Recession? That’s When You Need to Attack

Introduction:

This week, Paul Downs, Sarah Segal, and Laura Zander discuss how they think about the possibility of recession: Do they proceed with planned hires? Do they continue to spend on marketing? Do they look for unexpected opportunities? In addition, Sarah, having recently taken back ownership of her PR firm, asks Paul and Laura how they pay themselves, how much cash they keep on hand, and whether they think she should expand her offerings to include digital marketing. Plus: Laura, who’s acquired several businesses over the years, explains what she looks for, how she decides how much to pay, and why she’s come to see acquisitions as necessary for the survival of Jimmy Beans Wool. As usual, all three owners are remarkably generous about sharing their thinking and even their numbers.

— Loren Feldman

Guests:

Sarah Segal is CEO of Segal Communications.

Paul Downs is CEO of Paul Downs Cabinetmakers.

Laura Zander is CEO of Jimmy Beans Wool.

Producer:

Jess Thoubboron is founder of Blank Word Productions.

Full Episode Transcript:

Loren Feldman:
Welcome Paul, Sarah, and Laura. It’s great to have you all here. Sarah, in our email exchange before the show, you suggested you’ve been having kind of a tough week. Can you tell us what you were referring to?

Sarah Segal:
I think it’s a tough year, or a tough life as a business owner. I can’t pinpoint any one thing, but it’s just, we’re looking to hire people. We have a lot of work coming on. We all have a lot on our plates.

Loren Feldman:
Wait, those sound like good things.

Sarah Segal:
No, no, they are good things. So I literally am laughing because I can’t complain. It’s been nothing terrible. It’s all been very good things. It’s just, which mole do you whack first?

Loren Feldman:
You also suggested that you’re kind of thinking about this possible looming recession we’ve been hearing about for the past year or so, and wondering if there’s anything you can do to prepare for it. That, too, sounds a little bit at odds with what you just said about having lots of work and looking to hire people.

Sarah Segal:
Well, I’m not saying that lots of work is necessarily always the right work. I mean, we’re getting projects and stuff, I want to say, more than retainers. And there’s a drawback to taking projects. Because if you’re on a project, you know that, at the end of November, or whenever that project ends, all of a sudden, you don’t have money coming in. But you have to staff up to support those projects. So do you work with contractors? Or do you add people and have that optimism that more work is going to come in, or that particular project is going to continue?

As for recession, I mean, if you recall, I’m based in the San Francisco Bay Area. And it’s interesting to see what’s going on around here. I’m sure it’s visible in the rest of the country as well, but every other day there’s another tech company that’s just been laying off hundreds and hundreds of people. So, we’re seeing all of these layoffs happen, and my question is—and my assumption is—at some point, those layoffs are going to impact the marketing and PR agencies that support those industries. So it will basically translate to more competition for the work that I’m trying to get. So it’s just something always in the back of my mind, to be quite honest.

Loren Feldman:
You mentioned that we’ve probably been reading about what’s been happening in San Francisco and the Bay Area. The thing we’ve been hearing most about is Silicon Valley Bank. Has that had any impact on you at all?

Sarah Segal:
Other than people reaching out to my clients to see whether or not they’re involved, or have any relationship to it, no. But that said, we’re definitely watching the media conversation about it. Right now, with the instability of the banking system, are VCs and/or banks going to be a little bit more particular about who they give money to? Because there is such an uncertainty right now, in terms of where our economy is going. And when those VCs don’t give out their money, or those banks don’t give out money, then those businesses don’t hire us to do their PR and their marketing. So there’s kind of a domino effect.

Loren Feldman:
Paul, Laura, I’m curious: Have either of you felt any impact because of the banking crisis? Or are you rethinking where you’re stashing your cash, in any way?

Paul Downs:
No and no. Because I bank with a pretty big bank to start with, and I’d be surprised if a run developed on them. And I’m pretty sure they’re on the too-big-to-fail list. So I’m just not worried about that.

Laura Zander:
Yeah, same page. Well, and from what I read, it sounds like you’re gonna get bailed out either way, anyway. So what difference does it make?

Paul Downs:
Yeah, I mean, there was one guy in my Vistage group who missed payroll because it turned out his payroll service was using Silicon Valley Bank, but I think they sorted it out. But it was a real surprise for him.

Sarah Segal:
That was an issue that we actually had. We use this company called Rippling, and we got an email from them on Friday of last week, saying that we needed to make sure that our money could be taken out, because they’re switching out to JP Morgan. So that was the only impact that we had. But because it was a pass-through, it never caused problems.

Paul Downs:
I mean, I’ve got other problems. Our sales are down 40 percent off last year.

Laura Zander:
Oh my gosh.

Sarah Segal:
Wow.

Laura Zander:
Was last year exceptionally good?

Paul Downs:
Yeah, last year was great. And then this year is terrible. And it’s all the same people doing the same stuff. So I’m not sure exactly what it is. But we do still have enough of a backlog to get about six weeks of work on hand right now. So we’ve just got to drum something up before that. And we do have some things in the works that should make it better. But we’re not on the same pace as last year by a long shot.

Sarah Segal:
How was last year compared to the year prior to that? Was last year a banner year?

Paul Downs:
It was. And it was like that from the beginning. I keep very careful records of all the years going back to… jeez, going back to the last ice age. [Laughter]

Laura Zander:
I was going to say, the 1900s?

Paul Downs:
Oh, yeah, the mid-1900s. When I was in the womb, I was already doing spreadsheets. And so, anyway, 2022 was off to a great start right from the first month, and it never slowed down. And this year is off to basically the equivalent of 2014. So going from a $5 million pace to a $3 million pace, and I’ve got the machine built to do $5 million. So as long as we still have work, I’m gonna keep running it at that pace. But then if we run out of work, then I’ve got to do something. So it’s a white knuckler.

But I’ve been here before. And I think that, Sarah, getting back to your question—if that was your question about how to prepare for a recession—a lot of it is just, you’re gonna do the same things you ever did. But you just may have to make decisions about how big you are. So assuming that you’re not going to go back to zero clients, or zero dollars, you’ve probably had a configuration in earlier years to do the amount of business you’re likely to do. And you just go back to that. And that’s horrible for the people you’ve gotta get rid of. But that’s the plan I’m going to do.

Loren Feldman:
Is that the only option, Paul: labor?

Paul Downs:
Well, that’s the one that’s easiest to cut. And in my business, we’ve got overhead, labor, and materials. And if the orders slow down, you’re not buying as many materials, and at a certain point, you don’t need as much labor. The overhead is more or less fixed. I mean, you can cut your own salary, which I’ve already done. And you can identify cash reserves you could draw on if you needed to. And that’s as much preparation as you can do.

Now, the other thing I’m doing is, I had a whole expansion plan and marketing plan in place for this year. And in a recession, I don’t cut those things. Everybody else draws their neck in, and I’m like, “No, that’s when you need to attack.” And so I’m going to make sure we have the money to continue all that and try to expand my share. Even if the market is going to hell, there are still people buying my product, and I’m going to make sure that we’re out in front of them.

Sarah Segal:
Can I ask a question of the two of you? How do you pay yourselves? Are you a salaried employee? Or do you give yourself—like, how do you do that?

Laura Zander:
Yeah, I mean, I pay myself a salary. I’m mean, it’s not a ton. It’s six figures, but it’s not…

Loren Feldman:
Not what it would take to replace you with a professional CEO.

Laura Zander:
Correct, correct. So Doug and I both pay ourselves a salary, but then it’s mostly the draw stuff. So, whatever is left—not whatever is left at the end of the year, but if there is money left at the end of the year or during the year, then we’ll pull it out. But we take a really fluid approach.

So let’s say we take 100 grand out during the year, and then we decide we’re going to buy another business. Then we might put that 100 grand right back in and reinvest it in the business. So yeah, it’s a little fluid. How about you, Paul?

Paul Downs:
Well, I learned maybe 20 years ago that if you don’t pay yourself a regular salary, just don’t pay yourself. And so back in the day, I started doing that: I’m on the payroll, I gotta get paid. And that was helpful in starting to make some money out of the company.

My situation now is a little bit different, because I have a minority shareholder, my brother, who owns 23 percent of the company. And we’re an S corp, so if I take a draw out of profit, I theoretically have to send a quarter of every dollar to him. And it’s easier for me to just take it myself as salary, pay the taxes on it, and not have the profits.

He’s a dream partner, because he doesn’t need the money and doesn’t care what I do. But he’s a shareholder, so I’m honorbound to give him some if we’re doing distributions, but it’s just the way it all works out, it’s just better for me to move my salary around and pay as much as I reasonably can as salary. And I find it more convenient to just pay the taxes and payroll, too, than to have to make the quarterly payments and blah, blah, blah, blah, blah. I mean, I still have to do that, but yeah, I’m not sure that my situation is directly applicable to anybody else. Other than if you don’t pay yourself—like Sarah, are you on the payroll right now? Are you making a regular salary?

Sarah Segal:
We had had a parent company up until the end of last year, and we spun back out of that company and re-established ourselves. So going into January, I knew that we would be at zero dollars January 1st and starting to invoice. So I knew that my first quarter would be a little bit iffy, in terms of me getting paid. In fact, I took $20,000 of my own money, put it back in the company, just to make sure that I could make payroll while we’re waiting for invoices to be paid.

And so I’m on payroll, but it’s nominal. It’s enough to pay for my health care and pay for taxes and all that kind of stuff. I managed to pay back 75 percent of the money that I had put in. And now I have a little nest egg, and I can pay myself back. I have a couple other things I need to deal with. But the second quarter is where I’m going to be looking at my P&L and going, “Oh, well, I can actually pay myself a salary.” Do I do that? Or do I take withdrawals? I’m kind of in this decision space right now.

Paul Downs:
In my situation, there’s not much difference between—in terms of the taxes—whether I pay myself a salary or pay myself out the other end. There’s less money in my pocket if I pay myself from the draw, because as I said, I’ve gotta split it with somebody.

Laura Zander:
Our approach has just always been—because we’ve had some bad years—keeping our salary at a level that doesn’t tax the business and gives us flexibility. So, yeah, we pay ourselves a salary for accounting reasons and for tax reasons, but we’ve talked about increasing it.

I don’t know, we just would rather have the flexibility of giving ourselves the draw if that money is there, versus being tied to a salary and all of a sudden you have a bad year. And then we’re super stressed out because we’re not profitable, and maybe we have to kick more money in because we paid ourselves too much in the salary, and all that kind of stuff. So we’ve taken a really gradual approach to increasing it. I don’t know if that’s helpful at all, but we’ve been very conservative.

Paul Downs:
I’m curious about your use of the word “tied” to a salary. I mean, you guys are the decision makers. You can change it whenever you feel like it, can’t you?

Laura Zander:
We can. But I mean, there’s still the emotional side of that, and the like, “Oh my God, I need to cut my pay.” I don’t know, that just feels like it’s just easier, emotionally, I guess.

Paul Downs:
I started off this year, with my salary at 280 grand a year. I’m pretty happy with that. And then looking at the lack of sales and the cash that we’re not getting, but still wanting to maintain the marketing efforts and some equipment purchases, I just cut it to 100 grand a year. So like, okay, I just freed up $180,000 in my budget. And if I need to cut it again, I’ll just do it.

I think that part of the answer for everybody is on the other side: What do you need to run your life? And, Laura, I mean, you don’t have a kid in college yet, but it’s coming at you. Mine are done with that, thank God. And Sarah, I don’t know whether you have children, but everybody’s got a particular financial situation, and the company is part of that. And I think there’s a great comfort in being able to dial it up or dial it down. Like, I don’t have to ask anybody’s permission. I just do it, which is nice.

Laura Zander:
Yeah, that’s a great point, Paul. I guess, part of our approach has been, “Let’s just make our salary, as well, what we need to live our lifestyle. And then if there’s gravy, there’s gravy.”

Paul Downs:
Laura, when you’re taking a lower salary, are you building up a cash reserve in the business?

Laura Zander:
One hundred percent, yeah.

Paul Downs:
And what’s your target? Do you like to have a half million lying around? Or a million, or $100,000? Or what is it?

Laura Zander:
That’s a great question. And I’d have to ask Doug what his comfort level is. But yeah, somewhere between a half and a million.

Paul Downs:
That’s a pretty good healthy pile of cash.

Laura Zander:
Yeah, and for us, we’ve done, what? I think four acquisitions in the last five or six years. We get opportunities all the time. So it’s more like, “Are we making enough that we can live?” And then whatever is left over, we can either decide to invest in ourselves, or we can decide to invest it in another business to help us grow more. So it just gives us some flexibility. It gives us cash flexibility.

Sarah Segal:
For the cash reserves, what percentage of your revenue, what does that half million reflect?

Laura Zander:
Oh, that’s a great question. And you know, I don’t know. We’ll do about 14 million this year. So you could do the math. I know a lot of people say, “To have a really healthy business, you should have a six-month runway,” or whatever. I haven’t looked at it that specifically. Doug does all the cashflow stuff, and I look at all of the P&L and the profitability. And I look at the cash flow as well, but he makes sure that we have that runway, that we always have that runway.

Sarah Segal:
What do you do with those cash reserves? Where do you keep them? Are they just in a checking account? Or like, do you invest them? What do you do?

Laura Zander:
A combination of all those things. We’ve got some just sitting in cash cash that’s liquid, readily available at any point. And then we put a bigger chunk away in investments, and then if a big investment opportunity comes up, then maybe we will sell those off and use that as cash. It also depends on the market. If the market’s really low, then we might put more in the investment side and less in the bank—you know, try to buy a bunch of stuff while it’s cheap. Doug, my husband, is a finance guy. So he loves to kind of play with that stuff.

Paul Downs:
Well, there’s another thing underlying all of that, which is whether you’re able to operate profitably and collect the money that’s owed to you. Those are the only methods by which you can amass a pile of cash. I mean, the third method is to get a bunch of deposits from people and then run a little Ponzi scheme, but—

Laura Zander:
Well, bank robbery, too. But, yeah.

Paul Downs:
Yeah. But so Sarah, if you’re trying to figure out how to get a pile of cash, the critical thing is that you’re doing business profitably, and then you can build it up. That whole six-month guideline, it’s a concept. I have never found it to be particularly realistic for my business. And Laura, it sounds like you don’t have 7 million bucks lying around.

Laura Zander:
Agreed.

Paul Downs:
Yeah, you’re not doing that either. But a lot of it is just: How much would you really need to get through a rough patch? And what are you looking at? And then, where would I get it? Where would I get it if I needed it? And I often will take money out of the business, and if necessary, just loan it back to the business. So I needed to buy a fairly expensive piece of equipment, and rather than lease it from a service, or from some other people, I just loaned the money to the company. And I’m getting 10 percent on it. And I could change that anytime I feel like it.

Once you have some personal assets, you can use them in the business, and often deploy them in a way that would be difficult to replicate going to the open investment market. Because you have control over the whole thing, both ends of the deal. So you can set an interest rate, you can decide payment schedules, prepayment, whatever.

Now, I know that there are legal limits to what’s considered to be reasonable amounts of interest to pay. But these days, 10 percent, probably even 15 percent, isn’t going to raise anybody’s eyebrow. So it’s a way to get income out of the business in a way that, it’s under your control, and a better alternative than a lot of other ways to park cash.

Laura Zander:
That’s a really good one. We will loan the business money, but we never do it that formally. I mean, we just kick in if we need to kick in some money because we’ve got something going on. Like, we had an opportunity to bring in a couple of containers of product as opposed to just small air shipments. And it would make sense, but it would take us a year or two for that financial benefit to really hit. So we just we kicked it in personally, and then we usually pay it off within a couple months. So we don’t worry about the interest or worry about the schedules.

So I guess for us, Sarah, we just kind of look at it all as—and this is probably the wrong way to do it—our personal money and our business money. Again, there’s a lot of fluidity to it. And we kind of think about it as: Is there something that we personally would like to invest in as part of this business? You know, we know that if we spend $200,000 on bringing these containers in, we’re going to end up saving $50,000. So, is that return on investment worth the money and worth the risk? That’s more than we’ll get in the stock market, so we just do that.

Sarah Segal:
Interesting. I’m at a decision point right now where I can start getting myself a decent salary. Or I can hire more people.

Laura Zander:
And which is going to grow the business more?

Sarah Segal:
I think hiring people. I think getting me out of the weeds and getting more people to do the stuff that I shouldn’t do anymore is going to help the business. And so it might mean another quarter of beans and rice at home. But I think that the long-term benefit is worth it. But you know, it’s kind of hard to digest, too.

Laura Zander:
Yeah. I mean, beans and rice are good for you, lots of protein. I mean, that’s just sweat equity. Where do you want to invest it—to me—and where are you going to get a faster return on your investment? So either you pay yourself 50 grand, or you hire somebody else for 50 grand. And which one of those is going to make the bigger impact? And it sounds like you can scale things faster by hiring somebody else.

Sarah Segal:
Yeah, in the Bay Area in particular, there are a lot of PR agencies that are 100 percent tech. And that’s all they do. So guaranteed, all of these layoffs are going to result in killing their P&Ls. We kind of—not purposely, but just because I like to do a lot of different things—have recession-proofed ourselves a little bit, in terms of the diversity of clients that we have. Because we have everything from tech clients, B2B, to donuts. But is that enough to keep us insulated from any official downturn of the economy?

Loren Feldman:
Laura, how has your business been doing this year?

Laura Zander:
It’s good. It’s steady, stable, no huge ups, and no huge downs. So, yeah, I mean, we can’t complain. We’re working on the efficiency side. We’re working on what we’ve been working on the last couple of years, which is creating higher margins, becoming more efficient, reducing some of our expenses, and raising people’s wages. You know, so moving that around.

Loren Feldman:
Do you see any signs of recession in your various businesses?

Laura Zander:
Oh, no. Not really. But I mean, well, I guess that’s not true. Yeah, I mean, we’re seeing lots of fallout in our industry. A lot of businesses for sale, quite a few, compared to—

Loren Feldman:
Yarn shops around the country?

Laura Zander:
Shops, manufacturers, distributors, all of the different variants. I’m probably getting, realistically, maybe once every two weeks, I’ll get noticed of somebody who’s trying to sell or is selling or is going to just shut their doors and go out of business.

Sarah Segal:
How do you get notified about that?

Laura Zander:
They contact me and ask if we’re interested in buying them.

Loren Feldman:
Because you have been buying businesses over the last few years.

Laura Zander:
Yeah, we’re kind of on that list of potential buyers. Or, you know, just the rumor mill. Somebody will say, “Hey, double top secret, just want you to know, this is what’s going on.”

Paul Downs:
What is a good-looking business to you? Like, one that’s about to fail probably isn’t all that attractive?

Laura Zander:
No, those are actually the most attractive.

Paul Downs:
You think so? Why?

Laura Zander:
Just because they’re the biggest challenge, and there’s the most upside. That’s where we’ve had success, when we can rebuild and restructure and turn around. What we tend to be good at, I guess, is financial management and figuring out where there are efficiencies. And we’ve got some technical savvy that a lot of these other businesses don’t have. So, yeah, that’s the fun part, is finding people who are about to go under, and who have perhaps been mismanaged, and we can just jump in.

Sarah Segal:
Do you have any examples of that? Like you found something that was a sinking ship, and you were able to really resuscitate it?

Laura Zander:
Oh, yeah. I mean, that’s every business that we’ve bought over the last few years. And we’ve actually bought some assets over the last couple of months that we will, probably next year, end up putting some energy into and resuscitating. But yeah, I mean, the yarn manufacturing company, they were on their way out. And we’ve resuscitated that, restructured all the staff, brought it back to life, brought it back to profitability, restored their image, restored the culture in the business itself. And then, there were a couple of other brands that we had purchased. One had been completely shut down. And we just brought it back to life and made it a million-dollar business again. And then another one was a smaller business.

Sarah Segal:
What’s your secret sauce?

Laura Zander:
Probably that sweat equity that we were talking about. You know, just working your ass off. Just gaining 10 pounds, eating crap for six months, not sleeping, working as hard as you can possibly work, and digging in, and refusing to fail. Yeah. And then the financial side of it.

Loren Feldman:
Have you regretted any of the purchases you made?

Laura Zander:
Long-term, no. In the moment, yeah, of course. Absolutely. We bought one October 1st, I think, is when we closed on it. So it was our first distributorship. So now we’re the North American distributor of this yarn that’s made on the Shetland Islands in Scotland. It’s from a mill that’s 135 years old. And as it turned out, I don’t regret purchasing that distributorship, but the timing was terrible. We had to let a key player go in our business about a month before. And then our operations manager down in Texas of our other business moved and resigned. So we didn’t have an operations manager.

So I had to take on those two jobs and try to integrate this new business into our business without an operations manager and without another key manager. So the timing was terrible. And it just wreaked a lot of havoc, and then you start to find out all the things that these two people weren’t doing that you thought they were doing. And so it’s been a lot. The last five months have been a lot. It’ll be worth it. It’s already started to be worth it. But I mean, it’s just, you give up your life.

Sarah Segal:
How do you decide how much to pay for a business that you acquire?

Laura Zander:
For me, personally, I look at the net profit of the business. And then, obviously, what they’re doing, and then what if I am—

Loren Feldman:
Well, it sounds as if you’re buying some businesses that don’t have net profits?

Laura Zander:
No, some of them do. I mean, they definitely do. Sometimes it’s not much. But for me, it’s: Can I pay this back in two to three years? Can I pay the investment back? That’s the goal. And then my personal goal is to try to beat that prediction and pay it back faster. So: Can I get it to profitability? Can I get sales up? And can I get the expenses down faster than I thought that I was going to be able to? So that’s been the goal. As an example, if the business is making $30,000 a year, then I wouldn’t pay more than maybe $75,000. Plus inventory.

Loren Feldman:
Paul, have you ever thought about buying a business?

Paul Downs:
I have.

Loren Feldman:
Did you get close?

Paul Downs:
No. It’s a local competitor, who has sort of been a thorn in my side for years because they were poorly managed and didn’t have any real pricing model. So they would just be selling stuff at absurdly low prices and undercutting my ability to go to market locally. And so I approached them and said, “Hey, we’re in the same business.” It was a partnership—a sales guy and a manufacturer guy. And I spent a lot of time looking into that business and came to the conclusion that it was worth nothing. Because the two partners were actually loaning money to the business every year to keep the doors open. And that’s not a situation I wanted to be in.

I was still interested in doing it, because I thought that it would at least remove these people from the conversation. And I was confident that I could manage it much better and do a better job. But my Vistage group members looked at the whole thing, and they said, “You need this like a hole in the head.” Because I’ve got my own business.

And so I gave up that effort. But the funny thing is, those guys recently came back and said—the manufacturing partner had retired, and another sales guy had bought into the business. So now you’ve got two sales guys, and they can sell, but they don’t know how to manufacture. So they’re running into problems actually doing the work. And we’re investigating them outsourcing all their tables to me, which would be a very attractive proposition.

But they still have the problem of not having any real pricing system. And they also don’t have any mechanisms to understand what happens to a job once they sell it when it’s on their shop floor. They don’t keep track of any of the labor hours that go into production on a per-job basis. So they have no way of checking whether their prices were any good. And I’ve got systems that do all that, but they’re not easy to assemble, those systems. So these guys are in the beginning of a conversation about, like, “How are we going to work together, as opposed to against each other?”

And that’s the only business I’ve really thought about trying to acquire, and they’re relatively close to me. I would not want to acquire a business that wasn’t close by, because I don’t like to have to travel a lot. And I mean, I don’t know, Laura, how you do it running back and forth to Texas. It sounds dreadful to me.

Loren Feldman:
Laura’s bought businesses in China and Vietnam, too.

Sarah Segal:
Laura, have you ever bought a business that didn’t come to you for sale, where you were like, “I want to buy that business?” And you approached them?

Laura Zander:
Yeah.

Sarah Segal:
What did that look like?

Laura Zander:
That was that first one. But they were out of business. So she had shut down, the owner had shut down. Actually, she had come to me three years prior, and we weren’t ready and had never bought a business. And I wasn’t ready.

And so a couple years later, I went to her. And I was like, “I know you’re shut down, and you don’t have any inventory, but could I buy the name? Can I buy your contacts? Can I buy the designs and all of that? In other words, can I bring this back to life?” And so we just worked out a deal where I just paid her some money, and then also gave her royalties on everything that she had created, or that this brand had created. So we still write her a check once a quarter and give her a percentage.

Loren Feldman:
Sarah, you seem very interested.

Sarah Segal:
I am. It’s something that I’ve always been curious about. You know, I’m a small but mighty agency, and we’re growing very organically, which is great. But I have a client who’s great who was explaining how, when you’re a startup, you need that kind of influx of cash to kind of get yourself up into the atmosphere. And once you’re in the atmosphere, you don’t really need it. I mean, you’ve kind of created this self-operational mechanism, right?

So how do I go from small to medium, or medium to large without necessarily getting an outside investor, or taking out a small business loan? What are the options? Buying an agency is a little bit more haphazard, because there’s no inventory. You’re buying, essentially, clients and expertise. So it’s not something I know much about. So that’s why I’m asking questions.

Laura Zander:
Yeah, I mean, I don’t think that I even thought about it that strategically. It was a little more just ADHD, kind of, “Hey, some of this stuff has come to my lap.” Now, I’m starting to look for it a little bit more now that we’ve done it so many times. But it’s not even, “How do I go from a small to a medium to a large business?” It’s just, “How do I keep surviving? How do we keep diversifying, if you will? How do we have new projects? How do I have new stuff out there?” And just kind of watching the market, and seeing where the market grows, and recognizing that the part of the business that we had in 2010, I mean, it’s just not relevant anymore.

I mean, we have gone from—I might have mentioned this before—10 years ago, 100 percent of what we sold was made by other people. We sold other people’s stuff. And now about 70 percent of what we sell is stuff that we create ourselves, and that’s just happened kind of naturally over the years. And now we’re kind of looking for more and more things where we have more margin, so we can pay people more, so that we can keep the same people. And even if our sales don’t necessarily increase, our margins increase, so we have more cash. So we can do more interesting stuff. So we have more control.

And then, as you watch all these businesses go away that we were reliant on selling their stuff, we need more control. That was a big watershed moment for me. There was a couple of years ago where I recognized—I’m like, “Why are our sales not increasing?” And I went in, I was doing some data research, and saw that we had done $750,000 in sales to businesses that don’t exist anymore. They’ve disappeared over the last two years, and we hadn’t replaced those sales with new brands. And so, just recognizing the attrition in our own industry.

Sarah Segal:
Our core focus is earned media and organic social media. That’s what we do. We do it very, very well. But I can’t tell you how many times in the course of this year already, we’ve been asked by clients or potential clients if we would do their digital ad spend as well. And that is not our core competency. We don’t have anybody in-house who does it. I do have a couple external partners that I’ve referred people to. Do I figure out a way to add it to our offerings? And how do I do that?

Laura Zander:
Yeah, I mean, I might try it. Test it once. See how it goes.

Sarah Segal:
I literally had a client come in this week, and looked at me, and was like, “I will give you this amount of money. I don’t want anybody else to do it. We trust you. I want you to do it.”

Laura Zander:
And they know you’ll figure it out. Paul, if somebody came to you and said, “Look, I know you don’t make chairs, but if you’ll make us a chair…” would you do it? I mean, if they’re throwing you big money, you wouldn’t?

Paul Downs:
Hell, no. I mean, I get asked to do that stuff all the time. And when I was starting out, and I didn’t have a million customers, I would do it. And so now I don’t do it. Because I know what that’s like. I am always very concerned about, first of all, what are the client’s expectations? Sarah, this guy’s gonna give you all this money, but he wants something back at the end of the day. He wants clients. So can you deliver that? Are you confident that you can do that?

Managing digital ad spends, that’s quite complicated, in my experience. And you need to, depending on the platform, sort of understand each platform, how it’s administered, how it’s reported, how to interpret the reports, what are they not telling you? Like, there’s so many ways that could go wrong. I would hesitate to jump into it without the client being totally aware of what your weaknesses are.

And so, I find that saying no to business that is not the business we’re in has been a good move for me. Because we’re really, really good at something that very few people know how to do. And everything else that people ask me to do, somebody’s already really good at doing it, and we’re just gonna get our brains beat out if we try to beat them. And so, why bother?

Laura Zander:
Yeah, and I would take the exact opposite approach. I shouldn’t say I’d take the exact opposite approach. And obviously we’re in very different kinds of businesses, so the risk and reward is very different. But for me, my core competency really is treating people well, being good to customers. It doesn’t matter what I sell. It doesn’t matter what service I provide. Because that’s almost just like a symptom.

So for me, Sarah, we’d never made yarn before. I’d never made handbags before. But the risk was so low, and I was able to isolate the risk [enough] that we were willing to say, “Okay, 50,000 bucks,” or whatever the number is. You know, you hire one person for 50 grand. What’s the potential upside? I mean, if the potential upside is that this is a whole new side of your business that you didn’t even know could be, I mean, maybe this is your future. Maybe this other part is kind of dying, and this is where all the growth is gonna happen, but you won’t know unless you try it.

Sarah Segal:
Yeah, I know. And there’s a huge gray area, in terms of paid and unpaid media now, and part of me has that perspective of like, “ I need to add to our offerings in order to maintain relevance in this space.” Yeah, we’re really good at what we do, but like, paid advertising. I mean, we see all the media.

Laura Zander:
Yeah.

Loren Feldman:
Digital marketing is such a mess. I can understand why your customers are coming to you, Sarah. You’re building credibility with them, and they see this as a natural extension. But whether it really is or not, is an interesting question. Digital marketing is so tough.

Paul Downs:
There are two levels of risk. There’s the risk that the whole situation, the vast forces involved here, are just against you. And that’s why people are coming to you. Because even the people who they’ve hired who are really good at it can’t succeed in an environment where the utility of digital advertising is just going down the toilet. That’s one possibility. The other one is, it could be a great field, but their people aren’t executing. And why not? So I would want to understand why people are coming to you, and what expectations they have. And then, can you actually operate in a way that’s better than whatever anybody else is doing?

We went through all this when the pandemic started, and here I am making giant corporate conference tables. And people are like, “Well, why aren’t you making standup desks for home or home office?” And it was like, “Well, there are already people making all that, and they’re doing a much better job than I can.” And I can’t just like emergency-ramp up a credible product and marketing effort in a hurry, and I’m not even going to try. And that turned out to be exactly the right decision. So I think you could either say yes or no to the opportunity to do that. But you should really think carefully about what’s involved and what happens if it goes wrong.

Sarah Segal:
Do you two do digital ad spends? Do you have digital ad spends for your businesses?

Laura Zander:
Yeah, hundreds of thousands.

Paul Downs:
Oh I have for years. I mean, I’ve been dealing with Google since 2003.

Sarah Segal:
So, do you have an outside agency that does that for you?

Paul Downs:
At the moment, yeah, to manage my AdWords spend. But I’ve dialed it way back from the peaks. Because over the years, I became more sophisticated about how to do it. And when we built coding into our website that clearly identified whether a caller was coming from an organic search or an AdWords search, it revealed that 99 percent of our clients were coming from organic and less than 1 percent from AdWords. And so I cut back the budget incredibly, at that point, because, like, why spend the money?

Don’t even get started on trying to advertise on LinkedIn, or Facebook, or Instagram. Each platform is going to be different and have a different sweetspot, a different way to succeed. And I don’t know how easy it is to get that expertise very quickly. That might be a case where you try to acquire someone who knows how to do it, but I don’t know whether anybody knows how to do it. It’s constantly changing. And so people succeed for a while, and then they go around and wave their flag, like, “Oh, I succeeded!” And then everything changes, and that approach is now oversaturated and doesn’t work anymore. So I don’t know what to say.

Laura Zander:
We have been doing digital advertising for forever. In fact, I think one of the first times that Loren and I talked and met was talking through our YouTube strategy, which was organic but then turned into digital and paid and everything. My guess is that people are coming to you because you already know their story.

I mean, we don’t outsource it, and we won’t outsource it. Because there are too many hacks out there. They don’t know your brand. They don’t know the story. I mean, it just becomes formulaic. And to me, that’s just wasting money. Somebody’s got to really understand who you are, what you are, what differentiates you, what makes you newsworthy—all these kinds of things.

Sarah Segal:
What does your team look like that does that for you? Like how many people do you have working on that?

Laura Zander:
We have a team of… one, two, three, four, but really one person. She really manages that. So she manages all the Facebook advertising and the Google and everything else, with a little bit of help.

Sarah Segal:
How much do you pay her? Do you know?

Laura Zander:
I do. I mean, she’s paid kind of an executive salary.

Paul Downs:
And what’s your total spend on just the media every year?

Laura Zander:
A couple hundred grand.

Sarah Segal:
So you’re at $10,000 a month-plus?

Laura Zander:
Yes, more like $20,000.

Paul Downs:
Okay, I was at $12,000 a month for many years. And now I send Google $2,000 a month, mostly because I just think they want money. Let’s give them some. [Laughter]

Loren Feldman:
I want money, too, Paul.

Paul Downs:
You’re getting plenty from me, Loren.

Loren Feldman:
That’s true.

Paul Downs:
Here I am, right?

Loren Feldman:
Yep.

Paul Downs:
The thing is that the amount you spend on digital may or may not be related to the results you get. It’s very difficult to tie it back, unless you have a really nailed-down process to identify every inquiry that comes into the client [about] where it came from, who it is, is the story they’re telling you likely to be true, there are so many ways that can go wrong. And it’s such a moving target and so complex with all the different platforms. You’re great at YouTube. Are you gonna be any good at TikTok? Who knows? And what’s that experience like trying to administer an account like that?

Loren Feldman:
Sarah, if I remember correctly, you have some expertise in influencer marketing. Could that be the type of digital marketing that you focus on?

Sarah Segal:
No, we already do that. That’s its own beast. But we literally are being asked, “Will you do our Facebook ad spend? Will you figure out how much money we should put behind Instagram? Will you help us with TikTok?” And it’s something that I feel like we should stop saying no to. But I don’t know how to start saying yes. So that’s why this conversation is very helpful.

Laura Zander:
Can you pick one of the people who you feel like you work really well with and basically do it—not necessarily for free—but come up with an agreement with them that’s like, “Hey, let’s see if you’re willing to let us try this, let’s do some beta testing together, we’ll give you a great deal on it.” You know, blah, blah, blah, blah, blah.

Sarah Segal:
Yeah, I have a client who literally said, “I will give you $15,000 a month to spend on digital advertising, because I trust you will do it.” I looked at that person, and I said, “I don’t have anybody who does that. I’ll have to hire somebody.” And they said, “Okay, good.”

Paul Downs:
Yeah, that’s a very interesting conversation. But, boy, I mean, I would want to understand what their understanding of what they’re getting for $15,000 a month is now. Do they have any metrics on how many clicks, how many calls, how many sales, what’s the click-through rate? Because you’re gonna need to be able to demonstrate whether you’re succeeding or failing.

Sarah Segal:
Yeah, this is a unique client, because it’s a brand new product to the United States. So they don’t have anybody currently doing it. We wouldn’t be stepping into somebody’s shoes. We would be starting from scratch. So there are like no metrics to compare to.

Paul Downs:
Maybe it’ll be great. I mean, that’s 15,000 bucks a month.

Sarah Segal:
Well, no, no. That’s the amount of money spent on the digital ad spend. That’s not the pay for distributing that $15,000. So on top of that, we would have some sort of percentage of that spend. I don’t know what that looks like, necessarily, but I’d have to figure out what that payment structure looks like.

Paul Downs:
I would say this is a case where you really need to understand what’s normal operating procedure in this market. You know, Laura and I both have experience in it, but it’s not like I know what every furniture maker does. I don’t care. That’s just who I am. But in this case, someone’s coming to you with expectations and a budget. And you don’t even know how to charge for it.

So you’d better find somebody who is running this kind of thing and see if you can pick their brains and figure out, “Okay, what would be normal to do here? Do I want to undercut normal or to get market share? Do I want to charge more for the risk?” Like, without understanding what the other alternatives are, I think you potentially could be in a ton of trouble. That’s my cautious side saying that, and I’m very cautious with other people’s money. So Laura is probably like, “Oh, go for it, who cares? Charge them whatever they’ll pay.”

Loren Feldman:
Laura, have you had success recently with the kind of digital marketing that Sarah is talking about?

Laura Zander:
Yeah, I mean, we still—

Loren Feldman:
What’s working?

Laura Zander:
Right now, the text messaging stuff is killing it. And that’s been maybe a year, a year and a half. So we use a company called Attentive, and our market loves it. They sign up for these text messages, we send them out. The ROI is way higher than Facebook or Instagram.

Loren Feldman:
What kind of message are you sending out?

Laura Zander:
It depends. New product. Sometimes if we have some sort of deal, but not very often. Usually, it’s new product stuff.

Paul Downs:
Can you send pictures along with it?

Laura Zander:
You can. It’s a little more expensive to send the pictures. But yeah, you absolutely can.

Loren Feldman:
How do you get people to opt in to the service?

Laura Zander:
Through the website. And we’re kind of doing the, “If you sign up, you’re eligible to win a raffle. Or win this bag.” Or something like that. So, it’s been great. It’s been really, really good.

Paul Downs:
This sounds like the next generation of email marketing.

Laura Zander:
It 100 percent is. And it’s funny, when this came up, I found out about it literally a year and a half ago. And I told our marketing manager who does the digital ad stuff, I’m like, “I think we should do this. I really think we should do this.” And she didn’t want to do it. She was kind of irritated. And I’m like, “Please, please, please just try it. Let’s just try it.” And now like the whole team, that’s all they have. I mean, they love it.

Sarah Segal:
You have to do text. So Paul, you asked before, I have two teenagers. I have one teenager who’s on the verge of applying to college, but I also coach on the side. But teenagers don’t look at email. At all. All of their communication is either through text or Snapchat. Those are the two places they communicate with people, and that’s it. So emailing them is pointless, because they will never see it. So if you’re not leveraging text or messaging as your means of communication, you’re not going to be attracting or engaging with younger audiences, and you’re eventually going to not have new customers. So that’s really smart, Laura.

Loren Feldman:
My thanks to Paul Downs, Sarah Segal, and Laura Zander—and of course to our sponsor, the Great Game of Business, which helps businesses use an open-book management system to help build healthier companies. You can learn more at Greatgame.com. Thanks, everyone.