Quick Test: Should I Form a Startup?

“You can do it!” – line made famous by Rob Schneider in “The Waterboy.”

Being a big fan of the entrepreneurial space, I love to encourage people to get involved in new ventures. Forming something new or making what is there bigger and better can have a profound change on the world, and being a part of that is both exciting and daunting. I talk to owners every day and for those just starting out with an idea, I have a little test that I use to see if they should be encouraged or just continue to dream. Keep in mind a true entrepreneur knows the difference between an idea and an opportunity – thank you, Jeff Timmons – and you have to determine early on which of the two describes your journey.

So here is the quick, five-step test:

  1. Do you have a viable, unique idea? A baseball mitt for ambidextrous players may be unique, but viability may be a question. You should also be able to create a logical one page summary of your idea. It is amazing what happens when you have to put something down in writing. If you doubt this, try this little exercise – write down what you would like written on your tombstone.
  2. Do you have some money? Regardless of what you want to do, it will cost money. You may be able to minimize the cost, but you need to have some available money to get started. When I went into my own consulting business, I knew the most frugal way to incorporate, register, get a website and business cards, etc. but it still took a few bucks.
  3. Would you like to do this for the rest of your life? Next to sleeping, we spend most of our time working. If this is going to be your “job,” do you really like it? And please make sure you are not running from something, like a job you hate, but to a life you will enjoy more.
  4. Can you take the heat? Being the boss is the good news and bad news. Every new hire is another family you are responsible for so you have to be ready for that role. The road is full of stories about the team and sharing responsibility, but in the end, the buck will stop at your door and some people are not built that way.
  5. Can you make money doing it? Having your own business is great, but you need profits to pay salaries and make it worthwhile. This can involve difficult decisions on resource allocations. Be ready for that eventuality.

So there it is. If you have answered yes to these questions – and I think they all have to be yes answers – then you are ready to seriously commit to forming your new venture. Harness your passion and enthusiasm and get started. Just keep in mind that “you can do it.”

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Don’t Let Excuses Prevent Success

“I coulda had class. I coulda been a contender. I coulda been somebody, instead of a bum, which is what I am…” line by Terry Malloy (Marlon Brando) from the movie “On the Waterfront”

I am lucky; every day, I get the chance to meet bright, enthusiastic young entrepreneurs just beginning their journey as well as those who have mastered the art of being a business owner and are enjoying the fruits of their labors. Whether they are just starting out and are driven by the hope of success or reflecting on their accomplishments, whether they are young or mature (I hate old), they all share one common trait – – they never let excuses hold them back. Every obstacle is only a challenge; every failure a learning experience. Unlike Terry, they never lamented over what could have been; they made their way and remained focused on what they wanted. So, a valid question is why do I wax nostalgic at this point? Like most ideas I share, the roots are in the commonality of my experience.

Many of us who offer guidance to entrepreneurs try to be as practical as possible. We all create lists of dos and don’ts. I am guilty of this as well; my blogs include the Top 10 Points of Focus for Success as well as the 10 Reasons Why Startups Fail. We believe that making it simple and formulaic somehow makes it easier to comprehend and perhaps spurs a reader to action. But as one of my favorite clients used to say, “Says easy; does hard.”

So in keeping with this, simple is better approach, I offer the following for your consideration. Most accept the theory (I know I do) that most problems can be solved with a combination of three resources – – time, money and people. We can always use more of each to help us through the day, but I am discouraged when I see entrepreneurs falling back on the lack of resources as an excuse. Just some examples.

I met with a startup tech company that was looking to raise money. Table stakes here are developing a Minimum Viable Product (MVP). They apparently had the capability and resources at hand to achieve this milestone but were so focused on the “raise” they did not take the time to take this important first step. Needless to say, their timeline to raise funds (if they ever do) is now much longer. Their view; investors just don’t get it. If I only had the time…

Entrepreneurs at all stages can always use additional money. When the topic comes up, I am sometimes amazed at the responses when I ask two simple questions: how much do you need and what for? Believe me, I have heard more than one lament as to how fussy or ignorant potential investors are for asking. Really?

Mature businesses often do not take the time to recruit/develop the next generation of managers, and then are shocked when they try to exit and potential buyers shy away. I hear how potential buyers just “don’t appreciate the value I have created.”

So if this sounds familiar, I suggest you take a deep dive and find out what is really preventing you from getting to the next level. We all know that with additional time and money we could have “been something,” but isn’t the real question, “How come so many others are?”

Change of Control – Revisited

Cardinal Ximinez: “Nobody expects the Spanish Inquisition! Our chief weapon is surprise, surprise and fear, fear and surprise. Our *two* weapons are fear and surprise, and ruthless efficiency. Our *three* weapons are fear and surprise and ruthless efficiency and an almost fanatical dedication to the pope.” – Monty Python “The Spanish Inquisition”

I have seen my fair share of situations where change in control provisions in agreements resulted in unintended consequences. Until recently, I thought their sole purpose was as the name implies and as Curly said in “City Slickers,” “One thing; just one thing.” But maybe as the Cardinal suggests, there is more than one thing. Let’s look a bit more closely.

Every smart business owner knows his most valuable assets walk out the door at the end of each day. Most owners like to retain key employees and enter into employment agreements that among other things, provide for incentives (many of which vest over a period of time) that are protected, should the owner or owners no longer be around. This standard solution is known in plain English as a “change in control” provision. What this normally provides for is the acceleration of any vesting or even liquidity provisions of any incentive provisions for the key employee in the event the current owner no longer has more than 50% (usually) of voting control in the company. Everything seems fair so far; what is the problem?

In case one, I was asked to consult with a company that had a key employee that was promised an incentive payment in the event of a change in control. That provision was triggered when the Company was sold to a “strategic” but the Company took the position that they had accepted a lower sales price in return for the key employee being offered a position with the acquirer, thus they did not owe the incentive. While both sides believed their case had merit, the ambiguity created years of turmoil until we helped to resolve it.

In the second situation, an acquirer had issued an LOI for the purchase of one of my clients. During due diligence, they realized that the resulting change of control provisions would substantially “enrich the lives” of all the key management members, and they were sufficiently concerned with their motivation after the deal that they almost walked away. Fortunately, a solution was crafted which all found acceptable.

So just when I thought the key provision in an employment agreement with an incentive was a change in control, I have come to realize that it should be accompanied by a well-defined “continued employment” provision so both the team member and the company do not suffer unintended consequences when there is a change in control. Negotiating them at the start when both sides are not under the pressure of an impending transaction is also very helpful. I am starting to see these provisions in some recent transactions and strongly encourage their use. As the Cardinal said, the two key provisions are…

Kids in the business- Can it work?

“Kids suck” quote from James Beaudette – my very close friend

Jim and I have been friends for over 30 years. We first got to know each other when we began coaching our sons in soccer and our relationship has grown since then. We each had three children and many conversations would inevitably turn to something one of our children had done, which we would both find hard to fathom. The conversation would usually end with Jim stating his conclusion which we both share.

After 40+ years of consulting with family businesses, I could tell you stories about children in my clients’ businesses that would make your head spin. Some had unbelievable success; some abject failure; some were responsible young adults and others entitled brats, I have seen it all. I would almost be embarrassed to tell you how many times I had to lean in to a parent or parents and confide what Jim had taught me long ago.

But out of these experiences came some valuable advice on how to handle kids in the business. Now some of this will sound like motherhood and apple pie, but I have found that it does work. So here are three pointers.

The first is, family is family and business is business. I watched a young son take a $20 million business to over $1 billion in 20 years. Two young brothers who had worked part time in a business stepped up when their father passed away and turned it into one of the leaders in their industry. I also watched two brothers who were in dispute over leadership resolve their differences by craftily splitting the business resulting in two household name consumer products companies. The common theme here is while they shared that important bond of family, they never let family issues blur what they had to do for the business. It was appropriately striking this balance that resulted in each of their successes.

The next is when kids are in the business, be honest with yourself and your children. This is most important when you face major milestones and one that comes to mind is succession planning. I have done more than one succession plan where the end result of my work was that the oldest sibling did not become the heir apparent. They all ended with both successful transitions and with all talking to one another at Thanksgiving. I would love to take credit but it was the direct result of honest dialogue about the objectivity of the process and the importance of keeping the business sustainable. I have also walked away from assignments where the parents wanted me to “anoint” a family member as the next leader. To quote “In Living Color“, “Homey don’t play that.”

Finally, know the difference between being a mentor and being a parent. This is perhaps the toughest task of all. Too many parents make decisions as a supervisor (in one case to support the project a daughter was proposing that had little merit) with their parent hat on versus their mentor cap. This can enable bad behavior, lead to the ill-fated “bosses kid” syndrome and doom your child to failure. So while I am sure that on occasion you will reach Jim’s conclusion about your kids, try to be disciplined and follow some simple rules and you will find kids in the business can work and your family business will beat the odds of next generation success.

Your Business Plan; Are You Making a Living or a Killing?

“Go ahead. Make my day.” Harry Callahan (Dirty Harry) – from the movie Sudden Impact

I get the opportunity to see a good number of business plans / pitch decks each week and I focus on the section of the plan I believe is most critical. While some may believe it is the management team or barriers to entry; to me it is the financial projections. So at this point, you have to be saying, “Of course; he is a CPA. What is so surprising about that?” The truth is, there is no other place in a pitch where one can get a better picture of the “directional indicators” of a plan. Please allow me to explain.

Years ago, a colleague of mind was tired of working the long hours at our firm and wanted to become his own boss. He bought a Basking Robbins franchise. He accomplished his objective; he still worked long hours but now he was working for himself. However, at the end of the day, all he did was replace salary with small business income; from a financial perspective he was still just making a living.

If you are doing a pitch before investors, remember they are focused on high rates of return; getting their money back in multiples of what they invest. They are looking at what we euphemistically call “making a killing” and they are looking for you to “make their day” by showing them how. So where does the projection fit in to all of this?

First, what is the size of the opportunity in your eyes? If your projections show that in five years, your revenues will be $5 – 10 million, you cannot make enough money to attract most investors. Please do not get me wrong; growing a business to this size is a real accomplishment and can be financially rewarding. It is just not a killing.

Next, does the financial model follow the plan? If the plan is a SaaS model with monthly subscription payments, revenue is simple; multiply the expected users by the planned fee and that should be revenue. So now I can see how many users you expect to have (market share) as well as the monthly payment (market price). I can also look at how you plan to get to that level of users.

Finally, are the projections logical? If your margin or operating costs are substantially different from competitors, do you explain why or are you just plugging numbers to provide a financial result some online advice indicated was what investors want to see? It is a simple logic test that many fail on a daily basis.

Shakespeare said, “The eyes are the window to your soul,” and I think your financial projections serve the same purpose as it relates to your plan. So after you get done “crunching the numbers” please step back to see what they really say. There is nothing wrong with creating a nice profitable business model that might allow you to make a very good living for a long period of time. I have had hundreds of successful clients who have followed that path. Just keep in mind how this approach has to “step up” if you are looking for that investor who wants you to make their day.

Aggressive Advisory Services – “Hated It”

A man’s got to know his limitations – quote from ”Dirty” Harry Callahan (Clint Eastwood) in Magnum Force

Over the years, I have had the honor of working with a variety of advisors to entrepreneurs.  They may have been lawyers, investment bankers/advisors, industry mavens or just general business consultants and I must say, the vast majority were really fantastic.  To me, a good advisor objectively highlights the pros and cons of an issue and presents their take on a solution, but does not force an answer on the owner.  Not crossing this line is critical especially if you feel strongly one way about an issue, and the entrepreneur is leaning in the other direction.  While it is painful, I have learned to respect the difference of opinion and have found in more instances than not, the entrepreneur was right.  While you may as an advisor try to walk in the entrepreneur’s shoes, regardless of how dedicated you are, you are not thinking about their business 24/7 like they are. That is just a fact of life.

It is in this light that I throw up the caution flag for those owners who have an overly aggressive advisor.  I see this happen especially where younger entrepreneurs are dealing with a more experienced advisor and the senior person basically forces their point of view in a particular situation.  I have recently seen two examples of this – one by a lawyer and one by an insurance advisor.  They both created an environment which was intimidating to the business owners – almost making them feel as if they were not qualified to make a decision.  They were dealing with issues where the owner had limited experience and the advice almost came across as “I will make this decision as you are not qualified to do so.” They seem to follow the idiom that “in the land of the blind, the one – eyed man is King.”

In both cases, I decide to intervene to get the decision back in the hands of the parties who would bear the consequences – the entrepreneurs. In one case, the advisor’s recommendation was spot on – it was the presentation that caused the confusion. In the second case, the advice was dead wrong and fortunately, it was fixed and the entrepreneur saved a boatload of money.

So, my message to advisors (who probably do not follow me) is simple; please remember what Dirty Harry said and remember your role.  To the entrepreneurs, never feel you are not in control of what an advisor suggests because whatever the decision, you are the one who has to live with any consequences.  Trust that instinct when you feel you are being pushed and you will do fine.

Is it Time to Do That Acquisition?

“Patience hell; let’s kill something” – quote from famous image of two hungry vultures

At times, I think we live to repeat history over and over again.  Unfortunately, many of us only see with hindsight and not what is happening in the present.  How many of us today look back to the 2007 – 2008 time and admit that we should have taken all of our money and invested in stocks (remember GE at $7) and been part of the remarkable gains since then?  As usual, we realize it now when the best is perhaps behind us.

Many discussions I have with clients and prospects these days have a slightly different spin… “Had I only pulled the trigger and acquired that target – I would be so much better off today.”  Well, I have news for you – I think there is still a chance to do a successful deal.  Here is my gut reaction as to why.

First, I don’t know about you but if I have another conversation about the “new normal” I think I am going to vomit.  It is tough to take anemic growth rates that are so low, an extra workday this month versus the same month last year accounts for all of your growth.  How painful is it trying to assess progress that is so small, the tools we have can’t even measure it? What about being congratulated because your break even results are an improvement over past performance?  All of this is wearing on the patience of many entrepreneurs and this pent up frustration is leading them to think like these two vultures.

There is no doubt that your competitor or that target is probably sensing the same malaise.  And, while there is a good chance that the cost to acquire them may be higher than it was a few years ago, back then most felt their financial performance was at an all-time low so there was no motivation to even consider a transaction.  Well, most are now through that soft period and many are singing the famous Peggy Lee song “is that all there is?”  This, my good friends, can lead to the motivation to do something or what we refer to as a burning platform.

There is also a major factor working in your favor… the lending environment.  Interest rates have never been lower, the cash available at banks and investment funds are at record levels and with such strong competition for good deals, terms are as “borrower friendly” as we have seen for a long time.  We are seeing transactions close in reasonable time frames and robust activity is being reported especially in the lower end of the middle market.

So, if expansion and growth are in your strategic plan and you find yourself wondering if the time is right, I would encourage you to go after that deal and execute the transaction that will take your company to the next level.  And, please remember to get the right professionals to help along the way.