Moore's Law

Again, passing along information that I did not write, but find interesting:

Moore's Law comes to us from Gordon Moore, one of the founders of Fairchild Semiconductor (FCS) and, later, Intel Corporation (INTC). In a nutshell, Dr. Moore wrote a paper in 1965 describing his observation that the number of transistors on a given cost integrated circuit had doubled each year since the invention of the integrated circuit, and his belief that the number of transistors would continue to double, at the same cost, every two years for the foreseeable future. The subtle detail that is often missed in casual discussions of Moore's Law is that the number of transistors doubles AT THE SAME COST. So the size of a transistor has continually become smaller and less expensive.
This is almost unbelievable insight at a time where we were still four years away from landing on the moon, and we still didn't have the ubiquitous, and almost free, four function handheld electronic calculator.
Moore's Law (Moore's Observation) has been driving the progress in semiconductor technology for the past 50 years, and quite accurately, I might add. The feature size or "node" has been reduced from 10 um (micrometer) for the first commercial microprocessor (4004) to 14nm (nanometer) for the soon to be shipping Broadwell microprocessor. That is a 99.86% reduction in the size of a transistor. The 4004 had 2300 transistors and the Broadwell is expected to have about 1.6 billion transistors. That is almost 700,000 times more transistors than the first microprocessor!

The benefits we enjoy daily have been largely influenced by this miracle. But the subject of the article is that Moore's Law must come to an end.

We are about out of physics, here people. But the ride has been a good one. And this insight, as is mentioned, is truly amazing.

Search Intentionally

So, you want to purchase a business. You are tired of making money for someone else, time to work for yourself.

You have been searching the websites, BizBuySell and BizQuest for sure, and found some potentials, but nothing that quite measured up. 

In my opinion, and after doing this for 20 years, the search for a company to buy is better accomplished by doing it in an intentional, orderly way rather than just haphazardly thinking about what might be out there. A Planned Search. 

I perform these orderly, well-defined searches within the parameters that you set—with a money-back guarantee.  In writing.  All you have to do is tell me that you did not receive the work and the work product that you thought you would receive (we have to agree that I will not be able to find you a company that will pay you a million dollars for an investment of a couple of bucks!) and I will give you your money back.  It costs $5,000 and I spend virtually all that on mailings (my “secret sauce”), in getting the right lists and then massaging the lists to find what we are really looking for.

I have only had one client ask for the money back—I was just starting the campaign for a client in Detroit.  He had experience as a mechanic, knew the trucking business, and I knew of (and continue to know of) a business owned by a fellow who not only drove a truck but also recruited drivers with bad credit and sold them tractor-trailer units that he financed. This entrepreneur was in a special segment of trucking where he controlled all the money so that the driver/owner got a check every two weeks much like he was an employee, but built equity providing security for all parties. 

Sweet, sweet business.  Made a lot of money.  Anyway, before I even got started the fellow who wanted to look...took a job.  The more I talked to him, the more it was obvious that he was better suited to work for somebody than to own a business.  He just didn’t have the passion to succeed.

The second part of the arrangement involves my success fee. I charge a lower fee for a transaction that results from a Planned Search, and you pay me rather than the seller, unlike the more typical arrangement.  The reason for the lower percentage fee is that, in my experience, you will accomplish the purchase of a business if you have made an initial investment in finding one, so I am more likely to not be wasting my time. Because of the quantity of time spent, I only do one or two Planned Searches per year.

Having done this for years and years, I cannot tell you how much the whole business of "avoiding" a commission means to a seller!  They think they are avoiding the commission because you pay it, but of course that is not true.  You factor in the commission to the total price, finance it and the commission is there whether he pays or not.  I can’t prove this, but when you pay the commission, I work for you and I believe I get a much better price than if I were working for the seller. 

I talk about the “secret sauce,” but it is really that I have found a way to find people who want to sell but have not quite figured out how to do it yet.  It is sort of like getting the merchandize as it shows up on the loading dock, not after it has been on the shelf and picked over.

To point out the obvious, our efforts are more often rewarded when we know where we are going, when we plan and when we then execute the plan.

Resume

I would like to take credit for everything erudite and write wonderful stuff, but alas, not going to happen. I wish I could write better, but in order to make up for it a bit, I will publish the writings of others that I think fulfills a purpose on this blog. I try to give proper credit.

One of the most frequently repeated reasons for asking me to help you with buying a business, or entering into a Search process, is that you are tired of working your butt off making money for somebody else. Why not do it for yourself?

Here is a guy who wrote a resume but was an entrepreneur. Listen and learn, grasshopper...

This was posted April 9, 2012 by Marc Cendella, CEO and founder of “The Ladders.” 

Before he was famous, before he painted the Mona Lisa and the Last Supper, before he invented the helicopter, before he drew the most famous image of man, before he was all of these things, Leonardo da Vinci was an armorer, a weapons guy, a maker of things that go "boom".

And, like you, he had to put together a resume to get his next gig. So in 1482, at the age of 30, he wrote out a letter and a list of his capabilities and sent it off to Ludovico il Moro, Duke of Milan.

Here at TheLadders, we like to celebrate Leonardo's birthday — coming up next Sunday, April 15th — by sharing his wonderful resume with you. You can click on the image below to see the full-size version.

The translation of this letter is quite remarkable:

"Most Illustrious Lord, Having now sufficiently considered the specimens of all those who proclaim themselves skilled contrivers of instruments of war, and that the invention and operation of the said instruments are nothing different from those in common use: I shall endeavor, without prejudice to any one else, to explain myself to your Excellency, showing your Lordship my secret, and then offering them to your best pleasure and approbation to work with effect at opportune moments on all those things which, in part, shall be briefly noted below.

1. I have a sort of extremely light and strong bridges, adapted to be most easily carried, and with them you may pursue, and at any time flee from the enemy; and others, secure and indestructible by fire and battle, easy and convenient to lift and place. Also methods of burning and destroying those of the enemy.

2. I know how, when a place is besieged, to take the water out of the trenches, and make endless variety of bridges, and covered ways and ladders, and other machines pertaining to such expeditions.

3. If, by reason of the height of the banks, or the strength of the place and its position, it is impossible, when besieging a place, to avail oneself of the plan of bombardment, I have methods for destroying every rock or other fortress, even if it were founded on a rock, etc.

4. Again, I have kinds of mortars; most convenient and easy to carry; and with these I can fling small stones almost resembling a storm; and with the smoke of these cause great terror to the enemy, to his great detriment and confusion.

5. And if the fight should be at sea I have kinds of many machines most efficient for offense and defense; and vessels which will resist the attack of the largest guns and powder and fumes.

6. I have means by secret and tortuous mines and ways, made without noise, to reach a designated spot, even if it were needed to pass under a trench or a river.

7. I will make covered chariots, safe and unattackable, which, entering among the enemy with their artillery, there is no body of men so great but they would break them. And behind these, infantry could follow quite unhurt and without any hindrance.

8. In case of need I will make big guns, mortars, and light ordnance of fine and useful forms, out of the common type.

9. Where the operation of bombardment might fail, I would contrive catapults, mangonels, trabocchi, and other machines of marvellous efficacy and not in common use. And in short, according to the variety of cases, I can contrive various and endless means of offense and defense.

10. In times of peace I believe I can give perfect satisfaction and to the equal of any other in architecture and the composition of buildings public and private; and in guiding water from one place to another.

11. I can carry out sculpture in marble, bronze, or clay, and also I can do in painting whatever may be done, as well as any other, be he who he may.

Again, the bronze horse may be taken in hand, which is to be to the immortal glory and eternal honor of the prince your father of happy memory, and of the illustrious house of Sforza.

And if any of the above-named things seem to anyone to be impossible or not feasible, I am most ready to make the experiment in your park, or in whatever place may please your Excellency — to whom I comment myself with the utmost humility, etc."

What a fantastic piece of personal marketing! There's none of his famous backwards-mirror writing here — this letter was intended to be read and to persuade.

I'm a hopeless pedantic, so here's what I think we can learn from Leonardo's resume:

You'll notice he doesn't recite past achievements. He doesn't mention the painting of the altarpiece for the Chapel of St Bernard; he doesn't provide a laundry list of past bombs he's built; he doesn't cite his prior employment in artist Andrea di Cione's studio.

No, he does none of these things, because those would be about his achievements, not the Duke's needs.

Instead, he sells his prospective employer on what Leonardo can do for him.

Now imagine being the Duke of Milan and receiving this magnificent letter from the young prodigy of Florence. The specific descriptives paint a vivid picture of siege engines and bombardments and mortars and trench-draining and bridges to defeat the enemy. You can imagine the scenes that ran through the Duke's head as he held this letter in his hands and read through Leonardo da Vinci's bold statements of capabilities.

What Renaissance Duke wouldn't want "kinds of mortars; most convenient and easy to carry; [that] can fling small stones almost resembling a storm"? Sounds pretty enticing.

And that's exactly what your resume needs to do, too. Not the laundry list / standard bio that talks about you, but the marketing piece that talks about the benefits to your future employer and how you fit into his or her needs and desires.

So it turns out that even on his 560th birthday, this remarkable fellow Leonardo da Vinci is teaching us about the future. What a genius…

Your Self Interest and the Business Broker

This sounds Machiavellian, but it seems to me that people primarily act out of self interest. Yes, I will grant you that there are genuine acts of charity and self-sacrifice, but I did say "primarily." Just work with me here??

Take that one more step, and my "self interest" is best served when my interests parallel the interests of the other person. Extreme examples: during a mugging, it is in my best interest not to resist, to give them what they want and keep my mouth shut. That last part has always been a bit difficult for me. Your interest in surviving without too much damage parallels their self interest of not murdering you.

On the other hand, a typical example: partners (whether business or marriage) serve their own personal best interests by doing the things that need to be done in a manner that uses their own diverse talents even though some of those tasks may not be a lot of fun.

Enough about this philosophy stuff, what does this have to do with Business Brokerage? Simply this, that you will be best served when your business broker has an interest in the outcome that will be most favorable to you. How can this work when your financial interests are diametrically opposed to the Seller? He wants the highest price, you want the lowest price. Again, the intermediary has the interesting task of finding a "middle ground" that can be acceptable to both parties but allow for the transaction to actually move forward.

A good rule of thumb: when the Seller is not pleased and the Buyer is not pleased, you probably have a good deal.

Another clue is how the Broker/Intermediary is being reimbursed. It is quite common, and really good business for Brokers to charge a retainer. So much a month to do list the business, prepare the "book" and to develop potential buyers. This plus a commission or success fee when the transaction is accomplished. I know of a situation where the intermediary was paid $30,000 to prepare a "book," and it wasn't very good at that. Plus, they were to get the Lehman Formula for their efforts.

The Lehman Formula is the basis for most broker payments. Around for decades and named long before the Lehman Brothers failure, it provides for a fee of 5% of the sale price for the first $1 million, 4% for the second, 3%, 2% and 1% for anything over $4 million. Most Business Brokerage transactions are "double-Lehman," starting at 10% and ending at either 2% or 3%.

My listings are nearly always double-Lehman and I seldom charge a retainer except for a Listing Fee that ranges from $500 to $2,000 and has two purposes: one, to reimburse me for time and cash expended for preparing a valuation and for advertising; and, importantly, two, to determine if the Seller is actually serious. Without going into the reasons why people do what they do, suffice it to say that some Sellers will undertake a listing if it is free, disregarding the imposition that may cause on me. So, I impose that just to find out if they are serious.

With the double-Lehman, a business that is sold for $1,000,000 will owe me a success fee of $100,000 which, more often than not, I will share with another broker that brings the buyer. The broker pays for their own expenses and has a security interest to guarantee payment.

If I were advising a Seller, I would tell them to use an intermediary who practices pricing along those lines--virtually all the fees come from getting the job done, few if any fees come from up-front payments. There is little incentive to do the really hard work of working with buyers and sellers when you are sitting back collecting retainers.

Another caveat for the Parties is to make sure that the Brokers involved do not duplicate fees. If this happens, you will simply arrive at an impasse as the broker fees are so large that the deal is impractical.

So, self interest can guide you to a happy outcome. Align yourself with the interests of others and you get the best deal.

Contact me at 913.238.2298 or email at info@nbbcompany.com

Honey, I Just Talked to a Divorce Lawyer or How to Value a Construction Company

The other day, I walked into my wife's office and said, "Honey, I just talked to a divorce lawyer."

"Oh?" With raised eyebrows. Way to go, I had her attention!

"An old listing has asked me to provide a value for her construction company in a divorce case and I have agreed to do it." "Oh." The attention was fading.

Agreeing to provide a valuation, a deposition and testimony in court for a small fee and a potential listing did not raise my total worth in her eyes; and when I blurted it out, it didn't sound like a brilliant idea to me either.

Subjecting yourself to the humiliation and aggravation of interrogation by a lawyer set to make you look and sound incompetent should be avoided. So why do we do it? The only real reason: I know what a construction company is worth on the market, how difficult it is to find a buyer and close a transaction and I am offended by the highly paid, sublimely degreed imbeciles who compare the value of a construction company to a window manufacturing and installation business in Tampa.

The truth needs to be told. My wife, however, thought maybe someone else should tell it, and I should devote my efforts to something more productive and profitable. She had a point.

If you approach this from a mathematical viewpoint, develop averages, weighted averages and the like, the results are, in my opinion, flawed and extremely inaccurate. In this case, I thought the opinion of the opposing expert that the value was $750,000 was heinously wrong, but these types of valuations are appealing to the court because they do not require "judgment."

My opinion of value was $250,000 and I told her she would be lucky to get it. Especially since she was unwilling to provide a non-compete.

Here is what I subtracted from the "mathematical" viewpoint:

1. The lack of a non-compete. In this very personal business, the cooperation of the Seller is critical, and, in this case absent.
2. There was a back charge pending for over $300,000 and retainage exceeded $600,000. My valuation assumed (properly, I think) that only a fraction of these would be collected by a new owner.
3. Backlog at the time of valuation was $300,000. Compared to annual revenue of $10 million, this was "full-stop." Based on historical margins, this would not pay overhead for a week.

Instead of a company that would perform along the lines of historical averages, I saw a company with uncertain performance, impaired assets and little evidence of future business.

WHY WOULD YOU BUY A CONSTRUCTION COMPANY?

Short answer: There is no better way to amass significant wealth. Except, of course, the two best ways - marry it or inherit it. Sure, I would like to reap the benefits of one of Warren Buffet's insurance companies, but I don't have a spare billion dollars or so. While contracting takes money, it is money that is often within the reach of individuals.

But this road to wealth is littered with the bodies of the vanquished, the ones who reached and failed. It is high reward and high risk.

A fundamental guideline: in my experience, it takes construction experience to be a qualified buyer of a construction business.

When establishing a value/making an offer to purchase:

1. Keep the price within about 1.0 to 3.0 times cash flow. "Cash flow" is essentially Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) plus owner salary, benefits and perks that were included in expenses. Sometimes, I describe it as the amount of money thrown off by the business after taking account the expenses justifiably needed to perform your service or deliver your product. Another way: the money left over to pay yourself and the bank, whether the bank is a loan or it is the amount you invested.
2. Recognize the extra value of equipment, but the effect is probably not substantial in most except "heavy" contractors.
3. Include a "look back" provision in your purchase contract as a way of settling up on matters that will be decided as jobs complete.
4. Insist on a backlog that will provide a good start for the new owners.
5. Obtain a meaningful transition process.
6. In due diligence, look for general contractor back charges, establish a bonding line prior to closing and be very careful about the difference between what you thought you had been told by the owners and the broker and what you are seeing. Quiz current customers and any contractors you are a sub to.

PAY UP FOR QUALITY AND GROWTH. When considering the multiple of cash flow, move higher if the company is growing and fairly large, move lower if the company is small (your salary takes more of the "cash flow"). The term "quality" can mean a lot of different things, but make sure that you get a company that has some certainty to the future of the earnings stream although that is extremely hard to discern.

Buckle up, get ready for a ride! Good luck.

Contact me at 913.238.2298 or email at info@nbbcompany.com
 

I Have Never Fired Someone Too Early

Have you ever reviewed the dismissal of an employee in your mind and said, "Gosh, I wish I had not fired that person. I should have given him/her more time."

Well, that thought has never occurred to me. Instead, this is the way it usually goes: "Dang it, why did I wait so long?" Or something stronger.

The facts are that by the time you, the boss, figures it out, everyone else in the company knows and may be laughing at the way this employee gets away with stuff. You, my friend, are NOT the first to know.

After some time has passed, it is almost certain that more incidents or information will be revealed that indicate that the problem was deeper, more frequent and more serious than you thought when you fired the employee.

MY FRIEND LANCELOT

Well, his name is not Lancelot, but close, and that isn't the point of the story. L and his wife had come up through the trades and they ran a nice little business in the construction industry. Made a nice living, had a good crew and used their certification as a minority-owned business judiciously. They did good work and things were going well.


Until Mrs. L got cancer. It lingered for a long time, consumed L's time and energy and eventually Mrs. L's life. As she got weaker, she wasn't able to do the work at the company and they hired a friend from church, Marie, to help out. Marie became a permanent employee and things went along for a couple of years.

One day, a long-time supplier and friend saw L at a ground breaking on one of their mutual projects and said, "L, my man, I need to get paid on that invoice for this job." L was surprised and said he thought he had already paid it. No, better check.

Upon checking on things, it seems that Marie was not only Mrs. L's close friend from church, she was a gambler, had a big-time gambling problem and had embezzled almost $400,000 from this little company over a couple of years. It almost broke the company and, although she went to prison, the money was GONE!

Marie had intercepted all the calls, juggled the checks to keep the creditors at bay and didn't count on the chance meeting at an event. She would alter the checks that L signed so that she was the payee.

Lancelot survived, but he should have paid more attention, had more controls...and he certainly didn't fire her too soon.

STEALING TIME

This was, of course, an extreme case. More likely, it involves petty theft (one case I know involved buying supplies from a friend for a "premium" and splitting the proceeds) but MOST LIKELY, employee malfeasance involves stealing of another kind, stealing time. The employee is paid to do a job and just isn't doing it.

These kinds of situations are more difficult to ferret out and more difficult to bring to conclusion. Did I provide the correct instructions? Did I train the employee properly? Should there be a time that an employee should be able to work on "outside" jobs?

THE SECOND RULE

As well as "Never Too Early," the second rule is "Things are not very clear." You will always need to make these kinds of decisions with incomplete information, and for some supervisors, that kind of action is anathema. To make things worse, you will make mistakes.

I remember making one of those mistakes, and it almost cost me my job. The employee in question was shoved down my throat by my boss which started things off on a bad foot not improved by the actions of my boss and the employee to persist in going around me. The fact was, however, that she was not doing her job and even after extensive counseling, really didn't think she had to do the job because her benefactor would protect her.

Although I had documented the employee's ineffectiveness and insubordination and had it verified by others, although I had discussed the situation with my boss, I took action out of anger and that was the terrible mistake. As an excuse, I was fighting the flu and had a high fever at the time, but as you know...that's no excuse and there just aren't any.

DO IT RIGHT

You have enough information, it is well documented, you have gathered the approval of everyone else who needs to know. Now, just go ahead and perform your job.

Not getting rid of an employee who others know is not performing can have terrible consequences on the morale of the group and your reputation. They probably already know that you are not a hero, but they should not be encouraged to think of you as a milquetoast.

When you do your job, don't argue with the terminated employee. You are well past that. Good luck.

Buying a Construction Company

BUYING A CONSTRUCTION COMPANY

Contracting is high risk, high reward.  I have a client who has generated net worth in excess of $10 million, no debt, in less than a decade.  He started with very little except his experience and a lot of debt.

That same road is littered with the carcasses of those who didn’t make it.  But you will not be among them if you follow a few guidelines.

Never run out of money

Cash makes a difference in so many parts of our lives, but money really makes a difference in the construction business.  Make sure you have adequate net worth and a bank that understands the business.  Expect that 10% of your billings will be held back (“retained”) until the job is finished meaning that you, the subcontractor, may be done with your work in June but the rest of the job doesn’t complete until September and the owner doesn’t pay the General Contractor until December.  Your retainage comes to you six months after completion.  Make sure you determine whether you will qualify for bonding BEFORE you buy the business if this company works in a bonded environment.

Practice good management

The employees are the heart of the contractor’s business.  You can buy the best bathroom lavatory in the world, but if you are unable to install, you have no business.  Personnel practices in the industry are, in my experience, poor.  “Management-by-yelling” is the most common method of managing employees, so if you can employ policies and procedures that treat employees as valuable partners in the business, you have an advantage over your competitors.

A proven way to monitor employee productivity is the "revenue per day" metric. A good plumber bills over $1,000 per day from his own efforts. It gets more complicated when working on a crew and with prolonged jobs, but you get the idea.

Pay attention

This is not a business that can be put on “auto-pilot.”  While most of your competitors will have “come up from the trade,” meaning that plumbing companies are run by plumbers, etc., there is a size at about $5 million in revenue, say $250,000 in cash flow, $500,000 to $750,000 in price, that knowledge of the trade is less important than knowledge of business.

You absolutely need to know or learn the key function of your business. If you are a fireproofing contractor, you need to know how to bid a job. That involves knowing how to "take off" the job, understand the nuances of regulations that are so important to this business and how to translate that into a competitive bid. While someone else may do parts or all of the work, you cannot be in a position where a negligent or stupid estimator could get you involved in a loser.

Learn or hire

The owner/seller and, perhaps, other key people, will need to be replaced.  Make sure you can either replace the owner or hire someone to do so.  For instance, if the owner was the only estimator, you will either have that skill going in or you will need to hire an estimator.  They are available! Remember, though, that estimating needs to be watched and supervised or it can get you in trouble. If the owner is the accountant/bookkeeper, same process.  Determine your skills and see if they fit with the business.

You will have to learn the fine art of complaining.  One client asked, “Why would anyone get into this business?  It is so bad.”  He said this as he was counting the $45 million he received for selling his medium-sized company.

Construction will use all your business skills—estimating, project management, financing, personnel, reporting and others.  In return for doing those well, you are paid handsomely.  It is my firm belief that the price you pay for a contractor (within reason) is not nearly as important as how well the requirements of the company fit your skill set and how determined you will be to perform the tasks at hand.

Get ready to learn a new language, retainage, mechanics liens, surety bonds, and get ready to learn a new culture.  Then, get ready to build a valuable asset with excellent current income.

CAN YOU NAME ANOTHER INDUSTRY WHERE YOU CAN START WITH A HAMMER AND A PICKUP AND BECOME A MILLIONAIRE?

New Stuff

The Business Broker blog is a new thing for me. I have had the website for many years, but I have lost the ability to edit it! The person who designed the website is no longer available, so the info gets more and more out of date.

However, since I already have a personal blog on this service, www.bourbonanddad at blogspot dot com, and I enjoy writing, why not say some stuff on a blog.

Keep tuned. More to come. After all, I have more than 20 years of experience to pass along, and it might take a while.

Contact me at 913.238.2298 or email at info@nbbcompany.com