Civil Unrest

Most TEC groups have participated in a process we call The New Normal. The New Normal exercise is a facilitated brainstorming process where TEC members identify things we know now that will be different in the future. Some of the bullet points typically include:

- Inflation

- Higher interest rates

- Higher taxes

- Smaller cars, houses and buildings

- Social media increasing role

- Globalization

- Energy costs more

- Health care costs more

- Green is good

Only a partial list, but you get the idea. The intent of the exercise is to give TEC members a little better visibility of the future. And, then, allow them the opportunity to prepare contingency plans in anticipation of "the new normal."

The most unusual item that makes the list of most of the TEC groups that run the exercise is "civil/social unrest." We started doing this exercise in June of 2009. Well in advance of the protests in Greece, Tunisia, Egypt, Libya and Madison, Wisconsin.

As a result of The New Normal exercise, most members prepared plans for higher raw material costs. Some members locked in low, long term interest rates. A few members actually paid taxes in advance rather than following the deferral strategy that has been in vogue for years. A handful heeded the civil unrest warning and prepared contingency plans - both professionally and personally.

We have now seen several businesses targeted with boycotts, union intimidation and previously unimaginable threats against some of the most respected companies in Wisconsin. Did they have a contingency plan for "civil/social unrest?" Does your firm have a plan for The New Normal?

If you would like a summary list of the bullet points that turned up on TEC's The New Normal list, please contact me.

The Intolerables

Recently, a TEC member of mine promoted a bright young man to the position of General Sales Manager. The bright young man had performed well in a series of increasingly responsible positions within the company. The promotion gave him a significant opportunity in prime time.

Within one month, under the direction of the new General Sales Manager, sales increased and margins improved. The second month was even better. During the third month the company achieved record sales and profits. Truth be told, after surviving the downturn in the business cycle, the company and the CEO needed a big time boost in top line revenue and Gross Profit.

Unfortunately, the management style of the bright young man appeared to change after he was afforded more authority. His leadership style became directive. He created inter-department animosity with his new found command and control persona. In short, he became a bully.

My TEC member had experienced bullies before. When he was about 8 years old, he recalled having to punch the neighborhood bully in the mouth to get him to go away. The bully never bothered him again.

He also knew that the management style of the new General Sales Manager flew directly in the face of the team building effort on which he had been working for the past several years. The question was more sales, more margin and more money now or declaring "an intolerable."

My member chose the intolerable. He told the bright young man the negative effect the intolerable behavior was having on the organization. He also told the story of the bully from his childhood. He made it clear....real clear....that this type of behavior would not be tolerated regardless of the short term gain. It was "an intolerable."

The bright young man took it in stride. He said he understood. He would change his behavior. He was sure he could get the job done without the intolerable. Time will tell.

TEC Resource Specialist, Pat Murray, describes the concept of intolerables in his presentation titled "Leadership...The Inside Moves." If you would like a CD copy of the presentation, please let me know.

Do your people know The Intolerables?

All Businesses Are Worth $1 Million

When my partner and I were attempting to buy our first small business, we quickly learned a very important lesson about buying small privately held companies. All small businesses are worth $1 million. More accurately, every small privately held company is worth $1 million....per owner.

This small business owner valuation principle had a tendency to price our target companies out of the ballpark. An unrealistic opinion of value based on the seller's objectives rather than an objective review of earnings and, perhaps more importantly, future earnings forced us to disqualify some interesting acquisition prospects. It also may have cost some small business owners the opportunity reap some of the rewards of a lifetime of work.

A TEC member of mine is currently negotiating to buy a competitor. There are three owners of the target company. They are all in their late 60's. The owners have not kept up with technology in this capital intensive business. The management team is weak, at best. The company has not made money in three years. The owners want to "get out." Asking price? $3 million.

My member doesn't want the outdated equipment. He doesn't want the people. He doesn't even want some nicely located real estate, owned personally by the sellers. He is willing to buy the customer list. Fair market value? To be determined.

There is a better way. Kraig Kramers, a TEC Resource Specialist, has been instructing TEC members on the use of a relatively straightforward process for valuing companies that turns out to be remarkably accurate. Many members run the formula every year to get a realistic picture of how their companies are doing and how they are doing as CEOs.

The Kramers' estimate of fair market value can also save small business owners from pricing themselves out of the market. All business are not actually worth $1 million.

If you would like a copy of the Kraig Kramers formula, please e-mail me at dennis@globenational.com.

Price Fixing 101

I was having lunch the other day at one of the trendy downtown hotel/restaurants. I was alone, sitting at the bar. A young man, probably born between 1965 and 1984, came in and asked to see the manager. The manager appeared. The two young men talked for a couple of minutes. I wasn’t intentionally eavesdropping, but I did overhear that the Xer who requested to see the manager was representing another trendy downtown hotel/restaurant.

The manager, also probably born between 1965 and 1984, brought the bartender into the conversation and finished by saying something like “give him all the information he wants.”

Next, the bartender, probably born after 1985, starts poking the touch screen on a near-by cash register. The Xer from the competing hotel was working from a list and asking the prices charged by drink by the trendy downtown hotel/restaurant. Grey Goose? $11.00. Check. Johnny Walker Red? $9.00. Check. Glenlivet? $13.00. Check. And on and on and on they went until they ran through the entire drink list of the trendy hotel/restaurant. Check.

The 111th Congress was still seated at the time, but I doubt it repealed the Sherman Act of 1890. This was horizontal price fixing, right there in front of my Caesar Salad. Simply exchanging prices with or without intent could have been a criminal offense if the exchange of pricing information affected the prices these two competitors set. Will the Xer manager who authorized the exchange, receive pricing feedback from his trendy downtown hotel/restaurant competitor? Check.

Generation X has been maligned for everything from an inability to consume enough to an arrogance that comes naturally to really smart, highly educated people. But somewhere behind these Xers was another trendy hotel/restaurant manager – a Boomer…who should have known better.

Rule of thumb. It is okay to talk to your competitors. Glean as much competitive information as you are able. But never talk about prices.

Why Buy a $2 Million House

Economist, Brian Beaulieu, spoke to a combined meeting of my three TEC groups recently. The title of his presentation was "Recovery: 2011 and Beyond." Beaulieu attracts a fair amount of attention within the TEC community, in light of his accurate prediction that a significant recession would befall us in 2008. He started telling TEC groups about the impending problem in 2003. He also advised our members what they should be doing about it in advance.

With certain caveats, Beaulieu's presentation was much more optimistic. 2011 will be a good year. 2012 and 2013, as well. 2014 could be another problem. But it was the "what to do about it" part that was the most interesting.

Brian Beaulieu is predicting inflation. Long term, steady and prolonged - 5 to 6% range inflation. Others are now becoming increasingly concerned about the prospects of inflation. Beaulieu has been talking about it for several years. Okay. What to do about it?

Beaulieu advised our TEC members that now was the time to buy assets, productive assets and real property. He told members to borrow money at the current remarkably low (by historical standards) rates. He said to lock in as much long term money as possible.

He told our TEC members "Borrow as much money as you can now. Borrow so much money that you can't sleep at night. Then, borrow more - enough so your spouse can't sleep either."

One of my members who heard Beaulieu a couple of years earlier had been keeping track of a $2 million property that was in foreclosure. The day after the Beaulieu session, my member's real estate broker called him to say the property was going up for auction at a sheriff's sale the following morning.

There were two bidders at the sheriff's auction. The other guy dropped out after the opening bid. Much to his surprise... and the amazement of his wife…my member bought the property at a totally ridiculous discount from the original asking price.

Was Beaulieu right in his inflation forecast? Only time will tell. In the meantime, my member and his wife should have many sleepless nights in their new home. Good for them.

If you are interested in a complimentary CD of Beaulieu's complete presentation with the balance of his forecast from "Recovery: 2011 and Beyond," please let me know. One Hint: How much gold would you have to own to keep you awake at night?

Dog Story

Do you know how they train hunting dogs these days? A TEC member told me the story the other day. It involves “technology.”

Well, it also involves humans….and that is where the story gets interesting.

My TEC member is an avid outdoors man and dog trainer. He uses a shock collar to assist him in the training process. A shock collar of this nature is capable, if necessary, of blasting the dog with 20,000 volts of electricity. A police issued stun gun carries 50,000 volts. You get the idea. My member has been trained extensively in training dogs and the proper use of the collar.

My TEC member tells me that some people are untrained or just plain stupid when it comes to the use of the collar. He can tell the dogs that have been mis-trained just by watching them. The dog will walk slower, with its head hung low between its shoulders. Mis-trained dogs can be very aggressive, when given the opportunity. They tend to develop all sorts of exotic diseases. They die prematurely.

My member said his dogs actually like it when he attaches the collar. The well trained dog knows it is going to go outside and hunt…run around, chase birds, have some fun.

My member told me the story because, over the past two years of a business downturn, he had the feeling of a mis-trained hunting dog with a shock collar. He did not know from where the next economic/financial/regulatory shock was coming. But he was pretty sure that the repeated blasts without warning were taking their toll on him mentally and physically. Cumulative stress is a killer.

TEC Resource Specialist James Newton has suggested the following prescription relative to relieving long term, cumulative stress.

- Eat better. Healthy food. No sugar. Simply stated…eat real food.

- Exercise very regularly. Like 6 out of 7 days a week.

- Clean up the “ankle bitters.” Finish that nagging project.

- Recreate. Newton pronounced it “re-create.” Have some fun.

- Take a vacation.

.

On October 13th The Wall Street Journal promoted a similar approach to dealing with the effects of long term stress in an article titled “Slumping at Work? What Would Jack Do.” The Jack, in this case, was Nicklaus. Much of the article had to do with relaxation and positive visualization.

Business leaders in today’s environment may not be able to remove the shock collar entirely. There will always be weird things that happen in a highly competitive, increasingly regulated marketplace. Leaders can, however, mitigate the adverse effects of long term stress exposure. Indeed, they owe it to the people they lead. Take action. Relax.

The Blindside

At the request of a TEC member, I met recently with a former business owner. Dave, the former owner, had run a successful business for nearly 30 years. He was now a former owner because he was “blindsided” over the last two.

Dave’s company was forced into bankruptcy after a series of bad decisions. One or two of these decisions might not have been fatal. A string of poor decisions, however, ended with tremendous personal loss in terms of the number of lives affected. These poor choices would have been caught by an astute mentor, a trusted advisor, an advisory board or a TEC group. Someone needed to cover Dave’s blindside like Joe Theismann needed a Michael Oher.

As the story played out, the series of some of the questionable decisions looked like this…

- Dave decided to expand aggressively heading into the downturn in the business cycle. TEC members had been advised by TEC Resource Specialists such as Brian Beaulieu to plan on a recession in 2007. The macro-economic outlook was clear, according to economist Beaulieu, three years in advance of the actual recession. TEC members prepared in advance.

- Not only did Dave take on substantial debt to finance the ill-timed expansion, he added significant fixed costs that were difficult to shed when the downturn became apparent. The balance sheet was now leveraged for the first time in years and the company was hemorrhaging cash, when hording cash was the order of the day. Once again, TEC members were being advised of the exact opposite strategy heading into the recession.

- Dave decided to change banks. Typically not the end of the world. But in this case, the change in lenders appears to have been made without appropriate due diligence. Perhaps the regulators became more inquisistive. But when sales and profits began to deteriorate, the new bank grew increasingly nervous…and aggressive.

- The new bank told Dave it would be better if he would agree to a personal loan guarantee for the preciously unsecured debt arrangement. Dave eventually agreed, even though he had significant personal assets available at the time. No TEC group on the planet would have allowed this to happen. Ever.

The end of the business story is the bank called the loan, liquidated the business and took substantially all of Dave’s personal assets to cover the personal loan guarantee. The end of the personal story is that after running a nice successful business for almost three decades, Dave was left with, quite literally, nothing. Furthermore, this basically good (business) man ended up dazed, confused and embarrassed. And it didn't have to be.

If you are running a business, the question is…”Who has your blindside?”