Lesson #368: Pending Tariffs Creating Paralysis for Businesses

 

When businesses are unclear on what the future will bring, it often results in a “wait and see” approach before making any material investments.  We see that leading into most presidential elections, as different presidential winners could have different impacts on the economy based on their promoted policies.  The winner of the most recent election is touting his plan to levy up to 25% tariffs on China,  and potentially other countries where he sees an imbalance on trade levels.  The result of that has most business executives very worried about the future impact of any tariffs on their businesses, and hence has “paralyzed” many companies, resulting in them pushing off any material investments until the situation becomes more clear.  This post will better educate you on why business executives are worried, and what this may mean for your businesses.

Why Tariffs are Generally Bad for the Economy

Tariffs are not penalties paid by the country they are being imposed upon.  Instead they result in a 25% increase in the cost of those products which are imported from those countries.  And guess what, when the costs of importing goes up, the importing companies in the U.S. typically raise their prices to cover the higher costs of those products. And if the U.S. importers raise their prices, it is ultimately the U.S. consumer (you and me) that end up paying higher prices at the retail stores where we purchase these products.  Rising costs for consumer goods will decrease consumption, hurting the sales and profits of those products, which in turn lowers the success of the U.S. based importers, hurting their ability to re-invest in their businesses (creating new jobs), and in turn hurting the U.S. economy.  It is a vicious cycle.

To try and scope the size of the potential impact, here are a few stats.  Imports represent around 14% of the U.S. GDP and around 17% of total imports come from China.  That in itself does not sound too bad, but U.S. GDP includes a lot of huge industries like oil and food that are not sourced from China.  When you study consumer spending behavior on the goods they are most often purchasing, things like apparel, shoes, toys, electronics and textiles, around 40% of those products are coming from China.  If consumers see a 25% increase on 40% of their spending, that will result in a 10% immediate impact to their spending power, further straining their ability to effectively make ends meet.  As consumers will be spending the same 100% budgets they have to spend, it will only go 90% as far, forcing them to make difficult decisions on which products are kept in their monthly budgets and which products are cut.  The manufacturers or importers of the “cut products”, will see an immediate impact on their revenues and profits, hurting their businesses, their ability to create new jobs and the economy overall.

A Case Study

This is not the first time the Trump administration has imposed tariffs on China.  He imposed 10% tariffs on Chinese sourced products during his first administration (2016-2020).  We saw the impact of this on the restaurant furniture industry.  The retail cost of these products ultimately increased 10%, and the U.S. importers went looking for other sources of product (e.g., Vietnam), in an effort to try and get their prices back down.   Our business was fortunate enough to pass through a 10% price increase to our B2B customers, without a material impact on our demand or profit margins.  

But a 25% price increase would create much bigger headaches.  First of all, customers may be unwilling to pay 25% more for those products (which could impact margins and profits), or they may push off any discretionary spending entirely (hurting revenues and demand).  But in the restaurant industry, there will be a greater worry:  if consumers are seeing 25% higher prices on their everyday purchases like apparel, shoes and textiles, they will feel a squeeze on their personal checkbooks, which is turn may have them spending less on discretionary purchases like going out to dinner at restaurants, which in turn will have the restaurants seeing less sales and profits, and a general inability for them to reinvest in their businesses in the form of new locations (creating new jobs) or upgrading their old locations.  So, let’s hope that doesn’t actually happen.

What This Means for 2025

I think there is generally going to be a “wait and see” approach this year before companies make any material investments (creating new jobs), which in turn will stagnate the economy until the business executives feel more confident they have their arms around the situation.  Trump took office in late January, and tariffs on China may not be known until the end of his first 100 days in office.  Which means It could be the end of April before business executives have a clearer understanding of what actions were taken by the Trump administration and what the estimated impact of those tariffs on their businesses could be.

Then, one of two things could happen.  One, the news is not as bad as they thought, and they get back to growing their businesses normally, per their original plans.  Or two, they react negatively to the news, and they start to “batten down the hatches”.  That could result in a decrease in spending, a decrease in investments (job growth creation), or worse, they don’t have enough cash on hand to weather the storm, and they start laying people off to lower their expenses.  Once people start losing their jobs, that would negatively impact consumer spending, and in turn, further hurt the U.S. economy.  I am sure rooting for path number one over path number two.

Closing Thoughts

Many of us are already seeing a general softness in our businesses, largely due to our customers employing this “wait and see” approach.  Material purchases are getting “back-burnered” until business executives can get more clarity on the tariff situation.  That includes both for their normal day-to-day purchases (e.g., new store growth, major remodels, big capital expenditures), and for things that can materially move their businesses forward, like mergers and acquisitions.  Business buyers are more nervous right now and banks which fund these deals are being more cautious than ever in their lending decisions, making it harder for business buyers to access the needed capital. 

So, if I were the man sitting at the Resolute Desk in the Oval Office, I would think long and hard before implementing tariffs.  Yes, it may sound like you are punishing China and that could get you some short term sound bites with your voting base or generate additional revenues for the government.   But, if you put on your long-term glasses, you could end up putting the U.S. economy into a tail spin (which we are already seeing nervousness in the U.S. stock market).  Proceed with caution, both at the government level and in your own business forecasts!!   

For future posts, please follow me on Twitter at: @georgedeeb.

Why Pending Tariff Uncertainty is Creating 'Wait and See' Approach

When businesses are unclear about the future, they often take a "wait and see" approach before making any material investments. This is especially true in most presidential elections, as different presidential winners could have different impacts on the economy based on their promoted policies.  The winner of the most recent election is touting his plan to levy up to 25% tariffs on China and potentially other countries where he sees an imbalance in trade levels. The result has most business executives very worried about the future impact of any tariffs on their businesses and, hence, has "paralyzed" many companies, resulting in them pushing off any material investments until the situation becomes clearer. This post will better educate you on why business executives are worried and what this may mean for your businesses.

Read the rest of this post in Entrepreneur, which I guest authored this week.

For future posts, please follow me on Twitter at: @georgedeeb.

Lesson #367: Product Innovation Can Go Wrong--Don't Mess With a Good Thing

Why do consumer products companies feel compelled to change products that consumers have been happily using for decades just the way they are?  Didn’t they learn the lessons from New Coke being introduced in 1985, to only be met with the backlash from all the die-hard fans of Original Coke that had been around since 1892.  Yes, I see the desire to constantly be innovating.  But consumer product “staples” are a little different than a piece of technology like an iPhone that requires new bells and whistles to be added each year to break out from the sea of competitors that are chasing them.  As an example, we have all been eating Heinz Ketchup in its same form since it was introduced in 1876, with no reason to seek an alternative because the original works perfectly fine just the way it is.  But, the men’s care brands of Gillette and Schick obviously didn’t read that memo, as you will see in the below case study.

A Case Study

For many of my younger adult years, I was a loyal user of Gillette’s shaving gel.  One year, they decided to change the fragrance of that product, from what I would describe as “fresh” to “musky”.  I tried all the other Gillette shaving gel variations to see if I could find the original “fresh” fragrance with no luck.  I even called Gillette to ask what happened to the original fragrance, which I was told it had been discontinued.  I had no choice but to try Schick’s shaving gel product to find a “fresher” scent, which I did with their original Edge brand which had been around, unchanged, since the 1970’s. 

I then became a loyal customer of Schick and used their Edge brand product for years.  But then guess what happened: out of the blue, Schick changed their product.  The new product had a different “musky” scent, and worse yet, the gel did not come out of the can as a gel, it came out as a liquid that was hard to apply to your face.  I called Schick to tell them about my experience with the new Edge formula, and all they thought to do was send me a $10 coupon for other Schick products, which I had no interest in buying.  So, you can guess what I did: I went back to sampling other shaving gels, including giving Gillette a second chance.   Lucky for me, Gillette had returned to their original fragrance, and I was right back to where I started, a loyal customer of Gillette again.

The Key Lessons from This Story

How Much Revenues Are You Going to Lose from a Product Change.  I am sure the product managers at Gillette and Schick thought they were doing something good to improve their business, especially as the new employees on the team were looking to make a name for themselves.  But how much revenue did Gillette end up losing by making a fragrance change to their core product. I am guessing a lot, as they ultimately brought back their original fragrance after the fact.  But I as the user, wouldn’t have known that, until Schick tinkered with their formula and had me “looking for the exit”.  Now I can only guess how much revenue Schick is going to lose with this change, based on all the negative customer reviews that are being shared on social media.  But I will never know if they fixed their problem, like Gillette did, because I am now happy with the Gillette product and am not in the market to return to Schick (unless Gillette screws up again).

Always Be Innovating May Be the Wrong Strategy.  If you have a great “staple” product that is a best-selling sales leader in the market, don’t always feel the need to change.  Sometimes it is perfectly good just the way it is.  Just ask Coke, Heinz Ketchup, Oreo Cookies, Welch’s Grape Juice, Ticonderoga Pencils and many other consumer “staples” that are perfect in their current form.  Heinz once tried to switch to a purple color from their red color, to attract more kids, and it failed miserably; they ended up retreating back to their basic red color.  Imagine if Oreo used a strawberry flavored cookie instead of chocolate, Welch’s switched grape varieties from dark to light, or Ticonderoga took the erasers off the top of their pencils—we would not be very happy as loyal consumers of those products.  The point here is: innovation is critical for products that are constantly being innovated upon (e.g., technologies, cars, appliances).  But, if your product is a “staple” and consumers already love it, don’t mess with a good thing.

Always Do Your Market Research.  Before making a big change to your product, make sure you do your market research homework with your customers and ask them what they like and don’t like about the new product, compared to the old product, to ensure your base level of revenues will be maintained, and the innovation will actually help take your revenues to new heights.  Because without the market research, your team may think they are doing the right thing based on their personal instincts, but they could be capsizing the ship.  Just ask Guinness how it went when they mistakenly introduced Guinness Light in 1979.  People weren’t drinking Guinness to save on calories, they were drinking it because it was unique, as a rich dark stout, versus all the other lagers and ales in the market.  Their loyal drinkers would never be caught dead drinking a light version.

Closing Thoughts

Now that I am shaving with Gillette again, I am curious how many years it will take before some new product manager gets the “itch” to tinker with the formula again and may result in me going back to “Camp Schick” again.  Hopefully, Gillette learned their lesson and they have a better understanding of why their customers were buying from them in the first place.  A lesson that is now being painfully learned by Schick with their decades-long customers seeking alternatives for the first time ever.  But, for now, Gillette is “The Best a Man Can Get!!”  We’ll see how long that lasts.

 

For future posts please follow me on Twitter at: @georgedeeb.

An AI Avalanche is Coming for Google--Get Ready for a Bumpy Ride

I have been a serial entrepreneur for over 25 years now. Each of the businesses I built included a healthy dose of search engine marketing, anchored by Google, the "big dog on the block." Google controls over 90% of all searches completed on the internet worldwide, a market share it has held for the last decade. It was never imaginable that anyone could ever take Google down off its perch. But with all the progress artificial intelligence companies are making in the search world (e.g., ChatGPT recently launched SearchGPT), it may not be long before there is a "new sheriff in town." That could be really bad news for most of us digital marketers who have grown to be dependent on Google over the years. This post will help you get in front of this pending avalanche on the cusp of happening.

Read the rest of this post in Entrepreneur, which I guest authored this week.

For future posts, please follow me on Twitter at: @georgedeeb.

Lesson #366: How to Sell Your Business--A Step-By-Step Guide

 

I am in the middle of a sale process for one of our portfolio companies, and I wanted to share some useful tips to ensure your sale process goes as smoothly as possible.  This article will focus on the actual “process” of selling, so you can better understand what levers you can pull to your advantage in getting the quickest sale at the highest price. 

When Should You Sell Your Business?

The first part of answering when to sell your business is related to your business condition.  If you cannot clearly show growth in revenues and profits over the last couple years, it will be really hard to sell your business at an attractive price.  And, if there is anything negative going on in your industry (e.g., COVID impacting restaurant demand), it would be best to wait until those external factors are no longer an issue.

The second part of answering when to sell is related to the business prospects.  Are you bullish or bearish on the future?  If bullish, why sell now, wait to capture additional revenues and profits first, before selling.  But, if bearish, and you see the company ready to run into a wall, you may want to time your exit at the peak before the revenues collapse.  But in a typical scenario, a buyer will be doing due diligence on your industry and business, and they need to see a reasonable path forward to revenues continuing to grow under their ownership.  So, in all cases, make sure you can easily answer the question on how revenues will grow for them in the coming years.  Because if you cannot credibly sell that story of future growth, they will most likely not be interested.

The third part of answering when to sell is your personal psyche.  Are you tired, bored or burned out?  Maybe it is time to move on.  Are you no longer enjoying working with your team and you need a change?  Maybe it is time to sell.  Do you want to spend more time with your family, or need cash for another project?  Time to think about selling.  So, assess where you are personally, and that will help point you in one direction or the other.

Who Should Manage the Sale Process?

How you sell your business is really a function of how large your business is.  I would say selling a business under $500K in profits is typically more “do it yourself”, as it will not be large enough to get the attention of the normal business brokers.  There are plenty of websites you can list your business for sale to help get your business discovered by potential buyers (e.g., BizQuest, BizBuySell, BusinessesForSale.com) for a minimal listing fee.  If you go that route, look at examples of other business listings to figure out the best content and information to share in your listing.  Make sure you have a good lawyer lined up to help you with the negotiations and documentation of the sale agreement.

But, if you are a bigger in size, it is always best to engage a licensed and trusted business broker to assist you with the sale process and do all the “heavy lifting” for you, including drafting the sale brochure, creating target buyer lists, doing outreach to such buyers, negotiating the deal and helping you get to the finish line.  Business brokers come in all shapes and sizes, typically with a focus on certain geographical regions, certain industries or certain company sizes.  So do some research with your professional network or online for the best business broker for your exact situation.  Business brokers do typically come with a monthly retainer (e.g., $10,000 per month) plus a success fee from the sale (e.g, 3%-8%) depending on how large the expected sale proceeds will be.

Who Should Buy My Business?

There are typically three types of buyers: (i) strategic buyers already operating in your industry; (ii) financial buyers that are simply looking for investment opportunities; or (iii) other entrepreneurs looking for new companies to operate.  The valuations typically are ranked in that same order of categories listed, where a strategic buyer can typically see more ways for “one plus one to equal three”, getting synergies out of the business.  And financial buyers and entrepreneurs are typically looking for the “best deals” they can get.  So, start with strategics and go from there. Also think about things like: (i) do I trust this buyer to run the company (especially if any earn-out payments to you are involved); (ii) will they keep my team in place or treat them fairly if severed; and (iii) do they have the purchase proceeds, for both their equity and any needed loans, in hand.  As you will learn, not all buyers are created equal, so do your due diligence on them, the same time they are doing their due diligence on you.

How Quickly Should the Process Go

A normal sale process is typically around a 6 month process. The first month you are preparing your marketing materials and target buyer lists, the second month you are doing outreach to those buyers, the third month you are fielding questions and calls with the interested parties, the fourth month you are negotiating best terms, the fifth month the buyer is completing their due diligence and the sixth month you are getting the sale documents drafted and signed.  Depending on market conditions, it could take much longer than that.  If buyers are worried about the economy or interest rates, that will decrease the pool of investors that will be interested in moving forward until those issues are resolved.

How Should You Approach Negotiating

At the end of the day, “the market is the market”.  You may think you are worth one thing, but buyers could be telling you something completely different.  So, be flexible here.  And if there are 10 key points you are trying to negotiate through, pick the most important ones that you are going to “dig in on”, and be flexible on the others.  Negotiation is a two-way street and both parties have to be happy to get to the finish line.  But, in all cases, there are a couple rules of thumb that I live by: (i) your first offers are typically your most interested buyers and highest odds of getting to the finish line; and (ii) time kills all deals—the longer the negotiating process takes, the higher odds the buyer gets frustrated or disinterested and moves on.  Don’t sabotage your own odds of success by being inflexible, unreasonable or moving too slowly.

How Much Should I Expect for Valuation

Valuation is directly proportional to your: (i) industry; (ii) revenue/profit size; and (iii) growth rate.  Are you in a hot industry, like artificial intelligence, or a boring industry, like car washes?  Are you selling a $50MM revenue business or a $5MM revenue business?  Are you growing at 50% per year or 5% a year?   All these questions matter and dictate valuation.  So be realistic on what you can reasonably expect to receive by learning what similar businesses have sold for in the past.  As a ballpark, expect your EBITDA sale multiplier, which dictates valuation, to be in the 3x to 10x EBITDA range for revenues between $1MM to $50MM, depending on your answers to these types of questions.

Closing Thoughts

Selling your business can be an exciting time, but it can also be a daunting process.  So be sure to surround yourself with experts that have “been there and done that” to help you through the process.  That includes hiring a good business broker, an experienced M&A lawyer and seeking mentorship from others that successfully sold their businesses.   If you need any help here, don’t hesitate to reach out.  Good luck!

Also, don’t forget to check out these other articles I wrote on How to Find Buyers for Your Business and How to Structure the Sale of Your Business for additional details.

For future posts, please follow me on Twitter at: @georgedeeb.

Lesson #365: The First 100 Days With New Employees Will Dictate Success

 

You probably have heard the importance of the action plans of the “first 100 days” after a new President takes office or after you begin integrating two companies after a big merger, but I am guessing you haven’t heard it applied to your recruiting and onboarding efforts with each of your new staff members.  Unlike in most marriages, where you have been dating for years prior to “tying the knot”.  Often times in recruitment, you have someone joining your “family” after only a couple hours of “dating”, which means you are typically “living with each other” for the first time, in the first months of their employment (after the fact). It is in these “first 100 days” that will dictate if this “marriage” will work or not, and how you handle these first few months, is critical both ways.

What You Need to Do to “Romance” the Employee

This is no different than when you are dating someone prior to getting married, only you are doing it after the “wedding ring is already on their finger”.  You as the employer need to be on your “best behavior”.  These are the formative days of the employee deciding whether or not they are going to “love you” for life or not.  During these times, you are going to want to ensure:

The Employee is Properly Welcomed.  The rest of your staff needs to stop what they are doing and take the time to properly welcome the new staff member to the team.  This may include taking them to lunch on their first day on the job, taking them out to happy hour in the weeks after they have started (yes this is an ongoing welcoming process, not just “one and done” on their first day) and assigning them a “mentor” that can help them navigate the organization.   It is critical during this period that what you promised them during the recruitment phase actually materializes in their day-to-day job.  So, ensure their expectations are properly set upon hiring, and properly met during this welcoming period.  It’s very hard to change a first impression once it is set, so don’t allow yourself to get any “egg on your face” out of the gate, or they will soon be looking for the door towards a new employer.  And, the last thing you want is a revolving door with talent.

The Employee is Properly Onboarded.  Employees aren’t just going to step into a role and know exactly what to do on day one.  They need to be properly trained, duh!  But you would be surprised how many companies don’t have a formal training plan in place for every one of the positions they are hiring for.  That is the equivalent of throwing the new staff member to the wolves, and hoping they learn how to survive.  Prior to the start date, you need to have documented: (i) the full job description and key expectations of the job, including any KPIs they will be managed by; (ii) the curriculum and materials for which they will be trained to be successful in the job; and (iii) the training calendar of key people within the organization they will meet in their first weeks on the job, who are in charge of training the various aspects of the company and the role.  The more comfortable they feel with their training, the more confident and “loved” they will feel.

The Employee is Properly Cultured.  When working with a new staff member, they need to learn and feel the culture you are trying to promote within the organization.  For example, in one of my businesses, we aspire to have a S.P.I.R.I.T. culture, where all employees strive for Service-First, Positive-Minded, Innovating, Respectful, Intrapreneurial and Team-Oriented behaviors while on the job.  You can’t simply slap that on a slide in your strategy deck; you need to live those behaviors in your everyday job, and that starts from the top.  If you want the new staff members to live by those rules, it is important they see it manifested in their interactions with the rest of the staff.  So, make sure the entire team is demonstrating those desired workplace behaviors, which they naturally should be if they are “living the culture” of the organization.

What the Employee Needs to Do to “Romance” You

This is not a one-way street; the employee needs to be “dating you”, the same time you are “dating them”.  In the first 100 days, you are looking for the new employee to be living up to the expectations they set during their recruitment process.  Do they really have the skills they said they have?  Are they behaving in the way you want new employees to behave, culturally? Are they hitting the goals you have set for each other?  If so, full steam ahead.  If not, you may have a problem on your hands.

What to Do If The Magic Wears Off

If things are not going to plan after the first 100 days, you really have one of two options. First, you feel the relationship is salvageable and there is a clear long-term path forward together, most likely with additional training or whatever.  Or, second, you need to pull the “ripcord” and mutually decide this isn’t working out as planned, and both parties need to agree to part ways.  Hopefully, in your offer letters, you incorporated some type of “first 100 days” probation period language, that will legally enable you to exercise these rights if things are not working out.  But, in no scenario, should you keep the employee if you do not see a reasonable path forward together.  Like in any marriage built on an unsolid foundation, they will most likely end in a divorce anyway, so you might as well get it over, sooner than later, before the problems fully fester into “cancerous breakups” over time.

Closing Thoughts

Many good entrepreneurs put a lot of energy into recruiting great staff members to join the team.  But many of those same entrepreneurs, don’t put enough energy into what to do with those same new employees once the actually get started.  That is where the “rubber really hits the road”.  Your long-term success, both as a hiring manager and as a company (depending on good employees), will be decided in those first 100 days after a new employee gets started.  So, don’t blow it, remembering you only have one chance to make a good first impression, both ways.

 

 For future posts, please follow me on Twitter at: @georgedeeb.