Lesson #371: Tariffs Are Hurting My Business--Should I Cut Expenses?

 

With all the chaos in the economic and financial markets these days, largely around the impact of new tariffs, it is causing unexpected and unfortunate turmoil for many businesses today.  Businesses that used to be growing are seeing declines, and businesses that used to be generating healthy profits may now be experiencing losses.  That can be a scary time for the most seasoned executives, and even more so for startup executives living it for the first time.  This post will help you figure out how best to navigate these choppy waters.

Why is This Happening?

Tariffs are typically very bad for the economy.  Although it may raise revenues for the government in the short run, it raises the prices of goods and services that are imported from the countries in which tariffs are imposed.  And right now, tariffs of varying sizes are flying around many different countries and industries, wrapping pretty much everybody into this “dust storm”.  This means as importing costs go up with the tariff costs, either you will pass through those increases in the form of a higher selling price (which will lower demand and profits) or you will eat those increases at the original price (which will hurt your margins and profits).  Neither is a good outcome for your bottom line. 

What Are Your Options to React?

When profits are in a free fall, you really need to assess the situation and determine your best path forward.  For many, that could include dramatically lowering your cost structure with layoffs or otherwise, to help extend your cash runway so you can live to fight another day.  Whether you make these cuts, and the size of these cuts, is the conversation for today’s article.

Key Questions You Need to Ask Yourself?

In This Reduced Economy, Will I still be Profitable?  This is a very important question.  If you think you will still be profitable, then any cuts are optional depending on how high of a profit you want the business to generate for its shareholders.  Maybe your shareholders will have a longer term perspective and will not want to “rock the boat” in the near term, if they see a viable path to recovery in the medium term.  But if you are expecting losses, cuts may be your only option, unless you are sitting on a big pile of cash that can fund your newfound cash burn rate. 

Do We Feel This is a Short-Term or Long-Term Hiccup?  If you feel the impact will be short in nature (e.g., under a year), you may have a different perspective than if you feel the impact will be longer term in nature (e.g., over a year).  But for issues like this, you don’t always have a crystal ball with which to perfectly predict the future.  So be conservative in your thinking, assume it could be much longer than you think, and build in the appropriate cash cushions into your forecasts.

How Long is My Cash Runway?  Your cash position will often dictate your best path forward.  If you have enough cash to fund the next 18-24 months in a reduced sales environment, maybe you will be okay with no changes.  But for most startups, they do not have the luxury of sitting on a lot of excess cash.  So if you are incurring newfound losses and your runway is under 12 months, it is time to start chopping, as raising funds in this economic climate will be very difficult.

How Important is It to Retain Key Talent?  In highly specialized industries, making cuts can be extra painful.  You have invested a lot of institutional knowledge into your team, and you don’t want that to walk out the door unless you really have to.  So your decision around cuts may be directly related to how hard will it be to hire their replacements down road.  But be honest with your assessments here, not everyone can be the irreplaceable “Michael Jordan” on your team.

When Should I Make Cuts?  As fast as humanly possible.  The faster you cut, the quicker you start saving your cash, which will be a hot commodity in down markets like this.

How Deep Should I Cut?  As deep as you can without putting the core of the business at risk.  More is better than less, remember the deeper the cut, the more cash you start saving, again back to that hot commodity in these markets.  In all cases, your cash runway will help you decide whether you are cutting 10%, 20%, 30% or more.  But cut enough that you don’t have to go back and cut a second time down the road.  The worse thing you can do to your staff is having them constantly worrying about the axe hanging over their heads in repetition.

How Will Cuts Impact My Culture?   Yeah, cuts are typically not good for culture building in the immediate term.  The remaining staff just watched all their friends and colleagues walk out the door under unexpected circumstances.  They will be grateful they “survived”, but they will potentially be angry with management as the ones who dropped the axe.  As long as you are 100% transparent with your team about what the situation was, how tariffs impacted the business, and that you didn’t have any other choice to save the company and their jobs. Hopefully, they are mature enough to understand the situation and culture will hopefully rebound over time.

Are There Alternatives to Cuts?  Other than raising capital, you can get creative in how cuts are implemented.  For example, let’s say you have a staff of 10 salespeople all making $50,000 base and $50,000 in commissions (at 5% of sales).  Instead of cutting 3 people to save $300,000, you could change the compensation plan for all.  You can move all ten salespeople to a “commission only” model (which keeps everyone with the company).  That puts the onus on them to sell in order to get paid any amount at a higher 10% commission.  But if they don’t sell, you don’t have the fixed overhead of their salary to pay.  This may upset all 10 people instead of upsetting the 3 that would otherwise have been cut, which may have everyone looking for the door, but it is an option.  The more you can implement a single action and be done with it, the better, as compared to solutions that drag out the pain for everyone over a longer period of time.

Closing Thoughts

Hopefully, you now have a better understanding of how to navigate the current choppy waters many of us are experiencing.  Follow the guidance in this post, and you should survive to live another day and best position the business to weather the storm until the markets start to recover.  Good luck and hang in there!  This is never an easy topic to deal with.

 

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

 

 

Lesson #370: Not All Potential Acquirors of Your Business Are Created Equal

When your shareholders have decided that it is the right time to put your business up for sale, it is very easy to say “great, let’s sell it to the buyer with the highest valuation”.  But that would be a mistake.  There are several other factors that go into finding the “right” buyer for your business and your specific situation.  This post will help you think through those various consideration points and provide some warnings for things you need to look out for to avoid known potential pitfalls when it comes to picking the right buyer for your business.

A Normal Sale Process

When companies are put up for sale, that is often done with a business broker that is marketing your company to many prospective buyers at the same time.  Let’s say in a normal process they could reach out to 200 target buyers, get 20 of them to engage in some sort of dialog or preliminary due diligence and get 5 of them to submit a letter of intent to purchase your business.  The question of this post is:  which of the five buyers is the one you should pick?  Spoiler alert, it may not be one with the highest price.

The Different Types of Buyers

Most buyers can be classified into one of three categories: (i) strategic buyers that are companies looking to get into your industry or increase their current market share in your space; (ii) financial buyers that are often private equity firms or family offices looking to buy cash-flowing businesses as an investment strategy; and (iii) individual executives or entrepreneurs that are looking for a business for them to own and operate themselves (these can be individual executives or fund-less sponsors backed by private equity funds creating new executive roles for themselves).  Let’s talk about the typical advantages and disadvantages of these three different types of buyers.

Strategic Buyers

Advantages:  Strategic buyers are often the most reliable to get to closing.  They are talking to you because they see something in your business that can help them with their business.  Because of that, they are often the most willing to pay the highest valuations.  And they are often cash-rich, which means many do not need outside loans to get a deal done, depending on the deal size.  They don’t necessarily need your management team, if they have other executives able to step in and run the business.

Disadvantages:  Strategic buyers are often the slowest moving with the longest timeline to get to closing, with lots of different decision makers involved.  So, if speed is important to you, think twice about going down this path, as the due diligence and document drafting process could be the most cumbersome.

Financial Buyers

Advantages:  Financial buyers can move pretty quickly, as they are typically sitting on a big pile of cash that they are looking to invest.

Disadvantages:  They will often want to raise bank debt for up to 50% of the purchase price to better spread their equity investing potential into other companies.  And banks like to invest in companies with over $3MM in EBITDA, which may not be you.  They will want to back executives, as opposed to run the business themselves, so make sure you have a management team plan for them, which may include hiring and training your replacement prior to selling.  They tend to be the most aggressive in terms of negotiating the best price possible for themselves in order to maximize ROIs for their investors.

Individual Buyers

Advantages:  These tend to be the least sophisticated buyers and can require the least due diligence or least “hoops for you to run through” to get to closing.

Disadvantages:  They often require bank financing for a large portion of the transaction (up to 90% with SBA-backed loans), so the process can get slowed down by them having to secure the needed capital.  Since those bank loans often require personal guarantees of the buyer, they are often the most nervous about “making a mistake” and can easily talk themselves out of a transaction if they don’t want to take the additional personal risks.

Other Topics to Consider When Picking a Buyer

In addition to the type of buyer, you have to assess these additional considerations to determine if they are the right buyer for your business or not.

Their Reputation.  If you are interested in protecting your legacy, you don’t want to hand your business off to a buyer that will hurt the company’s reputation in the future.

Their Plan for Your Business.   If you care about how the business is going to be run post-sale, you don’t want to sell to anyone that doesn’t share that vision.

Their Plan for Your Employee Team.  If you care about your staff being treated fairly post-sale, you don’t want to sell to someone who is going to layoff your team.

Their Odds of Closing.  Selling to a buyer with a 75% chance to get to the finish line is a lot better than selling to someone with a 25% chance of getting to the finish line.  Even if it means a lower price.

Their Speed to Closing.  Selling to an experienced buyer that knows how to get through the process quickly is preferred to selling to an inexperienced buyer that could have the process drag out for months, and still not get to the finish line.

Their Personal Fit for Your Culture.  Make sure there will not be any personality or other issues with the buyer, in terms of how they will mesh with your current culture and team.

How is It Financed.  An all-cash offer is a lot better than an offer requiring any seller notes, earn-outs or third-party bank financing.  Duh!

How Secure is Their Financing.  If they do require outside bank debt or equity investors to fund the transaction, have those commitments been secured already, or is there risk they will lose their financing.  Even committed financings can fall apart, so be careful here.

Market Conditions.  If the economy or financial markets are perceived to be on unsteady footing, that will make buyers, banks and equity investors nervous, which will hurt your odds of getting the business sold.  Find buyers with a long term vision that are comfortable in all market conditions.

Closing Thoughts

So, as you can see, there are a lot more things to consider than maximizing valuation when picking the right buyer for your business.  Don’t be so focused on getting the highest sale price, that you potentially “topple your apple cart” by not fully thinking through all of the above issues.  Good luck!!

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

Tariffs Are Bad for Business. This Post Will Help You Survive.

All the chaos in the economic and financial markets these days, largely around the impact of new tariffs, is causing unexpected and unfortunate turmoil for many businesses today. Businesses that used to be growing are seeing declines, and businesses that used to be generating healthy profits may now be experiencing losses. That can be a scary time for the most seasoned executives and even more so for startup executives living it for the first time. Here's how to best navigate these choppy waters.

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

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

[VIDEO] The 5 Stages of the Marketing Funnel for SMB Success

I was recently interviewed by ASBN, an online "television network" serving the small business community, about how to optimize the five stages of the marketing funnel.  This video will help you learn more about those five stages, including brand awareness, consideration, purchase, repeat purchase and advocacy.  I thought this video turned out great, and I wanted to share it with all of you to make sure you are using the best marketing tactics and metrics for each stage of the funnel. I hope you like it!!

The embedded video player didn't give me the option to change the size of this video.  But, if you want to see a bigger version, simply click the expand size button in the player above.

Thanks again to Jim Fitzpatrick, Shyann Malone and the ASBN team for having me on the show.  I look forward to our next interview together.

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

Perfection Requires Time--And Time Kills All Deals! Stop Trying to Be Perfect!

 Winston Churchill is famously known for saying, "Perfection is the enemy of progress." And that quote most relevantly applies in business, perhaps more than any other sector. You may say, why is perfection a problem? Isn't perfection a noble goal when doing your work?  The answer is that perfection takes time, and time in the business world can often be a deal killer. If you can produce A- work in one week and A+ work in one month, that incremental benefit of the "perfect" work product, is most certainly lost in the form of the three weeks of lost time. When an A- is good enough to get the job done, take the win and move on. Here is how to better keep your business running at "light speed."

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 #369: Artificial Intelligence 'Avalanche' Looming for Search Engines

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 the artificial intelligence (AI) companies are making in the search world (e.g., ChatGPT recently launching SearchGPT), it may not be long before there is a “new sheriff in town”.  And that could be really bad news for most of us digital marketers that 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.

How Search Engine Marketing Works Today

If you are new business trying to get off the ground, most do so on the backs of companies like Google where millions of people are searching for things each and every day.  You simply needed to piggyback on their huge audience.  And you either did that by trying to get free organic traffic as Google indexed pages on your website, which you would try to manipulate through search engine optimization efforts (e.g., content creations, sourcing backlinks, optimizing the page code).  Or you would do it the quicker, easier and often more costly way of purchasing pay-per-click advertising through Google Ads.  This latter effort meant you always had an immediate way to get your business exposure with 100% certainty.  As long as you had advertising money to spend, Google would find you an audience.

How Artificial Intelligence Changes This

First of all, these AI companies are in their infancy and they are solely focused on winning the “technology war” up against their competitors to prove they have the best AI search product in the market.  Which means they are not focused at all on how to monetize it yet.  Secondly, there will be a handful of players that rise to the top of this race.  Which means it is unclear who the winner will be that you need to focus your marketing efforts on, which will result in a much more splintered marketing efforts across multiple sites to manage (no single “big dog” yet).  Thirdly, there is no “handbook” written on how you can “game” the AI companies to include free organic links to your company.  It took decades to learn how to “manipulate” the Google algorithm, and it is unclear what needs to happen to manipulate more conversational AI robots.

This doesn’t even speak to the biggest point—AI can do things that were never even possible or imaginable with Google, making it a “better mousetrap” which will capture a lot of attention from users looking for solutions.   For example, if you are looking for a vacation on Google, you better have your “keywords” ready (e.g., whitewater rafting trip,  best things to see in Florida, best hotels in New York).  With AI you can layer in a lot of different things into a single search.  I was amazed when ChatGPT could quickly answer this question I posed: when you combine the cost of air, hotel and concert ticket costs, which of the 20 cities in Taylor Swift’s European Tour is the cheapest place to see the concert with me starting from Detroit.  In less than a couple seconds it pulled all the airline cost options, hotel cost options, concert ticket options by city, and made a well-researched and detailed recommendation.  WOW, was all I could say!!  This is a game changer, and Google should be really worried.  But more importantly, us digital marketers need to be shaking in our boots right now.

What This Means for Digital Marketing

First of all, it is going to be a “wild ride” for the next few years.  Most likely two things will happen, in this order.  First, people will experiment with all the new AI engines.  And they will gravitate to the ones they like better than Google, and Google will start to lose its stranglehold grip and market share.  This means you will see a lot less traffic coming from Google to your website, or the cost of that traffic will materially increase as you and your competitors will be fighting over less-and-less traffic over time.

The second thing will happen is the winning AI companies will finally turn their focus to revenues and monetization and launch advertising options on their websites.  It is not exactly clear how they will do that (e.g., keyword based like Google or something completely different), so it will be a learning exercise for all involved.  Which means there won’t be an immediate replacement for your lost Google traffic, and there will be this “middle period” of waiting to learn how to replace that lost traffic from the new AI engines.  That will put a lot of strain on your financial results—losing traffic from Google, waiting for new solutions, learning new solutions from AI engines.  It could result in a material “shake-out” for undercapitalized companies that don’t have a big pile of cash with which to “weather the storm”.

Closing Thoughts

Hopefully, all the search engine optimization companies shift their focus from Google to the new AI engines to help us more quickly navigate this new “Wild West”.  Or better yet, Google protects its search turf with its own AI and acquires one of the big AI engines so it can quickly transition its advertisers from the legacy Google search engine to the new AI driven solution that users are migrating towards. Until then, protect your businesses in the coming years.  It most likely won’t be all “wine and roses” for immediate marketing positions that you can easily control.  Which will make it a really bumpy ride for your income statement, requiring you to have a healthy cash reserve on hand.  I can’t wait to see where we end up in the next five years—as digital marketing will look a lot different to what it is today.

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