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.