Good Customers Can Be Bad

When can good customers be bad? What could be wrong with a customer who buys a lot, pays promptly, and never has a service problem?

They might be buying too much. No matter how strong or comfortable a sales relationship is, it could end. You may be confident that the customer is yours for life, but therein lies the problem. Someone who buys the business doesn’t have the same level of confidence that the customer will be around for a whole new ownership lifetime.

Many mid-market companies rode one horse to success. There were bringing in a few million dollars in revenue when the landed “the big one.” Perhaps they had to scramble to add capacity and ramp up talent, but the seized the opportunity and met the challenge.

As these companies grow, the owners always say the same thing. “I know that it’s bad to have my eggs in one basket. I’m going to find other customers to even things out.”

big and little businessmenBut the good customer keeps buying more. They are twenty times your size, and an increase of 2% for them translates into 40% more for you. Businesses in this situation aren’t necessarily complacent. They are just scrambling to keep up.

This good customer brings many other benefits along with its dollars. They ask for plans and budgets, so you develop capabilities to meet their requirements. They coordinate packaging a shipping, so you learn more about logistics. They ask for detailed reporting, so you upgrade your tracking systems.

Your company’s increased capabilities translates into more business with large customers. You can show your ISO certification or online reporting. You deliver specifications or scope of work statements as professional as those of much larger competitors.

But you never quite catch up. You are like the dog that caught the pickup truck. You don’t have any control, but you can’t let go, either.

There is an obvious risk of good customers having a change in management or strategy, but for the most part the relationship is favorable. The problem arises when it is time to exit your business.

This issue is specific to mid-market companies. In a Main Street sized business, an entrepreneurial buyer (one who is purchasing a job) will often look at the steady income from a large account favorably. If you’ve grown large enough to attract a professional buyer, however, the “Quality of Earnings” audit will bite you.

Quality of earnings analyses are done by larger accounting firms for mid-market buyers, particularly private equity groups. Those firms typically charge between $20,000 and $60,000 for the audit. Not surprisingly, the client wants a return on that investment. That comes by way of discounting profitability associated with the “risky” business.

If the letter of intent is offering five time earnings, the price reduction is of course on a 5:1 ratio to the profits. Not to belabor the math, but if a $40 million company had $4 million in profits, and 40% came from one account, a 35% discount for that account alone would be $2,800,000 off the purchase price.

That’s when good customers can be bad.

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What is Your CEO Job Description?

On occasion, a business owner client will ask me if I have a CEO job description. I’m sure such exist in large corporations, but for an owner-managed company it’s a bit vague.

The simple (and usual) answer is that the CEO of a small business has two responsibilities. He or she does whatever he wants to do, as long as it includes everything that no one else wants to do.

Unfortunately it ends there in most closely held businesses. The owner/founder/leader develops the strategy, creates the processes, determines job responsibilities and handles the important customers. In the time that’s left over (!), he thinks about the vision, culture and tries to develop subordinates into decision makers.

The late Warren Bennis, a guru of early leadership studies, had two different priorities for CEOs. He believed that they are primarily responsible for communicating the vision of the business to employees, and then acting as the company’s representative to other organizations on the CEO level.

What would your business look like if that was all you did? Perhaps not today, but what if you could eventually arrange your CEO job description to only encompass those two things?

Your time inside the business would be focused on helping people understand why they do the things they do. Your employees would value each customer the same way you do. They would take personal responsibility for quality and reputation. Those with outside responsibilities would watch competitors for new products or signs of weakness. Managers would make choices that didn’t require your oversight.

Outside the business, you spend all of your time with other CEOs. You gather in learning forums like symposiums, peer groups or to hear thought leaders speak. You meet with others at your level in related industries to share intelligence and explore opportunities.

You never work your way up the food chain with a potential customer or client. Sales efforts start at the top, so when you get a purchase decision it is a done deal.

Dealing with vendors is on a level where you never have to hear “We can’t do that.” I don’t pretend that there won’t be underlings in your way anymore; it’s just that you don’t deal with them.

Clock and exec activitiesThe key factor in dealing at the CEO level is time. You must be able to schedule appointments that aren’t cancelled for the crisis of the moment. It’s part of your credibility. You must be able to leave the business for travel to events or meetings. On a local level, it includes being seen where CEO’s gather, not where you are networking with their employees.

The personal flexibility to act as the face of the company to other CEOs only comes after you’ve handled that “vision thing” internally. Creating a team that functions excellently without you allows you to do the things that only you can do.

In short, the CEO job description should be to do only those things no one else can do. If that still includes more responsibilities than Bennis defined, you now know what needs to change.

Do you know an owner who would enjoy Awake at 2 o’clock? Please share.

 

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2 Responses to What is Your CEO Job Description?

  1. Bob Kroon says:

    Hi John,

    Good post. In practice, I see CEO’s concerns focused on these, in no particular order: 1) Something finance (cash flow, fund raising, collections, etc), 2) Watching the “secret sauce” (could be following the CTO, watching key activities in a service business, product development), 3) Building the team (hiring a key person, replacing people, adding to the team), 4) Reaching out to customers, 5) Some issue or event which is a drain on the business (legal matter, facilities, misbehaving employee), 6) An opportunity (acquiring a big new customer, a competitor, a technology).

    Small wonder VC investors value teams more than individual entrepreneurs. The mental bandwidth required to lead alone is tough.

  2. Joe Zente says:

    Great Article, John…

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The Immortal Business Goes on Forever

Do you run an immortal business? I hope so. If you answered “no,” or even hesitated to be sure of your response, then you don’t think of your business as immortal.

So when do you plan to shut it down?

Most owners react viscerally to that question. They’ve invested too much time and too much sweat to watch their companies become a memory. They care too much about employees and customers to entertain the idea of  abandoning them.

ForeverFor many, the business is a part of them. Shutting it down would be like having a piece of you die.

Ironically, we play mental gymnastics in our heads every day. We think we have an immortal business. We know we aren’t immortal (on this plane of existence, at least.) Yet, I talk to owners every day who want to pretend that either they will run the business forever, or that it will find some magic way to continue without them.

Anyone who works in exit planning knows the standard answers to the question “What is your exit plan?”

  • “I intend to look for a buyer in about 5 years.”
  • “I still enjoy my business. Talk to me after I get tired of it.”
  • “I’ll sell anything for the right price if someone offers it.”

Each of those answers is a version of “I haven’t thought much about it, and I really don’t want to.” I wouldn’t be much of a consultant (or at least I’d be an impoverished one), if I didn’t have some counter arguments ready.

  • “I intend to look for a buyer in about 5 years.” That’s fine, but five years is about the minimum time you should allow for any serious tax planning. If you are going to take a subchapter S election, create a new entity, or change your  depreciation methods, it will take some time to have the desired effect. Of course, the Internal Revenue Service already has a plan for how they would handle the proceeds, so you could just go with theirs.
  • “I still enjoy my business. Talk to me after I get tired of it.” That is clearly too late. Whether you are selling to employees or family, or marketing the company to third parties,  the business needs to be running well to survive a transition to new ownership. Once you start losing interest, it gets much tougher.
  • “I’ll sell anything for the right price if someone offers it.” Sure but what is the “right” price? Is it based on industry metrics? Is it some multiple that a guy from a vendor told you a competitor sold for? Is it a number you need for retirement that has little to do with market value? If you received an offer tomorrow, how would you know if it was the best offer you might ever see?

The most important thing to remember is this: Planning is only planning. Implementation is a different activity in the management cycle. Just because you have a plan doesn’t mean you will use it today or tomorrow, but it will still be there when you choose to put it into action.

If you own an immortal business, you have an obligation to the folks who depend on it. Part of that is to know how they will be able to continue depending on it when you aren’t there.

If you know a business owner who would benefit from “Awake at 2 o’clock,” please share!

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Posted in Entrepreneurship, Exit Planning, Managing Employees, Selling a business, Strategy and Planning | Tagged , , , , , , , , , , , , , , , , | 2 Comments

2 Responses to The Immortal Business Goes on Forever

  1. David Basri says:

    In my head the answer to the question was an immediate “No”, because no business is immortal. That, however, is a completely separate question from, “Do you want your business to continue after you are gone or out of it”? Taking action to perpetuate a business may or may not succeed, but all entrepreneurs are used to that risk.

    There is no question that in most cases long term planning greatly increases the chance that a business will continue after the owner is gone. Then again, do not be afraid to jump if dump opportunistic luck comes along and someone offers a big chunk of money.

  2. Dane A. Shrallow says:

    I concur with your post. I’ve been involved in corporate practice, and the M&A field, for over 4 decades. One thing that is readily observable is that few businesses last forever. The vast majority have a finite life. Competition, evolving business models and disruptive technologies tend to take a toll. Want to own a retail store today? The primary focus of a business owner should be on how to preserve accumulated wealth for future generations. That could mean planning to keep the business in the family, at least for the next generation. But often the wiser choice is to realize your investment when the business’ future looks the brightest and capitalize on what you’ve built. In other words, sell when the business asset when its at its highest value, rather than at your scheduled retirement date. A lot can happen between now and then.

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Employee Peer Review: The Internal Market

There are various approaches to employee peer review. Comprehensive multi-level feedback, top-down and bottom-up comparisons, and even the lightening fast Stoplight 360 I wrote about here a few years ago. In many instances, however, the most powerful rating system is the internal market.

Employees work with other employees whom they like, can depend on, and who carry their own weight. Terrific technical expertise is wasted if no one calls on it. The most popular employee remains idle away from the water cooler if he or she can’t be relied on to deliver in a timely fashion.

I’ve worked with numerous businesses who have faced a reduction in force (RIF). In most cases they try to develop a fair selection system for laying off people. A few have measurable productivity. In those companies, the decision is easier. Those who don’t produce are higher on the list.

Whether you have productivity metrics or not, employee peer review, the work pattern of colleagues, is still the best barometer.

pencil standoutIs there a supervisor or project manager who seems to spend most of his time waiting for the next job? A technician who is snapped up by another team the moment he becomes available? A support person who always has a disproportionate backlog of help requests? An engineer who spends most of his time working on tasks that are below his pay grade?

The Internal Market isn’t sensitive to seniority, education or job title. It’s the vote of colleagues on how valuable a person is to the organization.

How do you determine whether a less experienced hire has potential? It’s a pretty safe bet that it’s someone who is busy. It’s someone who other people are making an effort to mentor and train. It’s the employee everyone wants to work with.

You don’t have to wait for a crisis to pay attention to the Internal Market. It doesn’t require long forms, goal setting or meetings for guidance. It is an integral part of your organization. Performance documentation is usually just an attempt to codify what everyone knows and sees daily.

Deriving value from employee peer review is simply a shift in how you observe your workforce. Pay attention to the Internal Market, and a lot of personnel decisions become obvious.

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Selling Your Business: Money isn’t Everything

When I was a kid my mother said “Money isn’t everything” in response to every envious glance at another kid’s stuff. As I became successful enough to afford things for my children, I reversed the meaning. “Money isn’t everything” became my reminder that their possessions didn’t make them better or happier than others.

The same holds true for companies. An entrepreneur who is struggling to generate sufficient working capital is an unlikely prospect for a lender, let alone an investor.

I regularly receive approaches from business owners who have a great ideas, but have run out of capital without generating cash flow.  They usually have trouble understanding why I don’t want to represent them in their investment search (for a fee contingent on only my success, of course.)

“But everyone says there is plenty of money looking for deals,” they say. It is true. There is always more money available than good investments. That’s why so many investments lose money.

Once your business approaches $1 million in annual earnings, the whole capital landscape changes dramatically. If you are scalable (meaning you likely have around 100 employees or more) your deal is attractive to financial investors such as private equity groups. There are currently about 7,000 such buyers in the US, pursuing the 17,000 or so companies who meet their criteria.

These buyers range from Search Groups (who have investors lined up if they find a company), to investment funds with a billion dollars or more in “dry powder” (cash in the bank).

If you are smart, and clever, and tenacious, and lucky, you can reach the point where there is plenty of money to buy you out. In fact, money is probably chasing you. Most sellers, however, come to realize that money isn’t everything.

shark with dollarThe M&A world abounds with horror stories of financial buyers who stripped the employee benefits from a company and drove off its key personnel. Others pulled their capital as soon as they had control (to leverage it in another deal) and left the business staggering under the debt replacing it. Still more inserted a Hired Gun executive from another industry whose inexperience quickly ran the business on the rocks.

That might not be your concern if you walk away with a terrific multiple, but if the deal (like many) requires you to leave a substantial amount on the table for a few years, it’s critical.

I work with business owners in their exit planning. Although I haven’t brokered in years (meaning list and market businesses for sale), I regularly advise owners who are dealing with an approach from financial buyers. Here’s my mental checklist for vetting a financial buyer:

  1. Do you trust them? Can you see working side by side with them as your partners?
  2. Do they understand your business and your customers, or are they just looking at your financial statements?
  3. How important to you is the future of your employees and your reputation?

Notice that the questions don’t include “How much money do they have?” If you are attractive to one financial buyer, you are probably attractive to a lot more.

Many of my clients, when they examine the non-financial aspects of selling, choose alternative exits. They arrange for the employees to buy the business, or merge with a friendly competitor. They may not make quite as much, but money isn’t everything.

If you enjoy Awake at 2 o’clock and know a business owner who would benefit from reading it, please share. Thanks!

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