Analyzing a Business for Sale
In this week’s Deal Breakdown, Micheal Girdley kicks the tires on a business listing that claims a 53-percent profit margin.
Good Morning!
Here are today’s highlights:
A Microsoft chatbot is giving NYC businesses some very poor advice.
Gene Marks says that even when his big-ticket clients pay with a credit card, he doesn’t mind those swipe fees at all.
America needs more plumbers, and Gen Z is answering the call.
How much should the government force businesses to pay to protect workers?
ARTIFICIAL INTELLIGENCE
A Microsoft-powered chatbot is telling New York City businesses to break the law: “In October, New York City announced a plan to harness the power of artificial intelligence to improve the business of government. The announcement included a surprising centerpiece: an AI-powered chatbot that would provide New Yorkers with information on starting and operating a business in the city. The problem, however, is that the city’s chatbot is telling businesses to break the law.”
“If you’re a landlord wondering which tenants you have to accept, for example, you might pose a question like, ‘Are buildings required to accept section 8 vouchers?’ or ‘Do I have to accept tenants on rental assistance?’ In testing by The Markup, the bot said no, landlords do not need to accept these tenants. Except, in New York City, it’s illegal for landlords to discriminate by source of income, with a minor exception for small buildings where the landlord or their family lives.”
“The bot said it was fine to take workers’ tips (wrong, although they sometimes can count tips toward minimum wage requirements) and that there were no regulations on informing staff about scheduling changes (also wrong). It didn’t do better with more specific industries, suggesting it was okay to conceal funeral-service prices, for example, which the Federal Trade Commission has outlawed.”
“The city’s bot comes with an impressive pedigree. It’s powered by Microsoft’s Azure AI services, which Microsoft says is used by major companies like AT&T and Reddit. Microsoft has also invested heavily in OpenAI, the creators of the hugely popular AI app ChatGPT.“ READ MORE
BUYING A BUSINESS
In his Deal Breakdown this week, Michael Girdley highlights a listing for a data-enrichment company that collects names, titles, contact info for businesses running outreach. It’s asking $8.75 million, with a profit of $1.9 million, and revenue of $3.6 million. That gives them a profit margin of 53 percent.
“Green flags: First, and most obvious: how can you not like that 53-percent profit margin? Next, this business is growing like crazy. They’re basically doubling year over year, and it looks like it’s accelerating. B2B sales is super hungry for this information.”
“Here’s the thing: companies will pay a premium when you help sales make money. When a rep can call the right person at the right time, it’s worth a lot to them. It’s all about getting close to the revenue. That means they’ve got a high customer LTV. They put 10 to 100 customers — assuming 40 customers, that’s $85,000 each. Not bad.”
“Red flags: If this business is purely labor arbitrage — that is, using offshore labor to do research cheaply — that works great up to a certain size. But it means you have to hire to scale. That means growing 100 percent year-over-year is not a slam dunk. Often growth stalls with this model. On the other hand, if they have some sort of owned intellectual property, scaling is easy. But I’m not convinced that’s here.”
“What I’d ask: The big question here is, how do they deliver this service? There are different ways to do this. Some places, like Zoom Info, are basically databases that you pay to access and search. Other places, like Taskus and Lead Genius, are more manual. You pay them, and they go out and do research. Based on the team size here, this is probably more manual, but I’d want to find out what they’re actually doing day to day.” SUBSCRIBE HERE
THE 21 HATS PODCAST: DASHBOARD
Gene Marks Is Happy to Pay Swipe Fees: In the aftermath of the big credit-card fee settlement, Gene addresses Visa and MasterCard’s agreement to cap the fees they charge merchants for five years. Gene explains both why many merchants are disappointed in the settlement and why he’s perfectly happy to pay those swipe fees when his big-ticket clients pay with a credit card. Plus: Gene discusses the new IRS rules you should know about and how the bankruptcy code has made Chapter 11 less of a defeat and more of a strategic tool for small businesses.
You can subscribe to the 21 Hats Podcast wherever you get podcasts.
HUMAN RESOURCES
More young workers are choosing trades over college: “America needs more plumbers, and Gen Z is answering the call. Long beset by a labor crunch, the skilled trades are newly appealing to the youngest cohort of American workers, many of whom are choosing to leave the college path. Rising pay and new technologies in fields from welding to machine tooling are giving trade professions a face-lift, helping them shed the image of being dirty, low-end work. Growing skepticism about the return on a college education, the cost of which has soared in recent decades, is adding to their shine.”
“Enrollment in vocational training programs is surging as overall enrollment in community colleges and four-year institutions has fallen. The number of students enrolled in vocational-focused community colleges rose 16 percent last year to its highest level since the National Student Clearinghouse began tracking such data in 2018.”
“The median pay for new construction hires rose 5.1 percent to $48,089 last year. By contrast, new hires in professional services earned an annual $39,520, up 2.7 percent from 2022, according to data from payroll-services provider ADP. That’s the fourth year that median annual pay for new construction hires has eclipsed earnings for new hires in both the professional services and information sectors—such as accountants or IT maintenance workers—ADP says.”
“The rise of generative AI is changing the career calculus for some young people. The majority of respondents Jobber surveyed said they thought blue-collar jobs offered better job security than white-collar ones, given the growth of AI.” READ MORE
MANAGEMENT
Jason Fried writes about how 37signals makes decisions: “A company is essentially two things: a group of people and a collection of decisions. How those people make these decisions is the art of running a business. Here are some of the things we think about at 37signals when faced with a decision. Some of these we say out loud, some we think quietly. Consider this a collection of tools in a tool chest — you only grab for the ones you need when you need them. Most stay in the box most of the time.”
“Why are we deciding anything at all? Does a decision actually need to be made here?”
“Is the right person making this decision? Not the right role, but the right person with the right information, context, and insight? Who’s merely chiming in?”
“If we remove the immediate impact, how do we think we’ll feel about this decision a year from now?” READ MORE
REGULATION
There’s a table saw that won’t cut off your finger. Should the government mandate it? “Government mandates of new safety technology are classic trade-offs, whether the product is a power tool or a car or a pill. In this case, regulations requiring that table saws be sold with this safety device might mean a few thousand fingers saved per year. But they might also lead to higher costs for consumers. When the technologies are patented, the trade-offs can become even more clear, like the high prices (and high profits) of drug companies in exchange for the innovation of new drugs. With table saws, it might similarly lead to a period of less competition and more profit for the company that developed the safety mechanism.”
“Among tools likely to be found in someone’s garage, table saws are the biggest driver of serious woodworking-related injuries: Each year they are responsible for about 30,000 injuries that require emergency department treatment — and nearly 4,300 amputations.”
“Only one company, SawStop, sells a consumer table saw that can stop and retract the blade in milliseconds once it detects the small electrical signal from a finger. SawStop holds over 100 patents, many directly related to the safety mechanism. Its table saws cost several hundred dollars more than the most popular competing models, and sometimes more than $1,000 extra.”
“Few consumers choose to pay the price. In 2016, the most recent year with available sales data, less than 2 percent of the 675,000 table saws sold in the United States were SawStop saws. Now the safety commission is considering mandating that the finger-detection system be included in every new table saw. SawStop currently produces the only consumer table saws that could be sold under the proposed rule.”
“But the safety commission generally doesn’t concern itself with the potential for patent litigation or effective monopoly. ‘The C.P.S.C. doesn’t deal with competition implications; it deals with problems of safety,’ said Herbert Hovenkamp, an antitrust expert at the University of Pennsylvania Law School.” READ MORE
The EPA has issued tougher emission standards for heavy-duty trucks and buses (California’s rules are even tougher): “The new federal rules will curtail a billion tons of greenhouse gas emissions each year and provide financial benefits worth $13 billion annually ‘related to public health, climate, and savings for truck owners and operators.’ Big rigs, delivery trucks, cement mixers, garbage trucks, transit buses and school buses are all included. California’s government enacted similar rules last year. The state rules are tougher than the Biden administration’s and are expected to remain so. California’s rules will supersede the federal regulations for large truck fleets operating within the state, whether they are registered in California or not.”
“Unlike California’s rules, which mandate sales of new electric battery and fuel cell trucks in increasing percentages through 2042, the federal rules allow more flexibility in fuels, as long as air emissions standards are met. Gasoline, diesel, biodiesel, hydrogen and electric-drive trucks would technically all be allowed, but even the EPA acknowledged the rules in effect will require a huge increase in the numbers of electric trucks.”
“The transition will be expensive. Right now electric big rigs are priced two to three times a diesel truck’s costs — as much as $500,000. A recent trucking industry study concluded that turning to a 100-percent zero-emission trucking fleet across the U.S. by 2050 would cost more than $1 trillion, including not just the trucks, but thousands of new charging stations and the electrical system’s capacity to power them.”
“The rules forcing the technological change could lead to far lower costs as manufacturing scales up, proponents say.” READ MORE
HEALTH CARE
The Biden administration has finalized a regulation that curbs the use of short-term health plans: “Under the new rule, the short-term plans will be able to last for only 90 days, with an option for a one-month extension. In 2018, the Trump administration issued a rule allowing the plans to last for just under a year, with the option of renewing them for a total duration of up to three years. Previously, under an Obama-era policy, the plans were required to last for less than three months. The plans, often with lower premiums than those found on the Affordable Care Act’s marketplaces, do not have to cover people with pre-existing conditions. They are also free from the health law’s requirement that plans offer a minimum set of benefits, like prescription drug coverage and maternity care.”
“Supporters of the short-term plans have said that the less expensive options are well suited for people who are unable to afford a marketplace plan. Brian Blase, who worked on the 2018 rule as a White House official under President Donald J. Trump, said the plans were also ideal for contract and self-employed workers, including those with incomes too high to qualify for more generous subsidies on the Affordable Care Act’s marketplaces.”
“Sabrina Corlette, a research professor at Georgetown University’s Center on Health Insurance Reforms, said the plans often showed up prominently when consumers searched online for health insurance, with deceptive advertising. ‘Often the marketing materials say they cover hospitalizations and prescription drugs,’ she said. ‘To the average consumer it looks like a real health insurance plan.’” READ MORE
RESTAURANTS
Boston Market, once a fast-casual pioneer, is in its final days: “Boston Market was a booming brand back in the mid-1990s, a pioneer of what we now know as the fast-casual landscape. It existed in a space diners were just realizing they wanted to be in, somewhere between the greasy burgers of fast-food drive-throughs and the sit-down production of an evening out at the Olive Garden or Bennigan’s. People flocked to its homey meals; its signature rotisserie chickens seemed fresh, even healthful, in that era of SnackWell’s cookies and Healthy Choice frozen dinners.”
“After being founded in 1985 as Boston Chicken, it eventually expanded to more than 1,200 locations well beyond its namesake city. Now, only a few dozen remain; a report this month by the trade publication Restaurant Business put the number at 27, with more closures expected at every moment.”
“The proximate COD seems to be its current management, a company called the Rohan Group that bought the chain cheaply from a private equity firm in 2020. Jay Pandya, the Rohan Group’s owner, was a franchisee at chains including Pizza Hut and Checkers who had a history of being sued. Pandya promised to turn the brand’s fortunes around and open new stores. Instead, locations around the country began shuttering by the dozens.”
“Restaurant analyst Aaron Allen says many of the brand’s problems predated its change of ownership. ‘It’s not the death of a thousand cuts, but many things contributed’ he said. For one, he said, after distinguishing itself in the 1990s as a cut above fast food, it attempted to compete with those brands by holding its costs down — a move that ultimately led to a reduction in quality, which only undercut it further. ‘If you chase a lower price-point consumer you can price yourself out of business,’ Allen says.”
“From the window of the last Boston Market still open in the state of Delaware, a slightly askew sign casts a weak light into the sunshine outside. ‘Open,’ it reads in red LED letters. The location anchors the northwest corner of a shopping center with an Acme supermarket on one end and a row of faded restaurants and a nail salon on another. And it might catch your eye if you’re driving past on Route 273 in Newark, maybe on your way to the nearby Christiana Mall or the University of Delaware campus across town. Nearly everyone, though, drives past it.” READ MORE
THE 21 HATS PODCAST
What to Expect When You’re Expecting a Business: This week, Paul Downs, Jennifer Kerhin, and Liz Picarazzi discuss the challenges couples face when one spouse is building a business. Liz says it was important to let her husband know that she spent years working on a business plan before leaving her corporate job to start her first business. Paul explains why, when times have been tough, he hasn’t always shared the bad news with his wife. And Jennifer says too many couples planning for one spouse to start a business focus on best-case scenarios rather than the more likely worst-case scenarios. She also suggests some important questions for couples to ask themselves, including this one: “Will she still have faith in him if the business fails?”
Plus: Businesses fail all the time, of course, and Paul explains why he thinks it’s usually for one of three reasons. And four years after the pandemic arrived, we take a look back: What was each owner’s toughest moment? What was their best decision? How have their business models changed?
You can subscribe to the 21 Hats Podcast wherever you get podcasts.
Thanks for reading, everyone. — Loren