FYE 16 | Business Cycle

 

Learning the truth about the life cycle of a business, especially small to medium-sized ones, is startling, to say the least. Even before COVID happened, 70% of small businesses were closing down. The life cycle of a business is comparable to the life cycle of a human being, which Michelle Seiler Tucker discusses in this episode. We also get into the details of the cycle, from the incubator stage to business death, using Toys R Us, the company owned by Charles Lazarus, as an example. That being said, when is it the right time to sell your business? The Seiler Tucker 6Ps can be a great guide to figuring that out.

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Business Life Cycle – From Incubator To Exit

We’re going to talk about the human and business life cycle. What does that mean? You’re probably asking yourself, “The human and business life cycle? What does that mean?” We’re going to get into that shortly. The big thing that business owners should know is that none of you plan to fail. Business owners don’t go into business and say, “I’m going to fail. I’m going to mess up my business. I’m going to do whatever it takes so that I fail.” People don’t plan to fail. They fail to plan. No business owner wants to go into business and have to end up going out of business. Unfortunately, the business landscape has changed dramatically. It used to be that 90% to 95% of all startups from years 1 to 5 would go out of business. That has changed dramatically.

When I wrote Exit Rich in 2019, I did the research again and realized that startups are not at risk anymore. Only 30% of those startups will go out of business from 1 to 5 years. If you want a business and you’ve been in business for over ten years, you’re at risk. Seventy percent of business owners that had been in business for ten years or longer are at risk of going out of business. That’s out of a sample size of 27.626 million businesses. Over 27 million businesses. Those are startling statistics from the Small Business Association Office of Advocacy report. I was shocked by this that I had my team did the research over and over again because I did not believe the numbers. How can 70% of businesses go out of business?

You hear the big box stories all the time. You hear about Toys “R” Us went out of business. JC Penny’s, Kmart, GNC is closing down 900 locations. Of course, Blockbuster. What you don’t hear about is all the small business owners on every street corner, in every town, in every state, across our great nation, these businesses are unfortunately dropping like flies. Over 70% and that’s a huge number. When you think about that, out of 27 million businesses, there are only 30.2 million small business owners. Out of 27 million, 70% are going out of business. This is extremely concerning. This is before COVID. Now you’re going to have even more business go out of business. The problem with small business owners going out of business, small businesses are the backbone of our economy. Small businesses employ over half the workforce. If they go out of business, you’re going to have loss of jobs. You’re going to have loss of spending power. We’ve got to keep small businesses in business as they are the backbone of this economy.

I like to compare a human cycle to business cycle. A newborn goes straight into the incubator. When you come up with a business idea, if you’re not buying a business, if you’re starting a business, if you invent something, that idea or that invention typically goes into what I call the incubator stage. Did you know that 90% of ideas and inventions never ever make it out of the incubator? That’s a huge number. I want to compare our human cycle and our business cycle to a well-known company that we are all familiar with. No matter where you live, you’re familiar with this company, Toys “R” Us. In 1948, Charles Lazarus opens a baby furniture store in Washington, DC just as a Baby Boom begins. He did not start out with toys. He started out with furniture. He had one store.

You go from the incubator stage to infant. What do infants need? Infants need everything. They need 24-hour supervision, they need constant handholding. What do infants do? Infants cry, eat and shit. They need constant supervision. They need money. It’s the same thing in businesses. Think about a business in its infancy stage. What does that business need? In 1957, Lazarus opened up his first store modeled after a supermarket. Toys “R” Us was his first store. What do you do in the supermarket? You stack things as high as you possibly can.

“People don’t plan to fail, they fail to plan. No business owner wants to go into business and have to end up going out of business.”

 

That’s how he started Toys “R” Us. Lazarus had four stores in 1957. He opened up one store in 1957 and opened up three more. He had a total of four stores. After infant, what’s next? Toddler stage. The terrible twos. Toddlers can at least somewhat feed themselves. They are getting potty trained. They are crawling, starting to walk, starting to be somewhat self-sufficient. They still needed a tremendous amount of handholding. They still need a lot of attention and a lot of supervision. They need money. Think about a toddler business. All of you that are reading should be thinking about your business. Are you in the incubator stage or do you have infancy business or is your business a toddler? In 1969, Toys “R” Us adopts Geoffrey the Giraffe as its brand mascot. In 1974, Charles Lazarus files for bankruptcy.

Think about that. In 1958 Lazarus has four stores. In 1974, almost twenty years later, he files for bankruptcy leading to restructuring. He sells off unprofitable divisions. In 1978, Toys “R” Us goes public. He files bankruptcy and then he goes public. Teenager. We’re going to go in from toddler all the way up to teenager. Teenagers, most of them are at least somewhat self-sufficient. Some of you might be sitting out there going, “My teenager’s not self-sufficient at all.” For the most part, they can feed themselves. They can hopefully clothe themselves and they can go to the bathroom on their own. Teenagers are what? They rebel. They think they know it all. They want to do it their way and they’re reckless. It’s the same thing with a teenager business. A teenager business still needs money and supervision. They don’t have all the answers.

In 1983, the first Kids “R” Us clothing store opens. In 1994, they have 1,000 stores worldwide. In 1996, Babies “R” Us opens. In 1998, Walmart beats Toys “R” Us for the title of Top US toys seller for the very first time. After teenager, what do we do? We go to young adult. Now the teenagers move into the young adult. They’re self-sufficient at this point, hopefully making some of their own money. They might still be living at home, still needs some supervision, still needs some capital, still needs mom and dad to pay some bills. It’s the same thing for our business. The business is doing much better than all the other previous stages, but it still is not functioning on all six cylinders, on all six Ps, which we’ll get into later, and it still needs supervision and capital injections.

In 2001, Toys “R” Us moves their corporate campus to Jersey for $36 million. They spent $36 million in 2001 as a young adult. In 2015, Toys “R” Us beats its biggest competitor, FAO Schwarz, leading to the permanent closure of their Fifth Avenue store. They then go from the young adult to the adult. The adult is when you are in your prime. Things are better than it’s ever been. This is when you should sell your business. A lot of business owners try to sell their business when they’re in the infant stage or the incubator stage. They try to raise money. How many times have you seen on Shark Tank where a business owner that’s in the incubator stage or in the infancy stage or maybe a toddler, trying to sell their business for $5 million or $10 million when their valuation is maybe $500,000 or $1 million? When you get to the adult stage, this is when you should be selling your business.

When you’re on the adult stage, you’re in your prime. It’s the best it’s ever been. In 2015, Toys “R” Us was in its prime leading to the permanent closure of FAO Schwarz’s Fifth Avenue store. This is huge for Toys “R” Us. In 2016, revenues reached its all-time highest at $11.5 billion. If they were going to sell, this is the time to sell. That’s adult. What happens after adulthood? What do we do? That’s called the senior citizen stage. The adult was beginning to deteriorate. They’re not as strong as they once were. They can’t do the things they used to be able to do. They can’t get around as well as they once did. Their memory is not there. It’s the same thing with a business. The senior citizen business is a very scary stage because this is where the business starts to trend downward. This is where the business starts to go backwards. This is where the business has problems.

You have to be able to fix your business in this stage. If you don’t fix your business in this stage, then it’s going to be disastrous after senior citizen. On September 19, 2017, Toys “R” Us files for bankruptcy. After senior citizen, if you don’t fix your business in this stage, what happens? The business dies. On March 14th, 2018, Toys “R” Us closes 800 US stores. On August 5th, 2018, all 1,500 stores closed in 35 countries. This was a business that was in its prime was doing $11.5 billion. A few years later, they filed for bankruptcy and they closed all their stores in 35 countries. It happens. It’s probably happened to some of you reading. It happens all the time. These are the stories that you hear about. There are many businesses out there that are closing that you never hear about.

You have to ask yourself right here and right now, what stage is your business in? If you’re an adult business, you might want to think about selling while you’re in your prime because what goes up must come down. Look at what stage you are in your business. What happens after death? It’s called rebirth. You can bring a business back to life. It’s not easy, but time and time again, brands have done it, companies have done it. You can rebirth the company over. It’s very difficult. It’s much better to try to keep that business in the prime in its adult stage than it is to go through senior citizen, die and have to start over with rebirth.

They are starting over with Toys “R” Us kids. Their slogan is, “Starting over with the new kids. We’ll also build upon 70 years of history.” It took 70 years to go in and out of these stages. Their brand is Tru Kids. Tru Kids brands are smaller boutiques. They’re not going to have the huge grocery store type model. They’re going to have the smaller boutiques. They’ve reopened two Toys “R” Us stores. Coming soon will be Geoffrey The Giraffe boutique stores and Babies “R” Us boutique stores. They’re rebuilding, but it’s a slow and painful process. Companies have to do everything in their power to try to stay in the stage of adult in your prime. Seventy percent of businesses fail due to lack of what I call AIM. You’re probably asking, “Michelle, what does that mean?” That means Always Innovate and Market.

The reason these businesses go out of business after being in business for ten years is because they stopped asking the client, “What do you need? What do you want? How can I make it easier to do business with my company? How can I make your experience doing business for my company more enjoyable? What can I do for you to make your life easier?” Whatever company makes it easier for the consumer to do business with them, then that company is winning.

Take Amazon. Amazon makes it easy for everyone in the world to do business with them. No matter where you are, you can be butt naked in your bed or do whatever you want, it will show up to your house in two days. Where else can you do that? Business owners have become complacent. They stopped asking the customer, “What do you need? What do you want?” They stopped innovating. They stopped pivoting. They stopped changing things and they stopped marketing. That’s what Blockbuster did. They saw the writing on the wall when Netflix came in and Netflix was going to do live streaming. Blockbuster was fat and happy. The rest of them are in their laurels and did nothing. Blockbuster died a slow and painful death. AIM, Always Innovate and Market to stay in your prime and to stay in that adult stage.

“Small businesses are the backbone of our economy. Small businesses employ over half the workforce.”

 

Ninety percent of businesses also will not sell. I alluded to this that a lot of business owners try to sell in incubator stage when they have nothing. They try to sell when they’re a toddler and they want to get $20 million for their company and their company is not operating on all six cylinders. It’s not a $20 million company. It might be $1 million company, but they want $20 million because that’s what they need to retire on. That’s what they need to enter the next phase of their life on. Ninety percent of these businesses do not sell because they don’t sell in the rights stage. You need to sell as an adult, not as an infant, not as an incubator, not as a teenager. I always say successful entrepreneurs make mistakes too. I’ve been doing this for over twenty years. I’ve been in the trenches. I’ve seen it all.

Most business owners don’t operate their business on what I call the Seiler Tucker Six Ps. When you don’t do that, you’re not going to have a scalable and sellable business. If you mess up on one P, you can go from adult to senior citizen very quickly, and into death. You’ve seen it with Toys “R” Us. They lacked innovation. Toys “R” Us didn’t change things for 40, 50, 60 years. They never asked a client, “What does a client want? How can we make their experience more enjoyable?” Let’s talk about the 6 P’s. Number one, people. Does the business have people? If the business doesn’t have people, I can guarantee you you’re not in an adult stage. If the business relies upon you to run the company, then you’re not in an adult stage.

If you’re a manufacturing plant and you say, “I don’t have W-2s. I have 1099s,” you’re making a huge mistake. I have clients that I’m working with that have 1099s in the warehouse, in a manufacturing plant, or in a shipping yard. That’s a huge mistake. One catastrophic event could occur and that could send your business to death very quickly. People is huge. That’s the number one thing. Employees and management team. Have the right employees. 1099s are great in a sales capacity and the capacity where maybe they’re working virtual and they work for you and they work for other companies. They are not good to work in environments where there’s no worker’s confidence and there’s no protection. One injury or one catastrophic event could cause your business to go into the death stage.

The other thing that’s fully important is product. Look at your business. Is your industry and your product thriving or dying? Are you on the way up or on the way out? Which is it? Blockbuster was on the way out and did nothing to innovate. Toys “R” Us was on the way out and they did nothing to innovate. What about your business? How’s your part in the industry? Since COVID, it changed dramatically. Those industries that were once dying are now thriving. Many industries like hospitality that were thriving are now dying. Look at your industry and pivot.

Processes. Lack of processes can definitely cost you money when it comes to making a profit. Many business owners lack processes. I always tell my clients, “Make sure when you design your processes, you design them with the customer experience in mind and well-documented and well trained on. If you don’t have the right processes and you’re not running at an efficient, productive level, then that can send your business into a senior citizen and a death experience. Proprietary is huge. There are several different pillars of proprietary. First and foremost, protect your brand name and your company name. Don’t just get a local trademark. Get a federal trademark. Protect your contracts. If you have client contracts, that’s a huge value driver, but make sure they’re transferable. If you have patents, if you have any intellectual property, if you have an invention, make sure you get a patent-pending. Make sure you protect it. Make sure you get those trademarks.

Also, databases are huge. What surprises me as I have a couple of manufacturing clients, they have one manufacturer. If that deal falls apart, they have no backup plan. They have no agreement with their manufacturer. They have no agreement with their distributor. You must have agreements in place with your manufacturers, with your distributors, with your vendors, and with your clients. You must always have a backup plan. Any mistake like this could cause your business to die. Make sure you have patrons. We’re working with a client that 90% of their sales is on Amazon. What happens if they can’t sell on Amazon anymore? They lost 90% of their revenues. We had an advertising company that had five clients. They lost two clients while we were doing the evaluation and handling the merger for them, leaving them with three clients left. They lost a tremendous amount of market share and they lost profits.

The last P is Profits. Profits is always the most important P because everybody wants to be in business to make money. I always tell my clients, “Profits is never the problem, but always is a symptom of not having the right people in place, not having the right processes, having the wrong product where your product is dying, having customer concentration or patron concentration. Not operating on one of those five Ps will definitely cost you a lack of profits. Here’s a quick way to go from hero to zero, to go from an adult prime business to a business that’s almost dead. I was selling a staffing company that had 30 or 40 locations, about $3.5 million to $4 million in EBITDA. We could have sold it between $30 to $40 million range. The seller decides that he’s going to leave his wife and marry his high school sweetheart.

This is how not to F up your business. He decides to leave his wife to marry his high school sweetheart while we’re selling the business. She turns around and sues him. While all of this is going on, the business has a catastrophic event. One of the employees loses an arm in a machine. It’s an industrial staffing company. He then falsifies the worker’s comp reports. Now he has no workers’ comp. An industrial staffing company that loses a worker’s comp overnight. They went from an adult prime to near death. They lost a location. They lost most of their employees. They lost all their top clients. We went from a $30 million to $40 million sales price to where they filed bankruptcy, Chapter 11. I got approved as a stalking horse in bankruptcy court. I was able to sell their business for $1.2 million. None of that money went to the owner. It all went to the creditors and there’s still money that’s owed. That’s how you F up your business. Don’t do that. Business owners sometimes make crazy mistakes.

Here’s one more example. This is a good story. This is a near-death experience where a graphics company called me to sell their business. The seller said, “I want to sell my business because I don’t feel like I have the business acumen to bring the business to the next level.” He said, “It’s me and my wife working out of our home office and we have one employee.” They had told that one employee that they were going to either sell or close the business. That one employee did what all employees would do. That one employee went out and found another job. I kept talking to this owner. One thing that I noticed that he had, which I call the seventh P, is passion. He had a tremendous amount of passion for his business. He’s like, “Michelle, my customers love me and I love them. I love the industry. I’m turning down 6,000 clients a year.” When he said that, the light bulb went off in my head because most business owners have the opposite problem. They don’t have enough clients. He has so many clients that they couldn’t get to them. They were so busy working in their business, not working on their business that they didn’t have time to hire. They didn’t have time to put people in place.

Out of the six Ps, they were functioning on three out of the six. They didn’t have people. They didn’t have processes. They had a great product. They didn’t have anything proprietary. They had great patrons, customer diversification. They did not have customer concentration and they have profits. They have three of the six Ps, but the company was not sellable and they were not in their prime. They were more in the infant to toddler. I said, “We’re not going to sell you because the business is not sellable. Anyone else would’ve put you on the market and you probably would have had to shut down the business and lose everything. I’m going to partner with you,” which is what I did. I partnered with them. We’ve grown the company. They’re doing millions and everybody’s doing great.

Husband and wife are doing great. The same man who told me he did not have the business acumen to grow this company to the next level, it’s not true. He has tremendous business acumen. He’s come up with many great ideas to catapult our business to the next level, but it was hard for him to think because when you’re in the fog, it’s foggy. He became a firefighter putting out fires all day long instead of the entrepreneur that he is. Re-evaluate and ask yourself, “What cycle am I on?” What cycle is your business currently in and build your business to run on all six cylinders, all of the Seiler Tucker Six Ps, and go your business to the healthy adult stage, where you will be in your prime. That’s it. Thank you for joining us on another episode. I look forward to seeing you next time.

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