An entrepreneur in financial distress wonders whether he should take an offer to sell his business.
Norm Brodsky is a veteran entrepreneur.
Dear Norm, I have a wholesale pump distribution business that I started in 1993. We've since grown to $3.5 million in sales, with three locations, but I'm afraid that I may be nearing the end of the ride. A string of events, including the recession, has put a severe dent in our cash flow. It's all I can do to make ends meet. I've been approached by four large companies to buy us out, which I suppose is one option, but I love what I do, and I'd hate to see what I've built go up in smoke or get diluted in another organization. Should I sell anyway? I could use an objective opinion.
(Name withheld at writer's request)
Selling a business because you're being forced to, rather than because you want to, is almost always a fate to be avoided if possible. It's called a distressed sale, and it seldom turns out happily for the seller. I telephoned the e-mail writer -- let's call him Joe -- to find out what alternatives he might have and to get a better read on his situation. (He asked that his identity be withheld because he doesn't want to broadcast his troubles, especially with a possible sale in the offing.) Joe's company sells pumps to plumbers, well drillers, and contractors, with an average sale of about $1,000. It's a seasonal business, he said, and dies during the winter. Though cash is always tight during the slow season, it was tighter than ever this year, leading him to think it might be time to get out.
I told Joe he didn't have to get out if he didn't want to. Cash-flow problems aren't necessarily fatal, and I suggested some ways he might alleviate his. For openers, I said, he's probably wasting money by having three locations rather than one. Almost 75 percent of his sales comes out of his headquarters. The other locations are for exchanges, emergencies, and walk-ins, which account for a tiny portion of sales. The company can handle everything else just as easily from headquarters. Closing the outlying facilities would allow Joe to reduce his inventory, thereby freeing up additional cash. It would also save money on rent, utilities, and the expense of having someone on the scene when a customer shows up, which can consume up to half a day of a salesperson's time. In territories his salespeople can't cover, he could sign up manufacturers' reps. That would cost nothing, because they work strictly on commission. Then, too, he could generate additional cash by finding other products to sell during the winter months.
Mainly, however, I thought Joe should focus on getting better control of his receivables. A year ago, he said, customers were paying in 45 days, but the company's average collection time had increased to 51 days. Given his $3.5 million in annual sales, each additional day represents almost $10,000 in cash flow. If Joe could get his collection time back down to 45 days, it would be like getting an interest-free loan of $60,000. How could he do it? The best way, I suggested, was to get his salespeople involved. "Most salespeople are afraid to talk about collections," I told him. "They think it will be harder to close the sale if they do. But they have to understand that a sale is not a sale until the company gets the money. That means telling customers up front about your payment policy. If a customer can't meet your schedule, you can negotiate other terms, but there needs to be a common understanding about when the bill will be paid."
I also suggested that Joe hold the salespeople responsible for making sure the bill is paid on time. Because his sales force is on salary plus commission, he has some leverage. Many companies, I noted, don't credit salespeople with the sale unless the receivable is collected in a specified time frame. For example, if the company's terms are 30 days, the salesperson doesn't earn the commission after, say, 45 days. So either cash flow is enhanced by the salesperson's bringing in the money in less than 45 days, or expenses are reduced because the salesperson isn't paid a commission. The company wins both ways. Meanwhile, it can help the salespeople collect by tacking on an extra charge when a
bill is paid late.
Please send all questions to AskNorm@inc.com. Norm Brodsky is a veteran entrepreneur. His co-author is editor-at-large Bo Burlingham. Their book, The Knack, is now available in paperback under the title Street Smarts: An All-Purpose Tool Kit for Entrepreneurs.