Yeah, I Can Hold Myself Accountable

[Music] hello everyone welcome to the 21 hats podcast I'm your host Laurin feldin this week Mel Gravely tells Jay gos and Liz picarazzi about his recently executed succession plan including what's worked and what could have gone better the main thing that could have gone better Mel says is his purchase of another small business where he says he misdiagnosed the challenges the businesses confronting I thought they just had a bad model and they weren't managing it well Mel tells us it was worse all of which leads to a discussion of the role that a board of advisers can play in helping an owner build a business while Mel has said he wouldn't run a lemonade stand without a board Liz and Jay like most business owners have taken a different approach the whole notion of having a board of advisers Jay tells us is something he struggles to get his head around I've been doing this for 45 years he said and I've never had anybody to answer to plus with the talk of tariffs getting louder Liz update us on her search for an alternative to manufacturing her trash enclosures in China we really have to have a plan B she says we'd be stupid not to have a plan V even in Good Times owning and running a business can be a lonely Pursuit our hope is that these weekly conversations brought to you by our principal sponsor the great game of business will let owners know they are not alone in facing challenges same thing with our daily newsletter the 21 hats Morning Report which Inc magazine named the best newsletter for business owners ERS and which you can subscribe to for free at 21h hats.com where you can also find transcripts of our podcast episodes and lots of other articles and interviews joining me this week on the podcast are regulars Jay gos CEO of the gos group whose companies in Chicago include a picture frame business artist frame service and a home furnishing store at Jason home Mel Gravely CEO of triversity construction a construction business based in Cincinnati and Liz picarazzi CEO of City bin which is based in Brooklyn New York and makes trash enclosures and package bins the episode is titled yeah I can hold myself accountable welcome Jay Mel and Liz it's great to have you here all want to start today by talking about succession I I recently highlighted a story from the New York Times in the morning report that painted a somewhat Bleak picture of retirement for business owners it focused on a particular owner who apparently had sold his business and was now puttering around the house while his wife continued to work remotely as an executive uh she had a team of employees the story is told from the point of view of uh the woman who clearly isn't thrilled that her husband is home all the time offering lots of unsolicited advice about how she runs her Zoom meetings and manages her team she starts to wonder what he must have been like as the boss of his own business um it's clear they lived uh lives on separate tracks he ran his business she worked her high level job while also raising the kids um there's a a poignant exchange where he says to her something like wow um our grandkids are are so bright and interesting and she responds you know your own children were very bright and interesting too I I don't want to suggest that any of you are headed in that direction but I I think you might be able to relate to some of that or share some of those concerns Mel you recently went through through uh a transition um it's not the same for one thing you haven't sold your business you just stopped running it on a day-to-day basis but having gone through this I'm I'm curious how's it going yeah I would say uh first of all I pray my daughter my sons and my wife would not report that that I was that as a parent when I was running a company and I'm hopefully not that now so I I would have to say it's going well Lauren um you know it's it is a transition but mainly an emotional one um you know when I visit the office no one asks me a question no one seeks my opinion it's not that they don't care what I think well maybe it is that they don't care what I think I mean I just I so that part's different from an emotional standpoint I am working from my home now but I've got so many things I'm interested in doing and I still do help out with um you know access for the company and the CEO and I have a formal check-in Cadence and I still chair the board so I'm still active there but I'm on a number of other uh privately Health company boards and active in the community I'm writing again so you know it's uh working out pretty well you put a lot of thought into this I know you planned it out you talked to a lot of other people who'd been through it y are there things that you looking back on the way you managed the transition are there things you got right are there things you got wrong what what would you highlight well first i' highlight the fact that it's May so it's been five months right so you know July or August could all fall apart I could be an emotional train wreck I could not resist my urges to go back in and take over I mean so it still could go bad but with that said I think the planning of not just the transition but the uh what I do with my time was pretty important um so I have less room to medal less room to worry less room to get in the way I think the other part is uh being clear why you're doing it and because it makes it easy for me not to look back because I'm very very clear about why we did it why we're doing it now we probably could have laed one more year but I think we were in the ballpark of getting the right time frame so what I would say I I could have spent more time on um been more thoughtful about is when I purchased the other little company I bought last year I probably should have given that a little bit more thought but um other than that I think I'm pretty pleased so far so give us some context who who took over did you bring him in him her from the outside what what's what's the story with who you left in charge yeah the the current president and CEO um and my business partner he now owns 10% of the business is um a guy that's been with me for about 11 and a half years almost 12 it'll be 12 in November um so we we we acted as partners for years to be honest with you Jay and um he's a great guy he's a construction guy and not so he brings a certain sensitivity to the business that I just don't have he's going to make the company more profitable um because he knows how and I I'll be out of his way and stop spending money but yes he was with us for a long time when did he get the 10% he got to 10% um like don't hold me to the exact date but it wasn't at transition he got to 10% um 2020 or so okay um maybe 21 I I really can't remember but he got it before he became CEO he was actually offered uh some ownership prior to that that that he declined at the time for some personal reasons but um but was glad to get it when he got it so what's the long term because you know I'm eight years older than you are but at some point we're gonna die yeah uh do you have a long-term plan cuz uh my wife is you know her father died when he was a year younger than me and she's has brought up to me like what if and I don't have a great answer at this moment I'm certainly working on it but but do you have a great answer I don't know if it's great or not so we have um prior to me leaving a CEO we had a two-prong plan one was an emergency plan what what would we do immediately um and then the other was then what would we do long term keep in mind that um this business although privately owned is stewarded by a fiduciary board of directors so there are seven people who are in a position to protect the company as it moves forward so if something were to happen to me at least there's a there are stewards of the business but now that I've transitioned to um chairman of the board uh and majority owner the plan is a little bit different so the long long-term plan I don't know we got a longterm framework it starts with the board my kids my oldest son is on the board his brother will join his younger brother will join in June as an advisor to the board so they'll learn how to be producer agents of a of a privately Health company maybe they'll get the itch and want to join the company and what but that's not an expectation so right now if you said Mel what's your plan it is to own the business as a family um forever and teach the uh familial uh successors in how do you motivate a management team and be good stewards of a family asset so of the seven people do any of them work in the company yes they do um the board seats are held in proportion to ownership so I control four seats there's another entity that owns 20% of the company they have two seats and then my partner and now CEO holds his own seat so he works for the business I guess I kind of work for the business and everyone else is outside of our company so two of the five are employees your situation is 100% different than mine I have no board I so I it's yeah I I understand sounds like for you that works fine and it makes sense uh let me ask Mel did did you create that board I know you bought the business did you inherit the board or did you create it no we we we uh I created aboard the first few months that I bought the company uh there was only three people at the time because there were three owners and so everybody had a seat and then um as we transition ownership and I wanted to expand the role of the board we grew it and so the board members are either selected or negotiated with the owners um about who sits in this those seats what motivated you to start the board for two reasons one I think uh I needed to be held accountable because we all have those things we keep doing that are not that smart but we just keep doing them and so I needed some accountability there and I don't like it actually I dislike it but it's been very very important um the second reason is I don't know how how you go from generation to generation without the continuity that a board can provide for you so from that standpoint if you really want a multigenerational business this was this and you were thinking about that way back when you first bought it oh absolutely multi-generational was the reason I wanted to grow a company of scale um I think you know a little bit about um what I'm out to prove but yeah at the very core of that is this has got to be multi-generational and that Above All Else is important you mentioned the business you bought last year and that you should have maybe put some more time into it what what was the motivation there did you buy this business as something that you expect to really focus on uh now that you kicked yourself upstairs from your main business actually I bought it um because I always loved this business I was hoping that I could convince triversity the the the company that I was exiting to over time see the value in it and add it to its portfolio of companies that it owns so that was the motivation right they they were not buying in and so I decided to buy it myself and convince them over time that it was a good idea it's a construction related business yeah it's Facilities Management so it's the grunt work plus so you know um little patches of drywall all the way down to mowing grass and moving snow and cleaning out gutters and cleaning windows it's the ultimate execution business but companies good companies during even bad times they're going to maintain their facilities well Y and so to me it was an offset to the economic kind of um trends of construction that construction can lead itself into but it is a tough business and um and I didn't buy the company I bought was um I misdiagnosed their challenges and um and now I'm in a situation where now I understand the challenges and they are they're tough ones how many employees are there all together in driversity or the new company no everything everything under your purview 150 people maybe total and the the the new company are are you managing it on a day-to-day basis uh no there's a president in place uh that just is um if he would have come along if I had five years he'd be great but I don't have five years he's got to gy up a little faster he's bright he knows this business super well but um and so I would have to say he's managing the day-to-day but I'm very involved Lauren I'm very involved and uh and I'm not used to being very involved so it's a challenge can you give us a sense what the the main challenges are why is it a tough business yeah the fundamentals is this company when I bought it had one customer so that to me is not a problem because they had an amazing customer a very large customer for this kind of business business and we were performing very well for them so I was confident that our ability to perform was going to be a base for us to be able to grow this business what I misdiagnosed I thought they had a management problem they had a structural contractual problem with the customer that is just we were actually paying the customer to show up every day and the team just didn't know it I'd never seen negative gross margin before literally never seeing negative gross margin and when I saw it I just knew it was a mistake so that that's the biggest challenge so the good news is is that it's a great customer we're working through um new contract uh terms new bill rates that I will put it back to profitability but you know when you dig a hole as deep as we dug it just makes it a challenge that the second thing about this business it is very cash intensive you know when you deal business with big customers 90 days is are good terms and so you're paying weekly because that's the kind of employees you have and you're getting paid in 12 20 days so the cash that it can consume is uh significant so you add the cash uh that it consumes to lack of profitability and you just it becomes very difficult wait wait why you see this is what's interesting about this this podcast we're very different I everything you've been saying up till now is like yeah that ain't me at I mean we're like on opposite ends of the spectrum you've got a bunch of Partners I have no Partners you've got one customer I've got 40,000 customers you finally hit on something oh okay I got my arms on this one what's with 120 days why do you have to wait 100 what if you say to them you need to start paying quicker why do you have to live with 120 day payment terms yeah that's a that's a great question um you don't have to but you do have to if you do business with them so you think this particular customer if you say we can no longer Finance this at 120 you think they'll find someone else that'll do it for 120 days I guarantee it wow now here's the nice thing if you're smart though and you're profitable you just build a carry into your into your business model yeah yeah yeah and um but you got you got to carry you got to build a carry into your business model and if you don't uh then you know then you're going to be really hurting you know our our diversity the construction company does business with the same customer we've never had a problem with 120 days we have some problems with our subs that can't wait that long but we've never had a problem with 120 days because we've built it into our business model are you looking for other customers uh no well here's why um I've got to make sure that I can cash flow a new customer the worst thing I could do today is get a new customer I see the customer have to pay me up front right and uh those and at scale those are hard to come by um we when we get this model straight though I'm confident and I've told the the customer and I are very clear about this we can get back to 120 days um we can continue to deliver at uh the A+ level that that we've been delivering and and then we can start to add customer you say you have gr negative gross margins I assume you've got to charge more right oh absolutely okay so my question is are they GNA find someone else that if you raise your prices where they need to be are they going to find someone else who's going to go ahead and do it cheaper because they don't know the difference is that a question mark or is that it's not a question for me at all because we've been very clear please do find someone else that could do it at this price and they can have it you know you know when you when you get super clear about super clear the customer gets super clear too and they've been great because what I said is I'm going to show you everything all the cost and you tell me that you're that you're paying for what you're getting now they never admit it we're not paying for something that we're getting what they did say is we're we're willing to talk to you about the pay rate the rates so um they've been great about it to be honest with you but you know it's not their job to make sure we're unprofitable they want me to be profitable it's not their job so interesting business question to me is the people that you bought this from how do you I'm going to guess they didn't have the proper accounting people in place to recognize that they were doing it a negative gross profit is that true that is correct now it comes down to accounting it does and an idiot to that would buy it without believing the proforma not because this company did not have the model change so I'm going to make it try to keep it short this this company did not have financials when I bought it it didn't even have employees when I I bought it the two owners prior to me were loaning employees to this business and charging the business 10% margin for the the the cost of carrying those people so they had no purview into what it was actually costing the company to do this because they didn't care because they were both getting 10% on all their employees where they did care was they couldn't seem to cash flow and they couldn't figure I that's where I misdiagnosed I thought they just had a bad bottle and that they weren't managing it well it was worse they had a bad model they weren't managing it well and they had no idea what it what it cost to deliver to service are your friends at triers who decided to pass on this purchase are aware of your uh challenges with it they're not only aware they have shown up like the troops that they are the people who have figured this all out are my very talented CFO and controller at diversity um the human resources at triversity are now the human resources in this little company they are are showing up to save my bacon the CEO is kind of like dude could you get this over with cuz we got work to do but you know what's funny about this whole story is like I said every single thing if I ticked off that you were going through yeah that's not me that's not me that's not me and now boy that's me I'm having the exact same issues with accounting with figuring out wait I got four businesses we've been allocating expenses to them and oops that's wrong and I'm in the same spot you are with the accounting thing which I've never met met a company that's super successful was got great accounting though I've met lots of them that failed because of bad accounting so accounting's critical that's the moral story for today accounting is critical well I think accounting and finance and and they're different in my mind at least you know the accounting is making sure I'm allocating costs correctly the finance is around strategy and projection and um and it drives what we buy and all of that so yeah absolutely Liz you're a ways away from needing to think about succession issues but does this conversation get you thinking about it at all yes it does in that when I retire um I I think I probably will retire but I'll have some sort of limited business interests you know I've often thought if I sold my business then I would have some years of investing Angel Investing partly because it just would be really interesting to me to be a part of that but I hearing Mel's tail I would be very cautious to take on a challenge like that um because it kind of sounds like the opposite of retirement sorry M to be honest you know I with succession um I haven't done a lot of thinking about it you know my daughter is 18 she's going to college in the fall she knows that if she wants to be involved in the business she can like many 18-year-olds you know I don't think she's going to be interested in that for a while so in terms of familial succession that's something I think about but also you know I've got incredible employees and I have no idea how exactly I would structure it but if I had a way without going the whole like ESOP complicated route to enable my employees to run the business own part of the business I would be interested um whenever I hear here on the podcast or I you know I went out to Fort Worth for 21 hats and I hear about you know ES S I just I kind of close my ears at this point because it all just seems so complicated but you know that's kind of what I have in mind if I did have an offer to sell the business that seems like it would make a lot of sense I would particularly if it would free Frank and I up to do you know a lot of things we love to do I'm I love to travel I love gardening I think that may sound crazy that I would really want to like give up my business to pursue like gardening and travel but the truth of the matter is is you think I probably would if I could have a lot of cash in the bank from selling my business and I could just pursue Hobbies like home renovation and traveling I would yeah Jay mentioned that he he um he doesn't have a board you don't either Liz I do not and Jay you almost said it with a sense of Pride what's the I'd have to think about whether it's a sense of Pride I'm not I hear what you're saying um I just that's a lot to process and I'd have to figure out who would be on the board and certainly I listen as you know many people I spent a lot of time looking at esops over the last couple years and have come to understand that one of the things that I should be thinking about is having a board and who would it be and how involved would they be given that no one has any equity in the business though it in your case you had no choice it goes with the whole thing so I just find it I have to think of the word wait why do you say Mel had no choice well he had people that that have owned stakes in the business but I could I could drag them I could drag them around like I own them because I own 70% of the company right so no I didn't have to do a board at all but it was more natural because they have stakes in the business so it it makes more sense that they'd be on a board in my case I guess it's on my to-do list um not guess it is on my to-do list because um I do need some people here that can help give some direction or whatever for uh for the day that comes that's necessary I just it's so um I guess it it's not that I say it with pride I guess I'm just saying it with it's so unfamiliar to me that I I really have to get my head around it's like I've doing this for 45 years and never had anybody to answer to and I also when you said you need someone to hold you accountable I I laughed to myself because whenever I would join a business group and they go well it's good because you can be held accountable and I always say to myself yeah I can hold myself accountable I don't need to be in a vage to have a group of guys holding me accountable so that's just the world I've been in though I can't argue with the fact it's good I listen I have my one of my kids here he's holding me accountable every day he's bringing up stuff that I should have been paying more attention to and he's absolutely right so I am getting some of the accountability things so it's just unfamiliar territory to me and I'm having to get my head around it with the knowledge that I do need to do that um that's just something I have to work on but but again just totally unfamiliar and you have to think about it and uh so this is all very interesting Liz what are your thoughts on the board thing I've often thought of creating something informal I mean I'm 100% owner of the business so I don't have you know board seats that I need to give to investors but I've thought of it less as a board of directors and more of a board of advisers and a few years ago I thought about trying to convene a group like physically or even by Zoom um all together maybe quarterly and I gave up on the idea because I felt like that was also even sometimes too much to ask of people and that what I'm really looking for is to get advice from people that I should just seek out the subject matter experts in areas that I'm want to move into so let's say I wanted to get into more Municipal Contracting or I wanted to get into higher ed or I wanted to work with more multif family developers these are all areas where you know I've made good inroads into those markets but if I could have advisers that would say hey you might try this this and this you may call this person that would be incredibly useful for me and if it were the right Board of advisers I think they also like people get something out of that they really people like to help people and if they offer a strategy that ends up working for my business that makes everybody feel good so I really I do have some interest in that it's been my list for a long time but I know recently we were talking about really like having a budget to take people out to lunch and this may sound really simplistic but I was thinking that budget could be like considerably less than having a board of advisers where I just take PE interesting people out to lunch that I think might be able to teach me something that could be really useful I do get a lot out of EO and um it's not really an accountability thing there's a piece in that but a lot of it is being in a network for like whatever question that comes up that you can ask the question in a huge group in my case EO New York has 200 members and I'm most likely going to get an answer and it's going to be a good referral so if we're saying board of directors no that's not something that's in my near future but Board of advisors I think I could be doing more on that and doing it more in like a dedicated way where I say I take one or two people out to lunch every month and then I get to look forward to it too by having an interesting conversation in a nice restaurant or just having lunch just being able to to have lunch yeah but um it's it you know sometimes I thought about it too like I've spent like really dumb money on like Google AdWords over the years which got me nowhere a few years ago I said I'm not going to spend a dime on Google AdWords or Facebook or any of those and I'm going to take that entire budget and put it into having lunches and doing things with people that can actually make a difference in my business and so that's sort of my approach to how I take an outside involvement and perspective let me put you on the spot then and ask you because we've had numerous meetings here Texas on the phone on the podcast and I have given you I just call a hard time on several issues which in off the top of my head one I have encourage you to buy some Warehouse buy real estate to I question whether you were paying yourself enough money and your husband so that is your financials truly uh accurate or are you subsidizing business by not pulling enough out of what would be called a market rate and three about you know having inventory which I don't think I think that one you're kind of on the same page but on those first two do you have I had any am I wrong so um Jay you have made a difference I'll start with the second issue getting paid yes Frank and I were subsidizing the business for many years um and this year we're not we basically doubled our salaries bam done and said if we can't afford this then we're going to have to really question this business you know so far so good we figured if we can't afford to pay us the market rate that we are now getting paid that we may do one of your favorite strategies Jay which is to raise prices again but I don't want to move ahead with that sort of price increase right now because it's likely going to need to happen if the the tariffs are raised with China so that's on number two on number one um investing in a warehouse I love the idea of it I already have you know a large um SBA loan and I don't feel comfortable taking on more debt I feel like our supply chain issue with having our own Warehouse has partially been figured out because we move from a 3pl to our own space that we rent and that we're not paying inflated rates on because it's it's just like we rented it's ours so do you think the rent you're paying isn't any more than you'd be paying if you own the building I did you do an analysis to see if I probably should do an analysis but remember I live in New York City Jay and you know there's a lot of people that have the same idea about warehouses in and around New York City and I've just found that like if you want to buy a warehouse It's still crazy expensive it's not something that I see myself taking debt on in order to get a position in but ask me again in the future I don't mind discussing it Jay uh those are really good questions I I can't help but point out though that it strikes to me that they're the kind of questions that a board would ask um Liz I think you're kind of making the argument for for having the board that you don't have no I'm I absolutely am no I that's why I was I was curious to see whether any of that sunk in because if it didn't I'd say well these were pretty obvious things and she say she said it made a difference okay because if not there are some people I don't think Liz is like that I know I'm not like that I absolutely listen to everybody input and think about okay maybe they've got something to that there are some people who just don't listen to any advice and just keep doing the same thing over and over and over I've seen it I've seen it when I was in vistage you'd go to meetings a year later you'd say wait wait wait we talked about this a year ago I thought you were gonna and nothing changes they just keep doing the same thing year after year which is partially why I got out of Vis just got frustrating they and they acknowledged they were doing it wrong but they just keep doing it for years Mel I my sense is that the uh decisions that Jay and Liz have made uh about having a board are more common than the decision that you made my sense is that a lot of people who choose to start their own business do so because they don't want to have a boss and they're not looking to to create one by starting a board is that your experience as well do you feel as though you're uh uh you've taken a slightly different path than most of the business owners you know yeah I would I would have to say that the majority of business own own don't have a board and if what Jay took away from my comments is that is all about accountability then I've done a horrible job of talking about board and board importance um in in my mind there's no difference from a structured Board of advisors and a structured board of directors accept the fiduciary responsibility I bet we don't vote more than four times a year on anything and that board so it is almost always advisory there Lauren one day I I'd loved it and maybe you guys have done this just a just a single topic day on um what do they look like and what value do they bring because every question that Jay asks of Liz are things that Borge can work through but they work through them with a deep level of context because they meet every quarter they understand a business they understand a business owner they understand their personal situation so when they give advice it it's contextualized over time so that they would have known about debt and about you know uh Liz's belief in in how much he wants and how much he does like it it it's just such contextualized advice that um if you said there's one thing that's magic and I think I've said this on this podcast before having at least a board of advisers that meets quarterly is just uh it's transformational for the leadership I just can't express how how much it changes and how much it adds to to to leadership I fully accept that here's the issue I've had where do you find these people to be on the board you know I I I've got to count I'm probably on four Boards of advisers maybe three of companies that are pretty small and um and and the way I got on those boards is uh in some of these groups I'm in you get to meet people you have a meal with them you have a drink with them they like you you like them you talk more about business you like their way they think and you ask them and and they either say yes or no but you're inviting inviting them to uh a party that you take seriously whether it's a fiduciary board or Advisory Board and um and if if I were doing it I'd start small I'd have three and never when I wouldn't want to have two I don't want to have three and i' make them promises we're going to meet quarterly I'm going to send you a packet of information before I'm going to value your time whether it's virtual or in person and um I'm asking you for it annual renewal of commitment and to me um if a person is taking it that seriously and I like them and I like their business or I'm interested in their business you shouldn't have trouble finding people to to participate on your board that's my that's been my experience and Mel do you pay your board members yeah we do pay our board members we need to relook at that by the way we've not changed it in a long time every Board of advisors I'm on is also paid but Liz when I say paid there are some of these are very very very small you know couple hundred bucks a meeting they're they're not significant but but I wouldn't worry about the money I would start with maybe maybe they don't get any compensation and that'll really test whether they're interested right but we do pay our board members our stien is $220,000 a year for our board members and um we wanted to be enough to show we were serious none of these people are there because of the money because we've forgotten to pay them before and never got a phone call Liz you mentioned before the the tariffs in China and I want to dive into that a little bit you we talked about it a few months ago I I brought it up back then because Donald Trump was talking about his plans to increase the tariffs that he had imposed as president if he is reelected as president uh and in that conversation you mentioned that you know Joe Biden could raise tariffs too which at the time I didn't think was much of a possibility but he has since been talking about doing that as well so both candidates for president are talking about this I'm wondering how that's hitting you and what your thoughts are uh at this point um it is probably my top preoccupation to be honest um when Trump announced that he would impose a 60% tariff in January we had already been kind of thinking that we needed to worry about that just because of us politics and what some of the polling numbers are showing but like you said in that podcast when we discussed it maybe we didn't really think that b would do that well on a campaign in Pennsylvania in um April 15th or so he said that he um was likely going to Triple tariffs the timeline on what does that mean wait what does that mean what is tariffs now to Triple what what's it start it so when I first started Manufacturing in China my Tariff was 3% then under the Trump tariffs 20120 went to 18% then it went down in 2021 to 11% it's been since then 11% and then they're talking about increasing it tripling it so it could go between 25 and 30% um the last time the tariffs were put into effect it was in like 30 to 45 days after they were announced with these tariffs apparently they are going to be going through Congressional review which did not happen with the Trump tariffs but I basically need to prepare for a either a tariff under Trump or under Biden and um know we've gotten the wheels in motion after the the Trump declaration in January we had been talking about Vietnam we're now working with our contract manufacturer in Shanghai that also has a Vietnam office and we've got samples being made of a couple of our products um in Vietnam and then franker and I are going over there in two weeks to meet the factory uh to check out the samples to kind of get the lay of the land and have that as a plan B we really have have to have a plan B we'd be stupid not to have a plan B and you know I've got a lot of opinions about this because I do think that these tariffs with China they disproportionately affect consumers and small businesses so some huge corporation whether it be 5% or 25% it's kind of like just um it's an inconvenience or a nuisance it's not a showstopper for a small business it's a showstopper don't forget tariffs or taxes if you're person taxes went from 3% to 18% to 11% and 25% in the span of just 5 years how would you be able to run your household I mean it's hard for me to run my business with that sort of volatility in the tariffs so it's really problematic and the other thing it's not just about the money it's actually about my entire supply chain so I've been over there in China now for seven years and it's taken me a long time to set up my supply chain end to end but there's a couple cple points in this supply chain that I really wanted to highlight and one of them is really the engineering work that is being combined with production all in the same Factory all with the same team is incredibly beneficial to me if I were to try to do that in the US my cost would be incredibly insane for me to have to move over to Vietnam and not know if I'm having the same L of engineering and production support that change is a huge cost to my business and to my time and into my sanity so you know I'm very happy with the the situation that I have with China right now and it's really maybe I'm a a You Know sample size of one but I really like my factory and I really like it that I have like innovated my product line and I have expanded my business through this relationship with a factory that works really well for me so that's another thing I find offensive besides just the schizophrenia in the tariffs is that there's a relationship ship here that has been formed between an American small business and a factory that happens to be in China that provides me the level of engineering and Manufacturing Services that unfortunately I was not able to get in the United States when I was here for three years in three different states New York Pennsylvania Connecticut I manufactured in all three states and I wasn't able to get what I needed in a profitable way and also there was a lot of frustration you know I've discussed in this podcast before I never felt like a American factories were hungry for my business when I put out rfps I need to literally chase them to get a response to get a quote for what I needed I've never encountered that in China they're hungry for my business we work very well together so these tarps not only disrupt my financials but it really disrupts my relationship that's taken me seven years to build I I have to add though this some of this is just math I mean if let's say the worst case scenario happened and the Tariff was 60% higher that doesn't mean you need to charge 60% more if you marked up the stuff 20% more it would cover the Tariff and it is a Level Playing Field everyone else has the same problem so everybody that you're competing with is going to have the same problem so just because it goes up 60% doesn't mean that your sales price is going up 60% so that's what's happened in America for the last 50 years with buying stuff from overseas people are taking longer markups now because the stuff got so cheap well in this case it's the other way around and you could take less of a markup but because it costs more the gross profit dollars are exactly the same so part of this is just pricing strategy right but increasing prices by 24% with a city I'm working a lot with municipalities now that it already feels like this might be too expensive could make them decide you know what we're not going to you know move forward with this trash containerization program you know or you know developers of multif family buildings you know what maybe this is an amenity that we want to include in this anymore I mean let's not forget my product is actually like 90% made of aluminum itself which is being tariffed so it's not like I'm working with plastic or something I'm actually Manufacturing in the very material that is being taxed not the most at least I'm not in steel I'm less I'm in aluminum but um it would be very drastic yeah trust me I'm not saying it's not a problem Liz Jay was making the point that there's a Level Playing Field and that the tariffs affect everybody making trash enclosures but are you suggesting that there's another alternative for your customers that they just don't have to buy trash enclosures yes that might be the decision of this is an innovation this is something in the city that we want to do or something in this property we're developing it's maybe viewed as somewhat discretionary and not something totally necessary you know I haven't presented any sort of price increases like that to my customers but I'm pretty sure that they would notice that there was a 25% increase over let's say I gave people a quote this year this the selling time cycle is long for a lot of my customers so if I give them a proposal this year for $10,000 and next year I give them a a proposal for you know $12,500 they're going to notice that they're also going to know that tariffs have been raised by 60% and you tell them listen unfortunately 60% is I'm just using her number that's what she said but not raising it 60% putting a 60% tariff on it you mean there's already a on it right well that makes right now I have 11% so I'd go from 11% to 60% I I have to push back on this you can't solve with your pricing math Jay on this to go from 11% to 60% in the course of 60 days which is about to happen if Trump wins because the last time he imposed tariffs it didn't go through Congress it was an executive action that took effect within 30 to 45 days my tariff rate went from 3% to 18% overnight Liz I'm with you on on that I I I don't I I don't think you can I you I think you're dead on it just feels this is the second time I've been on a podcast with you and I can feel um the emotion behind this so here's my invitation my invitation is you're already working on a plan B you know there's some emotional parts of working through what you've got in front of you the relational pieces of it how hard you've worked to get the supply chain intact so I I invite you to to to like acknowledge that there's some emotion to this because um spending more time on the emotion of it then you're spending on the solution of it is probably not productive but maybe healthy but it's I I don't know that it's it's it's productive I mean yeah I may be really emotional about it but I have like an eight-point action plan Mal to be honest and I heard that too I heard that too I mean even finding the very best lawyer to help me with an ex exception case yeah this time around the last time I did an exception I filed it by myself which was really stupid of course it was declined I'm literally going to find like the one that had the best results with exception cases when the tariffs were increased in 2018 and that's going to be my lawyer like I just started that hunt this week because I don't want just any old lawyer that says oh I can hand handle internet International Trade cases like I want people that did Commerce tariff law with China and that's where I'm going to go with I am certainly not suggesting this as a simple solution I'm just suggesting in the worst case scenario if you had to raise it because everyone else was Raising it that that that's better than losing money and and I don't know I'm guessing what your mark of is so I'm not even sure it would be that severe but that is worth doing the penciling to to just say okay what if and pass just to see but I'm just suggest it's it's not it's not great but it's not like you got to raise your price to 60% it's it's it's it's an option if you have no other options and I certainly respect and appreciate you like these suppliers and you want to stick with them so this is complicated and it does sound like you you're working on all pieces of it as you should be so I just think pricing is one of the pieces I just wonder if there do you have the energyc capacity to take another run at the United States I'm willing to do it and interestingly I only met that met that decision yesterday because I feel like if I don't look into it I'm really not have done my homework the last time I did this investigation was three years ago and I came up with you know it was going to be about 67% more to reshore my work to the United States which was bad enough but the piece that I can't get over is that I want a partner to be hungry for my business I have not found any manufacturers in the US that want my business Liz you were a smaller business back then especially if the tariffs come into uh play and do increase you would be looking to spend more money with an American manufacturer if you did uh reshore do you think it's possible that you might get better service at that higher price with with more business yeah I think it's definitely possible and you know I am G to look into it there were a couple of manufacturers in the tri-state area that I found that I thought well you know I could work with them but the price was just still too high to deal with at that point know I can kind of go back to them but I I just a lot of it goes back to know this sounds like ridiculous but I feel like I have this Lo not loyalty but I like the energy and I love being an entrepreneur working with a factory that can literally turn around an idea into a prototype in 40 8 hours and it's happened over and over with my factory I don't know if I'm going to find that here that was part of the reason I moved in over there I deal with it with buying picture frame holding the reality is even if you had to pay a 60% tariff on the Chinese price it still might be cheaper than buying in America that's I mean I'm buying stuff well actually I buy mostly from Italy and Spain but when you look at some of the prices of whatever you go to the store and you buy a garbage can you think wow it's only X the stuff is super cheap coming from China so even with the Tariff on there it still might be cheaper to pay the Tariff than try to get a m well you should try to get it made in America but it still might be cheaper than making Getting It in America that's just a harsh reality yeah well I mean that's the math that I'm going to do well I encourage you to try and only reason I say that is you know first I think it might be a quality of life Improvement to have them US based um but there's um there's there's a manufacturer in this country that will be a wonderful partner to you I don't know where they are but um our country's big enough that I I bet there is it and it may be like changing your doctor you know the last one you loved them but they retired and uh now you you got to find a new one but you've got to orient them enough to understand what you like and how you are and what your background is and um so I I I just just got to be a manufacturer in this country that would love to work now the question about price is different Liz you have plans to go to Vietnam right yes we are going in two weeks we're going to go for about a week we have samples that have already been made and we're going to be checking them out and you know if all goes according to plan then we're going to do a a small to mediumsized production run in Vietnam while maintaining production in China and then kind of figure out what's the proportion so this may be a little bit about balancing risk balancing risk between China and Vietnam because there's also a risk in having all production in one place and so as much as I say I like my Chinese Factory for these years I've been there it's actually been sort of risky that I don't really have a plan B and that's what partly what you know doing some work in the US was about was diversifying that risk when they talk about tariffs is it just China or are they possibly going to stick it on Vietnam too well there's tariffs on everything that comes in so if I were to bring in it from Vietnam it would still be 3 to 3.5% but you know it wouldn't be at the 25 to 6 I can just say anecdotally going to Nordstroms looking at where the clothes are made I have to tell you I have seen it was like all China a few years ago and I have noticed now there's lots of Vietnam lots of Pakistan that there does seem to be other places manufacturing stuff that's getting into the American Market instead of just China so I think plenty of companies are trying to do what you're trying to do and succeeding here's what's absolutely certain our relationship with China is not going to get better over the next decade or two and I don't know what that means to our businesses but the crystal ball says we're headed to a bad place with China Mel do you buy anything from China and with for your construction business yeah of course we do I mean but I'm buying it through others to to get there um and so we don't tend to have big challenges there and we will pass all of it through so we don't have the same volatility we will pass 100% of the cost through and if customers don't want to build it because they're steel cost too much then we won't they won't build it it'll be okay right so I I'm not speaking from a guy who gets impacted by it I'm just saying if you just look at our relations with China they're not improving as a nation and so got to have a plan B I can tell you I don't need a crystal ball the V I had a couple vendors in China they're done we're not buying from it they just stopped producing picture frame holding so we're we're done with buying pretty much done with buying from China it just shut it just shut off one day so I think there's plenty of businesses out there that used to get stuff from China that aren't anymore Liz have a great trip to Vietnam we will be very eager to hear uh what happens there what you think how it goes in the meantime my thanks to Jay goz Mel graveley Liz picarazzi and to our sponsor the great game of business which helps businesses use an open book management system to build healthier companies you can learn more at Great game.com thanks everybody wait wait don't leave yet if you have a question or a comment that you'd like the 21 hats owners to address send it to me by replying to your Morning Report or by email at Lauren at21 hats.com that's l r n21 hats.com do it now before you forget and don't be afraid to tell Jay what you really think you can take it and if you got something out of this conversation help us reach more business owners tell a friend subscribe and review us wherever you get your podcasts follow us on Twitter subscribe to the morning report at 21 hats.com this episode was produced by Jess Theron founder of blank word Productions okay now you can leave thanks for listening everyone [Music]