I Think We’re in a Recession Now

Introduction:

This week, Mel Gravely tells Shawn Busse and Jay Goltz that he believes we will eventually find out that the U.S. economy has already slipped into a recession. The funny thing about recessions is that they can start and even end before the GDP numbers make it official, which leads us into a conversation about what businesses can do to prepare for a possible recession. Mel, for example, says his team is checking in on everyone and everything: suppliers, customers, and employees. We also discuss why a lot of pricing models no longer work, why some businesses have never fully recovered from the pandemic, and how Mel turned around a facilities-management business that was losing $1 million a year. Plus: the owners discuss the relative merits of planning to fund your retirement by investing in a 401(k) vs. by selling your business.

— Loren Feldman

Guests:

Mel Gravely is chairman of Triversity Construction.

Shawn Busse is CEO of Kinesis.

Jay Goltz is CEO of The Goltz Group.

Producer:

Jess Thoubboron is founder of Blank Word.

Full Episode Transcript:

Loren Feldman:
Welcome Jay, Mel, and Shawn. It’s great to have you here. Mel, we’ve all been reading a lot about the uncertainty coming out of Washington, especially with regard to tariffs and mass deportation and the cancelation of government contracts. And in many of these stories, when they get to talking about the industries most likely to be affected, they often start with the construction industry. Lucky you. How are your construction businesses doing?

Mel Gravely:
Yeah, that’s a great question, and it’s great to be with you guys today. Thanks for having me join in. You know, I like to say there’s been no actual change. There’s just promise of change. And so what we’ve decided to do is to check in more often. And what I mean by that is check in on everything and everyone. So you check in on all of your supply channels, and you try to start mitigating risk around those that you think are going to be impacted by getting aluminum from Canada. You need to start thinking about: What might that look like? What suppliers have other countries they ship things from?

So you’re starting to look at your projects, look at your supplier chain, but you should be checking in with your customers. So if we’re reading this, Jay and Loren and Shawn, then our customers are reading it, too. So we want to check in with them, give them the updates that we have as it relates to the work we’re doing for them. Check in on our employees, because I think a lot of these changes are creating a lot of emotional, mental health challenges. People are just uncertain, and so communicating a lot about what we’ve got in our pipeline, what’s going on, what the impacts are, being as transparent as possible. It’s a great time to do that. But right now it’s just trying not to over-steer, over-correct to shadows—until you know the facts. So it’s a long way to say, we don’t know exactly what’s going to happen, but we want to be as close to the information as we can be so we can be ready to have risk-mitigating factors.

Jay Goltz:
Mel, you said something very important that shouldn’t be lost. You said, “as transparent as possible.” The key word being “as possible,” meaning, sometimes being completely transparent is not the healthiest thing for an organization. They want to see a fearless leader. They don’t want to see the leader say, “Yeah, I’m overextended with the bank, and I’m afraid.” [Laughter]

That’s just the reality. Sometimes, like, this is your problem, but that’s why I like the idea, you said, as transparent as possible, or maybe as practical. Because sometimes this is our problem. And there’s some point to where nobody wants to see the owner putting his head between his hands and, “Wow, this is really bad, blah, blah, blah.” That’s just a harsh reality. There’s a reason why that phrase “fearless leader” is a phrase. Am I wrong?

Mel Gravely:
No, I think you’re dead on. I think, “as possible,” I was referring to as much as I know. But yes, it’s always “as practical,” right? I mean, if you’re thinking about selling the business, you might not want to tell your employees too early about that. So though I totally agree with the practical part too, I wasn’t thinking about that at the time, but I agree with you, “as practical.”

Loren Feldman:
It sounds like you haven’t really been affected by some of the things going on. Does that include the tariffs? It hasn’t changed anything for you yet?

Mel Gravely:
Well, it’s been, like, four days, right? So, no, other than sending everyone into freak-out mode, no, we really haven’t seen a change. The challenge is going to be, though: We’re looking at a project in August, and we’re going out to get early bids to see if the project is going to fit within a pro forma. What kind of bids are we going to get based on this uncertainty, right? So anyone that’s got to be the subcontractor, that’s got to source the steel or aluminum or even lumber, and to get it from Canada or some other place, they’re going to mitigate their risk, and I think they should.

So that’s, Loren, where it starts to kick in. So now we’re going to get unreliable numbers back, and they’re going to be unreliably high, which then will probably mean the owner will say, “We’re not going to build it until this settles down,” which will then mean that people will have less to do. And I know the word recession is being tossed around. I’ve got an opinion about where we are right now, but that’s how this thing gets started. It’s not on facts. It’s on fear. It’s where this whole downward spiral in the economy could start.

Loren Feldman:
Does that apply to the labor situation for you as well? Because I think the same thing is true, in that we haven’t seen those mass deportations yet, but there has been activity. And there is certainly a lot of fear, and there’s been a lot suggested that some workers just are afraid to show up at work. And once again, that’s an area where the construction industry is especially vulnerable. Have you seen anything there?

Mel Gravely:
No, we have not. Now, our workforce, although diverse and inclusive of people who were not born in the United States, that’s not a large part of our labor force. And so we just haven’t seen much of that yet. But I can tell you, anecdotally, it’s absolutely happening that people are afraid. And you know, we can debate the right or wrongs of it. It’s the uncertainty that business leaders don’t like. And no matter what the uncertainty is, or what side of the political equation you are on, no business leader likes uncertainty, and I think this is creating it.

Shawn Busse:
Hey Mel, I’m kind of curious. You talked about not having a large percentage of your workforce being from other countries. Is that true also for your subcontractors?

Mel Gravely:
It’s a mix. We’re in the heartland, here in Ohio, and so it’s a mix. It’s clearly a growing number. But you’re right. Again, check in often. So our subs are going to struggle first. They always do—with manpower and with cash flow and with ordering things and with pricing. So we’re checking with them, too. They also are oftentimes less able to do the math that saves them, so they’re less likely to include in the right pricing models to cover their risk. So we’re checking with them, too, but as far as labor goes, that’s where it’s going to show up, Shawn, in that force. But it’s just too early for us to have seen it yet, at least in southwest Ohio.

Loren Feldman:
Mel, you’ve been generous in the past about sharing how you actually personally bought a construction business—one, you told us, that your colleagues at your main business didn’t actually want to buy. You bought it yourself, and then realized you bought a business with a defective business model. [Laughter]

Mel Gravely:
You’re being kind. You’re being very kind.

Loren Feldman:
Well, I think you told us that you were losing money on every transaction. So this seems like a tough time to be doing that. Have you been able to figure that out? Where does that stand?

Mel Gravely:
Thanks for allowing me to update the story. So, first, it’s a facilities-management business, which bleeds into light construction. So think cleaning out gutters, think cut grass, think remove snow, think patch paint, think refresh of a conference room. That’s the kind of work we do. It’s the everyday work that every company with serious campus infrastructure would have done. And so that’s the work that this business does. So I like it because it doesn’t tend to ride up and down with the economy, because if you own facilities, you’re going to generally take care of facilities—at least good companies do.

You’re right, it was losing $19,000 a day, and had been doing it for a while. We finished last year with a very strong finish after redoing the model, renegotiating our contract in the middle of the year. We got a great customer, super supportive of us. They realized, because we were very transparent with them, that this is a situation that no one should continue. And so, we had a good finish to last year. We’re off to a good start in 2025. We’ve got other challenges around personnel, and we lost some people along the way. We put the business on the market for a while, and then took it off. That didn’t help. But it’s off the market now, operating pretty well, and is profitable. So I’m very, very pleased with all of that.

Loren Feldman:
So you were able to raise your prices, I gather?

Mel Gravely:
Yeah, the customer was actually getting a level of service that they weren’t paying for. So I would say that we charge them more now, but I wouldn’t tell them that I raised my prices. We charge them more because they were getting more than they were paying for. We just fixed that challenge.

Jay Goltz:
So you were under-billing basically.

Mel Gravely:
Yeah, they’re just a very complex customer, and I’m gonna let them remain nameless. But they’re a very complex customer. They need a lot of management oversight, and none of that was being captured. They have payment terms that are very, very extended. None of that cost of money was being captured. We had increased salaries over the period where everybody was losing employees. We’d increased salaries over that three-year period 21 percent, but none of that was covered. And so if you add those three things in together, it made for a bad situation. And working together with them in a transparent way, we were able to realign our prices. And we’ve got, what I believe, is a sustainable business model.

Jay Goltz:
Could you give us some perspective? Nineteen thousand dollars a day is like $5 million a year. On what kind of volume? 50 million dollars? 20 million dollars? I’m just trying to get my arms around that.

Mel Gravely:
And I misspoke. I said $19,000. It wasn’t quite $19,000 it was more like—no, it was $19,000. No, it wasn’t. It was not $19,000. We were losing $1 million a year.

Jay Goltz:
Okay, well, that’s way different.

Mel Gravely:
We were losing a million dollars.

Jay Goltz:
Well, that’s $4,000 a day, not $19,000. That’s a big difference. That I can get my arms around. I unfortunately can—I understand that. The five I’m thinking, “Wow, how?” Okay.

Mel Gravely:
And the scale of the business, this business last year did a little over $8 million.

Jay Goltz:
Okay, no, that one I can totally get my arms around, because, unfortunately, I have almost been there. So that makes sense.

Mel Gravely:
But it’s a good business. I always liked it, the execution. I love businesses that say: If you come here, and you do your job, you get paid. You make a fair amount, and you share it with your employees, and you get to do it again the next day. I love those businesses. And Loren, we’ve worked really hard to get it to that place.

Loren Feldman:
Are you still hoping to sell it?

Mel Gravely:
No, we’ve taken it off the market. It’s fairly complex, but we had it on the market way too long. It had a deal. It fell through, and so it’s no longer on the market. We’re operating it day-to-day now.

Jay Goltz:
So you basically probably raised prices 15 percent or something, which, okay, that makes perfect sense. That takes you from losing money to making money. And then you also explain why costs are going up. Because, again, I lived through that whole thing. This whole pandemic thing is just still—the last three years haven’t been a good time. The labor increases you gave during the whole big inflationary period and stuff? It’s still built into the system there, and I’m not sure that everybody has fully adjusted their quote-unquote business model for the new realities. Between wages, insurance, and real estate taxes, in my world, and interest rates, all those things really have changed the business model.

Mel Gravely:
Totally agree with you. And I don’t even know if people are sophisticated enough. I mean, it takes a little bit of understanding to price that into your product. So I don’t even know if they’ve got the sophistication to understand, “How would I do that?” But I totally agree. The four things you named are the drivers to businesses that are—in my opinion—the drivers of businesses that are struggling today.

Shawn Busse:
There’s a fifth that I talked to a couple owners about the other day, which is critical suppliers falling down.

Jay Goltz:
Hmm, interesting.

Shawn Busse:
A lot of small businesses that provide services—services and goods—to other businesses, they just couldn’t handle the pandemic and flamed out. Or their service level really fell down. Or their prices went up, and their services went down. I’m hearing that from a lot of people. And that’s everything from my benefits broker to my outsourced financial team to my tax preparer. So those things all increase costs and decrease efficiency. And it’s kind of a hidden thing, which is why it probably didn’t make the list at first, but it’s pretty dramatic, when I talk to folks about it.

Mel Gravely:
It’s interesting. I wonder if, underlying those struggles, are the other four things that drove them into trouble too, you know?

Jay Goltz:
Yeah, that’s very smart. Absolutely. That’s kind of the point. And the problem is, and I’ve talked about this before, many of us go for 10, 20, 30 years with some magic formula: “Oh, I take a three-time markup or a two-time markup.” If your fixed costs go up, that’s got to change.

My father owned a dime store in the ‘70s, ‘80s, ‘90s. Back in the old days, if you were in retail, you had a keystone. It was called a double markup. Well, when things kept getting cheaper and cheaper, buying overseas, you’d be out of business, the typical retail store now, many of them are taking three-, four-time markups on the stuff they sell, because if they took the two-time, they couldn’t cover their fixed costs.

When I was a kid, my mother would buy a coat for me. It was made in Boston, and it cost, let’s just say in today’s dollars, $100. They sold it for $200. Now, the coat’s made in China, and it costs $33. If they charged double, they couldn’t cover it. So all of a sudden, slowly but surely, the markups have been going up, and there was no memo that went out.

Shawn Busse:
Oh, that is such a good point, Jay. What you’re saying is, the ratios that had served us are not accurate any longer. You know, Paul Downs, and I have talked about this quite a bit, which is the ratio of basically head count to revenue, and that produces a number, say, $125,000 or $200,000 a year.

And, man, I used to be able to count on those ratios like a Swiss watch. You know, I could say, “Hey, if you’re making anything under, say, $125,000 per employee with a certain type of business, you’re in trouble. If you’re making $200,000 per employee with a certain type of business, you’ve got some secret sauce.” And those ratios, they held true for a long time in my career, and I was looking at them the other day, and I’m like, “These are all wrong, just all wrong. It doesn’t work anymore.”

Jay Goltz:
Like I said, it’s not like you got a memo. It happens slowly. You know, 2 percent. Or I love the health insurance: “Hey, how much did you go up?” “Not bad, it only went up 5 percent.” Okay, well, do that for 15 years. I’m looking at what we’re paying for health insurance now. There’s no comparison to what health insurance costs today to what it cost 20 years ago. And it was done a couple of points at a time.

Loren Feldman:
So one of the things you hear people talking about these days that we weren’t for a long time is the possibility of a recession. And, you know, obviously I’m not making any predictions. I don’t know anything, but smart people do seem to think the odds have gone up. I’m curious, you guys have all been through a few recessions. Have you learned anything about what you can do to prepare for a possible recession? Anybody?

Jay Goltz:
I am absolutely watching the hiring, because I don’t know, business has not been great lately. I don’t know if this is a temporary thing that people are still getting used to all the chaos that’s going on, or whether this is going to go on for the whole year. So I’m very, very careful to hire new people now, and I’m just waiting to see. It’s every month. Let’s see how March goes.

Loren Feldman:
Are you not replacing people who leave?

Jay Goltz:
No, in some cases. This is what retailers do. You can always rationalize things: “Oh, business is down in February.” You know why it’s down 3 percent? Because last year was a leap year. There were 29 days, so there was an extra day shoved in there. So, okay, we’ve got to take that 3 percent off, but then it was still off more than that for the year.

And as I said to Paul ,when he said his business is off—he said January is always a good predictor of the rest of the year. And that might not be the case this year. Maybe it’s going to get better later in the year, because things are going to calm down. I just don’t know. And the last thing I want to do is start hiring more people to make it worse.

Mel Gravely:
Yeah, I think we are in a recession, Loren. So I want to say that first. I think we are already in a recession. The problem with a recession is, you’ve got to look backwards to calculate. But I think when we look back, I think we’re going to see that we’re already in a recession. But here’s the big challenge for us, at least in the largest of my businesses: Our backlog is full. To make plans this year, we’ve got to hire at least as many people as we hired last year, if not a few more. And should we do it? Because the backlog is full but people can stop projects.

So again, we’re checking in a lot. So we’re checking in on every single project in the backlog that hasn’t started yet. We’re reconfirming the sources of the funds, making sure they’re coming from places that make sense, making sure they’ve got their financing locked in. Any of them that don’t, we’re trying to figure out: Okay, well, let’s put odds on that. So it’s just harder to figure it out, which I think all leads itself to the self-fulfilling prophecy of a recession, because I think uncertainty is going to make people pause. And when they pause, there’s a trickle down.

Shawn Busse:
Yeah, I agree with you 100 percent, Mel, on the psychology of it. The other thing I would add, Loren, is having been through a few recessions, they’re all kind of a bit different. This is the talk that I give when I go speak to associations and groups these days: My talk is really about the problem with using the past to drive future decisions. And it can be tempting to say, “Well, past recessions have looked like this, and so we’re going to behave as if the next one is going to look like that.” And I think the pandemic recession proved how challenging that is, because you had an economic downturn as a result of the shutdowns, and then you had a lot of businesses immediately laying people off. In a recession, you’ve got to act quickly and decisively.

And then, I don’t know, some percentage of those businesses, a pretty large percent, ended up regretting that, because you had the stimulus dollars. You had new behaviors, like working from home, kind of revenge vacation. So you had these businesses that were in travel thinking, “Gosh, travel’s going to die.” So they fire all their people, and then a year later, they’re trying to hire everybody back. And that was a really different recession than, say, 2008. And so I think you’ve got to be really careful using the past to inform your future decisions. But I do agree with Mel and Jay that, boy, you’ve got to keep your finger on the pulse here. I mean, the signs are really challenging.

Jay Goltz:
Listen, I’ve probably got two more recessions under the belt than you do. I’ve been in business 46 years. I don’t know, eight recessions, maybe? I don’t know. But I’ve gotta tell you what’s different today, and really just bizarre: The cost of living adjustment was supposedly two and a half percent for the year. And like, things are tight. Okay, I believe in giving everyone a cost-of-living increase. The problem is, everybody notices. You go to pick up dinner, and it’s all of a sudden, instead of $40, it’s $60. I got an ice cream cone yesterday. It’s six bucks for one scoop. I don’t know. Is that normal? I guess it’s the new normal, six or eight bucks.

And the other thing I’m noticing that is just obvious: I’ve got way more than ever, people who have got serious psychological stress, anxiety, whatever. It’s becoming a regular thing now that never used to be like this. And we’re very supportive, and we work with everyone, but like, it’s been way harder in the last few years. I mean, there’s a lot of people who are just continually stressed out all the time with anxiety. And being the boss, it’s our problem, to some degree.

Shawn Busse:
Well, one of the things that I’ve learned—it took me a while to figure this out, and I learned this through just painful experience—was I would have an employee who was undergoing stress, just kind of ongoing stress. And we would find a way to remove that stressor. You know, let’s say it’s a difficult client, or too much work, or whatever. We would remove the stressor. And then six months later, the employee would quit.

And what I came to the realization of, through that process, and also talking to psychologists and other people about human behavior, it’s that the stress of the moment from the thing that happens to you lasts long beyond it being removed. We don’t realize the stress has been removed, and so employees have a tendency to kind of hold on to that. And I think that may be some of what we’re feeling, is that we went through a really large cultural stressing event. A lot of businesses have never really recovered. And some of the rescue dollars kept businesses alive that would have died, and a lot of them haven’t figured out how to operate in the new environment. And so they’re just struggling. And I think there’s a lot of that going on.

Jay Goltz:
And I have to draw a line. I think there’s a difference—and we could do a three-hour show on this—between stress and anxiety. I’m talking about anxiety, and they’re obviously related. But, I mean, they tell me this, they volunteer—A lot of my employees are taking medication for anxiety. Now, you could argue, “Oh, they probably were before, and they just didn’t tell you.” I don’t think so. I think there’s lots of reasons for this. But it’s definitely different today than it was 10, 20, 30—no question about it. This is becoming a regular issue for us, trying to help and navigate and support. And just, it is what it is.

Loren Feldman:
I want to just note, for the record here, that there are a lot of businesses out there that claim to be doing quite well. And I guess that’s always the case, even when you’re definitely in a recession. But you know, there’s some businesses on this podcast that are performing quite well, and there’s still a lot of businesses that are very excited about what’s happening in Washington. They’re expecting lower taxes. They’re expecting regulations to go away.

And not everybody thinks we’re in a recession, which I’d like to go back to, Mel. I guess the technical definition of a recession is to have multiple quarters where you actually have negative growth. Why do you think we—and obviously you could actually go into a recession and come out of it before you know it. So you’re right about that lag-time issue. But why do you think we’re in a recession right now?

Mel Gravely:
Well, I want to answer that question—so don’t let me forget to—but you said so many things in your preamble to the question. [Laughter]

Loren Feldman:
Sorry, that’s a terrible thing for an interviewer to do. I try to avoid that.

Shawn Busse:
Come on journalist, get it together.

Mel Gravely:
So first, I don’t think recession equals businesses not doing well.

Loren Feldman:
In the aggregate, it does, but any individual business can do well.

Mel Gravely:
Exactly, exactly. And I think part of it is, and this goes back to your original question: What can you do? In my opinion, times of uncertainty and recession or looming recession are not times to overeat. These are not times to maximize all of your opportunities. This is a time to moderate your opportunities, not to try to take everything that you could possibly see. Because to do that, you’ve got to maximize your investments in people and plant and equipment and all of the things you’ve got to do. In my mind, part of the risk mitigation is be okay not maximizing all the opportunities in the short run.

Jay Goltz:
Yeah, take your foot off the gas a little bit. Absolutely.

Mel Gravely:
A little bit. Be willing to be profitable, but not greedy, right? Because, because pigs, you know…

Jay Goltz:
That’s a Chicago phrase: “Pigs get fat. Hogs get slaughtered.” [Laughter]

Mel Gravely:
Hogs get slaughtered, right. So you’ve got to be careful about crossing that line, but you asked why I think we’re in a recession. It is because of all of the anecdotal things I keep seeing. I’ll give you a few examples, but when you look at things like the cost of eggs, it’s an indicator about everyday Americans’ struggle with their wallet, and struggling to pay—Jay said it—struggling with the cost of what everything costs.

When you talk to the restaurateurs, all of them I talk to, their business is down. Not horrible, but soft. There’s no reason for a business to be soft in an economy like the one we’ve got in front of us. When you look at looming increases—and there’ll be increases in supply—it all leads to less consumption. The last thing I’ll say to you is, as long as our economy is 70 percent driven by the consumer, the tie to the emotional state of the American people will always be a driver, a big indicator, in our GDP. So when I put all that together, Loren, I get nervous that we’ve already passed it.

Loren Feldman:
Is it reflected in your numbers, the numbers of your business, at this point?

Shawn Busse:
Well, no, he’s a lagging business.

Mel Gravely:
We’re a lagging business.

Shawn Busse:
Sorry, I shouldn’t talk for you.

Mel Gravely:
It takes a while, right? I mean, the stuff we’re looking at has been planned for a couple of years. So not that it can’t happen now, but it looks like it’s still in our portfolio, or at least in my backlog. Talk to me in six months, though. I don’t know if that stuff’s going to still be there.

Loren Feldman:
You mentioned that you have an extensive backlog, but that projects can be canceled. Is there anything you can do about that? Do you have language in your contract to protect you or to penalize somebody?

Mel Gravely:
No, no. Now, if you’re in the midst of a contract, that’s different. But if you’ve got a deal with someone that you’ve negotiated the contract, even signed it, and they decide not to build, it’s actually bad. What am I going to do to them? You want to sue them?

Loren Feldman:
Jay, you’ve talked here numerous times about your struggles with your inventory, which got out of control during the supply-chain issues early in Covid. Last time we talked about it, I think you still had too much inventory.

Jay Goltz:
I’m working it off, but I have to tell you, it’s much easier to buy it than it is to sell it. One phone call, oh yeah, one trade show, done. [Laughter] And then, you know, you could take three years to undo that whole thing.

Loren Feldman:
Are you still buying inventory?

Jay Goltz:
Well, I would say you have to buy a little. Here’s the problem in business, if you’re in the frame business: Okay, you run out of a black molding that’s popular. “Oh my God, we can’t run out of that again.” So what happens? The buyer doesn’t want to get yelled at from the boss. So what do they do? They buy five times more. I mean, “Oh, we’ll never run out of that again.” Yeah, because we got 50,000.

I don’t care what business you’re in. If you carry inventory, you really need to watch the inventory. It’s extremely easy to get out of control. And the problem I have is, you know the phrase “nature abhors a vacuum”? I bought a gigantic building, an 85,000-foot building. I filled it up. If I had a 40,000-foot building, I’d have less inventory, because I would have had nowhere to put it. [Laughter] And that’s part of the problem. No one ever came to me to go, “Jay, we got nowhere to”—No. “We need some more pallet racks.” “Okay, get some more pallet racks.” So I got a big building full of inventory. And that was the constraint I had. But I learned from it. I’m fixing it.

Mel Gravely:
Well, Jay, I think you’re articulating something that, if we go industry by industry—again, we have a consumer-driven economy. And whether you’re selling liquor or you’re selling bread, or you’re selling furniture, if the consumer slows down their spending, and they’re 70 percent of our GDP, then we’ve got some challenges to face. And we’re just expediting it with tariffs and uncertainty.

Jay Goltz:
Here’s a fact: Wayfair, they advertise a lot. They’re doing online furniture sales. They’ve never made money. In 2021, I believe, their stock was like at $323. Last week, it was $33. Down 90%.

Mel Gravely:
Why?

Jay Goltz:
I’m gonna say two reasons. Shipping furniture—I’m in that business—is very expensive. Stuff gets damaged. People don’t like it when they get it, and then they’re paying shipping back. I don’t know that shipping furniture is a great business model online. There’s lots of great online businesses. Shoes are easy, sweaters are easy, pens. There’s a thousand things that are easy to ship online. Furniture isn’t one of them. So I think there’s a business-model problem there, on top of the fact they’re also suffering from the fact that half as many people are moving. Hence the stock to $33.

Shawn Busse:
You know, one thing I’ve been thinking about is, I have a meeting in six hours or so with somebody whose business is just on fire. I mean, it’s just going crazy. What industry is he in? He’s in automation. So he’s making it so that a company can have fewer workers in the factory, and his business has just taken off. And I think one of the really important things to look for in times of change are new opportunities. There’s always the strategy of: sit still and wait for things to settle out, which it sounds like is what Paul’s going to do with his business, and hoping that your competitors go out of business.

I don’t really jive with that. That’s just not how I operate. But I think about, the last recession forced me to change my business model to a much better model, like a much better model, and that’s when I discovered ideas like blue ocean strategy and go into new markets. And so I think for folks, who are maybe pessimistic about this moment, that the silver lining is: Wwhere is the opportunity going to be? What could you find?

Jay Goltz:
And you know what, for you, I think that makes sense. But I’ve gotta tell you, I also can relate to Paul’s point in that, when things get bad, there’s going to be a fall. I’ve watched this for 46 years. There were 69 frame shops in Chicago 25 years ago. Now there’s 21, and my guess is, in three years, there’s going to be 16. There is something to be said for—Lou Mosca said it very nicely this week. He said, “Listen, control what you can control. Look at your own dashboard.” And I totally subscribe to that.

I don’t think Paul’s necessarily wrong that he’s just hunkering down. I don’t know if he should start making new furniture or something, but I think for you, that absolutely makes sense. For Paul and me, there might be something to that, but there is something for: Weather the storm, literally and figuratively. Weather the storm, and you’ll be in business. And one of my assets is—I’ve told framers this for years—it’s a great advantage to own your own building. It takes one big variable out that, all of a sudden, your landlord decides to sell the building out from under you. And that’s happening all over the place.

Loren Feldman:
Are you sleeping at night, Jay?

Jay Goltz:
Not great. Yeah, not great. So anyway, stay calm. I’m figuring it out. I’m telling you, one of the things is, I own all my buildings, except for one store. It makes a huge difference. Makes a huge difference. I mean, if you’ve got four different landlords you’re dealing with?

Loren Feldman:
All raising their prices?

Jay Goltz:
Yeah, and I’ll tell you something else all landlords have in common: They all die eventually. And they’re probably older than you are when you’re younger, which means they’re eventually going to die. And the kids have no interest in their mother or father’s building. They live in California, and they’re going to sell the building out from under you, and then you’ve got a problem. So one of the reasons why I’ve been able to weather the storm—storms plural, all these years—is owning the building is helpful, for sure. And I’ve got stable people that have worked for me for 20-30 years. None of that’s changed.

Loren Feldman:
Well, Jay, you chose to put money into those buildings, going back quite some time. That kind of leads me to the last topic I wanted to bring up today, which is, a business owner recently posted a question on the 21 Hats Slack channel. He wanted to know what most business owners were doing, in terms of trying to prepare for retirement. Were they relying on the eventual sale of their business to fund the retirement, or were they putting money into a retirement vehicle, like a 401(k)?

And there’s the obvious tension there. I had a tax accountant on the podcast not long ago who said she doesn’t always recommend 401(k)s to business owners, because an investment in the business is likely to have a greater ROI. But of course, then you’ve got all your eggs in that one basket, which is quite risky, if you’re thinking about your retirement years. What do you guys think?

Jay Goltz:
I think there are so many variables to that that there’s no blanket answer, that for some people who have a great return on investment in their business that’s extremely stable, why should they put it into a 401(k)? And then there’s the opposite. I think that’s extremely individual, based on an individual situation.

Mel Gravely:
You kind of put it in a box, Loren, and I don’t know if the box is real or not, but I’ll respond to the way you put it in. The way you put it was 401(k) or some investment vehicle, or rely on the business, selling the business as your retirement income. That’s how you put it. And I agree with Jay. It’s just too many variables. But I will say this: Every business is not sellable.

If you’ve got a business that is so dependent on you, or whatever the reason is why it can’t be sold, in my mind, the question is: Do you really have a business that’s going to have value when you’re not in it? If the answer is, it will, then you’ve got more options. But I would tell you that so many businesses I look at acquiring, they’re not worth it without the person who’s owning it now. And so, it just drives the value out of their business.

Jay Goltz:
And then there’s another piece: If you’ve ever wondered why you see retailers having going-out-of-business sales, and you think, “God, why didn’t they sell?” They make more money with the going-out-of-business sales than they can selling the business. The math just works better. If they’re gonna get three and a half times earnings, the inventory might be worth that. So there’s plenty of people who make a ton of money on going-out-of-business sales. So it’s another option.

Mel Gravely:
But for me, it’s: and both. Once I got the business to a point where it was stable, I’ll call it, not highly valuable at the time, I immediately started making sure we put money in a retirement asset for myself, because I never wanted to have to stay past my useful life. So it was almost a risk mitigator for the business, too. But I didn’t want all my eggs in one basket, Loren, and if I could diversify it, I would.

Loren Feldman:
Mel, you’re also in a different situation, in that you raised what happens for an owner who’s unable to sell their business. You have a philosophy that you’ve talked about here, the evergreen philosophy. You don’t intend to ever sell your business, so you had to make other plans for that reason, too.

Mel Gravely:
Correct. That’s why I say, I don’t want to have to stay in the business because I can’t afford to not be in it—or I have to liquidate it to afford to live. So we had to create some balance to that. I will still tell you, a predominant amount of our wealth is tied up in that company, but we’ll be fine without it. We can live in retirement without it.

Jay Goltz:
I want to throw in another thing that people should think about: Life insurance is a really good deal. I mean, the life Insurance companies do not make money by gambling that you’re going to live. They make money gambling that people are going to stop paying the premiums at some point, and that’s where they make most of their money. Because all the risk is, obviously, at the back end of their policies. They would never sell a universal policy if they thought you were going to live to the last day.

Over half the people who buy these policies get rid of them. They stop paying. They get divorced. Once their spouse dies, their kid could die. They run out of money. And the insurance companies make a gazillion dollars on those canceled policies. So if you go and get a life insurance policy, it’s probably not a bad way to hedge your bets. Something to think about, at least.

Loren Feldman:
Shawn, you didn’t weigh in. Do you have any thoughts about planning for retirement?

Shawn Busse:
Mel stole my thunder. [Laughter] I mean, I think it’s an and. Same with me: I had no retirement for many years because I thought I was reinvesting in the business. But the truth was, I wasn’t running an effective business. And once I figured out how to run an effective business, and it started throwing off cash, then it became like, “Oh, this is a good vehicle for wealth creation, but also, you should have something that’s kind of churning in the background.” I looked at my account balance on my 401(k) the other day, and I was just, like, shocked. And the reason I was shocked is, I don’t do anything with it. I just set it and forget it. And, you know, the power of the market and compounding interest is really significant.

The last thing I’ll say on this is that I think diversification is really important. I think, if I recall correctly, the person who asked the question said he had a half million dollar business selling shaved ice, and it takes, like, one employee.

Loren Feldman:
No, no, he’s a one-person administrator, but he does have employees, multiple employees. But you’re right about the business.

Shawn Busse:
Okay, then I don’t know the health of the business, to both these guys’ points. Different businesses are effective in different ways, but to think that the big payday will happen for your business, statistically, that is not a very high probability. It’s just such a small percentage of people who can sell their business.

Jay Goltz:
I think that’s true, from what I’ve seen also. I would say one piece I already talked about: You can combine both things by buying the building that you’re in. That’s an investment. No, that’s better than a (401(k). You can probably make a 12-, 13-, 14-percent return on owning—because when you buy real estate, the big risk is finding a tenant. If you’re your own tenant, it’s the greatest thing ever. The return on investment, on buying real estate, if you’re occupying it, it’s both good for the business and it’s good for you. It’s better than putting money into a 401(k), if you buy it right. I mean, it’s food for thought.

Shawn Busse:
That was true for decades, Jay. And then, I’m looking at businesses in certain parts of town here that are absolutely decimated.

Jay Goltz:
Well, office buildings are decimated, for sure.

Shawn Busse:
I just think you have to be careful with that blanket advice, because while it was true, you could be kind of an idiot and win.

Jay Goltz:
I agree. We’ll say could. It could be a better investment.

Loren Feldman:
Jay, do you pay yourself a market rate for that real estate space that you use?

Jay Goltz:
Yeah, absolutely,

Loren Feldman:
Which is important to really understand—

Jay Goltz:
This is where people get themselves in trouble. And my kid makes a living on this. He does small development. People buy the building. They run their restaurant. The restaurant gets paid off one day, and they stop paying themselves for the rent on the restaurant. Now, they’re 60-something, and they go to sell their restaurant. It’s worthless because the person would have to pay so much for the building. They’re not making enough money. Had they viewed it as an arm’s length transaction and raised their prices and paid themselves the market rent, the business would have been viable.

And it happens all the time that people stop. “Oh, I paid off the mortgage!” And they don’t treat it as a separate thing. You’ve got to keep those two things separate. This one restaurant in mind that I’m thinking about was an institution in Chicago. People went there for their weddings or anniversaries, and you go to dinner there and you think, “Wow, this is cheap.”

Shawn Busse:
I’ve seen that. I’ve seen that many times where it’s like, there are these artificial advantages that the business has—especially second generation—where the kid inherits both the business and the building from the parents, and they run the business without a true cost center for the building. And then when it comes time to either sell or actually make new investments, it’s just not a healthy company.

Jay Goltz:
No, I went to dinner there. The dinners were, like, $23, and they should have been $27. And if they would have done that, it would have been a viable business with the building. And instead, this legendary institution ended up just closing. It’s a medical center now.

Mel Gravely:
I don’t know this person who posed the question, but a half-million-dollar business, and I think you said shaved ice? Back to the cost center, I see a lot of very small companies where they don’t have themselves fully burdened in the cost center. So they just have no idea whether they’re making money or not. So when someone wants to buy your company, they’re going to add all that stuff in, and you may be left with nothing at all. If there’s any lesson here, it’s make sure all the real costs are covered.

Jay Goltz:
Right, because at the end of the day, no one wants to buy a job. They’re not going to pay you to make $60,000 a year. Because why would they pay you half a million dollars for a business, and you’re pulling out, whatever, $80,000? It’s buying a job. And they’re not going to, and I think we’ve all seen it.

Loren Feldman:
All right, not all of this conversation may have been uplifting, but it was all real, as usual. You guys are very generous in sharing.

Mel Gravely:
I want to get back on when there’s happiness. [Laughter]

Shawn Busse:
Well, hey, you have backlog, Mel. That sounds good to me.

Mel Gravely:
But I’m scared about it.

Loren Feldman:
My thanks to Jay Goltz, Mel Gravely, and Shawn Busse. I really appreciate it.