Divorce Entrepreneurial Style
For business owners, divorce can be especially challenging and painful. But there are some things you should do to protect yourself—no matter how healthy your marriage is.
Happy Leap Day!
Here are today’s highlights:
The SBA is making it much easier to buy a business.
Thrasio, which was buying up hundreds of Amazon merchants, has filed for bankruptcy.
After the backlash, Wendy’s backs away from surge pricing.
Will Chinese EVs devastate Detroit?
THE ENTREPRENEURIAL LIFE
Divorce can be especially challenging for business owners: “No one goes into a marriage with the expectation that it will end in divorce. But regardless of the state of your marriage, it’s important to take steps in advance to protect your company’s assets — and even your business partners’ interests. One of these steps is to have a buy-sell agreement with your partners. This is a legally binding document that stipulates in writing what happens when one partner dies, wants to be bought out, or experiences other significant events that may impact a business. Doing this in advance creates a defined road map and significantly reduces any confusion when a situation — like divorce — arises. Most buy-sell agreements require that a business has insurance to cover the costs of these types of events.”
“It’s important to make sure your books are as clean as possible. Many business owners I know mix too many of their personal and business expenses, usually due to sloppy bookkeeping. During discovery, an opposing attorney can request just about anything related to your business, and this could put you at a disadvantage during negotiation.”
“Arbitration — where you hire an independent attorney or judge — may be the best and most cost-effective route for a divorce negotiation. [Linda Kerns, a family law attorney] says that in arbitration, all matters are private and not subject to reporting. [John Zurzola, a divorce specialist] agrees that arbitration tends to be a smoother process and ‘hopefully’ results in a more fair settlement.”
“One of the reasons cash flow becomes a challenge is that a business often gets valued during divorce proceedings, and the value of the business may contain noncash assets such as customer lists or a company’s reputation. ‘If, for example, your business is valued at $1 million, it’s not all cash, and you have half of that to pay your spouse,’ Kerns said. ‘So you may have to finance that amount.’” READ MORE
FINANCE
Ami Kassar reports that the SBA has made it much easier to buy a business: “As part of the massive changes in Small Business Administration rules over the last few months, banks and authorized lenders can now finance somebody buying an interest in a business. This is a dramatic change. Previously, you could use an SBA loan to buy a business only if you were buying 100 percent of the business. Also, the selling owner could remain with the company as a consultant for just one year. In the new rules, a seller can retain equity and have an ongoing long-term relationship with the company.”
“For example, if a business is valued at $1 million, and you have an agreement to buy 30 percent of the business, you could be eligible for a $300,000 loan. Here’s another important detail: The loan must be guaranteed both by the business and by the individual buying the shares.”
“This helps the many sellers who are ready to pass the torch but not necessarily ready to retire. Sellers often welcome the idea of sticking around to lend support and have a role in the business even if they’re no longer in charge.”
“So far, only a few SBA banks and lenders are experimenting with these loans. As lenders become more comfortable with the changes, more are likely to join.” READ MORE
ECOMMERCE
Do we really know how Amazon makes money? “If you read the recently unsealed materials from the federal antitrust lawsuit against Amazon, you’ll see why the company wanted to keep them under wraps. According to the unredacted notes from one meeting, Jeff Bezos directed his team to stuff more ads into search results, even if it meant accepting more ads internally categorized as irrelevant to what users were looking for. Other quoted documents reveal the company working to conceal a mysterious price-hiking algorithm, in part because ‘of increased media focus.’ Similarly unflattering nuggets abound. But here’s something you won’t find in those materials, because it was deemed too sensitive to unredact: precisely how Amazon makes its money.”
“Nearly 30 years after the company was founded, we still don’t really know. Amazon has long cultivated the impression that it operates its shopping platform at razor-thin margins, relying instead on its cloud division, Amazon Web Services, for much of its profit. And yet the Federal Trade Commission’s lawsuit contends that Amazon’s e-commerce business is, in fact, ‘enormously profitable.’ The resolution to this dispute is likely to figure heavily in whether the judge finds that Amazon is merely a benevolent retail giant or a destructive monopoly.”
“In 1966, the Senate antitrust subcommittee held a series of hearings exploring how weak financial-reporting rules threatened competitive markets. A main focus was how conglomerates—companies that combine multiple businesses under one roof—could hide information about their subsidiaries that, if revealed, might be evidence of anticompetitive behavior.”
“Following the hearings, the SEC revised its rules to require corporations to disclose financial data for each of their major divisions, or segments. The aim was to ensure that investors and the public had a clear view of each unit on its own. But in practice, the SEC has given corporations ‘near total managerial discretion’ to decide what counts as a segment...” READ MORE
Meanwhile, Thrasio, a high-flying startup that rolled up Amazon merchants, has filed for bankruptcy: “Thrasio raised more than $3 billion in the past five years and nearly went public amid the pandemic-fueled online shopping boom. But the company’s strategy of buying up hundreds of emerging sellers on Amazon failed financially after consumers shifted away from clicks and back to bricks (and mortar retailers). In its bankruptcy filing in federal court in New Jersey, Thrasio cited liabilities of $500 million to $1 billion and assets of $1 billion to $10 billion.”
“Thrasio is seeking to reorganize and remain in business after shedding almost $500 million of its debts. The company, which employs 415 people, is not planning any layoffs due to the bankruptcy filing, a spokesperson said. Lenders have agreed to loan Thrasio $90 million while the company navigates the bankruptcy process.”
“Tech startup veterans Carlos Cashman and Josh Silberstein started Thrasio in 2018 and acted as co-chief executives. The idea was to find the sellers of popular, well-reviewed goods on Amazon and pitch them Thrasio’s ability to improve their efficiency, logistics, and marketing.”
“‘When you can buy a business that is doing $2 million in revenue, and it’s doing $30 million two years later, it just works,’ Silberstein told the Globe in 2020. ‘That core thesis is at the heart of everything we are doing.’”
“The company’s sales reached $500 million and generated a profit of $100 million that year, Silberstein told TechCrunch. ... But by the second half of 2021, consumers’ fear of Covid was fading and online shopping growth slowed.” READ MORE
PRICING
Wendy’s seems to be backtracking on surge pricing: “I reached out to Wendy’s, which is aiming for $2 billion in global digital sales by the end of the year, to get the full story. A spokesperson sent me a statement that included: ‘Wendy’s will not implement surge pricing, which is the practice of raising prices when demand is highest. We didn’t use that phrase, nor do we plan to implement that practice.” CEO Kirk Tanner had said on the company’s Q4 earnings call that, beginning as soon as next year, ‘we will begin testing more enhanced features like dynamic pricing and day-part offerings along with AI-enabled menu changes and suggestive selling.’”
“And on Wednesday morning, the company posted on its blog that ‘digital menu boards could allow us to change the menu offerings at different times of day and offer discounts and value offers to our customers more easily, particularly in the slower times of day.’”
“So items will cost different prices at different times. Even when framed as ‘discounts,’ it’s a process surrounded by land mines. If implemented poorly, according to McKinsey, even having access to the best advanced analytical tools to help tailor prices isn’t enough: ‘The common mistakes that retailers make include the following: introducing prices that alienate customers, changing prices too frequently, and relying on bad data.’”
“More from McKinsey on dynamic pricing: Businesses should ‘establish and enforce strict pricing guardrails. Your prices shouldn’t fluctuate so dramatically that they confuse and alienate customers. If customers perceive price changes as random, unfair, or disconnected from your value proposition, they’ll simply shop elsewhere.” READ MORE
MANUFACTURING
Are China’s electric vehicles about to devastate Detroit? “The biggest threat to the Big Three comes from a new crop of Chinese automakers, especially BYD, which specialize in producing plug-in hybrid and fully electric vehicles. BYD’s growth is astounding: It sold three million electrified vehicles last year, more than any other company, and it now has enough production capacity in China to manufacture four million cars a year. But that isn’t enough: It’s building factories in Brazil, Thailand, Hungary and Uzbekistan, to produce even more cars, and it may soon add Indonesia and Mexico to that list. A deluge of electric vehicles is coming.”
“BYD’s cars deliver great value at prices that beat anything coming out of the West. This month BYD unveiled a plug-in hybrid that gets decent all-electric range and will retail for just over $11,000. How can it do that?”
“Like other Chinese manufacturers, BYD benefits from its home country’s lower labor costs, but this explains only some of its success. The fact is that BYD and other Chinese automakers like Geely, which owns Volvo Cars and Polestar brands, are very good at making cars.”
“Ford and GM plotted an ambitious E.V. transition three years ago, but it didn’t take long for them to stumble. Last year Ford lost more than $64,000 on every E.V. that it sold. Since October, it has delayed the opening of one of its new E.V. battery plants, and GM has fumbled the start of its new Ultium battery platform, which is meant to be the foundation for all of its future electric vehicles.”
“The Chinese carmakers are the first real competition that the global car industry has faced in decades, and American companies must be exposed to some of that threat, for their own good. That means they must feel the chill of death on their necks and be forced to rise and face this challenge.” READ MORE
THE 21 HATS PODCAST
Managing Your Tasks, Your Credit Cards, and Your Anxiety: This week, Jay Goltz, Jaci Russo, and Sarah Segal talk about whether it’s finally time for Jay to enter the brave new world of task-management software. That’s, in fact, what his two kids in the business are encouraging him to do. As it happens, Jaci and Sarah have tried most of the project-management tools out there, and they kind of love them—but with one caveat: They can be a lot of work. Which is all Jay needed to hear. After that, we talk about the challenges of managing credit cards and points, and Jay explains why, after 40 years, American Express is no longer what’s in his wallet.”
Plus: the owners tackle a question posed by an entrepreneur with a very new startup: “When does the anxiety of a new business subside?” asks the newbie, which prompts some laughter and this answer: The anxiety subsides in the 42nd year, says Jay, who’s been running his business for 42 years.
You can subscribe to the 21 Hats Podcast wherever you get podcasts.
Thanks for reading, everyone. — Loren