Business # 8 – Blinded By the Light

Posted by on Apr 25, 2013 in Blog, Featured | 0 comments

Business #8 came as a referral.  The owner wanted to sell his sign business because he was tired of the struggle to make payroll every two weeks. The business was similar to business #1 in that it manufactured and installed signs. I had long since vowed to stay out of the manufacturing side of the business after I started business #2.  I much prefer the wholesale business of installation because it is easier to manage.  Out of curiosity, I reviewed the numbers and was not initially interested in buying the business.  However, the business did have some juicy contracts and it did not have sufficient working capital to complete them.  Intrigued by these contracts, I offered to loan the company working capital at 18% while also helping them manage the cash flows.

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Granada Theatre, Santa Barbara, CA

In the back of my mind I knew I should not be getting into the sign manufacturing business again, but the creativity and showmanship of it is very alluring.  There was also the draw of feeling needed and utilizing the many years of experience I had in the industry.  If there was someone out there that could save this business, it was me.  Whether that was possible or not is a different story.

The business was creating a niche in historic theatre renovations. From a sign guy perspective, these jobs are the Big Leagues.  They are almost up there with the casino signs in Las Vegas. These projects are the cornerstones of  huge development projects and the signs definitely take center stage.  The signs all required extensive research and design and needed a big budget to pull off.  However, it is quite a rush on grand opening night to flip on the lights and see the excitement.

In spite of the exciting work, management and the owner were not getting along.  The owner would meddle with the production schedule to meet his personal customers without regard to the big picture.  The owner was a small, hand-to-mouth operator and the business had outgrown the his vision and expertise.  The manager and talented designer wanted to continue to pursue more historic signs in far away cities.  The owner wanted to focus on doing small retail signs for strip malls, the jobs he had done his whole life.

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Fox Bob Hope Theater, Stockton, CA

The company discord and problems were placing my investment at risk.  To solve this problem I converted my debt to equity and bought out the owner outright.  We completed many challenging projects, but without the financial results I had hope for.  Project management and cost overruns are serious challenges in this highly custom business.  Fit and finish had to be near-perfect.  We would burn many hours at the end of the projects detailing the displays so they would shine.  No one looks at there electrical panel, but  everyone looks at the sign.  The “dollars and cents” of it was I could make better margins installing pumps, panels and air conditioners, all with less headache and risk.  I eventually finalized a sale of the company to existing management and we all hope for a happy ending.

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Fox Bob Hope Theater, Stockton, CA

Keys To Success

  • Don’t repeat your mistakes
  • Don’t try to be a hero
  • I know this is repeated every time, but if you lend money have an exit strategy
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Money (Crystal) Ball

Posted by on Apr 18, 2013 in Blog, Featured | 0 comments

Trent from The Simple Dollar posed an interesting question in a recent post titled, Anticipating Wealth.  He asks the question of what would you do differently if you knew your income would not increase over the next 10 years.  What if it went down? The level of income certainty in today’s economy is definitely different after the recent recession.  People that had steady jobs suddenly lost them.  Others with locked-in government jobs soon saw drastic cuts in pay.  Small business owners, especially, took a big hit.

So, do you make your financial choices with the assumption that down the road you will be making more than you are now?  The only time I have made this assumption was when I was in college, because I was making negative dollars.  Otherwise, I budget based on my current salary.  If I suddenly got a raise tomorrow, I honestly don’t know where it would go.

But what about for your business?  A large part of running a business is forecasting revenue and making plans that will affect you three to five years into the future.  Should I buy this equipment or move to this new building?  You don’t know what the future holds, but you have to act as if you do or you will never make it.

One thing to understand is that there are various zones of profitability at different levels of revenue.  These “profit zones” are not equally spread out along the revenue curve.  Just because you managed to increase revenues by 10% does not mean profits will increase accordingly.  If you have found a profit zone, understand it and be able to recreate it.  You might be tempted to reach for the next profit zone, but it may require financial leverage and increased risk.  In other words, you could get out of control.  How does this relate to the initial question?  In the midst of an ecomonic downturn you may have to scale back to lower profit zones.  Knowing how to stay profitable with lower volume is a key to survival.

The other thing you should consider is if you are not able to increase profits in the long run, you should at least be able to increase control. Try to make the same amount of money with less effort.  The world keeps score with dollar bills, but if you can make a comfortable living working half as much as the next guy, have you not achieved success?

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Business # 7 – More Learning Than Earning

Posted by on Apr 11, 2013 in Blog, Featured | 0 comments

I was having so much success acquiring businesses, friends and family wanted in on the action.  My brother-in-law (and childhood friend) found a business for sale in Sonora, CA, a sleepy foothill town on the way to Yosemite.  The business was in the HVAC industry, which seemed to fit in the realm I was comfortable with.  We started in on due diligence.  It looked like a 6/0/20/15, but it was relatively cheap and the seller would carry the loan, 50% down and 50% financed for 60 months at 8%.

We certainly felt like we could, again, be the big fish in a small pond.  The business had an emergency service element to it and seemed like a good situation.  The only red flag was that the seller was a little flaky and kind of hard nosed.  We found a manager with tons of experience to take over the day-to-day business operations.  Tragically, it only took us us 90 days to figure our he was a drug addict.  We had to scramble to quickly find another manager.

The new manager we found took a ownership position with a small amount of equity, which we thought would drive great results.  His first suggestion was that we stop renting and buy a place to run the shop out of.  This seemed like a great idea at the time because real estate was starting to take off.  We found a little house that was zoned commercial and figured we would use the house as the office and then build a shop.  We closed the deal on the little house and started planning the move when a much better shop came on the market.  Our partner suggested we could rent out the little house and as the area developed around us, it would increase in value.  He was insistent we needed the larger shop.  We reluctantly bought the second shop, all along thinking real estate would be a great investment.  Well we all know what happened to real estate.  We should have kept our eye on the ball.  We needed to build our business, not our real estate portfolio.

We put our faith in the new manager’s abilities, but he led us off track in the type of work we performed.  His vision did not match ours.  He had good skills, but lacked focus and work ethic.  He made money for employees, but not the company.  We had several high volume, low profit years.  Whatever money we did make, you guessed it, we invested in real estate.  In additional to all this, he hired his wife and a small time criminal as office managers, which proved to be good for him, but bad for the business.  We had to let him go.

As is always the case with being business owners, we were left holding the bag.  Without the time and energy to build the business back up, we orchestrated an employee buyout and are still waiting to see how it all shakes out. We currently still own the little house and the shop and rent the shop back to the business.  However, these properties are cash flow negative.   Business #7 was definitely more learning than earning.

Keys To Success

  • Don’t spread yourself too thin
  • Owning your building seems like a great idea, but it locks you in and complicates the exit strategy
  • Pick partners carefully because your future is, in large part, in their hands
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The “Thou Shalt Not’s” of Leadership

Posted by on Apr 4, 2013 in Blog, Featured, Leadership | 1 comment

Recently Jack Welch (former GE CEO) and his wife Suzy Welch (bestselling author) wrote an article on linkedin.com on called The Six Deadly Sins of Leadership.  It proved to be a worthy read and brought up several points that are easy to change if you current management style requires it.  We have given some of our thoughts on the sins below.

1. Not Giving Self-Confidence its Due.

Ryan’s Take:

Many Type-A personalities natually stifle self-confidence in others because they percieve it as a threat.  Managers with these traits need to be cognicent of this and do their best to build up those around them.  As the Welches point out, confidence gives people the ability to make bold moves.  In many ways self-confidence is like liquid courage (alcohol), only without all the embarrasing party antics and crushing headaches the next day.

Ken’s Take:

Self confidence can be encouraged by leaders in the way they respond to questions.  Using every question as a teaching opportunity, the leader creates confidence in the employee to continue to ask questions.  When questions are asked mistakes are avoided, communication increases and relationships of trust are forged.

2. Muzzling Voice.

Ryan’s Take:

This may come as a no surprise to many of you, but I regularly watched Star Trek: The Next Generation.  I think Captain Jean-Luc Picard is a model leader.  He makes the hard decisions, but he always consults his knowledgeable staff. Whether it’s Geordi La Forge’s knowledge of the ship or Worf’s expertise on security issues, Captain Picard carefully listens to recommendations without ego.  One person can’t know everything, even if he is the boss.

Ken’s Take:

Know-it-alls seem to demand respect for their knowledge.  Respect needs to be earned, not demanded.  Humility with a listening ear creates an environment of group accomplishment and pride.  All voices being heard makes for a strong company.

3. Acting Phony.

Ryan’s Take:

Sometimes it’s hard to avoid seeming like a phony when you are legitimately trying to change your bad leadership habits.  Employees might recognize the change and not trust it.  In this case, transparency is key.  Tell them you want to change and why, to gain their trust.

Ken’s Take:

Acting phony is saying I am all of that and a bag of chips.  I like to keep it fun and real. I try to focus on laughing and caring.  Whether in business, church or family lets start by laughing at me and caring about you.  It works.

4. Lacking the Guts to Differentiate.

Ryan’s Take:

Differentiating is wearing an orange shirt when everyone else is wearing white.  If you are wrong, your error is completly exposed.  The fear of this exposure leaves people frozen in their tracks  They do nothing, which in the end, is the worst thing they could do.

Ken’s Take:

My mentor also taught you must be able to fund the winners and close the losers.  You can’t let the losers drag you down.  This is actually more difficult than you might think.  You want every investment decision to be correct.  Closing down is an admission something went wrong.  Mix that with playing a large role in people’s lives and you have the reason why leaders deserve the big bucks.

5. Fixation on Results at the Expense of Values.

Ryan’s Take:

You need to know who you are to succeed.  However, nobody else places much stock in your values, just your results.  Have you ever heard of an earnings call that went like this,  “We are sorry to report that earnings are down 10% year over year.  We would have met our guidance had we bribed a Russian dignitary, illegally dumped toxic chemicals and used more child labor.”  Taking shortcuts has tempted many managers, but skirting your values will eventually lead to disaster.

Ken’s Take:

I am fixated on results!  The only question is timeline.  Positive long term results will always be supported by the real values of an organization.  A transparent, honest, positive passion for excellence creates a foundation for long term success.

6. Skipping the Fun Part

Ryan’s Take:

I went from a company that never celebrated to one that celebrates often, but with a style so canned I can tell you exactly what will be served (cupcakes), the color of napkins and the music that will be playing.  It’s a little like watching the movie Ground Hog Day.  While I do appreciate the gesture, I think these formalized celebrations are only marinally better than doing nothing.  It is akin to receiving a form email versus a handwritten card (with money stuffed in it).  As an employee, I realize how much a personal touch can make.

Ken’s Take:

Owners don’t like to celebrate because at the top of every mountain is the danger of falling.  It feels like we might be letting our guard down,  thinking we have arrived and we don’t need to work as hard.  I am not saying this is right, I am just saying I understand why celebrations make leaders nervous.

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