Willful Blindness – A Consultant’s Take

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I read Michael Gerber’s eMyth Revisited in 2003, the same year I started my consulting practice.  I felt that it gave me a roadmap to success as a consultant.  The book opens by describing a woman who loves to bake, and her friends all suggest “you should be running a bakery.”  So off she goes.   However, she soon becomes overwhelmed by the managerial responsibilities that come with owning a bakery, taking her away from her true love and passion: baking pies.

“Simple,” I thought, “I’ll help resolve this disconnect by assisting my clients on the managerial side of the business so they can continue to ‘bake the pies.’   And there will be an educational piece to my practice too: I will teach these bakers  enough about finance so they are better equipped to manage their businesses.”

But as the years have gone by, and I have gained experience as a consultant, I have come to realize there is something deficient about this model; some of my clients have a real aversion to learning how to manage the financial side of the business.  Some even avoid hiring anyone to do it for them!  There was the entrepreneur who did not file tax returns for numerous consecutive years, with the thin justification that these were loss years so they didn’t owe any money; but he put himself at risk of losing valuable tax-loss carry forwards.  Then there was the maker of high quality organic desserts who couldn’t persuade her partner to create a “bill of materials,” and consequently did not know if some products were being sold below cost.   And there have been numerous instances of people thinking about starting, or actually starting, businesses without having a clear idea of how much capital it would take them to get to positive cash flow.  This systemic avoidance went well beyond what was described in eMyth.

Fortunately, Margaret Heffernan has written Willful Blindness and I believe it provides a deeper psychological/sociological explanation for why business owners are blinding themselves from the positive results of proper financial management.  Figuring out whether the business is going to make a profit, what to do if it isn’t going to make a profit, where to find money to pay quarterly estimated taxes, etc. is not likely on the top of any business owners “to-do” list.  Avoiding these and other similar activities for a day or a week may seem acceptable behavior, but as Heffernan writes, “All of us want to bury our heads in the sand when taxes are due, but in trying to pretend the threat doesn’t exist, and we don’t have to change, we are… trying hard to avoid conflict.”

I’ve also recently had the chance to do join up with Richard Magid and his team at Soundboard for some important client work and to witness firsthand how effective they are in the areas of coaching, training and cultural assessments.  Their wide range of successful client work has made them highly sensitive to the discussions that are not taking place – but should be.    If you are looking for consultants who can help get your employees more engaged, you should give them a call.

Client education will continue to be an important aspect of what I do, and I will continue to ask myself whether individual clients are truly coachable in financial literacy or not.  I’m at a point when I can no longer keep my head in the sand when it comes to business owners who are not willing to get into the financials, because your business is too important not to look at the financials, and mine is too.

 

Senate Bill to Raise Credit Union Small Biz Lending Cap Stirs Debate

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On March 9th of this year, Senator Mark Udall of Colorado introduced Senate Bill 509, the Small Business Enhancement Lending Act, a bill that would raise the permissible amount of Member Business Loans from the current cap of 12.25% to 27.5% of a Credit Union’s assets.

In aggregate, Credit Unions ‘ Member Business Loans equaled 4.2% of assets in 2010.  While only a tiny fraction of Credit Unions are being held back by the current 12.25% limit, which was put into effect in 1998, and  some have called arbitrary, National Credit Union Association survey data shows that nearly 70% of Credit Unions do not make Member Business Loans in the first place, perhaps held back by the perception that these loans were too risky.

The proposed legislation is supported by the Obama administration, and by the Credit Union National Association, which projects that the bill’s passage could result in $13 billion of new lending to small businesses, which would in turn stimulate 140,000 new jobs, all at no cost to taxpayers.  The American Banking Association is vigorously lobbying against Udall’s bill, contending that the proposed legislation is intended to support “large, aggressive, growth-oriented credit unions who have abandoned their mission of serving people of modest means.”

Personally, I hope the Senate can move bill 509 quickly through committee, debate, and to an affirmative vote.  While it is true that only a small minority of Credit Unions are currently constrained by the 12.25%-of-assets lending limit for Member Business Loans, in addition to freeing these Credit Unions to lend more, the bill’s passage might also stimulate other more conservative Credit Unions to think about originating Member Business Loans for the first time.  To have this bill stifled by Big Banking as it attempts to protect its turf against encroachment from not-for-profit Credit Unions would be ironic, especially as this country attempts to pull out of a recession that was made worse by the reckless and unregulated actions of some of this nation’s largest banks.

 

 

60 Minutes Raises Tough Questions about Greg Mortenson and Central Asia Institute

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Last Sunday evening’s broadcast of the CBS news show “60 Minutes” raised some important questions about “Three Cups of Tea” author Greg Mortenson and the governance of the charity he founded, the Central Asia Institute (CAI).   I watched the episode, reviewed the Central Asia Institute’s latest 990 form, and also read the CAI’s response to 60 Minute questions, which is now posted on their website.

Both CBS and the Central Asia Institute agree that only 41% of the Central Asia Institute’s spending actually went to build schools in Afghanistan and Pakistan.  Furthermore, while the CAI spent $1.7 million for book related expenses (i.e., advertising, events, film, publications, and travel)  what is much murkier is how much of Mr. Mortenson’s royalties from sales of “Three Cups of Tea” have been donated back  to the charity, raising the very reasonable question of whether Mr. Mortenson is deriving excess benefits from the charity he founded.

I personally felt the 60 Minutes segment was the product of some outstanding investigative journalism while I did not find the responses posted on the CAI website very reassuring.  Read them both, decide for yourself, and add a comment here, or on the 60 Minutes website, which has 379 viewer comments, and counting.

 

 

 

 

 

Harry & David Files for Chapter 11 Protection

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Harry & David Holdings Inc. filed for a pre-arranged  chapter 11 bankruptcy on March 28th, 2011 after having skipped a $7 million interest payment to bondholders on March 1st.  Harry & David’s sales had declined in recent years, as recession-strapped consumers and corporations cut back on discretionary gift purchases, and new competitors such as Amazon and Edible Arrangements entered the fruit basket business, competing with free/discounted shipping and innovative new fruit basket arrangements respectively.

Harry & David arguably would have been able to ride out the recession without the need for a bankruptcy if its balance sheet had not been weakened earlier in the decade.  Specifically, the acquisition of Harry & David by investment bank Wasserstein in 2004 for $254 million weighed down the company with $250 million of debt, as Wasserstein hastened to pay itself back for the capital it had used to make the acquisition, recouping 1.25x its original investment. The founding Holmes family had sold Harry & David to RJR Nabisco in 1986, a previous peak period for leveraged buyouts, and ownership of the company had changed hands additional times before Wasserstein’s acquisition in 2004.

The company’s bondholders, including Wells Fargo, will become the new owners, as they convert their debt into equity, the “Los Angeles Times” reported.     The company is continuing normal operations on the internet and its 70 remaining retail stores, under the leadership of Kay Hong, chief restructuring officer and interim CEO.  Harry & David’s previous CEO,  Steve Heyer, former CEO of Starwood Hotels, was appointed Chairman and CEO of Harry & David in March, 2010 by Wasserstein, and never moved to Oregon, choosing instead to run the Oregon-based company from his office in Atlanta, Georgia.   In February 2011, Heyer was replaced by Hong, the former CEO of turnaround firm Alvarez and Marsal, when it became clear, after a disappointing Christmas selling season for Harry & David, that some sort of financial restructuring was unavoidable for the century-old firm.

Crumbs Investor Presentation Looks Good Enough to Eat

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Crumbs Bake Shop, which was founded in 2003 by wife-and-husband team Mia and Jason Bauer, hopes to see their company stock soon listed on the NASDAQ exchange – quite an achievement coming at the tail end of the recent recession.

The 2/8/11 Crumbs investor presentation is as nicely laid out as the Crumbs store I visited earlier this week, and a must-see document for any would-be restaurant owner who is thinking about writing a business plan.  At first glance, I was amazed by the degree of disclosure of their business strategy, and key metrics.

Crumbs’ business model may wind up being  just as delicious for investors as their cupcakes are for consumers.   By baking their cupcakes off-premises, the average build-out cost of a Crumbs location is held to $300,000, while their average ticket (i.e., sales per transaction)  of $18-20 translates to average sales per location of $1.1 million, for an average 16-month cash payback on each new location.   And with an average EBITDA per store of $231,000, their cash-on-cash return on that $300,000 build-out cost is a tasty 77%.

The vehicle for taking Crumbs public is 57th Street Acquisition Corp, which already trades over-the-counter, and in January announced plans to acquire Crumbs as soon as this month, which would be the final step of a reverse merger.  The Crumbs investor document projects that at closing, 55% of Crumbs stock will be owned by the public, 40% by current Crumbs management, and 5% by 57th  Street sponsors.  The deal structure is less easy to understand than the store economics, and I noticed from the investor document that a considerable number of contingent shares are being created which would be issued once the stock price reaches certain future targets, which could serve to dilute public investors’ returns. And at $31 million of (unaudited) 2010 revenue, Crumbs is on the small size to be a publicly traded company, although it projects it will be at $85-90 million of revenue by 2012, and be at 200 units by 2014.

So with cupcakes coming in three different sizes: “taste”, “classic” and “signature”, hopefully there will be enough Crumbs to go around on a post-IPO basis to make everybody satisfied.