'Things Are Going to Suck’

Introduction:

This week, Laura Zander tells Shawn Busse and Jay Goltz about her approach to buying businesses. Laura says she simply recognizes that for a period of time, life will be miserable for her and for her team. That’s what happened almost a year ago when she bought two businesses that were a challenge to integrate. And now, just as things have calmed down a bit, she expects it to happen again as she eyes another acquisition. It’s also what she expects to happen as she and her husband Doug proceed with their ongoing migration to Shopify. “Our sales are going to go down,” says Laura. “SEO is going to be rough. My biggest concern, honestly, is Doug’s mental health. This whole process has been so stressful for him.” Shawn, Jay, and Laura also discuss how they feel about the possibility that the 20-percent Qualified Business Income deduction could go away next year, when it’s set to expire. You might be surprised by their answers.

— Loren Feldman

Guests:

Laura Zander is CEO of Jimmy Beans Wool.

Jay Goltz is CEO of The Goltz Group.

Shawn Busse is CEO of Kinesis.

Producer:

Jess Thoubboron is founder of Blank Word.

Full Episode Transcript:

Loren Feldman:
Welcome Shawn, Jay, and Laura. It’s great to have you here. Laura, you’ve spoken a good bit here about the businesses that you’ve bought and how challenging it can be to integrate them into your existing business. In fact, after hearing you talk about the most recent purchase, I kind of got the impression you might never buy another business. [Laughter] But I’ve heard a rumor that you might be looking at another acquisition.

Shawn Busse:
Oh my god. That’s her heroin, Loren. She loves it.

Laura Zander:
Yeah, right? So we have finally gotten traction from the two that we bought about nine months ago, 10 months ago, and things have been clicking. They’re in place. It’s working. Our sales down in Texas are going to be up. Right now, we’re tracking at 24 percent over last year, which is fantastic.

And yes, there’s a business that we had had our eye on for the last couple years. We felt like it would be a really good complement to what we have going right now. And they reached out a couple months ago, and they were like, “Hey!” And I’ve been kind of talking to them for a couple years, so it’s been slow moving. So we will probably pick it up. And if we do, it won’t be for another couple months. So we’re trying to take it really slow.

Loren Feldman:
You’re waiting at least a year before buying another.

Laura Zander:
Yep, exactly. And it’s so funny, because one of the members of my leadership team, she’s the one who’s just like, “Daggone on it! Why do we keep doing this?” And, you know, “Blah, blah, blah, blah, blah. This is a bad idea, and you’re doing it every year.” And I’m like, “Well, we’re not doing it every year.” And this one, she really wants. She’s like, “Well, yeah, but we really should get this one.” And I’m like, “See, this is how it happens.”

Jay Goltz:
Okay, but to be clear, the reason you’ve done all these is they were tremendous opportunities that were too good to pass up, right?

Laura Zander:
One hundred percent. And then, in our world, there are some commodity products, but most of these brands are legacy brands. They were built by, literally, mom and pop, and there’s a lot of emotional attachment from the yarn shops and from the consumers. And people don’t want to see these brands go away, you know?

And we will never, obviously, be able to replace that emotional—we’re never going to be the founders. And so we recognize that, but we’ll do the best job that we can. And they’ve created some really special, unique products that have great history. They’ve got great SEO. They’ve got great name recognition. And it would be really fun for us, as kind of the next generation, to take it and run with it and keep them alive.

Loren Feldman:
You say it’s fun, but the other thing some of them, at least, have in common is that they—correct me if I’m wrong—were in distress when you bought them. And it meant a lot of stress for you, integrating them and turning them around. Is that right?

Laura Zander:
True, great point. What I have discovered personally, though, is that the in-distress or declining, like the ones that we’ve been looking at have been declining primarily because the founders—they’re aging. They don’t have the energy. They don’t have the time and the attention. You know, you throw Covid in there.

And those, I think, are the most fun. They’re the most challenging. They’re the most rewarding. I mean, if we can take something that’s on the decline and breathe new life into it and give it the energy that the founders weren’t able to give it, it’s very rewarding.

Jay Goltz:
How much of it is that, and how much of it, though, is a snapshot of the industry, that the industry is slow? Has the industry slowed down?

Laura Zander:
Well, there are two parts of the industry. There’s the industry that’s the big box—the yarn that you would buy at Michaels and Walmart and Hobby Lobby—and then there’s the independent yarn shop. So, similar to yours, Jay—similar to your industry—the independent yarn shop has slowed a little bit, yes, but the big box is growing. So, the industry as a whole has not slowed down, but the customers are moving from higher-end products to lower-end products. And I think that’s part of the economic cycle that we’ve seen.

Jay Goltz:
Well, I’ve gotta tell you, though—because this is very similar to picture framing—I’m not sure that that’s true. What could be happening is the Baby Boomers are getting old and leaving the marketplace. And maybe what’s happened, maybe it’s not that the better customers are going down market to go to a chain store. Maybe the chain store is just picking up some new customers.

Laura Zander:
Great point.

Jay Goltz:
And that’s what I think is happening. Because I just went to a Michaels yesterday, and I just forgot. Like, oh my God. I just don’t believe a lot of people going into the custom frame shop where there’s a professional behind the desk who can help them pick from beautiful moldings is going to go… It’s like going from a fine steakhouse to McDonald’s. I think it’s a matter of, they’re picking up some new customers, and the existing stores have lost a little bit of their customers because they’re aging out.

Laura Zander:
I agree. You’re absolutely right. Those high-end customers aren’t leaving, but there’s a middle section—you know, the Hampton Inn customer—who would come in and who would buy stuff who are leaning a little more [that way]. And we see it in our sales. The less expensive products are seeing an increase in sales, and the higher-end products are seeing a decrease.

Jay Goltz:
And my point is, I think that’s as much to do with Baby Boomers getting older. I think that’s a large part of it, because it’s affecting everything.

Shawn Busse:
Yeah, I mean, that makes a lot of sense. I was talking to a friend the other day, and he and his girlfriend both have inordinate student debt. Like, I couldn’t believe the size of debt they had that they were servicing. And they’re in their… gosh, they’re in their 40s now. And it really changes their decision-making. And I think in prior generations, they would be at a place in their life right now where they would be going into the higher-end places and starting to go up market. And I think the combination of less discretionary income—

Jay Goltz:
What’s the debt from?

Laura Zander:
Yeah, are they doctors?

Shawn Busse:
Student loan debt.

Jay Goltz:
I was gonna say, I think the student loan thing is—

Shawn Busse:
It’s real.

Jay Goltz:
Baby Boomers are one thing, and student debt is another. And I think it’s absolutely had an effect on the market.

Shawn Busse:
Yeah, and then, the other factor—and I think you’ve capitalized on this well, Laura, by being strong online—is just buying behavior and impatience. So my other friend, who’s 10 years younger than me, we were in the woodworking store the other day together, and he’s looking for this power cord for his sander. And the sales guy, gosh, I mean, the sales guys are all retired woodworkers in their 60s and 70s. You know, cute old guys.

Laura Zander:
Awww.

Jay Goltz:
We don’t need a little moan there. [Laughter] Oh, they’re in their—oh, those, awwww.

Laura Zander:
It’s the same as the yarn industry.

Shawn Busse:
So my point being, the sales guy says, “Well, our rep is going to be in next week, and I’ll ask him about getting one of those cords.” And before he could almost finish the sentence, my friend is ordering the cord on Amazon. And he’s irritated by this idea that he should have to wait any length of time to get the thing. And so I think that those two forces are really powerful.

I’m going into far fewer brick-and-mortar stores these days. My behavior’s really changed because I don’t want to deal with traffic, I don’t want to deal with lines. I don’t want to deal with them not having the thing when I get there.

Laura Zander:
Yeah, well, I don’t want to deal with people. [Laughter]

Loren Feldman:
Laura, I’m sure there’s only so much you can tell us about the business that you’re considering buying, but is it in decline? Is it like the others?

Laura Zander:
Sure, I mean, it’s in decline in that the founders have just not been able to put the energy into it—as opposed to being in decline because the market demand is a lot less. So, you get what you put in. So, yeah, there’s potential to grow it some.

I mean, my approach is, even if it doesn’t grow, are we happy with it where it is? Does it fit in, even if it shrinks? I’m assuming that it will shrink when—if and when we take it over—that it will shrink by 25 percent, simply because there will be some customers that only purchased it because the founders were the founders. And you lose some of that loyalty, and that’s what we’ve experienced in the past. It has taken us years and years to start to grow the Madelinetosh business back up.

Jay Goltz:
So, if we went to their website, it doesn’t look great. It looks okay.

Laura Zander:
No.

Jay Goltz:
Okay, I mean, that makes sense.

Laura Zander:
Yep, it could use a facelift. It could use some work. And we just think it would complement, as we have moved away from just being the singular brand Madelinetosh into the Maddy Tosh Group—which distributes five different brands to our wholesale customers—we think that this is a really nice complement to all of those other ones. It’s a higher-end product that we don’t already have. It’s just a nice niche.

And the same way that the Jameson’s that comes from the Shetland Islands that we distribute now is a very small brand—it’s only a couple hundred thousand in sales; it’s not a huge thing compared to all the other stuff—it’s a nice way to get into the shops. And the shops that do carry it are very loyal, and it’s very unique, and there’s nothing else out there on the market like it.

Loren Feldman:
Laura, I’m curious, you told us a moment ago that, to some extent, you’re seeing sales move downstream to less expensive products. But I think your vision, as you just articulated it, in terms of the brands you’ve been buying, has been to move your offerings upscale. Are you at all concerned about the conflict there?

Laura Zander:
No, because it’s just volume versus price. That said, we’re countering. One of the brands that we just launched is a lower-end, or a lower-priced brand. And then we are launching in the next month or two 100-percent acrylic yarn, which is the lowest of the low, in terms of value pricing. So, we’re doing both. We’re hitting it on both ends.

Loren Feldman:
Laura, was that a big decision to go acrylic? Because you could have done that 20 years ago to compete with JOANN or Michaels.

Laura Zander:
We could have, and I probably should have, I mean, not probably. We should have done a lot of the stuff that we’re doing now 10 years ago. But we didn’t. I now have a team that can support it, and can do it, and has the experience. And I didn’t have that until one and two years ago.

I mean, as we’ve talked about, I’ve hired over the last 24 months. We have picked up between 10 and 15 people from other companies, so these are people who are coming in with varied experience. They have mill experience. They have yarn-development experience. They have design experience. All these things so that they can hit the ground running. We hired six, and hopefully I have an interview tomorrow. Maybe seven people from our biggest competitor have come on board this summer. So now we have these people who know what they’re doing and can help us do this stuff, which before, I mean, I’m just starting from scratch.

Loren Feldman:
Is that what got you over the stress of digesting the previous acquisitions, these hires that you’re talking about?

Laura Zander:
Umm, to some degree, yeah. Yes, for sure. I mean, part of the stress of the previous acquisitions are, that’s it’s just part of the deal. I mean, it’s like us. We’re migrating to Shopify in the next couple weeks, hopefully. And we just keep saying, “This is going to suck.” It’s going to be messy. Things are going to break. There is no way around it. But we don’t know what’s going to break. Otherwise, it wouldn’t break. We don’t know what’s going to be messy. Otherwise, we would fix it before it got messy. But the reality of the situation is: We’re gonna crash. Things are gonna suck. It’s gonna be miserable. You are going to cry.

Jay Goltz:
That is an inspiring leadership speech, if I’ve ever heard one. [Laughter]

Laura Zander:
Thank you. Well, I think that is really important. And it was the same thing with us taking on these brands to recognize that it’s normal and we will get through it. And it is going to suck for probably a month.

Jay Goltz:
All right, so here’s my question. You hired six people. They all worked out? They’re all what you expected?

Laura Zander:
Yes, we have one who we’re still on the fence on. But the other ones have been fantastic, like so fantastic, I can’t even describe it.

Jay Goltz:
Makes sense. I just don’t think it’s ever gonna be 100 percent.

Shawn Busse:
I think you’re making the right call with your “It’s gonna suck” move.

Laura Zander:
I mean, it just is.

Shawn Busse:
I think that’s right. Because so many companies, when they do a new technology, or do something new, they oversell it. They hype it up, and then the reality almost never lines up with the promise they’ve made. Being realistic is a really great move.

Laura Zander:
It’s playing sports. I mean, it’s playing football or basketball. Like, you get into the fourth quarter and you’re exhausted. You’re spent. You’re tired. Maybe you’re demoralized, and that’s where grit comes in. That’s where Rocky comes in.

Jay Goltz:
There are so many mug things—sayings on mugs. Like, “It’s gonna suck.” You just spit out about five mugs that I’m gonna have made now. [Laughter]

Laura Zander:
I mean, I think it’s really important—it is for me anyway—to set the expectations and to just be like, “Look, it’s going to be hard.” Because if you’re feeling like it’s hard, it’s not you. It is the situation. And all we can do is, together, watch each other, and when you see somebody falling, you help pick them up. Because you’re going to be falling in a few steps, and we’ll get through it together. It’s not going to suck forever.

Jay Goltz:
I don’t disagree.

Loren Feldman:
Laura, tell us where you are in that process. Just to remind listeners who may recall, you had a software platform that you guys built yourselves. You’ve had it for 20 years, and you’ve been looking for a way to get out of that for a long, long time. You finally made the move to go to Shopify. I think you’ve been taking active steps for months on this. Correct?

Laura Zander:
For a year. Yeah, we started last October or last November, is when we started talking to Shopify. We started interviewing agencies to do the work. We found an agency that we went with, or that we decided to go with, and they started work in January or February. And it’s so funny. Of course, they’re like, “Yeah, it’s gonna take three to four months.” And we’re like, “Bullshit, there’s no way.” Like, absolutely no way. It’s not going to take three to four months. It’s not going to take six. So it’s been nine months. [Laughter]

Shawn Busse:
They were wrong by three.

Laura Zander:
Yeah, and we hope—we are shooting right now for November first-ish—

Loren Feldman:
Right before the holidays!

Laura Zander:
—knowing that it’ll be in December, if not in January. I mean, it’s awful. But what are you going to do?

Jay Goltz:
Jayson Home is on Shopify. I believe we’re very happy with it.

Shawn Busse:
Oh, it’s a great platform. Plus, your husband designed the thing. I mean, that was the other thing, right? Your husband was chained to this old system.

Laura Zander:
Exactly, yes. This is his retirement.

Loren Feldman:
And the only person who could handle it.

Laura Zander:
Yes.

Jay Goltz:
Does it concern you that the consultant was that far—I mean, why do they have to be so far off?

Laura Zander:
That’s so normal. When Doug and I were doing software, I mean, Doug has always been very, very good at estimating timelines to the point where he always seems very pessimistic. But dammit, he’s usually right. And, I mean, we are all super optimistic.

Jay Goltz:
I get it, but if it’s normal—these people do this for a living. How many times do you have to do this before you think, “Yeah, I know it seemed like three, but since we just did 20 jobs, they all turned out to be two or three times longer. Let’s stop telling people it’s going to be three.” I don’t understand how a consulting firm can be so far off.

Shawn Busse:
Because it’s part of the sales process, Jay.

Laura Zander:
It’s part of the sales process, yeah.

Shawn Busse:
And in the sales process, if you tell somebody the truth, you lose the deal.

Jay Goltz:
Okay, well, that’s an explanation.

Shawn Busse:
It is the reality. You tell people what they want to hear. I’m not saying I do this, but it happens in the industry. They’re told what they want to hear. It’s terrible, and it’s everywhere: It’s in construction. It’s in software development.

Laura Zander:
Great point, yep, exactly, exactly. It goes back to the patience and wanting instant gratification, and I don’t want to wait for somebody to order the part in.

Jay Goltz:
It’s a great point and a very sad and disturbing point, at the same time.

Loren Feldman:
Laura, what’s your biggest concern about what could suck when it all hits?

Laura Zander:
Honestly, I don’t have any. Our sales are going to go down. SEO is going to be rough. My biggest concern, honestly, is Doug’s mental health. This whole process has been so stressful for him. He’s a developer, and he likes things to be perfect. And he watches what’s happening, and he gets frustrated. The developers don’t seem to get it, in certain ways. And so when things break, he’s going to have a hard time. And me, I’m like, “Eh, it’s going to break, but we’ll fix it.” You know, sales might drop, but they’ll go back up.

Loren Feldman:
Do the extra months mean that you’re paying a lot more for this than you expected?

Laura Zander:
Sure, because we’re paying for Shopify every month. It’s two grand a month that we’re paying on that side of it. On the developer side, I mean, it was a fixed bid, so they’re the ones who are out.

Jay Goltz:
Now that’s interesting that it was a fixed bid. So it’s not like they’re milking you, and two grand a month in the big picture is nothing.

Laura Zander:
Exactly, I mean, I can’t worry about it. I’d like to, but I can’t.

Loren Feldman:
Shawn, you’ve had an interesting technology experience lately. Wanna share what’s going on with your bank?

Shawn Busse:
How mad can I be online? [Laughter]

Loren Feldman:
Very. Go for it.

Shawn Busse:
My bank changed platforms. They called it an upgrade, which these companies always do, and it’s just been a disaster. We pay a lot of things through ACH, as a lot of companies do these days. And so, with the old system, I put in place a lot of risk-mitigation tools so that not anyone could just ACH into our company and take money. So I built out all these pre-approved companies.

They didn’t migrate any of that over. So now all the companies that were pre-approved and being paid like clockwork were getting rejected, and then the system would alert me. You know, “Hey, this is a company that’s being rejected, unless you authorize it.” It sent the alert out at 4am in the morning, and then I had until like 10 o’clock to approve it. And I just happened to be in a meeting all morning, so I didn’t see the email. So it got rejected, and that led to a whole cascade of things. And it’s just been a mess.

Jay Goltz:
Is this a little bank, medium bank?

Shawn Busse:
It’s a small community bank.

Loren Feldman:
Which is what a lot of people encourage business owners to use.

Shawn Busse:
Yeah, I know. I mean, I left Bank of America at the beginning of the pandemic. It was a great decision. The bank is very responsive and very helpful, but I just watched the communication about this, and it’s just been terrible. So when Laura was saying, “Hey, I set the expectation, ‘It’s not going to go well,’” I was like, “They set the expectation, ‘This is going to be amazing.’ And it’s been nothing but heartache.”

Jay Goltz:
I would argue, I wouldn’t tell someone to go to a small bank. I would tell them to go to a medium bank. Because I certainly wouldn’t go to the big bank, but I don’t know that I’d be going to a one-location small bank either for this reason.

Shawn Busse:
Oh, they’re not that small. No, it’s not that small, Jay. And I don’t know, I’m skeptical that this doesn’t happen at other banks as well that are in that kind of midsize range, because they’re using purchased technology, as opposed to their own. So anytime they change it, it’s going to be a real nightmare.

Laura Zander:
Ugh. See, that’s what Doug always says. He’s like, “You know, everybody thinks using purchased technology solves everything, but it doesn’t.”

Shawn Busse:
Yeah, it’s really the transition that’s the problem. And the way companies handle those transitions with their customers is, usually, they underestimate how difficult they’re making the lives of their customers. Because they’re only seeing it through the lens of, “Oh, this is going to be so much better. This new technology is going to solve this problem for us and that problem for us.”

But they’re not thinking their customers—even though the technology is imperfect—they’ve got a system to work with it, and it’s sort of just operating in the background. And I’ve seen this with IT. When you change IT providers, it’s really a killer for small businesses and their productivity.

Laura Zander:
You know what’s interesting is how much time, as the owner of a business, we spend on stuff that is not growing the business. So, that’s where I get frustrated. Doug gets frustrated. Maybe you’re getting frustrated too. It’s like, I could be spending time getting new clients. I could be spending time, like, blah, blah, blah, but instead I’m reading a 216-page tax document.

Shawn Busse:
Yep, I’m in it. I’m approving ACHs and then questioning this one and dealing with Intuit. Dear God, that was an awful experience, too, anybody who’s on QuickBooks. To the theme of this show, it’s like I’m wearing a lot of hats right now, and a lot of them, to your point, Laura, are not adding value to the business. It’s just firefighting.

Jay Goltz:
Which gets to the prime question of: Perhaps you need another person working for you who will deal with this stuff. Because maybe you should be spending your time finding new business, and maybe some of the stuff you’re doing should be done by somebody else.

Shawn Busse:
In theory, you are 100-percent right, Jay. Financially, that just doesn’t pan out right now.

Jay Goltz:
No, I get that too. That’s the constant razor edge we’re all on.

Shawn Busse:
Well, and part of it is of my own making, in that part of my transition plan is to promote people into roles that I’ve had. So, I’ve actually downshifted into more administrative roles and elevated others into more executive and strategic roles. And so the money is just not there, when you’ve got kind of this duplication of effort right now. It’s a pain of transition more than anything.

Laura Zander:
Yeah, that totally makes sense. I’m on the same page, Shawn. Our office manager kind of had to suddenly retire for medical reasons a couple months ago, and so I’m literally Zelle-ing people and ACH-ing everybody, and I’m writing checks and sending $100 here and $50 there. I just started to train somebody else. But, I mean, it is what it is.

Shawn Busse:
Yeah, and your business is considerably larger than mine. I mean, you’re in the double digits, right? In terms of millions.

Laura Zander:
Yeah.

Shawn Busse:
So, I mean, even you, you’re writing $50 ACHs.

Laura Zander:
It just is what it is. And I’m like: My job is to fill in the gaps, a lot of times.

Loren Feldman:
So I want to hit one more topic before I let you guys go. I don’t want to get into the politics of this, but there is an issue that’s kind of a big deal. And it’s going to be an even bigger deal as we head into 2025, which is what’s officially known as the Qualified Business Income Deduction. I think it’s Section 199A. It allows pass-through entities to deduct 20 percent off the top. That was part of the 2017 Trump tax cuts. It’s going to expire next year, and it’s part of a package. There are big questions. It would cost a lot of money to re-up all those tax breaks. What’s going to happen is anybody’s guess at this point, but I’m curious to get your impressions on: How important is that tax break to small businesses. Anybody?

Jay Goltz:
I would put that very low on my list of issues I’m dealing with. I wish that I was making so much money that I would be crying about all the money I’m losing on the tax thing. So, I don’t know. Personally, it’s not even on my list.

Laura Zander:
Same. It’s not on my radar at all.

Loren Feldman:
Shawn?

Shawn Busse:
Same, yeah.

Loren Feldman:
It’s been around for a while now. Have the numbers just not been significant for any of you? Is that it?

Jay Goltz:
It gets down to the fact: If you’re making money to where it’s costing you money, you’re still making a lot of money. So, you’re making a little less money.

Shawn Busse:
I think experienced owners generally recognize where they spend their time and energy. And if they’re really fixated on tax, tax, tax, tax, they’re probably not looking at the right stuff in the business, in terms of generating value to the business. So yeah, you can spend a lot of emotional energy worried about this or thinking about this, but at the end of the day, if I go get a new customer, it has way more impact on my business than if this goes away or stays.

Loren Feldman:
Which is interesting, because if you read the business press—and nobody reads it more than I do—this is portrayed as a huge issue with pluses and minuses. I think you’re going to see it play out as a huge issue. And it’s really fascinating to me that none of the three of you seems all that concerned.

Shawn Busse:
Well, I mean, here’s one of the issues here, Loren. That type of a benefit is predicated on you making money.

Jay Goltz:
A lot of money.

Shawn Busse:
Yeah, a lot of money. And so, in terms of tax policy, the things I’m way more concerned about are nonsense things that are happening in my state, which are taxes on gross revenues.

Jay Goltz:
Horrible.

Shawn Busse:
Right now, there’s a voter-sponsored initiative to tax gross receipts for businesses above, I think it’s $25 million. And it’s like a huge hit, like 3 percent, and then that’s going to be supposedly distributed as a universal basic income. So, let me tell you, folks: This has got the business community freaking out.

Jay Goltz:
I can see that. That is beyond horrible.

Loren Feldman:
Is that a concern to businesses that have revenue of less than $25 million?

Shawn Busse:
Oh, absolutely. I don’t have 25 million, and it would be a terrible thing for this state, because—

Loren Feldman:
Why would it be bad for you?

Shawn Busse:
Why would it be bad for me? Because first of all, prices are going to go up on everything. Businesses are not going to just take this and pay it. They’re going to raise their prices. And then, worse, you’re going to see businesses leave the state, which they’ve already been doing because of terrible tax policy in the state of Oregon.

Jay Goltz:
I’ve got to tell you something. The big thing in Chicago is, “Oh, I’m going to move to Florida and I don’t have to pay any personal income tax.” And like, at the end of the day, it’s just not that big of a percentage that I think someone’s going to pick themselves up and their entire business and move to Florida. On the other hand, 3 percent on your gross? Absolutely move out of the state! How could you stay in business with that? That could be half your profit. That’s crazy.

Laura Zander:
Or it could be all of your profit.

Jay Goltz:
Or it could be more than your profit. It could be putting you into the hole.

Shawn Busse:
What makes me even more concerned is that we already passed this nonsense thing called a corporate activities tax, I don’t know, four or five years ago, which was also a tax on gross receipts, and it went all the way down to businesses at the, like, $2 million level. And so, you’ve already got one, and now they want to put another one on.

And what has happened? I’ve seen it happen, especially in municipalities like our local county, which layers on even more. Businesses are literally moving out. Like, this isn’t just hyperbolic. They are literally moving away. And so that’s why I’m concerned about it, Loren. It doesn’t impact me directly, but in terms of the business vitality, it’s a killer.

Jay Goltz:
I gotta tell you, we hear about, “Oh, minimum wage is going up. I’m gonna close.” Oh, bullshit. Most of the time, I don’t buy that. This thing, though, yeah, I’d be moving. I don’t know how you can stay in business if you’re paying 3 percent on gross. That’s crazy.

Shawn Busse:
Yeah, it’s bonkers.

Loren Feldman:
Shawn, do you know how many other states or municipalities have such a tax?

Shawn Busse:
We’re being used as a guinea pig by out-of-state actors. So, it’s just the same with the legalization of small amounts of narcotics. I don’t know if you all paid attention to that.

Loren Feldman:
I think that got reversed recently. Didn’t it?

Shawn Busse:
We finally reversed it, but we were legalizing fentanyl. And it was done by out-of-state actors who wanted to basically prove that, “Oh, this would be beneficial by not putting a bunch of quote-unquote, low-level drug users in jail.” It was an utter disaster, an utter disaster, and they finally reversed it. But this is the same situation. You have out-of-state actors. They fund signature collectors, and then they put these ballots on the initiative that are like, “Oh, everybody gets $1,700 a year in universal basic income.” And it’s like, “Oh my gosh.” It’s just terrible.

Loren Feldman:
What are the politicians doing? Does this have support among elected officials?

Shawn Busse:
No, it has no support among elected officials. It has no support among the business community. But to the Joe on the street who reads a ballot initiative that says, “Hey, I’m gonna get $1,700 next year if I vote for this,” it’s attractive. Because they’re not thinking through it, right?

Loren Feldman:
Has there been any polling? Do you have any idea whether it’s likely to pass or not?

Shawn Busse:
That’s a great question. I don’t know. I don’t know. There’s a lot of effort to put it down. I mean, the business community is super aligned against it. There’s a ton of money going into fighting it off. But we have a very vulnerable process in our state that I used to think was good, because a lot of good has come out of voter initiatives.

Loren Feldman:
So, let me go back to that 20-percent pass-through one more time. One more thing, here’s my question: One of the criticisms of it has been, as you guys have suggested, that the benefit goes to a small percentage of companies, a very small percentage of very successful businesses get the majority of the payoff from this tax deduction. There’s going to be this huge fight over it. What should small businesses be fighting for instead? What would be a better way to support small businesses than with this tax break?

Jay Goltz:
Oh, I have an answer. I argue that a brain surgeon who makes a million dollars a year compared to the business owner who makes a million dollars a year, the fact of the matter is, the business owner is probably leaving $600,000, $700,000, $800,000 in the business. Plus, he or she needs to pay taxes on it, and that, given that they’re creating jobs and supporting the economy—

Laura Zander:
Wow, that’s a really good one.

Loren Feldman:
Wait, explain that, Jay. Not everybody understands that.

Jay Goltz:
So, the brain surgeon gets made a million dollars. He ends up with, whatever, $650,000 in this checking account at the end of the year, whereas a business owner who makes a million dollars is not actually seeing all that money. A lot of it’s being left in the business, and a lot of it’s being left in the business to pay the taxes.

The point of the story is, it would be things like investment tax credits, something that gives the business owner a little break. They’re creating jobs. They’re creating business. Literally, I pay millions of dollars a year in taxes: real estate taxes, sales taxes, employment taxes. Millions and millions of dollars. The brain surgeon’s just paying the income tax. So it makes sense for a business owner to get a little support from the government for creating jobs and growing their business. I do think it would be helpful to have some kind of investment tax credit to help small businesses.

Laura Zander:
I love that. Especially the inventory. It’s the inventory that kills us.

Jay Goltz:
Absolutely.

Laura Zander:
As an example, we have invested $500,000 at least, in inventory and adding inventory this year. So that’s cash out the door. But we have to—

Jay Goltz:
Not deductible.

Laura Zander:
Not deductible, so we still have to pay on that 500 grand—what do we need to pay? Like $200,000 in taxes?

Jay Goltz:
Right, you get no credit for buying inventory. It’s not a cost of goods sold, it’s just inventory. I gotta tell you, I’ve done speeches at MBA classes at, like, Northwestern, smart schools, right? And I go through a growing business, and I go, “Oh, so what do you think the problem is? Why can’t I pay the bill?” No one, they’ve never figured it out. They never consider the fact, “Oh, wait, you’ve got to pay income tax on all that profit, and you don’t have the cash.”

To Laura’s point, it’s in inventory and receivables. You don’t have the cash! So it’s a strain for businesses for years. I’ve dealt with it for years and years and years. So, yes, it would be helpful and productive for the government to give us some kind of credit so that we can continue to reinvest in the business, hire more people, pay more payroll checks, blah, blah, blah, blah, blah.

Loren Feldman:
Just to clarify, when you say inventory isn’t a cost of goods sold, it becomes a cost of goods sold when you actually do sell it, right?

Jay Goltz:
Right. But until then, it’s just cash tied up.

Laura Zander:
It’s an asset.

Jay Goltz:
It’s an asset. The point is, the brain surgeon’s money is sitting in a stock market account or in his mattress; the business owner’s is sitting in inventory. It’s different.

Shawn Busse:
Yeah, and the professional services business, which I am, we have a slightly different problem, in that the growth that we put into payroll kills us on the cash flow side of things. Because most professional services businesses are on a net 30, 60, 90 time payback. And so what happens is, in order to grow, you have to hire people. Okay, so the clock is ticking, because you’re now paying salaries. So then you start the work and—

Jay Goltz:
And training people. They’re not even productive.

Laura Zander:
So the people are your inventory.

Shawn Busse:
Yeah, that’s right. That is such a great insight, Laura. Tell me about the project you’re doing with the Shopify agency. Have you paid them for all of the project?

Laura Zander:
Yeah, most of it. But more importantly, we’ve paid the four people who are on Doug’s team to be working on this full-time. Because we’re paying that. You know, we’re paying the agency, but it’s almost more work on our side.

Shawn Busse:
That’s really interesting. So, I was asking because a lot of agencies don’t collect fast enough. Or, let’s say there’s an end-of-project payout, where it’s a big payday. Because the project goes long, their ability to get to that money can be really hampered. And so for services businesses, people are the inventory. That is so great.

Jay Goltz:
No, you’re correct, in that I don’t need to hire anyone, generally, until I’m busy enough to need them, whereas you need to hire the people to get busier. So, you have to invest in people. And you’re right. So you have that, and we have inventory. Either way, the typical small business that’s growing, by definition, is tight on cash.

Shawn Busse:
Right, and you’re having to keep it in the business for those situations. You’ve got to keep the cash in the business, but you have to pay taxes on it. So it’s like this crazy thing where, on paper, you look like you’re rich. But actually, you’re just like holding the money or those situations.

Laura Zander:
Yup, paycheck to paycheck.

Loren Feldman:
Laura, does it even out in the end? Is the issue short-term?

Shawn Busse:
When you die. [Laughter]

Laura Zander:
Sure, when I die. No, it doesn’t. Not if you keep growing.

Loren Feldman:
To clarify, is it a short-term cash flow problem, in that you have the money tied up in inventory and you still have to pay the taxes, but you don’t have the cash? But eventually, that inventory becomes cost of goods sold, and it’s all fine. Or no?

Laura Zander:
No.

Loren Feldman:
Why not?

Laura Zander:
Because as the business grows, your inventory grows. So, yes, if you are shrinking, then it works out okay, because you start to liquidate inventory. But you probably liquidate the inventory for less than what you wanted to and—

Jay Goltz:
Way less, way less. Like 10 cents on the dollar less.

Laura Zander:
No, never—and even if you sell the business, people aren’t going to pay you dollar for dollar what your inventory is worth. No, it never gets better.

Jay Goltz:
You build the inventory with the expectation that the inventory is going to drive more sales. Sales are going to drive more EBITDA, and then when you have a bigger EBITDA, you can sell the business for more money. But the problem in the picture framing businesses I talk to, they go, “Oh, well, I’m going to try to sell my store for $150,000. That’s how much inventory I have.” And I go, “No one cares what your inventory is. All they care about is your bottom line. And you’re paying yourself $52,000 a year. No one’s going to go buy a job for 150 grand.” And that’s why frequently, if not more than likely, the typical frame shop just closes one day. It doesn’t sell. It’s unfortunate.

Shawn Busse:
Yeah, I mean, if policy makers really were serious about helping small businesses, this is what they would attack. This issue of paying taxes on pass-through revenues—no benefit at all to keeping money in the business, even though you have to do that—I mean, there are just no advantages. There are no tax advantages for small businesses, with a few exceptions. Maybe the R&D tax credit and so forth. But even that’s sketchy, at best.

Jay Goltz:
I think the problem is, these people that are coming up with the stuff have never actually talked to a small business owner, and they’re getting information from some trade association. And the people who work at the trade association don’t really understand it either. Because it does beg the question: This is fairly simple. Why doesn’t the government, who claims to want to help small business, do that?

Other than that, the greatest thing ever is the SBA loan, for sure: 10 percent down to buy real estate. That’s a great government thing. Beyond that? I can’t think of anything off the top of my head. Or tax investment credits have been helpful over the years. But the government could do better. There’s no question.

Loren Feldman:
My thanks to Shawn Busse, Jay Goltz, and Laura Zander. Thanks for sharing, everybody.