prices will work.

You are not normally going ‘loose money on every item produced and make it up on volume’ (a famous aphorism that came out of a large automaker), although you might for a while getting to breakeven and positive cash flow.

Starting a Business Part One

THE IDEA

The idea of starting a business can come from anywhere.

You might decide that you can do your profession better than the people you are currently working for, or you might have a completely different idea for a business.

Your business idea might involve manufacturring, or a service, or a combination of the two.

You might be offered the opportunity to buy your existing company, or another company in your industry, or  buy a business in a completely different industry.

Personally, I and my clients have gotten ideas for new businesses from all sorts of places,

All of us have thought of ideas in the shower, while cutting the grass, working out, or practically anywhere.

The key thing is that when you get an idea, you’ve got to research it: how big is the market, what’s the pricing look like, what unique role could you play, etc.

If your research is positive, then you need to take our Entrepreneur’s Questionnaire on our web site, www.thesolutionsforum.net, to see if you’re suited from entrepreneurship.

Back in the day, I used to research ideas using traditional methods, such a customer interviews, questionaires and focus groups. I originally started The Marketing Doctor (TM), we used all these methods.

We still recommend doing market research, and not just among your friends over drinks. Friendly research is important, but shouldn’t stop there. Now, things are much easier: you’ve got the internet.

The internet allows you to look over who is out there in your chosen industry, what sort of public presence they have, and probably what their customers think of the existing offerings.

All of these external research items will help you flesh out your idea, to see if it’s a good one.

You might also find that you’ve got to pivot away from your original idea, because it’s either not workable, or isn’t likely to get to the profits you want.

If your market research is positive, then you can move to the mini market plan, to flesh out the financial committment. You should plan on doing ‘steady state’ financial profit and loss, which will serve as a long term goal of where you want your business to be.

A word should be inserted here about social responsibility of your proposed business. Is it going to use recycled materials, does it use a lot of water, could you defend your business in front of the city council?

One could say that the mere idea of starting a business is socially responsible, because you’re employing other people (eventually). We have a ‘socially responsible’ checklist in our Freebies on our Solutions Forum.net website.

If the ‘steady state’ doesn’t yield the kind of profits you and or your investors want, they you’ve got to figure out how to get to your profit goal.

We have done business plans backwards from time to time, working backward from the profits desired through taxes, personnel required, materials required into the top line revenue.

At this point, you have to determine the mix of after service and original equipment revenues. You should have an idea about the mix of these revenues from your market research.

You should also know what your price points are from your market research, so that you can determine your unit volume.

If you know your unit volume, you can figure out the market share that you need to get over the area that you plan to sell.

Does this share make sense? Are your competitors large and entrenched? If they are, you’re going to need to raise your marketing and sales promotion expenses in order to pry customers away from the competition. And, prying them away might take longer and cost more than you had planned (it normally does).

If your idea is particularly revolutionary, the market research may not be entirely positive, because the market hasn’t seen anything like it, and customer perceptions are hard things to change (which means more money and time).

As an example, when we did market research for an existing restaurant concpt, it wasn’t positive: odd name, no clear selling proposition, poor location.

But, I and a partner thought we saw an opportunity, and we did, but it cost us $150,000 in losses before we got to profitability. While we sold the restaurant for a modest profit, it was less and took longer to realize than we had planned. But we got a lifetime of stories.

On the other hand, when I got the idea for Solutions Forum (while sweeping my driveway), we took out the domain name first, and then did the market research. I was already working for a national competitor, who had retained us to open the Arizona market.Research was positive and that was 17 years and about 50 companies ago. We were profitable the first year (having grown to 23 clients in groups the first year), and have had only one unprofitable year, 2020 because of COVID.

WHAT’S YOUR UNIQUE SELLING PROPOSITION?

When I originally moved to Arizona, I worked for a series of companies on a retainer basis developing their sales.

I discovered that the startups didn’t have a unique selling proposition (USP), or why a customer would buy from them as opposed to one of their competitors.  The USP would normally emerge from the initial sales calls, over about three months, and at a cost of $5-10,000.

The classic USP has four components: Price, Promotion, Service and Selection, not necessarily in that order of importance. We have found that  Post Sale Service is alsow a component of a good USP, and most companies ignore it.

You might also want to add ‘socially responsible business’ if you think it’s important to your customers.

‘Locally owned and sourced’ is also a part of a potential USP.

If you’re a really good wordsmith, you can incorporate all of these into a paragraph, which would be your mission statement.

But, all of these snazzy statements should resolve around one overriding tenet: customer centricity.

CUSTOMER CENTRICITY IS KEY

We can’t stress enough focusing on your customers needs and wants.

Most businesses focus on price, to the exclusion of everything else, but that’s only part of the story. Your customers will tell you what’s most important, if you give them a chance.

How many television ads to you see where all they talk about is price?

Far too many. Car dealers are the worst offenders, mainly because there are probably too many of them, especially for GM and Ford. The foreign automakers have been smarter about the number of dealers they need. These dealers generally use a geographic model….where’s the customer demand?.

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Return the Call!

Those who know Solutions Forum know that we built this company on talking to business owners directly.

In 17 years, we’ve helped about 50 companies solve problems in all sorts of fields. On average, we’ve added about $100,000 of value to the companies who’ve been members, over an average of 18 months.

This value added works out to about 20 times the dues that they’ve paid us.

Not all the value comes from groups, either. About 25% of our business is from one/one clients, where we discuss how we can help them, or we discuss how they can do things better than they are now.

Sometimes, as recently happened to one of our one on one clients, they did what we suggested, and it helped create about $100,000 more sales; they invested about $500 in consulting fees. So, they called us again to help them hire some more people and solve over sales problems.

Even though the two owners are so busy they can hardly relax during the day, they took a couple of hours on two consecutive Monday mornings to talk over what’s going on. One result is they’re going to borrow an person from another client to do invoicing at the end of their day, because they had about $15,000 of unbilled work.  She might do some accounts receivable collection, too. They are also going to hire another machine operator. We know each machine generates about $150,000 in revenue, paying for itself in about a year. But, at some point, they’ll run out of space, wo we’ll deal with that when it becomes a problem.

We have other stories of success that we’ve facilitated.

We never know in advance what’s going to come out of one of our client meetings, whether they’re groups or one/one’s.

The bottom line is, when we leave you a voicemail it’s worth returning the call!

Not returning our call might cost you $100,000.

 

How to Hand Off Your Business

This is actually a topic that I’m doing in a podcast for my good friend Shauna Weckerlein, The Tax Goddess, so I’m throwing it out there to see if we get some comments.

  1. Do you have any idea what you’re going to do after you hand off the business? IMHO, playing golf travelling and eating get old after a while.
  2. What or who are you going to hand off to? Do you have kids who are interested? Are they in the business? Do you have another person who’s interested? Don’t expect to make the decision on a Sunday, do the handoff on Monday and be done with it. (Entrepreneurs usually don’t think that way, anyway)
  3. If the kids are interested, what have you discussed with them? If you have more than one child interested, could they both, or do they, run the business in tandem? Is the business big enough to support all those who want to run it, or could it grow to support everyone? Is it clear who the lead dog is?
  4. What have you done to validate your children or this person’s interest in running your business? Have you done an in depth interview with them, probably offsite?
  5. Assuming after the answers to one and two above are positive, what are his/her plans for the business? Do they plan to run it ‘as you would have’ or do they have larger plans? For example, when I and my business partner bought my family company, I knew what the weaknesses were, and I thought we could fix them, and we was successful, but there wasn’t an organized, written down plan. And, after he bought my controlling stake, he stayed on essentially the same plan for another 15 years, so it was enduring.
  6. What financial arrangements are in place, or could be in place for the new manager to acquire a financial stake in the business? (In our experience, managers should have a financial stake in the company, so they have an incentive to make the business grow and prosper)
  7. Do you have in place a non-disclosure agreement with the prospective handoffee?
  8. If you have performance goals that have to be met, by the handoffee,  are they spelled out?
  9. Is there a buy/sell arrangement that is in place, should the handoffee want to purchase the business?
  10. Do you need the money that you might get from a sale? When and how do you need it? Monthly payments ease the tax and cash flow burden, if not the overall tax of buying the business. BTW, whatever you hammer out with the handoffee, run it buy a tax advisor.
  11. What are the financial metrics that you’d like the handoffee to meet? E.g., profits, return on equity.

Whew.

Do I Need to Worry About Cybersecurity ?

The news is full of stories about the Chinese and the Russians hacking businesses, but the question is whether you, as a small business owner, need to be concerned.

We’re going to outline some thinking points, and you can think about them.

We are going to try to write this from the standpoint of our average client of 50 employees and $5 million in annual revenues.

  1. Do you have any enemies that would want to harm your company, such as disgruntled former employees? An example would be a former employee that took you to court for back wages, or reinstatement during the COVID crisis.
  2. Do you have any corporate secrets that someone in some foreign country or even this country would want enough to hack your computers or cell phones? For example, do you do any classified work for the Defense Department or other agencies?
  3. What kind of protection do you have on your computer network in your office or any remote locations that you have? What carrier to you use for communications? Do they have any security? Note that T Mobile just had it’s entire 52 million person customer list hacked. They clearly have problems. Wireless networks might be more vulnerable.
  4. Can you think of any other vulnerabilities that your business might have?

That’s all for the moment.

Avoid These Hiring Mistakes during COVID Era

  1. Don’t move too slowly, because the available labor pool is smaller than the number of jobs available. We’ve in the past counselled deliberation because the cost of a bad hire is high, but it might be time to temper that deliberation.
  2. Don’t rely on ‘post and pray’, e.g posting your job on a hiring board, even an online one, and pray that the right person shows up. Use multiple job boards, and talk to your employees about who to hire. Many employees come from within your company’s circle..
  3. If you interview on Monday, and the candidate seems good, make an offer; don’t wait all week to think about it.
  4. Don’t insist on office interviews, since not all the people who need to interview a candidate might be in the office. Use virtual interviews over Zoom or some other video platform.
  5. Don’t assume the hiring process over when the offer is accepted. There is less ethical behavior among employees, because they know that they’re in demand.
  6. Start your onboarding process as soon as the offer is accepted; corral the people that the newbie will be working for/with and have them start making the newbie comfortable.
  7. Don’t nickel and dime the offer; guess at what the competition is offering and raise it 10% if you really want the newbie.
  8. Don’t make a big deal of a new hire’s vaccination status: there’s some question legally about how much you can ask. You can get them vaxed later if they’re proving out well.