Boomers and the Lost Generation

Those who read this column regularly are well aware of the huge shifts underway as a result of the Baby Boomers’ coming exodus from the workplace. Those who aren’t familiar with the issue are invited to download my free, 45-page eBook Beating the Boomer Bust.

Almost four years ago I mused about the chances of Generation X, smaller in numbers and less accustomed to competition than the generations immediately before (Boomers) or following (Millennials) becoming another Lost Generation, much like that of the F. Scott Fitzgerald era.

Now, I’m seeing and hearing more evidence that such may be the case. A friend who works closely with the large corporations in the oil and gas industry noted a different trend in the layoffs that are accompanying the fall in prices. The Great Recession, like previous downturns, saw buyouts of many workers who were approaching retirement. This time around, companies are getting leaner by cutting less experienced workers, and keeping their more experienced core regardless of age.

older workerI see a similar trend in smaller businesses as well. Owners who traditionally filled lower and mid-level positions by seeking younger workers are now much more inclined to hire people in their 50s and 60s. What is causing this shift?

First, there is a new expectation about employee retention. It’s well documented that workers from GenX and the Millennials are far less likely to take a job for life. Regardless of how well they are treated, younger workers take a position with the expectation that they will be moving on when they find a better opportunity, or simply when the job interferes with their chosen lifestyle.

The majority of small businesses are still owned by Boomers, and they are often more comfortable with employees who share their experience and attitudes. If a young employee has an employment life expectancy of, say, five years, why not have that position filled by someone who understands that paid time off is something that has to be accrued before it’s taken?

If you have to accomplish more work with fewer people, employers naturally want people who will stretch to get things done. Most Boomer workers accept the need to work late on occasion, and are accustomed to planning personal activities around the job. Younger people often see that as being too docile, or foolishly loyal when “It’s only a job.” Employers, on the other hand, cherish such dedication.

Boomers are generally healthier than preceding generations. They haven’t been great savers, and most plan to work longer than their predecessors. As the pace of change accelerates in almost every industry, a worker who needs little ramping up and can be expected to produce for another ten years looks better and better, regardless of any gray hair.

Not all Boomers have the skills necessary to function in today’s workplace. If you are looking for technical abilities, however, someone in their 30s (a Millennial) is likely to be faster and more savvy than someone in their mid-40s. That’s why Generation X is getting squeezed in the middle.

Of course, as another friend says, “A Millennial will figure out how to use technology to accomplish in a single day what would take a Boomer three. Of course, then he wants the other two days off.”

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Measurement is Not Management

“The employees respect what the boss inspects.” Since Frederick Winslow Taylor published The Principles of Scientific Management in 1911, breaking down tasks into measurable pieces had been the cornerstone for employee training and tracking performance.

Why then, do many large organizations with over 100 years of measuring work still  have problems with productivity? I once had a friend who supervised a plastic bottle production line. Every quarter, new productivity goals came down from “management.” He could always tell when they were too aggressive. A yellow hard hat, required wear in the plant, would accidently fall into the plastic mix.

MetropolisThat necessitated a work stoppage, and several days of lost production while the feed lines were cleaned out. Production goals went out the window. A rash of such accidents first generated threats of retaliation, but it was never the same employee twice. The next quarter, goals would be jiggered to emphasize a reduction in lost production, not the speed of the line.

Things would run pretty smoothly, until the word came down to speed up production again.

Employees like to excel. I’ve seen scores, and probably hundreds, far exceed their own wildest expectations in the proper circumstances. Everyone wants to be recognized for their effort, and measurable goals are a part of that.

I knew an owner who hated “motivational techniques.” He took pride in what he considered adult treatment. “You  know what you are supposed to do, and as long as you do it, I’ll leave you alone.”

One week he put a number on a piece of paper on the wall. Literally. Hand written, no explanation, no rewards even hinted at. Everyone recognized it as a sales number about 25% in excess of anything they had ever done. By midday on Friday the whole team was frenetically pounding the phones looking for new opportunities. They beat the number by a whisker, and threw themselves a party after work.

That’s a great story about the value of goals, but would putting a new number on the wall the following week have had the same effect? What about the week after that?

Of course not, but it’s what many business owners try to do. When simply setting goals isn’t sufficient, they try adding incentives. When some other factor such as product quality or customer satisfaction, declines, they set new goals in those areas. Their management style becomes a juggling act; an ongoing effort to balance objectives and rewards. Somehow, they never get to the Holy Grail of consistent and motivated employee effort.

Measurement is not management. It’s a tool for tracking performance, but it isn’t performance. It helps in motivating employees, but goals aren’t motivational by themselves. It can direct employees’ attention to important areas, but it doesn’t make them want to improve.

Management is not leadership. We all know owners who are lucky if they know what their revenue is, yet run effective operations that make enviable profits. You probably know others who “run by the numbers,” but seem to struggle when it comes to getting good results.

Simon Sinek has put his stamp on “Start with Why?” His big-picture approach, of a company that builds raving fans internally and externally is great, but not everyone can come up with (or buy into) the Big Why.

Your job as a business owner is to help employees understand why they want to do their jobs well. Some of that may be a Big Picture, but more often it’s because they have a good place to work, are recognized for their performance, and can go home at the end of the day feeling like they accomplished something.

Measurement is part of that, but it only deserves a supporting role.


Posted in Customer Relations, Entrepreneurship, Incentives, Leadership, Managing Employees | Tagged , , , , , , , , , , , , , | 4 Comments

4 Responses to Measurement is Not Management

  1. David Basri says:

    Could not agree more!

  2. In French the word is Saboteur for throwing you wooden shoe into the mill to stop the work. before Mr. Taylor or you friend experienced in in the bottle factory. That is the real issue. why do we keep reinventing the wheel? people don’t change – the environment in which they work and are surrounded does. They are not guinea pigs to experiment on. The real issue is what knd of employee do you reruit and grow within your organization.

  3. Todd Marquardt says:

    I’m impressed by your awesome insight as usual. I’ll keep your article in mind as we manage by statistics.

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Is There Anything CEOish for Me to Do?

The line is from one of my favorite New Yorker cartoons. It’s being asked by an executive of his secretary. It is also a common question of business owners who have built successful organizations.

The need for a CEO is present in every company, regardless of size. For most owners, the idea of acting as a CEO gets subordinated to the urgency of their day to day responsibilities as President and some other C-level title; Chief Operating Officer, Chief Sales Officer, Chief Financial Officer, or sometimes all of the above.

If they do their job well, if they learn to train, mentor and delegate operating duties to managers, owners may reach a point where they aren’t buried in the minute-to-minute operations of the business. They have time to think about the future. They can analyze the company’s direction for how it supports their vision.

Thinking ideaA CEO is supposed to think strategically. He or she is the only person in the organization charged with looking for what isn’t there. What missing key capabilities will prevent the business from making the next leap? What competitors or new products threaten the existing flow of products or services? What disrupters challenge the customers themselves?

In reality, most small business owners who can actually carve out quiet time from their workday don’t know what to do with it. They dive deeper into reports, or call additional meetings with their managers to assure themselves that things are still on track. Setting aside time for strategic thought is tough. It feels too much like goofing off.

New ideas don’t come on demand. They are responses to stimuli. The best way to generate those is to be in a situation where they occur. That’s not accomplished by meeting with the people or attending the events that have always been part of your business. You need to expose yourself to different stimuli to get different ideas.

Join a peer group that isn’t focused on your industry. Attend some professional events that your customers frequent for education, not the ones where you sell to them. Attend trade gatherings of your vendors to see what your business really looks like to them. Go to local presentations about business topics that you may have little natural interest in, like technology or finance.

Most importantly, get out. Just carving out time to “be strategic” has little value if you are sitting in the same office surrounded by reminders of your day-to-day challenges.

Posted in Business Perspectives, Entrepreneurship, Leadership, Strategy and Planning | Tagged , , , , , , , , , | 2 Comments

2 Responses to Is There Anything CEOish for Me to Do?

  1. That is right on for a successful company. I continue to stimulate with outside influences and appropriate the time for projections on business needs and direction along with diversification. Good and simple read, but most overlooked in small business. Good job John!

  2. Steve Davies says:

    Well put, as always! When I was running my computer service company we moved to a new building, and I was a little embarrassed at the size of the CEO office that the new office layout had. The thing was huge with a cathedral ceiling, and I always felt that you could play basketball in it! I was talking to a consultant one day who was helping me with strategy, and I mentioned my thoughts to him. His reply has always stuck with me and is germane to your point: “Your job is to sit in your big office and think the big thought.”

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Germany Makes a Business Decision

Germany just announced that it could accept an additional 500,000 refugees when other countries are jockeying to accommodate as few as possible. As much as the announcement was portrayed as a humanitarian effort, it is just as likely a simple business decision.

Few members of the European Union, or those outside of the EU for that matter, would accuse Germany of fuzzy-headed liberalism. Their insistence on economic reforms focused on austerity, curtailed government benefits and a balanced budget (or at least closer than most nations manage now), has earned them the enmity of most Greeks and  economic liberals throughout the continent.

While I can’t criticize the undeniable human benefits of Germany’s decision, it also reflects two key factors that are important for any business or economy; the size and talent of its workforce.

Like northern hemisphere nations from Canada to Japan, and including the United States, China and the entire European Union, Germany’s working population is ageing. Multiple studies by both their government and private think tanks predict a shortage of up to 1.5 million skilled workers in the next five years.

Any shrink in new and skilled workers (who are also consumers) will slow economic expansion. The EU countries with the lowest birth rate over the last 30 years are Greece, Spain, Portugal and Italy. Japan is already feeling the impact. China will be hit worse, but a bit down the road ( from 2030 to 2050). In the US, the massive exiting of the Boomers from the workplace has begun, and will accelerate over the next ten years.

liberty and NY skylineThe key term is “skilled” workers. As technology whittles away at the middle class, few societies are say “Give me your tired, your poor, your huddled masses” anymore. That’s where Germany’s offer is brilliant.

The Atlantic published a great look at the Islamic State in its March issue. Trained by ex-KGB agents, IS infiltrators enter a city in advance of their military force. They attend town meetings and other public events, noting the names of community activists, elected officials and business executives. When they attack in force, assassination squads equipped with the names and home addresses of these leaders go from house to house eliminating them. Their objective is to decapitate any local nucleus for organization.

The result has been to create a refugee population that is generally better educated and wealthier than their countrymen. Anecdotally, a friend who visited Greece a few weeks ago tells the story of a Syrian refugee’s frustration at the inability of Greek shopkeepers to make change for 500 Euro notes, the smallest denomination he carried. Many of these refugees are anything but destitute. Germany is seizing an opportunity to add much-needed skills (and possibly capital) to their worker population.

In the meantime, the run up to the U.S. Presidential nomination continues to generate waves of anti-immigration rhetoric, ranging from the racist to the silly. Mass deportations, amending the Constitution to limit citizenship and building a giant wall are populist sops that, unfortunately, play well with a frustrated population.

The problem isn’t immigration, it’s the right immigration. I understand that the egalitarian ideal expressed in “All men are created equal” is part of our national psyche, but does it mean that we have to run our economy into the ground in its observance? I’m certainly not racist, but no rational businessperson would argue that a Latin American subsidence farmer has the same economic potential as a Chinese PhD.

Germany has seized a business opportunity by reaching out to talent that can positively impact its economy. The United States can do the same by introducing a sensible immigration policy that includes some consideration of economic merit.

Posted in Economic Trends, John's Opinions, Politics and Regulation, Strategy and Planning | Tagged , , , , , , , , , , , , , , , , , , | 6 Comments

6 Responses to Germany Makes a Business Decision

  1. Dan Bowser says:

    Thanks for putting a face on the other side of the immigration issue. Our country benefited greatly economically from immigration in the past. We can benefit now while helping many people at the same time.

    I wonder if we as a nation can get past the frustration of extreme political self-interest and see through the pandering on the part of some candidates.

    I’m hopeful but concerned.

  2. David Cunningham says:

    This observation is spot on. Japan will suffer worst because their racial intolerance is so bad that they cannot contemplate the an immigration program at any scale that would save them. On a visit to Yokohama I had repeated experiences in being denied access to jazz clubs, because they were “Japanese Only”. It was a trivial discrimination but it made me aware how bad it can make you feel.
    The least intelligent of the current US immigrant phobias are the proposals to repeal the 14th Amendment to the Constitution – “All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the state wherein they reside.” and to repeal the Dream Act that removes the threat of deportation for children of illegal immigrants. In most cases, we have already educated these young people and they are an economic benefit to their communities.
    I wish “Cost / Benefit” analysis could be applied to many of the challenges that face the USA.

  3. Katrin Anger says:

    Good point!
    While there are many perspectives that can be taken on this topic, this is certainly one with a positive side effect. – Whilst I don’t think that this is the main motivation for the German government, it could indeed prove true and benefit Germany in a few years … if they succeed on integration.

  4. Several years ago I was traveling in Norway and was struck by the large population of Somali immigrants there. Norway also has a negative population problem and had been attracting immigrants from many countries including the US becuase they seem to be color blind according to several former American black people I met. they would rather raise their children there there away from gangs and low expectations. Norway only wants you to commit to raising your children there and will subsidize you to do so with parental leave, education and job training for the parents. I was surprised to see so many olive and dark skinned people in the land of the blond, blue eyed Norsemen even outside of the urban areas..

  5. We all should be champions for open immigration and free movements cross the borders, as long it is based on the trader principle. If you have the right to your life, you should be able to live and work wherever you want, in a free world.

    Immigration as become a hot topic in Scandinavia. I hope people will learn from the melting pot and the land of opportunity: the United States of America.

  6. As with most European countries, meetings etiquette in Germany relies on professionalism, good business sense and formality. Bearing the above in mind, together with a positive attitude will ensure good results.

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Companies Sell for a Multiple of…What?

Last week we discussed the difference between Main Street and Mid-market companies regarding their prospects for finding a buyer. You can read it here, but the short analysis is that the market is tightening for Main Street businesses, while the number of buyers and valuations for Mid-markets are at or near an all-time high.

The confusion between the two regarding valuation methodologies is even worse than that surrounding potential buyers. Owners and their professionals talk about earnings, add-backs and recasting financials as if they were universally accepted terms. They are not, and their usage differs dramatically between the two types of companies.

Despite this, I frequently (and I mean with something close to half the cases I work with) see professionals (who should know better) toss out valuation multiples like they were written in stone somewhere. CPAs seem to be the biggest offenders, but attorneys run a close second. They casually tell a business owner things like “All small businesses sell for about 5 times earnings,” or “You can expect your company to bring between 3 and 4 times its adjusted cash flow.”

They seem oblivious to the fact that an owner takes their uninformed and uneducated off-the-cuff statement very, very seriously.

level with coinsNo two companies are alike. Besides profitability, growth rate, customer concentration, management depth and geography, valuations can vary by as much as 40% with the swings in the financial markets. There is no “typical small business value,” but how companies are valued is pretty consistent in the two segments.

Let’s start with a high-level view. The buyers for Main Street (under $3 million valuation) businesses are typically purchasing a personal income stream. Those acquiring a Mid-market company are seeking return on investment, whether from profits or potential growth. Therefore, the two look at expenses and cash flow differently.

Main Street: When preparing a smaller business for sale, a broker will “recast” some expenses on the income statement. Recasting starts with profits before taxes, and adds interest expense, depreciation and amortization. The first add-back, interest, is assumed to be a cost of growing the business, and one which an owner could avoid if he or she chose to. (If you are borrowing to cover losses, you company probably isn’t saleable anyway.) Depreciation and amortization are non-cash methods of accounting for tax purposes, and are considered available cash flow.

The rest of the recasting involves those items that are “Sellers Discretionary Expenses” (SDE). Put politely, they are the type of expenses that the seller would probably not be able to take in someone else’s business. They can range from a personal vehicle to transporting the family “Board of Directors” to Orlando for an annual meeting.

These expenses are added to the owner’s salary and benefits to give buyers a better picture of all the financial benefits of ownership. Valuations are different for every company, but when a business is being sold to an individual owner-operator who will use third-party financing for the majority of the purchase, the ability to draw a salary and support the debt keeps valuations for such companies at an average of 2.2 to 2.8 times the SDE. (I repeat- your results may vary, but these are the averages.)

Mid-Market: These buyers don’t really want to see a bunch of hidden benefits. It’s too hard to explain to their investors or corporate executives. They assume that the owner’s compensation package is in line with what they will have to pay a new president to run the company. Except for some GAAP adjustments, their add-backs to cash flow will include Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA).

Falling back on averages again, multiples of EBITDA paid by private equity groups from about 2003 to 2013 ranged year-to-year from 4.7 to 5.2 times “earnings.” Not a very big range, and not surprising considering that they have investment return targets for every deal.

Which one is better? Neither. Both. It doesn’t matter. I’ve seen plenty of companies where 2.8 times SDE was more than 4.7 times EBITDA. It’s just the way the two markets measure.

It is important, however, if you are preparing your company for a third party sale. Many advisors tell their clients to strip all personal benefits out of the company years before selling in order to raise historical EBITDA. That is far more important if you are selling a business worth over $3 million, but usually in such businesses the personal benefits aren’t really material. In a smaller business, most of those expenses will be recast anyway.

Just understand which methods apply to your business. If you are working on an assumption that  your buyer will “typically” pay 5 times SDE, you have mixed apples and oranges, and are likely heading for disappointment.

Posted in Economic Trends, Entrepreneurship, Exit Planning, Selling a business, Strategy and Planning | Tagged , , , , , , , , , , , , , , | 5 Comments

5 Responses to Companies Sell for a Multiple of…What?

  1. Jon Konchar says:

    Right on target. Thanks for the article. Thought: The experts who have never bought oe sold a business,,, are they experts?

    • John F. Dini says:

      Good point, Jon. Some believe that their technical expertise in analyzing financial statements or drafting contracts is sufficient to handle a transaction. Too bad so many owners find out too late that isn’t the case.

  2. David Cunningham says:

    Hi John.
    If I am representing a buyer, we would look at the discounted cash flow of four year projected earnings, plus a terminal value, particularly if the buyer is using some debt to make the acquisition.

    • John F. Dini says:

      NPV of future cash flows is a reasonable way of calculating ROI for a buyer, but it would still translate into a number that needs to be compared against the industry data calculated in the more standard way.

  3. Oswald Viva says:

    Good article. The truth is that a business, any business, is not worth what the owner think is worth, and is not worth what the buyer think is worth; it is somewhere in between, but how do you convince both parties of that?

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