Martinka Consulting's Getting the Deal Done Podcast
Informative insights and conversations with owners, CEOs, M&A dealmakers, and other professionals on lessons learned, tips, current business conditions, and more.
If you're producing a good product at a good price and good service and reliable delivery, they don't want to go anywhere. This is John Martinka and welcome to the Getting the Deal Done podcast. And today is part one of Silent Deal Killers. Those of us in the buy-sell MA world know all too well that things can creep up that business owners don't even think about. Because of course their business is the best thing since either sliced bread or cold beer or whatever analogies you want to use. So today we're going to talk about two different categories, and uh part two will cover another two. Customers. Customers can kill a deal. Now, what do most people think of? Concentration, customer concentration. And an owner doesn't often think that way. They think, well, this customers, they've been with us for 18 years. The owner and I go out together, we play golf together, they love us. And sometimes it's they love you, Mr. or Miss Owner. So let me give you a couple examples. A while back, I get a frantic call from the owner of a contract manufacturer, made supplements, vitamins, etc. He had 90 plus percent with one customer. The customer CEO left, the new CEO said, I'm switching over all the manufacturing to a friend of mine's company. Yeah, you know. So when he called and said, I need a buyer, it was like, no one's gonna buy it. You are in trouble. Another one, client of ours, we started working with the company. The wife was really the driver, is really the driver. Uh and we we said, no, your your customers, your top customers, 63%. That's a problem. No, no, no. We've been they've been with us forever. While we were doing prep work to sell the company, a buyer approached her and she wanted to talk to him. And so I'm having a conversation, and he ended up, the short story is he ended up passing because of that customer at 63%. She got the message. She started diversifying the customer base over the first years, less than a year, she cut it in half. But then to show how risky the is this is that customer started having business problems, and it has affected the business. She's still they're still making good money, but not as good as before, and they're having to scramble a little more. Customer concentration can be deadly. But what about pricing of customers? Where it's really bad is when a top customer with concentration is your highest margin. So if you lose them, you may lose 22% off the top line, but 35% off the gross margin. That hurts. It's the opposite of business owner. We know Bob, we have been coaching him for a while. And Bob has a dominant customer, a little over 20%. When I raise the issue, he says, it's easy business and it's really low margin. If they were to go away, we could replace them with higher margin work pretty quickly. I'm not worried about it. And he probably shouldn't be. And then we get into custom customer contracts. A lot of times business buyers will say, Hey, I need a contract with those customers, and they just aren't there. It's not that big a deal. Uh if you're producing a good product at a good price and good with good service and reliable delivery, they don't want to go anywhere. But what about a what about a contract like this? Client shows me contracts with, and it's one of their commodity things that they do. So it's not high margin, but it's a four-year contract. I said, Well, does the price go up? No, we averaged a price where we thought increases would be over the next four years from when we did the contract. In other words, you're making a certain margin. A buyer's going to come in and make lower margin in the last couple years. Hmm. Sometimes, you know, no inflation kicker averaging the price if you're going to sell makes no sense. Second category of silent deal killers. And these are the things that get in the way of getting the deal done, as this podcast is titled. Culture. It can be hard for a buyer to find out about culture. And more an owner, a seller, insists nobody can talk to the employees or the at least the management team before the sale. The more red flags are raised on a buyer's and a buyer's world. So I'm going to talk about a construction industry acquisition. We represented a company doing about 20 million in sales. The acquiring company was about four or five times as large. But when they first met, things were realized. And those things included their philosophy of business was the same. The type of jobs was the same. The attention to the customer was the same. The industry they like both like to focus on was the same. They were all on the same page. And it was a seamless quality merger because one of the selling owners got equity in the new firm and is continuing to work there. Just think what would have happened if they didn't hit it off. There would have been no deal. Work ethic. Oh, is that important? So I'm going to give you two examples here, and you'll get the point. Had a client I had done a couple projects for, and he hired us to help him put do an acquisition of a um a shop that did what he did. So he's a machine shops and uh fabricator. This other one was a small machine shop. Our client needed the capacity, he needed the people. And during the due diligence process, he sent them a job. And he said, I need the job. I think it was I need the job. I I got to ship this job on Wednesday, so I need back from you. On Tuesday, he calls on Tuesday and says, Is the job ready? And they say, No. And uh our guys are leaving at four o'clock, and we'll get we'll get to it in the next day or two. He sent the team over, he got the materials, brought it back, paid overtime to get the job done that night so he could ship on Wednesday and keep his customer satisfied. End of deal. He said, There's no way they are going to be part of our company if all they think is you show up at 7.30 and leave it for, and if you've got an important job you don't get to it, it's not going to work. And it's not just making things, it's selling things can be that way. Uh no of a buyer a number of years ago who looked at a company and it was in the automotive space. They sold a lot of things for cars and trucks. And this guy loved cars and trucks. He adored them. He wanted to be in that kind of industry. They were a sales organization. I don't know how many salespeople they have, let's just say 10. And, you know, business has been sort of flat. The owner wasn't making that much money. Didn't look like the salespeople were making that much money. And what the owner said was, you know, we work just hard enough to make what we want, and then we go enjoy ourselves. And the buyer said, if I come in here and I want to grow this business, those people and their intellectual knowledge of how things work and how to make sales, how to work with the customers, is going out the door because they aren't going to work the way I want to work. And then finally, and this is third person, a friend of mine is consulting to a pretty major organization on some operational issues and you know, just things to make it better, you know, organizational development is called. And he told me about goes in the into the maintenance division, and there on the wall are posters that let's just say they were a step or two beyond a Playboy centerfold. And the people in the department say, Yeah, yeah, that's you know, we just they're there, they're okay. He went to the CEO and told him, no, that's a lawsuit waiting to happen. You got to take control of that department. Uh and I think, and as I recall it, the manager was read the riot act and didn't end up staying with the company because that in these days is a you know culture. No, no, you you it wouldn't even be if females had come in. It could be just males who were offended by that. And that is a lawsuit waiting to happen. So, silent deal killers. Today we covered culture and customers, and stay tuned for part two, which will cover two more silent deal killers, and those are management and employees and negotiations. Thanks for listening or watching to the Getting the Deal Done podcast.
