Dashboard: Smart People Are Hanging on to Their Cash

[Music] welcome to another 21 hats dashboard I'm Lauren Feldman and I'm here with David Barnett who is a consultant who helps people buy and sell businesses he works with businesses in the US and around the world and he's based in Canada welcome back David hey Lauren how are you today I'm doing great how are you I'm good I'm good so David I I know our countries are having a bit of a tough time but we can still be friends right absolutely and it's funny that you say that because I over the last three weeks I've actually made two trips to the US and everyone I met there was really friendly I'm very glad to hear that uh can can you tell me what people in Canada especially in the business Community are making of all this yeah so it's it it's very interesting because uh in the general public you know when I open up my personal Facebook account and I see what my neighbors and friends are talking about there is a a big nationalist sentiment uh reactionary sentiment of course about what's been happening in the news and uh I you know there are definitely people who are worried about uh their jobs so amongst employed people who are in industries that are attached to exports um you know people are worried that you know there's going to be a recession that they might lose their job and I mean I think everyone can understand that um there's of course a great deal of the of the things that Canada prod produces and Export goes to the us we have a an integrated North American economy um there is a lot of importing here from the US and um you know I think one of the things that you probably see in the news is that you know your average everyday person they kind of I think they kind of feel powerless you know it's not you or I or or anyone that we know that's going to really be making these decisions about what happens with these rules and so people I think react in the only way that they can which is you know to choose a product you know made in in Canada versus something maybe that comes from the states and and people make a lot of noise about it and um I think it's an expression of frustration but a lot of these people I think feel really powerless so this is this is how it's manifesting that makes sense you know I talk to business owners all the time some of them have been directly affected by the back and forth on tariffs and some of them are are having a really tough time others are having a tough time just because of the uncertainty and their sense is may not know for sure why their businesses dropped off but they suspect it's because people are reluctant to proceed with plans not knowing for sure where this is all headed there's a lot of talk about recession down here uh just as you said up there um what's your sense what what's the bigger issue that you see the actual impact uh of the tariffs or just the uncertainty of all these changes and what it might mean well I'm having very different conversations between Canadian small business owners that I talk to and American small business owners that I talk to so um you know exporting internationally is not typically something that a small business would do we're talking usually about much bigger Industries and those people aren't talking to me and so the Canadian small business owners that I talk to are are worried more about Market risk so someone who may be thinking about their business in a in a city like Hamilton Ontario whether it's a steel mill or someone who's thinking about buying a business in Hamilton they're of course worried that something's going to happen with that steel mill and the the local city is going to go into a recession there may be less money flowing around so they're kind of concerned about this more macro level thing um and the fact that people who lose their jobs end up on unemployment benefits and you know maybe other opportunities come up it kind of It kind of mutes that the you know those worries a little bit the people that I'm talking to in the United States um are very much feeling personally threatened because there is something important with their specific business that is tied to these threat tariffs so maybe they use steel or they use aluminum parts that come from a main supplier that is using steel that comes from outside of the US and so they're worried that they're going to have these big price increases foisted upon them and they don't really know if their customers will accept a price increase you know and so it's it's scary um I think that the uncertainty that you mentioned um really manifests itself with people who sell expensive things to other businesses so a as as everyone listening can probably appreciate when you just don't know what's going to happen the natural reaction is to hang on to cash because if uh if we don't know what's going to happen but we think something bad might be coming the one thing that we need is to buy time and so you hang on to your cash what does that mean it means paying your bills more slowly trying to collect your receivables more quickly and it certainly means putting off investment in that big expensive piece of equipment perhaps that you were thinking about buying at some point last year and I was um one of my clients was saying to me the other day that he wanted to download some some specifications about a piece of equipment from a a supplier's website and in order to get the document he had to put in his email address and was emailed to him and the next day a sales rep from that company showed up at his business wow so so they were watching the emails of who was downloading information and they knew who he was by his email and they drove over to talk to him about if potentially he needed to buy something and and you know I've had a career in sales and when sales people are doing that kind of thing it it means to me that they are really looking for a sale and and so that means that right now people are putting off reinvestment um and so I got to I got to imagine people who sell expensive bits of equipment to other businesses are really hurting right now across the board you know both Canada the US and and you know down to Mexico and everything you know there are some people in the US who are doing just fine uh and and I think that's typical in any recession there are businesses some businesses do better in a recession uh but I think some of the businesses that are doing well down here are still optimistic for the reasons they were optimistic after Donald Trump was elected president they still expect reg the regulatory situation to improve for them they still expect lower taxes they still expect businesses to be more confident and start spending more money is there something comparable to that in Canada uh yeah well the last two months have been an economic boom because everyone's trying to beat the Tariff you know Sawmills are Around the Clock trying to get as much across the border as they can you know all of the car companies are trying to get as much across the border as they can um I interacted with a car dealer on Twitter the other day and he was bragging about the how February was one of his best sales months ever he's down in the US and I posed the question I do you think I said do you think some of that is people trying to beat the tariffs and and he was kind of dismissive of the question but I certainly think that that could be something you know if someone was planning to buy a car at some point this spring and they thought there might be a threat of the car prices jumping a few thousand dollars now would be the time to buy one right sure yeah what about in the market that I believe you follow most closely which is the market for the buying and selling of businesses uh what impact are you seeing there it's hard to tell because everybody of course looks at the performance over time and so it takes a while for numbers to show up in the reporting for a business and right now people are starting to clue in that there could be some trouble on the horizon um I I think that the people who are looking in Industries you know buyers who are looking for businesses in industries that they think could be impacted by these tariffs have either backed off a little bit or they're you know if they are making offers I think what they're doing is they're employing some of the tactics that we saw just postco when you know lot of businesses had a decline in Revenue sellers were promising the businesses would recover buyers were saying hey I don't know if that's really the case or not and they were creating deal structures that would you know only pay out to the seller if the business did in fact recover and when you're worried about potentially a downturn in a business what you do is you often ask the seller to hold a greater degree of seller financing and maybe you make part of that subject to certain performance benchmarks in the coming years so you say Hey you know we're going to have have maybe a a $100,000 balloon seller note payable in 3 years but if my sales don't hit this Benchmark over the next three years then it's forgiven and so it's it's kind of like I'll pay you based on what I see but because of these uncertainties if you still want to sell I need some kind of mechanism that protects me a little bit if I have to suffer through a terrible recession uh that we're just getting into and of course sellers don't like that kind of thing but as buyers you know more and more start to perceive the Potential Threat um and more and more of them become skittish you know the market will move like this are you seeing that pretty much uh the the same on both sides of the Border uh you know there was a a headline in the Globe and Mail the big newspaper up here that a lot of business people follow and it was saying that you know big m&a activity on Bay Street has kind of stopped and uh while I'm still dealing with buyers that are looking at deals and people that are shopping in the market um I I definitely think that if somebody's you know I I don't necessarily think that someone right now would make an offer on a business that is a support business to someone in the auto sector in Ontario right there's just there's just too much unknown I mean two days we're recording this Friday two day and I think it's important people know because two days ago president Trump signed a document saying there was going to be 25% tariffs on all cars built outside the US and then uh yesterday I heard on the news that uh was it trade secretary lutnick had called Premier Ford saying that the Canadian cars wouldn't be affected and then called back later saying that they would be affected but at a lower rate and it just it seems to change every 12 hours and right so you know by the time this airs it could be different again and so if if you are looking at a company that provides services to maybe a Parts Plant I I don't know if anyone would buy that business right now so what advice would you give to somebody who really had hopes of selling a business at this point it's all based on provable track record and everyone values a business based on what it has done under the assumption that they are going to continue that cash flow under their own stewardship and for most people that question is answered by you know how well organized is the business are there systems and processes and procedures in place and am I as a buyer you know sort of qualified to be uh the person who can capably run this business and that's usually what people look at today there's a third leg to that question which is you know is there some catastrophic macroeconomic change that could happen now here's the difference between a business owner who's been around for 30 or 40 years and someone who's buying a business someone who's long established who's been around for a long time has probably paid down their debts they've got a very strong balance bance sheet they might have Savings in the bank and they could probably weather an economic downturn pretty well even if you know the car plant or the parts plant they service does happen to close up they can probably change that business over time find new customers find new ways to make money Etc the problem for a buyer is that when you buy a business you're almost always borrowing a lot of money from the bank and that puts you into a position where you have this Finance risk you suddenly have this this overhead of this debt payment that has to be met every month and and so the business that someone buys is very different than the business that someone sells and it could be a great business but until people know that they reasonably can carry on the cash flow they're not going to undertake the risk of taking on the debt does that mean if someone really needs to sell you know and and hey I meet a lot of really motivated sellers for all kinds of personal reasons you know is there a way to get out there always are it just depends on how motivated the seller is and how creative they're willing to get you know in in how they make their deal the last time you were on we talked a little bit about your book of buying versus starting a small business and kind of the calculation that goes into what makes one or the other the right decision for any given person does all this change that calculation um I don't think so you know one of the unfortunate conversations that I have a lot of the times with with people who want to sell their business is if their business hasn't been that great um I often have to show them why it's really not possible for anyone to buy their business you know it's it's a marginal business it doesn't really earn much more than a paycheck for them as owners and they may be working hard at it but but it just is not able to acrw a great deal of value if it were to change hands and it you know it's unfortunate for owners that are in that position um what I don't think is appreciated though is that even though that business may not hold tremendous value for its owner because it of its performance over time that business holds tremendous value in its Community for its employees and for the government because even though the business is marginal the employees still get paid Source deductions income taxes you know um all the deductions they all get remitted to the government that business is paying income taxes local state taxes you know business levies uh license fees property tax all that kind of stuff and so so it's still a contributing Cog in the machine of the community and and of everything that you know is required to make a community go and when we get these these ripples or waves in the economy with these uncertainties and these problems and things those are the businesses that are the first to go and um you know often times it's really hard to get some of these things going again if they can ever get going again and and this is you know the danger that I don't think people really appreciate is it's often very surprising to people in the general public how on the edge a lot of small businesses really may be um but that this is the potential catastrophe I think that might be on the horizon you know everything you just said I think was true a year ago as well Ian we've there have been a lot of conversations about the silver tsunami and the percentage of businesses that are not really sellable but but have that value that you just described um and we were headed towards a difficult situation with that in any case and no matter how good the economy um any sense how much worse this is making that well I mean we'll see I you know when when I'm talking to people over the last two weeks you know back back in February when the tariffs were first announced everyone was in full panic mode um now I think people are getting used to the flip-flopping Dr drama it's it's almost like that children's story you know the boy who cried wolf I people are almost becoming desensitized to the the changing headlines right the boy who cried tariff well and so you know regardless of what happens business owners and you and I Lauren are not going to be the ones who make the decision and so we just have to deal with the consequences and when we don't know the consequences the only advice I ever can give to business owners is do what you can to hang on to as much cash as possible because whatever does end up H happening you're going to need time to make adjustments and cash buys you time and and I know that that very advice it which is I think Sound Advice is the advice that could trigger a recession yeah if everybody follows that advice that yeah that's where we are of course in times of uncertainty there's always opportunity out there somewhere unfortunately for a lot of us we only find out about it till the opportunities have been taken and they're gone um but are there things you look for in a period like this as potential opportunities that might be you know seized upon that wouldn't otherwise have been there if it hadn't been for this uh crazy period yeah so I was actually writing about that this morning in one of my regular emails to my subscribers and I was talking about the possible outcomes of of this scenario if the tariffs do come to pass in a meaningful way and so I was saying you know take stock of your competitors do you think some of them may be in a worse position than you you know there there could be an opportunity for you to get a bunch of customers because somebody else happens to close down first um is there going to be some kind of assistance program so here where I live in the province of New Brunswick the premier just announced a $50 million fund for helping businesses that need to retool and reorganize uh in the event that they lose uh their export Market to the US so what does that mean well it means that someone with older equipment maybe they can get a low interest interest loan you know and and retool and be better able to make things to ship to Europe or something and so you have to be aware of of what's Happening um I also wrote that you need to take note of who your business friends are uh who are the other people that you know that you get along with could there be opportunities to work together with some other people maybe save on expenses or share resources in some ways um in any great time of change there will be opportunities for some people there's all different kinds of quotes out there about how you know many fortunes were made during the Great Depression um the the change is is always going to come and I think that if people were afraid of change and afraid of problems they certainly would not choose to be a small business owner and so so it's it's um and this is why I say like a lot of the stuff that I see on my own personal social media is from you know sort of the general public you know the the person with a job at one of these plants that could be affected they're really worried because 100% of their income is coming from that paycheck um business owners you know is Ford going to end up being okay at the end of the day you know I think that whatever the changes are it's going to be very expensive and their shareholders could take a hit but we're probably still going to be able to buy a Ford in 10 years time it's all the all the small folks you know that uh that are really worried and are reacting business people you know you got into business through creativity and creativity is what keeps us around it's interesting to me that you described a moment ago uh plans that are already a foot in Canada at least in uh your area to be supportive of businesses that are struggling um um here in the United States where we're causing this disruption I've heard no such discussion and I know a lot of business owners who probably could use some help well and you know I think it has to do with the fact that the businesses primarily affected here again are bigger Industries right so if you've got a mill that employs a few hundred or oil refinery that employs a few thousand you those are a lot of Voters and so the the politicians are very attuned to you know what's going on the feelings in the community um you know I think in the United States obviously what the president is saying is that this plan is going to be positive right and so uh that's that's what they're running with I guess but he has acknowledged that there'll be a little bit of a disruption and obviously here too um it's the smaller folks who will pay the price for that and could most use the help yeah absolutely David Barnett is author of buying versus starting a small business you can learn more about him at davidc barnet.com David thank you for taking the time and for uh continuing to be my friend awesome Lauren it's great to be here thank you so much always a pleasure have a great week everybody