Is the Business More Important than the Friendship?

Here are some questions to ask each other before you commit to taking on a partner.

Good Morning!

Here are today’s highlights:            

• West Virginia is the only state with fewer residents than it had in 1940.

• Michael Girdley analyzes a listing for a chain of three med spas.

• “They weren’t upset about paying a little more. They were upset about how they were paying a little bit more.”

• A hand-sanitizer business pivots away from its pandemic pivot.

PARTNERSHIP

If you’re thinking of taking on a partner, don’t. But if you must, here are some questions you should be sure to ask each other:

• “Is the business more important than the friendship? Many business partners start as friends. But would you each be willing to give priority to making the right decision for the business, even if it means possibly hurting the friendship? Would you each be capable of letting the other one go if it was better for the company?”

• “What does success look like to you? Is one looking to grow slowly with customers and suppliers in the community and get to better than break even after three years, while the other wants to be cash-flow positive in year one and scale quickly to sell the business to a larger entity after 10 years? There’s a lot of success and failure in between those two outcomes, depending on your perspective.”

• “What does everyone bring to the table? It is crucial to discuss what each partner is contributing to the partnership in terms of expertise, experience, network, and money. Kathryn Zambetti, an executive coach specializing in founder relationships, recommends taking an honest strengths-and-weaknesses inventory of yourself and your partner and then discussing what you both bring to the table. The exercise will help delineate which responsibilities naturally suit each partner, and it will highlight areas that will require additional work or outsourcing.”

• “If the partnership doesn’t work out, how will it end? A co-founder relationship is a binding agreement with financial and emotional repercussions, just like a marriage. But starting a business has the added stress of having the company—the baby—arrive on day one. If there is a divorce, who gets custody?” READ MORE

PRICING

More companies are raising prices by adding hidden fees: “​​Business owners say fees are needed to cover costs and show customers where their money is going. But retail analysts and advocates like the Consumer Financial Protection Bureau say secondary fees diminish people’s ability to shop around. CFPB data also show fees cause people to pay more overall because businesses can charge more than what the market will let them get away with in the sticker price. ‘People don’t shop based on fees. They shop based on the price of the product,’ a CFPB spokesman says.”

• “Congress introduced a bill last April to ‘limit and eliminate excessive, hidden, and unnecessary fees imposed on consumers,’ while similar measures have recently passed the New York and Illinois state senates. California, too, added restaurants to the list of industries covered under its existing hidden-fee ban.”

• “Triple T Hospitality didn’t expect much customer pushback when the New Jersey-based company rolled out a 3 percent cash discount to its chain of restaurants across the Northeast in 2022. ‘We felt it was an opportunity to say, Yes, our costs are going up, but there is still a way for it to not affect you,’ Chief Financial Officer Christopher Dietz says. Customers didn’t see it that way.”

• “‘They weren’t upset about paying a little more. They were upset about how they were paying a little bit more,’ Dietz says. Almost nobody switched to cash.” READ MORE

BUYING A BUSINESS

This week, Michael Girdley analyzes a listing for a chain of three med spas near Boston. Doctor-owned and specializing in weight loss, they claim $4.7 million in revenue, $1 million in cash flow. And they’re asking $3.25 million: “This is definitely a growing category. Discretionary purchases like weight-loss therapies are the stuff you want to be in. Usually insurance isn’t involved, so you can pretty much name your price for a premium service. Because the reality is Americans keep getting fatter. And we’re going to keep spending money on health (and vanity).”

• “There’s also a lot of recent developments in the weight loss space, which I see as a benefit — you’ll have more effective tools in your arsenal. See Ozempic, etc as the newest ‘wonder drugs’ helping people with their weight loss efforts. And that’s the final thing I like: you’re in a business that’s helping people. You’re giving people a way to get healthier and like themselves better. And that’s exciting and inspiring to be part of as a business owner.”

• “I also notice the listing talks a lot about ‘brand’ — which says this might be part of a larger franchise. If that’s true, your options are pretty limited in what you can do in terms of adding new services or expanding beyond the currently limited area. The other thing I don’t really like is the narrow focus in a pretty broad industry. Traditional med spas do weight loss, but also do laser hair removal, chemical peels, IVs, and all sorts of things you can cross-sell or upsell your customers on.”

• “At the end of the day, you really can’t ignore those numbers. Figure out the regulatory stuff and you’ve got yourself a great business. And getting something at this price that generates a million dollars in cash. … That’s a quick way to become a millionaire.” SUBSCRIBE HERE

HUMAN RESOURCES

West Virginia desperately needs workers: “West Virginia shares a demographic dilemma afflicting many parts of the country: an aging population and unfilled jobs. Decades of migration out of Appalachia have left West Virginia older, less educated, and less able to work than other parts of the U.S. Its labor-force participation rate—the share of the 16-and-older population either working or looking for work—was 55.2 percent in March, the second-lowest in the country. Some other states, including Maine, Indiana, and Utah, have sought immigrants to shore up their workforces. But while West Virginia represents one extreme in its labor needs, it represents another in its resistance to immigration.”

• “State lawmakers have introduced bills that would: require businesses to conduct additional screening for unauthorized workers; punish companies for transporting migrants who are deportable under U.S. law; create a program to enable state authorities to remove even some immigrants with legal status to work; and appropriate money for Texas to install more razor wire along the Rio Grande.”

• “Local business groups representing manufacturers, bankers, real-estate agents, builders and auto dealers are lobbying against the proposed worker-screening legislation, which they say would deter needed workers and create burdensome and duplicative requirements.”

• “‘We should avoid sending messages, either overtly or through our actions, that this is not a good place to come if you’re willing to work,’ said Steve Roberts, president of the West Virginia Chamber of Commerce. The state doesn’t need only doctors and engineers, he said, but manual laborers to ‘do the work that some of us have just gotten too old to do.’”

• “The worker shortage is especially dire in sparsely populated Pendleton County, where Franklin is the county seat. The dining room at Franklin’s Star Hotel & Restaurant, adorned with taxidermied creatures including a black bear and a bobcat, has had to stop serving breakfast on weekdays or opening on weekends. ‘We can’t find help anywhere,’ said Felicia Kimble, whose family owns the place.” READ MORE

LITIGATION

TikTok is fighting back: “TikTok sued the federal government on Tuesday over a new law that would force its Chinese owner, ByteDance, to sell the popular social media app or face a ban in the United States, stoking a battle over national security and free speech that is likely to end up in the Supreme Court. TikTok said the law violated the First Amendment by effectively removing an app that millions of Americans use to share their views and communicate freely. It also argued that a divestiture was ‘simply not possible,’ especially within the law’s 270-day timeline, pointing to difficulties such as Beijing’s refusal to sell a key feature that powers TikTok in the United States.”

• “TikTok pointed to the billions of dollars it has already spent to address potential security risks in the past four years, an effort known as Project Texas, as well as a draft 90-page national security agreement that made ‘extraordinary’ commitments to the U.S. government. TikTok has separated its U.S. user data from the rest of the company’s operations and provided third-party oversight of its content recommendations.”

• “Anupam Chander, a visiting scholar at the Institute for Rebooting Social Media at Harvard who has publicly opposed the law, said that he was among experts TikTok contacted on Monday for an advance briefing on the filing. He said Project Texas is likely to play a key role, and whether TikTok can persuade the judge that it was a reasonably available alternative that addressed the government’s concerns.”

• “‘The real question that remains that I haven’t seen an answer to is, what more would the government have wanted?’ Mr. Chander said. ‘We’ve never heard why Project Texas was insufficient, publicly.’” READ MORE

TECHNOLOGY

It seems everyone hates (but lots of companies use) the HR software platform Workday: “The company devising this torture that is the modern job application is called Workday. Since 2006, Workday, which provides software for payroll, talent management, and expense processing, has been making a mint creating misery where painless processes could be. More than half of the Fortune 500 companies use Workday to pay, hire, onboard, and administer benefits to their employees. Clients range from Netflix to Goodwill, Spotify to The Washington Post, Chick-fil-A to Ohio State University. Trillions of dollars in revenue and tens of millions of employees are at the mercy of Workday's back-end people-management software.”

• “Every HR professional and hiring manager I spoke with — whose lives are supposedly made easier by Workday — described Workday with a sense of cosmic exasperation. ‘It's like constantly being botsmacked by bureaucracy incarnate,’ said a copy director at an AI startup in San Francisco who had the misfortune of having to hire contractors through Workday.”

• “The X account Work Day Failing tracks memes and news articles describing workers and companies suffering within various circles of Workday hell, from Amazon's failed migration to Workday in 2021 (after which Workday's stock dropped by 7 percent) to an ongoing class-action lawsuit that alleges Workday uses AI to discriminate against candidates based on race, age, and disability.”

• “Of course, Workday has innumerable competitors, their names as ridiculous as their sheer volume. We have Dayforce, Zenefits, and Sage. We must not confuse Paycom with Paycor, or Kudos with Kudoboard. How dare you mistake Namely or Cornerstone for Rippling. Beyond standard HR Information Systems, legions of niche operators offer add-ons to boost employee engagement, from Bonusly (really) to BucketList (sad but true), to Motivosity (yes).”

• “Are any of these better, or are they all maligned? As easily as you can find a founder who hates UKG Pro but loves Rippling you can find a similar rant from another founder ripping Rippling a new one.” READ MORE

THE ECONOMY

The head of the Aspen Economic Strategy Group says productivity is surging, and it’s driven by new businesses: “The consulting firm McKinsey & Co. declared in a 2023 report that ‘Generative AI is poised to unleash the next wave of productivity,’ adding value roughly the size of the U.K.’s economy to global growth each year. During the World Economic Forum in Davos, Switzerland, corporate chief executives predicted that advances in AI would enable ‘productivity on steroids,’ as ServiceNow’s Bill McDermott put it. Certainly, these positive effects would be welcome — on whatever timeline they arrive. But the best-kept secret in the United States is that we are experiencing a productivity boom right now. And it’s not because of AI.”

• “New analysis of government data finds that worker productivity is growing at the fastest pace since the decade-long surge of the 1990s — what is still the highest productivity growth rate in 50 years. The current upswing is not driven by headline-grabbing trends such as generative AI. Only about 5 percent of businesses use artificial intelligence to produce goods and services right now, and as economist Erik Brynjolfsson argues, its growth may soon detract from productivity numbers, as businesses invest time and money in expanding their AI capabilities.”

• “One shift in the post-pandemic economy that is much more likely to be driving America’s productivity pop: the surge in new business creation across the country. It is well documented that entrepreneurship is the lifeblood of productivity growth because these companies bring innovations to the market and drive competition, which in turn forces larger, incumbent companies to become more productive or lose market share.”

• “One example of a highly effective funding model is the Small Business Innovation Research program, which awards grants ranging from $50,000 to $250,000 to help early-stage firms develop and commercialize their technology. These grants are tiny compared with an average early-seed investment of nearly $19 million as of early 2023, but they provide critical value in helping these firms get off the ground, doubling the odds of receiving private venture funding down the line.” READ MORE

TRADE

Are we heading into a trade war? “Donald Trump’s economic advisers are eyeing aggressive new legal justifications to impose tariffs on all imports, seeking to buttress a second-term plan that would reshape the U.S. economy, according to public and private comments by top aides. On the campaign trail, Trump has repeatedly promised to enact a ‘ring’ around the U.S. economy by enacting a tariff of at least 10 percent on goods imported from any other nation. Trump’s plan would target more than $3 trillion in annual imports and risks sending inflation soaring in what probably would prove the biggest escalation of trade hostilities in decades, ratcheting up the standoffs that marked his first term.”

• “Trump’s advisers have divergent views on the purpose of his aggressive trade proposals. GOP allies on Wall Street and among the business elite see his rhetoric as a negotiating tactic aimed at winning concessions from trading partners, such as more favorable conditions for U.S. exports.”

• “Other Trump advisers believe more lasting trade restrictions are necessary to achieve a fundamental rebalancing of the U.S. economy, as the key to revive domestic manufacturing and insulate production from unfair foreign practices.”

• “Asked about the 10 percent tariff proposal, Trump told Time in an interview published last week: ‘It may be more than that.’ He added: ‘I call it a ring around the country. We have a ring around the country. … A lot of people say, Oh, that’s going to be a tax on us. I don’t believe that. I think it’s a tax on the country that’s doing it.’” READ MORE

STARTUPS

So how’s that hand-sanitizer business doing? “During the pandemic, hand sanitizers became everyone’s front-line defense—and countless startups launched to meet the overwhelming demand. Then the demand wasn’t so overwhelming anymore. According to research company Statista, the global hand-sanitizer market boomed by 500 percent in 2020 to $6.3 billion in revenue from $1.03 billion in 2019. But as the pandemic subsided, so did sales: $3.5 billion in 2021, and hovering around $3 billion for the next couple of years. So, what happened to all those startups?”

• “Amy Welsman was inspired to rework sanitizer before the pandemic hit—when she became a new mom in 2019. Welsman, who previously handled an array of jobs for women’s intimates brand Knix, found the sanitizers on the market harsh and off-putting, and she didn’t want it on her hands when she changed her baby. Her idea: sanitizer with a better scent and ingredients that nourished the skin, sold in more environmentally friendly packages.”

• “By the time she launched her startup, Paume, in 2021, the pandemic was at its height. ‘I was planning to make utilitarian hand sanitizer a luxurious beauty product—something totally new,’ she says. ‘As I was developing the product, the pandemic hit, and the sanitizer category changed overnight.’ With demand for sanitizer soaring, she decided to reach out to a wider base of customers than just new moms.”

• “The company garnered some attention in the media and attracted a loyal following, Welsman says. But overall ‘marketing to a broad market was tough in the early days,’ she says. ‘There was a backlash in the hand-sanitizer industry, where people would say, ‘I never want to see it again.’ So, Welsman decided to focus her efforts on the group that originally inspired Paume—new moms. They ‘care about hand hygiene and minimizing the spread of germs in their families. They also want products to make you feel good,’ she says.”

• “The strategy worked. Paume’s revenue grew 40 percent in 2022 to $570,000 as the company expanded beyond sanitizer into the hand-care category. Revenue reached over $1.5 million in 2023 and is on track to double again this year, Welsman says, and the company has launched six new products, including a nail and cuticle cream.” READ MORE

THE 21 HATS PODCAST

I Don’t Hate Regulation, But …This week, in episode 194, Shawn Busse, Jay Goltz, and Jaci Russo talk about the new rules that may—or may not—ban non-compete clauses, increase the number of employees who must be paid overtime, and eliminate TikTok in the U.S. How much would those changes matter to each of their businesses? What might the owners do differently? Do the changes make sense? And why does it so often seem as if it’s small businesses that get caught in the cross-fire when the government tries to rein in abusive big businesses? On the question of non-competes, Shawn says he thinks they are often used by lazy businesses that haven’t done the real work of building loyalty with employees and customers.

• “Plus: Do Shawn, Jay, and Jaci ever regret starting a business? Have there been times when they’ve thought about packing it in and trying something else? And also, are the terms “business owner” and “entrepreneur” interchangeable? Or do they carry different connotations? Might there be a better term? Jay thinks there is.

• You can subscribe to the 21 Hats Podcast wherever you get podcasts.

Thanks for reading, everyone. — Loren