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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
This content was produced by 21 Hats.
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Podcast 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.
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