Step 1 Valuation Benchmark:
We think of value when we want to buy or sell a business, settle a shareholder dispute or divorce. Another place for assessing value is knowing when to close the doors.
Technology changed quickly causing a business to suffer. The owner was in acquisition mode, trying to gain some economies of scale by buying smaller companies, reducing duplicated costs, and rolling them up into a larger company.
However, on this day, the owner and I go visit his father to review the financial challenges of this business. Father and son owned a majority interest, were highly successful businessmen, and were well respected in the community. The family was willing and able to invest more capital. As father and son began the conversation. I remained quiet. They reviewed the current state of the business and more importantly, what was the son going to do to turn the business around. It got tense. Father offered no sympathy and wanted answers. He was a no nonsense, old school, highly successful businessman. He was used to getting what he wanted, when he wanted it. Telling him “no” was not advisable. However, son did not back down.
At some point, we took a break. I went into the kitchen to find a drink. I was exhausted just from watching the confrontation. The father followed me into the kitchen.
Remember those Southwest Airline commercials?“Want to get away?” My thoughts were,“Oh no! He’s following me in here! Do not make eye contact. Avoid communication at all costs. Where is the bottled water? How can I get out of here? ” I could not find an escape hatch. There was no way out. The father looked at me, cleared his throat, and said, “So what are we going to do to get this ox out of the ditch?”
There is no play in this man. He is all business. He does not want some long, circuitous, weak, milk toast answer. He wants an answer…now!
I turned to look him straight in the eye, took a deep breath, and replied, “We’re not. This is not a matter of more money, better marketing or management. Technology changed overnight. There was nothing we could have done about it. Investing any more money in this business is a lost cause.” His eyes blinked a bit, probably not expecting my answer.
He continued, “Well, what are we going to do then?” I replied, “We are going to write off this one, and make it up on the next one.” He cleared his throat again and said, “Ok.”
The meeting ended right there. There was no more discussion. None was needed.
We closed that business soon thereafter. Although stockholders took a loss on that venture, those that participated in the next one, made up all their losses and more.
For several years after that, whenever I spoke with the son, the first thing out of his mouth was, “Gary, that was the best advice I’ve ever received.”
As the song goes, “You got to know when to fold ‘em.” The family was willing and able to pump in more money, a lot of it, into this dying business. However, it would only have increased their losses. It was a sinking ship.
Another takeaway is when a man or woman asks a direct question, give them a direct answer. There are times when a longer explanation is warranted, but other times it is not. Know the difference and be willing to step up to the plate and give a clear, short, direct, honest answer. Sometimes today, we are more focused on telling people what they want to hear and trying to make them feel good instead of telling them what they need to hear.
If you have any questions about measuring and growing the value of your business, please contact me for a free conversation at [email protected]