Read an Excerpt
CHAPTER 1
DUE DILIGENCE
WELCOME TO THE WORLD of entrepreneurship. It's a unique club. There are no barriers to entry — no barriers based on historical paradigms, age, religious preference, sexual orientation, race, height, or gender. All that matters is whether you can figure out how to sell an enormous amount of stuff in the marketplace with an appropriate gross margin. Sounds easy, but what most people don't realize is that the biggest barrier to success is themselves.
For as long as you can remember, you've obsessed about new business ideas and aching needs in the marketplace. Some ideas were good, but let's be honest, most of them were a little off the mark. That T-shirt business in high school? European vacation–inspired kebab shops near college campuses? Mid-January Michigan–inspired full-service gas stations? The mechanism that makes putting a baby seat in a car simple? An app that tracks city bus progress? And on and on.
Now that you've reached this point, you can't ignore this entrepreneurial itch or you'll go nuts — or worse, look back on your life with regret. No more being envious of the neighbor who owns seven Subway sandwich locations and seems to have gobs of money and all the free time in the world, always gardening and spending time with the kids. You finally have your idea. No more scribbling on bar napkins and backs of envelopes. No more energized "what if" conversations only to wake up the next day and go back to your monotonous routine. Now you believe in yourself and your idea with every cell in your body. It's time to execute! Let's roll!
New business owners are among the most optimistic people on the planet. That's why I love working with them. But that optimism serves a more evolutionary purpose: in the face of all the inevitable and unexpected pitfalls, especially during the start-up phase, an obnoxiously positive attitude is a necessary survival tool. But to survive what?
Everyone has a degree of entrepreneurial spirit, yet only 16 percent of Americans own their own business. Why? Because you have to be the right kind of crazy and believe in yourself completely to even try, first. Second, the failure rate of new enterprises is astronomical. According to The One Minute Entrepreneur by Kenneth Blanchard, Don Hutson, and Ethan Willis (withfigures updated from the Bureau of Labor Statistics), "Within any given year, close to 1 million people start a small business in the United States. Sadly, at least 20 percent of those businesses fail within the first year. 64.3 percent of them will be out of business within 10 years." More remarkably, just 0.04 percent will reach $100,000,000 in annual sales; out of approximately 550,000 start-ups with employees, only between 125 and 250 companies will reach that level. Odds for success are low.
As my good friend Dr. Green likes to say, "It isn't all sushi and puppy parties." You accept it, you understand the statistics, you know the risks, and, even with all of the naysayers, you are ready to make the leap.
What next? This book is an invitation to come and sit in my backyard at my picnic table. You are drunk with enthusiasm; you accept my invitation and fly to Ann Arbor, Michigan, for lunch. The barbecue is on the grill, and my dog is chasing bugs around the yard while snacking on poop. My beautiful wife insists on giving you a tour of the house before she brings her famous cucumber salad as a starter.
It is driving you crazy. You are dying to dive into it, so let's get down to business. I reach over, grab a mirror. I ask if you are ready to engage in the most important conversation in your professional life. I ask if you are ready to start the only process that matters to the success of your new business. "Yes, yes, of course," you say. We are going to start the due diligence process — due diligence on you. I hold the mirror up in front of you.
You are the number one ingredient, the most powerful factor in whether your new business will succeed or fail. Your mind-set, your enthusiasm, your attitude, and your commitment are the most powerful influences on the success of your new enterprise by a factor of ten. The leading indicator in your business is you, your self-awareness, your attitude.
I watch people do hundreds of hours of due diligence. They research everything there is to research, including the following:
* Capital structure: What is the precise level of leverage that is appropriate?
* Real estate data: What is the right dirt and why?
* SWOT analysis to provide insight into the competitive landscape
* Financial analysis with pro forma data to provide complex ratios on cash flow
* Marketplace metrics to show size of market, with a .01 percent capture rate equating to success
* Complex demographics to explain consumer buying power and predict the size of the market
* Consumer behavior trends with in-depth analysis of millennial behavior: How best to capture this powerful force in a particular market?
* Personality profiles on team members: How are they going to contribute?
* Exit strategies, valuation methods, clawback provisions, and cap tables in the event it all doesn't work
All these types of data are good to think about, and this kind of due diligence is certainly important. Yet almost all of the lists I see are missing the most crucial bullet point: YOU!
I can hear the collective sigh from academics out there. But let me assure you, a perfect understanding of the marketplace will not make your business successful. Before you even start examining unintended costs, market forces, and competition, you must have a clear, comprehensive understanding of yourself.
The franchise business pretty much models a controlled study to prove this point. McDonald's, like any other well-organized franchise, offers the same system and product to all of their franchisees. Some people take those tools and make them work, and they are wildly successful. Others use those same tools and fail. What's the difference? I think it's obvious, but what is scary is how few people will acknowledge this fact. There have been hundreds and hundreds of different coffee shop concepts started in America over the past twenty-five years. How many have gotten to over $100 million in revenue? Fewer than ten. What is the difference? At the sake of sounding arrogant, the difference is my partner and me versus everyone else.
We have spent more than twenty years in the trenches. We have both mopped the floors and cleaned the toilets, hundreds of times. We both have had social engagements squashed by last-minute call-ins, hundreds of times. We both have had customer interactions that teetered on psychotherapy, hundreds of times. Most importantly, we both knew the other had our back. We knew the other was a gift and must be respected. We both knew that it could all go away in a split second, and we still feel that way today. In the end, this is our start-up, our mission; this is who we are and what we do. There is nothing else.
We have battle scars. There is a little limp when we first get out of a chair. We carry a trace of dried blood under our fingernails. My partner's right shoe is untied because he won't take the time to bend over and make a bow. But even today, twenty-plus years later, the twinkle is still in our eyes. Unbridled enthusiasm got us to where we are, and if you ask either one of us, we will tell you we are just getting started.
The greatest things in life are generally the hardest things. Starting a business can be remarkably rewarding, but it can also be extremely difficult. Let's see if you are up for the challenge. Accomplishing the proper due diligence on yourself requires strict attention to a few crucial traits you must be aware of and bring with you — or not — every day to your start-up. If you don't have these positive qualities in spades, or they're not your strong suits, then work on them; build them up every single day. The same holds true for getting rid of the negative ones. It takes time and focus, but this stuff is critical.
This first chapter is devoted to helping you do due diligence on yourself. It's essential to take the time to think about you, because how you think and what you feel is the only thing that matters when it comes to whether your business will die in the start-up phase or make it to its first dollar in cash flow. It might seem obvious at first, but I see new business owners over and over who can't get out of their own way, and it usually doesn't end well. That's because they weren't thinking about these ten crucial steps in doing due diligence on themselves:
* Grow in self-awareness.
* Make friends with the boogieman.
* Be patient with the results but aggressive in execution!
* Be humble, curious, and ready to learn.
* Muster massive doses of energy and enthusiasm.
* Model dependability and dedication.
* Tap into the secret of focus.
* Be gentle with your internal control freak.
* Gut-check your ego.
* Name the end game.
* The powerful stuff is simple.
GROW IN SELF-AWARENESS
If the single most important factor of a start-up's success is you, then the single most important quality that you must have is self-awareness.
At first glance, there might not seem to be much of a difference here, but it is one of my most powerful points. We could simply rephrase the whole thing to say: you actually aren't the most important ingredient to the success of your business, but your self-awareness is.
Nobody is perfect. Not a single one of us has all the traits and qualities that make up the perfect founder who can launch a new business and make it profitable. On any given day, you may be fired up to make sales calls and talk to anyone you meet about your fabulous new product. Another day, you may not want to leave your office or pick up the phone ever again.
We are all human. We have our good days and bad days, and on each you're going to be strong in some areas and weaker in others. So it goes. The key is to understand this cycle and develop a strategy to take care of your business by working hard to understand what you need around you to offset and counterbalance ... you!
It's important to take honest stock of yourself. I know it sounds cheesy and cliché, but you really do need to take a look in the mirror. What are your strengths, and how do you leverage them? What are your flaws (limitations?), and how do you compensate for them?
What are the traits I recommend you evaluate before you get started? There are many, but what I want to give you is a look into the ones I feel are most important — the fundamentals. These are the quirks, the things that most people don't look at before getting started with their new business, but to me this is the gold. This is the stuff that nobody else is thinking about but the stuff that is most important and will make all the difference.
MAKE FRIENDS WITH THE BOOGIEMAN
Your start-up will punch you in the gut nearly every single day. That's a given. The only uncertainty is where that punch will come from. I like to call it the boogieman behind the tree. When you're walking along the path, minding your own business (literally), you never know when the next boogieman is going to jump out and take a swipe at you. It won't jump out at the same time every day, or from the same angle, but the next one is always coming.
Being aware that the boogieman exists is healthy. But if you let the boogieman affect you as you're running your business — if you're paranoid and glancing behind every tree — you're in trouble.
Being out on your own is hard. Building a start-up is one of the most difficult things you can do. I haven't met a single business owner who has said, "Gee, that was much easier than I thought it would be." But if you let all that difficulty get to you, if you let it shake your confidence and deplete your energy and enthusiasm, it will determine how you present yourself to the world, and your chance of success in the business will be greatly diminished.
Let me share a scary tale about when I got punched (and kicked, and punched again) by the biggest, most powerful boogieman I have encountered: the bank.
Back in 2003, only eight years into our business, my partners and I purchased and converted a six-store chain of coffee shops called Sufficient Grounds into BIGGBY. We operated it for about a year, and business was mediocre at first but improving. We had borrowed a significant sum to purchase and convert the stores. We were never late on our loan payments, and I was sending regular financial statements to the banker. One day, I got a call from said banker, who invited himself to my office with his boss. A call out of the blue from your banker, who says he's bringing his boss over to chat? Red blinking lights started going off like fireworks in my head. Here comes the boogieman.
The two bankers arrived and proceeded to tell me that our business was outside some covenants of the loan agreement and they were putting us in default. Now, I'm going to let you in on a little secret: I had no idea what being in default meant. Ignorance can be bliss, but had I known what I was in for, I would have been smart to simply give up. Critical point: Any successful business owner will have a story like this, in which they say, "If I had known at that moment what I was up against, I would surely not have kept going." But in my experience, the successful ones never stop, never give up. Please understand I am not advocating ignorance. I am suggesting you will find yourself in situations where your naiveté will land you in difficulty, and nobody is experienced enough to avoid this spot. What I am advocating is those who succeed are the ones who never threw in the towel, those who never gave up, those willing to succeed or die trying. Remember Ray Kroc was in his fifties when he started McDonald's.
After settling into a table with their BIGGBY lattes (on the house), the bankers proceeded to explain that through a random selection of accounts, they had done a review of our file, and quite simply our free cash flow wasn't appropriate to our debt service. They politely reminded me that I had signed a contract that said I'd keep this ratio within a set range. We were outside that range, and we were being put into default.
I was more than a bit naïve about how much power bankers wield. I was about to find out what a loan default actually meant and felt like.
The bank assigned to us what is called a "workout specialist." This person's job is to liquidate the company and get as much money back as possible. Basically, their job is to be as big a jerk as possible, and from my experience, they are quite good at it. I mean, these folks come from the same delightful talent pool as bouncers and prison guards.
The workout specialist raised our interest rate from 7 to 11.5 percent, nearly doubling our monthly payment. They took every dime of cash from the business and cleaned out our personal bank accounts. They set up a separate account to capture all of our revenue from all entities. In short, they were perfectly comfortable putting us out of business because we didn't have a penny anywhere to spare. Every penny that wasn't mission critical to the business went to pay down debt.
While all this was going on, we still had other stores and employees to manage and owner-operators to support. Every week from Sunday to Wednesday, I drove two hours each way to manage one business in Toledo to try and placate the bank that was threatening to take everything we had. The remaining part of the week I worked at the home office to help manage and grow the rest of our business. It was incredibly stressful.
I still had to meet with prospective buyers, put on my sales hat, and champion the company. It took a lot of energy to force a smile with a friend, much less a stranger. But smile I did; I even laughed. In front of customers, I remained BIGGBY's biggest cheerleader, even though I knew it was distinctly possible that everything could evaporate. If I couldn't compartmentalize the fierce attack the boogieman was raining down on me, it would all be over. Eight years of my life flushed.
In the face of my company's impending implosion, if we had flinched even the slightest, if I had failed to bring my usual energy and enthusiasm to my staff meetings or to my conversations with potential franchisees or customers, they surely would have noticed. Before long, the boogieman would've dealt his death blow.
How much positive energy and enthusiasm will you bring to work on your darkest days? The days the boogieman has kicked you in the groin, kneed you in the nose, and has you in a headlock, giving you a noogie. Will you be your business's biggest cheerleader at this moment? How will you answer questions about how your business is doing? The boogieman is powerful, and he defeats most people; are you ready to poke the boogieman in the eye, kick him in the groin, and then laugh in his face with a huge smile on your face? You had better be, because he is coming after you, I promise.
(Continues…)
Excerpted from "Grind"
by .
Copyright © 2019 Michael J. McFall.
Excerpted by permission of An Inc. Original.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
