Minnesota attorney Aaron Hall speaks with the Twin Cities Small Business Development Center’s Director, Mike Ryan. Mike has served as the director of the Twin Cities SBDC since 2001 and has extensive experience in business and as an entrepreneur.
Aaron Hall: I’m Aaron Hall, a Minneapolis attorney. We work a lot with small businesses and today we’re speaking with a small business expert. Mike Ryan is director of the Twin Cities Small Business Development Center which is invaluable resource for business owners and to the business owners it’s free. Now Mike, we talked a little at a time about all the fact that startups meaning brand new businesses, are not necessarily your target market you are compensated by Congress and by those that donate in order to help grow jobs which is generally by an operating business. Let’s start first for the small business owner who’s a start-up. Really getting their feet wet in entrepreneurship. What three resources are available to them.
Mike Ryan: As you mentioned, we don’t do a great deal of work with startups because our mission is really to create, help create jobs and have a positive economic effect. So, primarily we have an agreement with an organization called Score, which used to stand for Service Corporate Hired Executives. They don’t go by that tag line anymore. But what they do is a free service to start ups and pre-venture individuals, so people who are testing their idea or just want to get a sense of if this is a feasible idea, is it something to leave my day job for.
Aaron Hall: And these are experienced business executives who volunteer their time to help entrepreneurs?
Mike Ryan: That’s right. And they’re not all retired. They’re not all just retired folks, there are active people, business owners, all kinds of folks. But our agreement with SCORE is, for the most part, an individual comes to us with a thought or an idea, we’ll ask them to work with SCORE at least to develop a business plan, if they come through that and they have what appears to be a viable business, then we will take another look and see if we can help them out. But, by and large, most of these starts up never actually start. So we really can’t focus too much of our time on those.
Aaron Hall: What are the businesses that really can be helped by you?
Mike Ryan: Well a typical business for us, where we would look, where we would be the best fit, would be $1 to $3 million small manufacturer looking to expand, looking to grow their market share, get into different products. That’s really ideal us because the manufacturer base is important for the Twin Cities. THey also tend to create pretty good jobs.
Aaron Hall: So what does this look like from a practical standpoint? So a business owner calls you up and says hey I have a company here, it’s going up. They’ll probably tell you they have some challenges which prompted the call. Maybe it’s money challenges. What do you do from that point for the business.
Mike Ryan: It is true, they don’t usually call us if things are going really well. They are pretty happy on their own if that’s the case. Usually there’s some symptom, there’s some obstacle they have come up against and generally, it’s tied to cash. That is usually the indicator, they are short of cash, they’re falling behind on their debt. We can usually figure out what’s going on, generally it’s revenue. They just don’t have the business, they can’t support the business, it’s not growing like they would like it to. So the process that we like to go through is if a prospective client wants to come work with us, I try my very best, I try to interview them first. Either by telephone or in person. To find out, first of all are they a good fit. If we can’t help them, let’s manage these expectations so people know what they’re in for. If they’re a good fit, meaning they have revenue, they have a track record, they’re profitable or somewhat profitable, and we can help them, then I kind of think through my staff and who the people I have working for me through St. Thomas, who is the best fit? Do they have marketing issues, we have some terrific marketers. Do they have financing issues, we have some really good numbers people. To help them get credit, to expand their business. To help them grow we help them with marketing plans, product development, things like that.
Aaron Hall: So how much time would your staff actually spend with the average business owner?
Mike Ryan: We work with between 400 and 500 businesses a year. A typical client for us we may spend a period of 10 to 20 hours over 3 to 6 months. That’s just kind of typical and that will be several meetings and we don’t do the work. We can only advise. We are not allowed to do anything. We can advise them but we give them assignments. We will go through their business plan, go through their marketing plans and say, hey you should really take a look at this or that issue. We work with so many business that there’s not many things that we haven’t seen, at least in some form.
Aaron Hall: Do you see any common problems that are brought to you and if so, how do you advise them with those?
Mike Ryan: The most common problem, there are a couple of problems but the most common is people taking too much money out of the business. Business owners work very hard and if they’re profitable, they often take the money out of the business and they don’t leave enough in. They don’t leave enough in to operate and they get into trouble because they try to replace that money with debt and the leverage starts going up. And then things start collapsing.
Aaron Hall: Is there a generally rule about how much operating income should be left in the business?
Mike Ryan: I don’t know if there’s really a rule. I like to see, you know I don’t like to see debt more than two or three times the equity in the business. That’s ok, there’s good reasons to borrow money. Borrowing for long term assets or growth is one thing. Borrowing to cover losses is not a good thing and that’s where we start to run into problems. But people having cash flow issues, taking too much money out of the business.
Aaron Hall: So, the business owners who are ongoing, they have employees, they’re having some problems like this, what’s the next step for getting in touch with you.
Mike Ryan: Well, we would have our initial conversation. Then generally I will, or one of my colleagues, will run through a fairly detailed analysis of their financial situation. Because that is an objective for us to look into the business. Often what they are telling us, it’s not that they’re not trueful, they’re not maybe putting their finger on the problem. I need to look at the numbers and then we tell them what we think is the issue. Sometimes it is the same thing and sometimes it’s not. But we like to take that sort of an objective look at about three years worth of financial history and figure out what we think are the issues, then we will confirm that with the owner. To say, do you agree with this, is this something we want to work on? Because if we don’t get them to buy in to the plan. Into a plan to fix things or improve, then it’s not going anywhere.
Aaron Hall: I was delighted to hear about your organization and the free resources that it offers. SCORE does something very similar for a different market. Are there other organizations or resources out there that you’re aware of where business owners can get this type of help?
Mike Ryan: Yes, there are. There are too many too mention because I would I’m sure leave some out. But let me say this, I would welcome people to call us directly. If we’re not the best fit for them, I do know where all of these other places are. And we will get them to the right spot. If it’s not the best fit for us, it’s very seldom we will send someone away unhappy. We will say, hey, we’re not the people but these folks are and there’s 25 places that are around town that do this stuff. So I hesitate to start mentioning any of them. But they can get to those through us.
Aaron Hall: Mike, you meet with a lot of business owners who may have problems or struggles. Sometimes they are aware of the problems, sometimes they’re not. Do you see any common issues among business owners that might provide some tips to those who are watching?
Mike Ryan: Well, there’s one thing that might surprise you and that is it’s not unusual for an entrepreneur to under price or charge too little for their services. It may have something to do with the Minnesota Nice. Not wanting to brag about yourself or charge what you really are worth.
Aaron Hall: Can you give me an example of that?
Mike Ryan: You see that a lot in service businesses. It causes some problems. They don’t charge enough because they don’t see any costs. It’s a service business. I’m not buying widgets, i’m not buying sheet metal, I’m not painting things, I don’t have out-of-pocket costs. They don’t recognize that there really is a cost, a fixed cost, to running their business and they don’t cover it. So one of the strategies that’s usually a terrible strategy in the service business is I’m going to get business by under pricing. And it does a couple things. It can just wreck the industry. I mean it can wreck the local industry because now everyone is racing to the bottom. But they really need to give themselves credit. If they have a skill or a marketable service or product, they need to charge the proper amount. And that’s something that we can walk them through. They may not recognize all the costs that go into this business just because it’s not necessarily out of their pocket at the moment. So, that’s a fairly common thing in service businesses and we try to shake them out of that if we can.
Aaron Hall: How often do you work with the spouse of the business owner? I imagine business owners sometimes work closely with the spouse, maybe both in the business. Other times the spouse’s doing his or her own thing.
Mike Ryan: Well we get to know the spouses quite often. Just because they’re finances are so tied together. Often they are working the business together.
Aaron Hall: I was wondering about that. How often are they in the business versus not?
It’s hard to say. It’s common, I wouldn’t say most of the time, but it is common to have the spouse working with you. I’m not saying it’s a great idea necessarily. Do you really want to be with this person all of the time.
Aaron Hall: I understand there is a value in having, you’re on the same page, you have aligned interest, you both know what’s going on. On the other hand, then you take that stress home every day. You’re both bearing that same load. That, you don’t have that reprieve going home like you would if the spouse is not involved.
Mike Ryan: There is some of that. There’s some interesting dynamics when this happens more than you would know. More than you would think. When the wife is actually running the business and the business is support. It causes an interesting dynamic. The other thing that it causes, you’re so not diversified. Your fortune and your family’s fortune is tied to that business. You wouldn’t want to be in a corporation and have your retirement all in that corporate stock. So you have everything in that one basket so it is very stressful. So we get to know the spouses fairly well.
Aaron Hall: One of the common problems that causes people to come to you is lack of cashflow. At what point do you advise businesses to take on debt? What are the factors that would say, hey it’s a good idea?
Mike Ryan: Well first of all we would like to figure out what the debt is for. The principle in finance and financing your business is you want to match the duration of the assets and liabilities. So taking on long term debt makes a lot of sense if you’re building a building, putting in a longer term asset. Taking on a long term debt to finance short term losses is not a good thing. You put yourself in a big hole and it’s difficult to get out. What we generally do is look at the cash flow to the business. What are they going to use it for? And are they going to be able to cover that debt service, that means the principal and the interest, in a sufficient way, that means with enough cushion? Generally, the lenders will be looking for a certain ratio and we know what that is and we can guide them. But we don’t like to take on debt. Equity, your own money, can be used for anything. That’s the best way to finance it. When at all possible we recommend boot strapping which is a term you may be familiar with which means essentially financing your business with retained earnings. Keeping the money in the business. It goes back to people taking too much money out. So debt, going into debt for the right reasons is great because it is cheap. Borrowing now is incredibly inexpensive if you have good credit. I just wouldn’t want to overdo it.