Archive for the ‘Small Business’ Category.

Chip Card Transition, And Life as A Small Business Owner

Well, per the new rules, we replaced all of our old credit card readers (dozens) with new ones that can take chip cards (EMV).  Here is the bone pile of all the old technology, many of which were bought less than 2 years ago:


This illustrates both the best and worst of running one's own company.

The bad:  As CEO, I am actually futzing with distributing credit card terminals to the field and collecting the used ones to be recycled.

The good:  I have total control.  I was just in Washington DC, and in one meeting the National Park Service was there talking about some multi-year, multi-million dollar study to figure out their electronic payments "strategy" at their parks.  My payments strategy discussion went literally something like this:

Merchant guy:  Do you want to pay an extra $100 for the terminals to accept NFC payments (e.g. Apply pay, Android pay).

Me: Um, sure seems like the future.  Does it cost more to clear a transaction that way?

Merchant guy: no

Me:  They yes, I'll take it.

Now, we can take smart phone payments at dozens of public parks my company operates, all decided and implemented in about 30 days.

By the way, I am amazed at how many large companies like CVS appear to have the chip card readers but the store clerk tells me that they are not turned on yet whenever I try to stick my card in that slot (for those of you who don't know, the chip side goes head into a slot like an ATM slot on the front).  October 1 was the date that there was a liability shift, where merchants bear more liability for fraud if they don't take the chipcards.  Not sure how I was able to get this done in my little company but they can't manage it.

I was told by one person at CVS, a store manager but they may be off base, that they don't take the chip cards yet because they take longer than swiping.  This seems dumb.  First, many retailers for swipe cards waste time asking for the last four digits of your card, which is not necessary with the chip cards.  Further, CVS wastes a TON of time at the register with their stupid loyalty program.  Yes, I know it is a pet peeve of mine I rant on from time to time, but I have spent a lot of time waiting for people in front of me to try different phone numbers to see which one their account is under, or to waste time signing up for a loyalty card with 6 people in line behind them.  Makes me crazy.  If they can waste 30 seconds each transaction on stupid loyalty cards they can wait three extra seconds for a more secure credit card transaction.

Postscript:  It really should have been chip and pin rather than chip and signature

PS2:  Never, ever lease a credit card machine.  You pay about 4x its retail price, even present value.  I got roped into doing this for a few machines on the logic that this equipment transition was coming, and they would switch out my equipment.  But then they sold their leasing portfolio and the new owner wouldn't honor this promise, so I ended up overpaying for the old terminal (and having to pay $1000 each just to get out of the lease) and then buying the new terminals.  Live and learn.

Flattery is Death for an Organization

The WSJ wrote the other day about Hillary Clinton's emails:

A common thread running through the tens of thousands of emails that landed in Hillary Clinton’s in-box in her time as secretary of state is that aides and assorted advisers believe she is, well, awesome.

With a few exclamation points tacked on.

In notes sent to the private email account Mrs. Clinton used, various advisers routinely heap praise on the person who gave them their jobs or elevated them to her inner circle. Email flattery of this sort is a common tactic in the everyday workplace, but the Clinton emails show how it comes into play at the highest levels of government.

Employees tell Mrs. Clinton she is doing a “spectacular job,” that she has many admirers and that her remarks were “pitch perfect.” They assure her she looks “gorgeous” in photos and commend her clothing choices.

Look, I guess everyone has their own leadership style but from my experience it is a terrible idea to promote this kind of thing in one's organization.

Why?  Well, my organization has 350 people in it.  We can either think with just one person (me), working to improve our operations, or we can think with 350.  Those 349 other people know many of the ways in which we are screwing up and can improve -- the problem is getting them to come forward with those ideas.  And getting them to do so is far less likely if we are maintaining some sort of North Korean style personality cult of the CEO.

I have written about this before, but it's why I consider my Ivy League degrees to be a negative in running the company.  Many of my employees have only a high school education (at best) and are intimidated in bringing up an idea or telling me I am screwing up because they assume since I have these Ivy League degrees I must be smarter than they are and know what I am doing.   But in their particular job, in terms of my knowledge of what they see every day from customers and operationally, I am dumb as a post and completely ignorant.

Anyone who has worked for me for more than a few months can likely quote my favorite line which I use in most of my employee talks -- "If you see something that seems screwed up, don't assume Warren is smarter than you and wants it that way, assume that Warren is screwing up and needs to be told."

Postscript:  This sort of flattery also makes me deeply uncomfortable on a personal level, so much so I have a hard time understanding people who revel in it.  I once had an employee that could not stop with this sort of personal flattery, and eventually we ended up terminating them.  We terminated them for other good reasons, but I must admit to being relieved when they left.

The New Rich -- Living the High Life Through Your Non-Profit

Several months ago, a lot of folks where shocked to find that the Clinton Foundation only spent $9 million in direct aid out of a total budget of $150 million, with the rest going to salaries and bonuses and luxury travel for family and friends and other members of the Clinton posse.

None of this surprised me.  From my time at Ivy League schools, I know any number of kids from rich families that work for some sort of trust or non-profit that has nominally charitable goals, but most of whose budget seems to go to lavish parties, first-class travel, and sinecures for various wealthy family scions.

But this week comes a story from the climate world that demonstrates that making a fortune from your non-profit is not just for the old money any more -- it appears to be a great way for activists to build new fortunes.

The story starts with the abhorrent letter by 20 university professors urging President Obama to use the RICO statute (usually thought of as a tool to fight organized crime) to jail people who disagree with them in a scientific debate.  The letter was authored by Jagadish Shukla of George Mason University, and seems to take the position that all climate skeptics are part of an organized coordinated gang that are actively promoting ideas they know to be wrong solely for financial enrichment. (I will give the near-universal skeptic reply to this:  "So where is my Exxon check?!"

Anyway, a couple of folks, including Roger Pielke, Jr. and Steve McIntyre, both folks who get accused of being oil industry funded but who in fact get little or no funding from any such source, wondered where  Shukla's funding comes from.   Shukla gets what looks like a very generous salary from George Mason University of $314,000 a year.  Power to him on that score.  However, the more interesting part is where he makes the rest of his money, because it turns out his university salary is well under half his total income.  The "non-profits" he controls pays him, his family, and his friends over $800,000 a year in compensation, all paid out of government grants that supposedly are to support science.

A number of years ago Shukla created a couple of non-profits called the Institute for Global Environment and Security (IGES) and the Center for Ocean Land Atmosphere Interactions (COLA).  Both were founded by Shukla and are essentially controlled by him, though both now have some sort of institutional relationship with George Mason University as well.  Steve McIntyre has the whole story in its various details.

COLA and IGES both seem to have gotten most of their revenues from NSF, NASA, and NOAA grants.    Over the years, the IGES appears to have collected over $75 million in grants.  As an aside, this single set of grants to one tiny, you-never-even-heard-of-it climate non-profit is very likely way higher than the cumulative sum total of all money ever paid to skeptics.   I have always thought that warmists freaking out over the trivial sums of money going to skeptics is a bit like a football coach who is winning 97-0 freaking out in anger over the other team finally picking up a first down.

Apparently a LOT of this non-profit grant money ends up in the Shukla family bank accounts.

In 2001, the earliest year thus far publicly available, in 2001, in addition to his university salary (not yet available, but presumably about $125,000), Shukla and his wife received a further $214,496  in compensation from IGES (Shukla -$128,796; Anne Shukla – $85,700).  Their combined compensation from IGES doubled over the next two years to approximately $400,000 (additional to Shukla’s university salary of say $130,000), for combined compensation of about $530,000 by 2004.

Shukla’s university salary increased dramatically over the decade reaching $250,866 by 2013 and $314,000 by 2014.  (In this latter year, Shukla was paid much more than Ed Wegman, a George Mason professor of similar seniority). Meanwhile, despite the apparent transition of IGES to George Mason, the income of the Shuklas from IGES continued to increase, reaching $547,000 by 2013.

Grant records are a real mess but it looks like from George Mason University press releases that IGES and its successor recently got a $10 million five-year grant, or $2 million a year from the government.  Of that money:

  • approximately $550,000 a year goes to Shukla and his wife as salaries
  • some amount, perhaps $90,000 a year, goes to Shukla's daughter as salary
  • $171,000 a year goes as salary to James Kinter, an associate of Shukla at George Mason
  • An unknown amount goes for Shukla's expenses, for example travel.  When was the last time you ever heard of a climate conference, or any NGO conference, being held at, say, the Dallas-Ft Worth Airport Marriott?  No, because these conferences are really meant as paid vacation opportunities as taxpayer expense for non-profit executives.

I don't think it would be too much of a stretch, if one includes travel and personal expenses paid, that half the government grants to this non-profit are going to support the lifestyle of Shukla and his friends and family.  Note this is not money for Shukla's research or lab, this is money paid to him personally.

Progressives always like to point out examples of corruption in for-profit companies, and certainly those exist.  But there are numerous market and legal checks that bring accountability for such corruption.  But nothing of the sort exists in the non-profit world.  Not only are there few accountability mechanisms, but most of these non-profits are very good at using their stated good intentions as a shield from scrutiny -- "How can you accuse us of corruption, we are doing such important work!"

Postscript:  Oddly, another form of this non-profit scam exists in my industry.  As a reminder, my company privately operates public recreation areas.  Several folks have tried to set up what I call for-profit non-profits.  An individual will create a non-profit, and then pay themselves some salary that is equal to or even greater than the profits they would get as an owner.  They are not avoiding taxes -- they still have to pay taxes on that salary just like I have to pay taxes (at the same individual tax rates) on my pass-through profits.

What they are seeking are two advantages:

  • They are hoping to avoid some expensive labor law.  In most cases, these folks over-estimate how much a non-profit shell shelters them from labor law, but there are certain regulations (like the new regulations by the Obama Administration that force junior managers to be paid by the hour rather than be salaried) that do apply differently or not at all to a non-profit.
  • They are seeking to take advantage of a bias among many government employees, specifically that these government employees are skeptical of, or even despise, for-profit private enterprise.  As a result, when seeking to outsource certain operations on public lands, some individual decision-makers in government will have a preference for giving the contract to a nominal non-profit.   In California, there is even legislation that gives this bias a force of law, opening certain government contracting opportunities only to non-profits and not for-profits.

The latter can have hilarious results.  There is one non-profit I know of that is a total dodge, but the "owner" is really good at piously talking about his organization being "cleaner" because it is a non-profit, while all the while paying himself a salary higher than my last year's profits.

A Fundamental Shift in the Economy, At Least for Entrepreneurs and Small Business

When politicians argue about small business growth, they argue about stuff like taxes and access to capital and, god help me, completely irreverent (to small business) stuff like the ExIm Bank.

I would argue that there has been a fundamental shift in the economy relative to small business over the last four years, but it has nothing to do with any of that stuff.  I would summarize this shift as follows:

Ten years ago, most of my company's free capacity was used to pursue growth opportunities and refine operations.  Over the last four years or so, all of our free capacity has been spent solely on compliance.

Let me step back and define some terms.  What do I mean by "free capacity?"  In a small, privately-held company, almost all the improvement initiatives spring from the head of, or must heavily involve, the owner.  That would be me.  I have some very capable staff, but when we do something new, it generally starts with me.

So OK, our free capacity is somewhat limited by my personal capacity as owner and President.   But actually, I have a head full of ideas for improving the company.  I'd like to do some new things with training that takes advantage of streaming video.  I'd like to add some customer service screening to our application process.  But my time turns out not to be the only limit -- and this is one of those things that HBS definitely did not teach me.

In the real world, there are only so many new things I can introduce and train my line managers to do, and that they can then pass down to their folks.  An organization can only accept a limited amount of new things (while still doing the old things well).  This is what I mean by "free capacity"  -- the ability to digest new things.

Over the last four years or so we have spent all of this capacity on complying with government rules.  No capacity has been left over to do other new things.  Here are just a few of the things we have been spending time on:

  • Because no insurance company has been willing to write coverage for our employees (older people working seasonally) we were forced to try to shift scores of employees from full-time to part-time work to avoid Obamacare penalties that would have been larger than our annual profits.  This took a lot of new processes and retraining and new hiring to make work.  And we are still not done, because we have to get down another 30 or so full-time workers for next year
  • The local minimum wage movement has forced us to rethink our whole labor system to deal with rising minimum wages.  Also, since we must go through a time-consuming process to get the government agencies we work with to approve pricing and fee changes, we have had to spend an inordinate amount of time justifying price increases to cover these mandated increases in our labor costs.  This will just accelerate in the future, as the President's contractor minimum wage order is, in some places, forcing us to raise camping prices by an astounding 20%.
  • Several states have mandated we use e-Verify on all new employees, which is an incredibly time-consuming addition to our hiring process
  • In fact, the proliferation of employee hiring documentation requirements has forced us through two separate iterations of a hiring document tracking and management system
  • The California legislature can be thought of as an incredibly efficient machine for creating huge masses of compliance work.    We have to have a whole system to make sure our employees don't work over their meal breaks.  We have to have detailed processes in place for hot days.  We have to have exactly the right kinds of chairs for our employees.  We have to put together complicated shifts to meet California's much tougher overtime rules.  Just this past year, we had to put in a system for keeping track of paid sick days earned by employees.  We have two employee manuals:  one for most of the country and one just for California and all its requirements (it has something like 27 flavors of mandatory leave employers must grant).  The list goes on and on.  So much so that in addition to all the compliance work, we also spent a lot of work shutting down every operation of ours in California, narrowing down to just 3 contracts today.  There has been one time savings though -- we never look at any new business opportunities in CA because we have no desire to add exposure to that state.

Does any of this add value?  Well, I suppose if you are one who considers it more important that companies make absolutely sure they offer time off to stalking victims in California than focus on productivity, you are going to be very happy with what we have been working on.  Otherwise....

I fully understand the dangers of extrapolating from one data point**, but for folks who are scratching their head over recent plateauing of productivity gains and reduced small business origination numbers, you might look in this direction.

By the way, it strikes me that regulatory compliance issues set a minimum size for business viability.  You have to be large enough to cover those compliance issues and still make money.  What I see happening is that as new compliance issues are layered on, that minimum size rises, like a rising tide slowly drowning companies not large enough to keep their head above water.  We are keeping up, but at times it feels like the water is lapping at our chin.


**Unrelated Postscript:  I have found that in the current media/political world, people love to have only one data point.  Why?  Well, with two data points you are are stuck with the line those points define.  With just one, you can draw any line you want in any direction with any slope.

Letter to Nitin Nohria, Dean of the Harvard Business School

I wrote Dean Nohria in response to this story

Ben Edelman is an associate professor at Harvard Business School, where he teaches in the Negotiation, Organizations & Markets unit.

Ran Duan manages The Baldwin Bar, located inside the Woburn location of Sichuan Garden, a Chinese restaurant founded by his parents.

Last week, Edelman ordered what he thought was $53.35 worth of Chinese food from Sichuan Garden’s Brookline Village location.

Edelman soon came to the horrifying realization that he had been overcharged. By a total of $4.

If you’ve ever wondered what happens when a Harvard Business School professor thinks a family-run Chinese restaurant screwed him out of $4, you’re about to find out.

(Hint: It involves invocation of the Massachusetts Consumer Protection Statute and multiple threats of legal action.)

Here was the letter I sent, which was significantly more mature in tone for having waited 24 hours before writing it

My wife and I are both HBS '89 grads.  We own and actively manage a small to medium size service business.  I was encouraged at our last reunion to hear a lot of the effort HBS seems to be placing on small business and entrepreneurship.

However, I was horrified to see an HBS professor (prof Edelman) in the news harassing a small business over a small mistake on its web site.  I don't typically get worked up about Harvard grads acting out, but in this particular case his actions are absolutely at the core of what is making the operation of a small business increasingly impossible in this country.

Small businesses face huge and growing compliance risks from almost every direction -- labor law, safety rules, environmental rules, consumer protection laws, bounty programs like California prop 65, etc.  What all these have in common is that they impose huge penalties for tiny mistakes, mistakes that can be avoided only by the application of enormous numbers of labor hours in compliance activities.   These compliance costs are relatively easy for large companies to bear, but back-breaking for small companies.

So it is infuriating to see an HBS professor attempting to impose yet another large cost on a small business for a tiny mistake, particularly when the proprietor's response was handled so well.  Seriously, as an aside, I took service management from Ben Shapiro back in the day and I could easily see the restaurateur involved being featured positively in a case study.  He does all the same things I learned at HBS --  reading every customer comment personally, responding personally to complaints, bending over backwards to offer more than needed in order to save the relationship with the customer.

As for the restaurateur's web site mistake -- even in a larger, multi-site company, I as owner do all my own web work.  Just as I do a million other things to keep things running.  And it is hard, in fact virtually impossible, to keep all of our web sites up to date.  Which is why Professor Edelman's response just demonstrates to me that for all HBS talks about entrepreneurship, the faculty at HBS is still more attuned to large corporations and how they operate with their enormous staff resources rather than to small businesses.

Large corporations are crushing smaller ones in industry after industry because of the economy of scale they have in managing such compliance issues.  If the HBS faculty were truly committed to entrepreneurship, it should be thinking about how technology and process can be harnessed by smaller businesses to reduce the relative costs of these activities. How, for example, can I keep up with 150+ locations that each need a web presence when my sales per site are so much less than that of a larger corporation?  This is not impossible -- I have learned some tools and techniques over time -- and we should be teaching and expanding these, rather than spending time raising the cost of compliance for small business.

Another Reason for Declining Business Formation

I often criticize others for attributing 100% of any bad trend to their personal pet peeve.  To some extent I am guilty of that in my last post, where I blamed declining business formation on increasingly complex regulation and licensing.  I think there are good reasons for doing so -- I have spent the last 6 months passing up on business growth opportunities because I was too consumed with catching up on regulatory compliance minutia, particularly in California.  And I have watched as many of my smaller competitors who have fewer resources to dedicate to such compliance issues have left the business, telling me they could no longer keep up with all the requirements.

But there is seldom just one single cause for any trend in a complex, chaotic system (e.g. climate, but economics as well).  One other reason business formation may have dropped is the crash of the housing market and specifically in the equity many have in their homes.

Home equity has historically been an important source of capital for small business formation.  My first large investment in my company was funded with a loan that was secured by the equity in my home.  What outsiders may not realize about small business banking nowadays is that it is nothing like how banking is taught in high school civics.  In that model, the small business person goes to her local banker and presents a business plan, which the banker may fund if they think it is a good risk.

In the real world, trying to get such an unsecured loan from a bank as a small business will at best result in laughter.  My company is no longer what many would call "small" -- we will do millions in revenue this year.  But there is no way in the world that my banker of over 10 years will lend to my business unsecured -- they will demand some asset they can put a lien on.  So we can get financing of equipment purchases (as a capital lease on the equipment) and on factored receivables and inventory.  But without any of that stuff, a new business that just needs cash for startup cash flow is out of luck -- unless the owner has a personal asset, typically a house, on which the banker can place a lien.

So, without home equity, one of the two top sources of capital for small business formation disappears (the other top source is loans from friends and family, which one might also expect to dry up in a tough economy).

Postscript:  Banks will make cash flow loans if guaranteed by the SBA.  This is another whole can of worms, which I will not discuss today.  SBA loans are expensive and difficult to get, and the SBA has a tendency to turn the money spigot on and off at random times.  I have often wondered if the SBA helped to kill cash flow lending by banks.  First, why make risky small unsecured loans when you can get a government guarantee?  And second, with more formulaic lending criteria, SBA lending eliminated the need for loan officers who were good at evaluating business risks.  I can say from personal experience that the folks who can intelligently discuss a business plan and its risks are all gone from banks now (at least in the small business market).

Coyote in the News

I have a couple of quotes in this article on the difficulty of doing business in California.

On the same topic, Megan McArdle quoted extensively from my post on leaving Ventura County, and has some comments of her own.

Ventura County Blues, Update

One of my favorites writers Megan McArdle comments on my post about the regulatory excess in California.  The same post was linked by Reason as well.  The Reason post got the attention of Ron Paul, who will be interviewing me for his radio show next week.

I posted a few updates on the article today:

Wow, reading this again, I left out so much!  An employee once sued us at this location for harassment and intimidation by her manager -- when the manager was her sister!  It cost me over $20,000 in legal expenses to get the case dismissed.  I had an older couple file a state complaint for age discrimination when they were terminated -- despite the fact that our entire business model is to hire retired people and the vast majority of our employees are 70 and older.  And how could I have forgotten the process of getting a liquor license?  I suppose I left it out because while tedious (my wife and I had to fly to California to get fingerprinted, for example), it is not really worse than in other places -- liquor license processes are universally bad, a feature and not a bug for the established businesses one is trying to compete with.   We gave the license up pretty quickly, when we saw how crazy and irresponsible much of the customer base was.  Trying to make the place safer and more family friendly, we banned alcohol from the lake area, and faced a series of lawsuit threats over that.

The Ignorance of Pundits

Brad DeLong writes

What are they thinking?

I mean, some employers are going to drop hours below 30 a week once the employer pay-or-play hits. But we won't see that until the February 2015 employment report, and there is no reason for employers to start that eighteen months in advance. It isn't there in the data. And nothing would lead anybody to expect that it would be visible in the data right now.

So why are they claiming that it is?

I am amazed at how even prominent pundits don't bother to educate themselves on even the most basic aspects of the policy issues they discuss.

Let's go back before the 1-year delay in the employer mandate, which was scheduled to take effect on Jan 1, 2014.  In the implementation rules, employees would be classified as part-time or full-time on Jan 1, 2014 based on a 3-12 month look back at actual hours worked in 2013.  That means that for many companies, such as ours, to have employees classified as part-time on day 1 of Obamacare, we had to have them working part time in January of 2013.  By the time the Obamacare employee mandate was delayed, we had already made changes in our operations, so we are not going back and will just maintain them until 2015.

So for our company, and likely for many others, the change to part-time showed up in the first quarter of 2013.

So why is DeLong claiming otherwise?

Scam Alert -- US Telecom

We get literally (as they would say on the TV show Archer, literally literally and not figuratively literally) hundreds of paper bills to pay each month in our business.   We can barely keep up just with paying them all, much less vetting every one.  Which is what scam artist marketers count on when they craft fake bills they spam to businesses in hopes that some percentage, in their hustle and bustle, will pay the bills without knowing they are fraudulent.

These letters really, really tick me off.  They are sent by people who apparently cannot sell a product or service on its own merits and so must trick harried business people into accidentally sending them money.  I get these most frequently from companies that send me letters that look just like a government agency requiring yet another fee (the corporate minutes fraud).

So here is the most recent bill my accounts payable person questioned and put on my desk.   It is from a company called US Telecom, and despite the remission address on the letter it is apparently based in California.  You can click to enlarge the letter -- it is in very high resolution, which we will need to find the small print that they use to try to cover their butts.

Click to Enlarge US Telecom Scam Letter


Does this look like a regular bill to you for some service we have contracted for?  It did to me.  Note the "Due upon Receipt" at the top, the calculation below with previous balance and new balance and "pay this amount."  No reasonable person in this country would say it looks like anything but an invoice for service received.

But this is not a bill.  It is a solicitation for services.  If you send the money, then you are committed.  And by the way, per the terms below, once the agreement is in place, it cannot be terminated or amended (or likely refunded) without a signature from both parties, which means only if they approve it.  If they don't, congrats, you are stuck in this contract.  I have no idea if you actually paid, whether you would receive any services or not.  Since they priced this service without even knowing what assets I have that would be serviced (note no equipment or equipment location is listed in the bill, the first "tell" to me this was a fraud) I am not sure how they would ever provide any service.  (we were really saved by Quickbooks on this one, because my payables person flags any bill from a vendor not set up in our system).

They attempt to cover themselves, in the same way the corporate minutes scamsters do, with the small print in the last two lines at the bottom.   Can't read it?  LOL, I could not read it myself, even full size, without my glasses.  You can click through if you wish to see it on the high rez version.  But it says that it is not a bill, it is a solicitation, and that I am under no obligation to pay unless I accept the offer, which I do by paying.  But by the language, once paid, I have accepted the offer and cannot get out of it without a signature from an authorized officer of their company.  I bet that would be easy to get.

That last fine print may keep them out of jail or even let them sleep at night, but no legitimate business with a valuable product sells its services this way.

Update:  Apparently there is a legitimate US Telecom and they are understandably pissed.  They have set up a page on this billing fraud, and apparently the Attorneys General in a number of states are investigating.

Update #2:  Talk about waddling in late on a story!  These guys' registered corporate name is UST Development, run by a guy named David Bell.  Ken White of Popehat has been on these guys for years.  LOL, I even linked Ken's post a while back.  You sleazy folks out there can f*ck with me all you want but you do not want to mess with Ken White.

Update #3:  Good God, Ken did 14 posts on these guys.  Enjoy.

Mergers and Acquisitions for Entrepeneurs

The original purpose of this blog nine (eek!) years ago was to share lessons learned in my foray into entrepreneurship.   I still try to post some things on this topic, though we obviously have moved a bit away from this original concept.  But to this end, I wanted to link Walt Lipski's new small business M&A web site.  I think of Walt as a entrepreneur who happens now to do investment banking.   He was the one who helped me  ten years ago get into this business (the entire business acquisition and start-up process described here), and I still go to him from time to time for advice.  He is as straight forward and as trustworthy as anyone I have met in the M&A business.

Officious Insanity in Alabama

I got a crazy inquiry from the state of Alabama today.  I can't reproduce it without redacting a lot of confidential numbers and such, but essentially they said that we had originally filed to pay unemployment taxes in Alabama in March of 2009, but our first payroll report was not until April of 2009.  I said, sure, once we knew we were going to start business in Alabama, I applied for all my Alabama registrations at one time to make sure they were in place for the start of operations (this includes corporate registration with the secretary of state, request for a taxpayer ID number,  eGov account, state sales tax, state lodging tax, state boat rental tax, County sales tax, county boat rental tax, unemployment tax, and employee tax withholding).  I am sure I am forgetting a few, and to make things more fun, every state is different.  Tennessee, for example, has an entirely different set of tax types for businesses that I still do not fully understand.

Anyway, apparently most of these registrations must be obtained in advance, before starting business.  BUT, at least in Alabama, I was told today it is ILLEGAL (yes, they used that word) to register for the unemployment tax system before your first payroll in the state.  Apparently, one must register in arrears.  Because of this, I was told my account has to be shut down and I have to be issued a new account number  (which of course means more paperwork for me making the switch at my payroll company).   All of this over 4 years later because I did not have any payroll in one month and had the naive notion that it was better to have all my government wastepaper in place before I started operations.  I got the strong impression that this was the results of bureaucrats searching hard for something to keep themselves busy.


Vagrant Economy, Dodging Garnishments

I have zero desire to comment on Tawana Brawley, but this article raised an issue at the end that has always been interesting to me.  After literally decades of court action, Brawley finally had a garnishment order enforced on her paycheck to start making good on a defamation suit by the man she victimized with her false rape allegations  (Which in fact demonstrates another point I have made before -- you can win a judgement in court but that can often be less than half the battle.  It can be harder to get the judgement actually paid).

Anyway, apparently as soon as the garnishment order was applied by her employer, she quit the job without a forwarding address (the headline says "loses her job" as if she was fired but the text seems to say she quit, presumably to dodge the garnishment).  This happens in my business all the time.  On our 400+ employees, we probably get 5-10 new garnishment orders a year, often tax liens or child support payments.  These take a while to catch up with people, so while the orders may be years old, the employees might work for me 3-6 months before the order shows up in our office to enforce.  (For those who don't know, each state typically requires some sort of new employee notification by our business to the state, so they can run the employee's name and social security number against various data bases to generate these orders).

Once the first garnishment hits their paycheck, at least 80% quit immediately, moving on like Brawley to get another 6 months of work somewhere else before the garnishment presumably catches up to  them again.  I have no idea how large this group of job vagrants is that are constantly moving to dodge garnishments, but from our sample it is pretty large.

My Predicted Biggest Economic Story of 2013

Last year I predicted that the biggest economic story of 2013 would be the end of full-time work (due to Obamacare) in the retail service industry.  I seldom make predictions, but wrote that at the time because I was amazed that this shift to part time work was all we were talking about in the small business world, since for technical reasons in the law we had to have these changes in place in 2013, well before the 2014 start of the employer mandate.

The media world is finally catching up, particularly after recent jobs reports where the totality of net new job creation (and more) was in part time jobs.  Here is yet another story from the media finally noticing a business conversation that has been going on for almost a year:

Employers around the country, from fast-food franchises to colleges, have told NBC News that they will be cutting workers’ hours below 30 a week because they can’t afford to offer the health insurance mandated by the Affordable Care Act, also known as Obamacare.

“To tell somebody that you’ve got to decrease their hours because of a law passed in Washington is very frustrating to me,” said Loren Goodridge, who owns 21 Subway franchises, including a restaurant in Kennebunk. “I know the impact I’m having on some of my employees.”

Goodridge said he’s cutting the hours of 50 workers to no more than 29 a week so he won’t trigger the provision in the new health care law that requires employers to offer coverage to employees who work 30 hours or more per week. The provision takes effect in 16 months....

The White House dismisses such examples as "anecdotal." Jason Furman, chairman of the president’s Council of Economic Advisors, said, “We are seeing no systematic evidence that the Affordable Care Act is having an adverse impact on job growth or the number of hours employees are working. … [S]ince the ACA became law, nearly 90 percent of the gain in employment has been in full-time positions.”

But the president of an influential union that supports Obamacare said the White House is wrong.

"It IS happening," insisted Joseph Hansen, president of the United Food and Commercial Workers union, which has 1.2 million members.  "Wait a year. You'll see tremendous impact as workers have their hours reduced and their incomes reduced. The facts are already starting to show up. Their statistics, I think, are a little behind the time."

This has to be spin by the Obama Administration and not an honest belief.  There is no way they could have missed this:

In June, the household survey reported that part-time jobs soared by 360,000 to 28,059,000 – an all time record high. Full time jobs? Down 240,000.  And looking back at the entire year, so far in 2013, just 130K Full-Time Jobs have been added, offset by a whopping 557K Part-Time jobs.

I have written before that I think these changes are here to stay.  In some cases it is actually easier for businesses to stitch together full service coverage from part-time workers, as I discussed in this article at Forbes.

Thoughts on Online Reviews, Suburban Express, and Dennis Toeppen

Apparently Dennis Toeppen likes to sue the customers of his bus company Suburban Express  (here, and previously here) with as many as 125 suits just this year in small claims court, many aimed at stifling customer criticism of the company.

This is just incredible to me.  Last year we served about 2 million customers in the parks we operate (I am guessing that is a few more than Mr. Toeppen serves).  Over the last 10 years we have served about 17 million customers.  Do you know how many I have sued?  Zero.  Do you know how many I considered suing even for a microsecond?  Zero.  Unless a customer is 6 months late on a payment that equals a measurable percentage of annual revenues, you don't sue your customers.

I know online reviews can be a mixed bag, and some people's mental state or unreasonable expectations simply do not allow them to be fair.  Get over it -- take your ego out of the equation.  For God sakes, Casablanca has 39 1-star reviews  (I always thought John Scalzi had a healthy way of dealing with this, publishing his one-star Amazon reviews on his blog from time to time.)

We get negative review from time to time.  The vast majority, while perhaps overwrought from what some might feel was a small slight, have a core of truth.  We treat all these reviews at face value, we try to track down the customers to find out more about their experience, we give out refunds and gift certificates, and then we fix things.  Our biggest problem is that we hire what seem to be perfectly normal people who turn out to be arrogant and overly-officious when dealing with customers.  This tends to come out in the form of an irritating predilection to over-enforce every trivial rule until customers' vacations are ruined.  In other words, they seem to act like Mr. Toeppen and his employees.  Negative customer comments are a treasure, as I can't be in every campground every minute of the day, and these comments are often the canary in the coal mine, letting me know we have an employee or process or training problem.

Yes, in a few circumstances we get flat out dishonest comments.  One ex-employee was so upset at being terminated that he posed as a customer, posting fake reviews about how we employed a sexual predator in some campground.  Several review sites we work with, knowing that I don't make a habit of trying to take down negative reviews, were willing to take this one down once explained.  The other sites that by policy do not take down reviews allowed me to post a comment under the review, wherein I explained the situation, and gave my office phone number and email for anyone to call if they had any concerns about the campground either before or after the visit.

On Crazy Government Requests and Subsidizing Economists

There is some chance this may be apocryphal (I don't see any evidence the reporters confirmed this with the FDA), but as someone who has had government inspectors show up on our property demanding to see our license to sell eggs, it wouldn't surprise me if true.  I am bombarded with government insanity of this genre every day.

Apparently, a children's magician who was forced to obtain a government license for his stage rabbit is claiming

My USDA rabbit license requirement has taken another ridiculous twist. I just received an 8 page letter from the USDA, telling me that by July 29 I need to have in place a written disaster plan, detailing all the steps I would take to help get my rabbit through a disaster, such as a tornado, fire, flood, etc. They not only want to know how I will protect my rabbit during a disaster, but also what I will do after the disaster, to make sure my rabbit gets cared for properly.  I am not kidding–before the end of July I need to have this written rabbit disaster plan in place, or I am breaking the law.

The bizarre government requests like this one at least give us a laugh around here.  Less funny are the zillions of other pieces of waste paper that must be supplied to various agencies every month -- for example the 9 different permits which took 3 years to accumulate from Ventura County just to remove a dangerous and rotting deck  (not coincidentally, we are closing all our business in Ventura County at the end of this year).  Just in the last several days the Department of Labor asked for new, more onerous monthly reporting of headcounts and payroll by state (I declined) and the census bureau asked for quarterly rather than annual detailed reports of our lodging business (I declined).

One piece of advice I would give to harried small business people is to say "no" as often as possible to these data requests.  Obviously, you will need to turn in your monthly sales tax reports or you will be going to jail, but do you really need to feed the census?  The department of Commerce?  The Department of Agriculture?  The Labor Department?  Much of this data they gather is used either 1) to craft regulations that will just make your life as a business owner harder in the future or 2) to subsidize academics and economists in the form of free data.  As I told the Labor Department the other day, I am happy to fill out their survey if they want to pay me, say, $100 a month to compensate me for my time.  Otherwise they are just stealing free labor and proprietary data from me to help some grad student write her PHD or help some Wall Street hedge fund manager better call the market.

Trying to Make My Job Impossible

Walter Olson has an article on three recent 5-4 decisions where we narrowly avoided Supreme Court rulings that would have further separated liability as a business owner from actual bad actions.  This one in particular resonates with me:

Vance raised the question of who counts as a “supervisor” for purposes of harassment liability. Under existing Court precedent, employers are more or less automatically liable when a “supervisor” engages in harassment. When it’s a co-worker, they are still frequently liable – e.g., if they have received a complaint about it but not fixed things, or if they have negligently allowed the situation to develop – but liability isn’t as close to automatic. As all Justices recognized, however, the old model of a workplace with a military-like chain of command is fast giving way to newer models in which it is extremely hard to tell who is supervising whom, and in particular work orders (“Here, do this for me.”) can issue in multiple directions, not just from “up” to “down.” The four liberal justices were happy to blur the lines by saying that the more people are doing supervisor-like things, the more employees’ misconduct will be imputed automatically to the employer with no chance for it to raise counterarguments that it had acted properly. The majority led by Justice Alito more reasonably recognized that the ability to take tangible employment actions against a co-worker is a better test of “supervisor” than the ability to ask them to undertake some work responsibility.

Last year I got sucked into a lawsuit where an ex-employee, after her termination, sued our company for allegedly racist remarks another employee made about her husband.  The lawsuit was the first we ever heard about the alleged incident -- it was never reported to me or any other manager or employee, it was behavior that was banned by our policies and training, and we never (obviously) had a chance to make any corrections.  The litigant tried to argue that the person who made the alleged remarks was "supervisory" because she had sometimes been asked to draft a shift schedule for the manager.

We eventually had this dismissed, but it cost us $25,000 in legal fees to make it go away.   It was particularly frustrating given that if this had ever been raised as an issue to me, it would have been investigated and heads would have rolled if necessary.  This whole notion of having liability even when operating to the highest standards is just terrifying.  And four Supreme Court justices tried to make all this irrelevant, essentially linking my liability to the standards and intelligence of whoever is my weakest employee.

Discrimination: The All-Purpose Accusation

Today I got three letters with a subject line and/or opening sentence accusing me of discrimination.  Here are the three complaints:

  1. A camper did not get the $8 senior discount to which he was entitled, in large part because my new employee did not recognize his very old-style government recreation access card (I processed a refund immediately).
  2. A 20-year-old accused me of age discrimination when we told her she was too young to work in a store, despite the fact our manager explained patiently several times that we are prevented by law from hiring minors to sell alcoholic beverages
  3. A camper accused me of discrimination because we would not let him occupy a site clearly marked as having been reserved by another camper (who had not yet arrived).  This obviously is odd -- I am discriminating against people without reservations for reserved sites?

None of these folks appear to be a part of a legally protected group, nor did they site any treatment they received that was different from similarly situated people at the same location.  They just didn't like a particular policy and wanted to complain, but have been taught by society that the best way to get attention is to claim DISCRIMINATION -- sort of like a witchcraft accusation in the 17th century.

All of this is to answer the question of why someone like myself who has vocally supported gays and gay marriage for decades would oppose legislation naming homosexuals as another government-protected class.  I have defended openly gay employees of mine against ignorant accusations that their homosexuality somehow posed dangers to the kids camping at the park they helped to maintain.   But discrimination law makes me crazy.   Think of it this way -- bad things happen to everyone from time to time.  I am a white male, but despite this status I have gotten turned down for jobs, have been laid off from jobs, and frequently have received bad, even rude customer service.  Everybody does.     Discrimination law often takes these typical day-to-day indignities we all face and converts them, literally, into a Federal case.

Geometrically Proliferating License Requirements Are Driving Me Nuts

I frequently write here that almost never does a month go by, even in a state where I have operated for over 10 years, that I don't discover yet another tax I owe or license I must obtain.

Today, I got a note from the state of Arizona that we must license our two septic pumping trucks with the state.  Already, these are licensed each year with the County in which they operate, a process that includes a fee (of course) and an inspection by the County.  Now I have to fill out a bunch of forms to send the exact same information to the state, with yet another fee (of course) and the need for another inspection each year by the County.  I asked if my current County license would suffice to cover the inspection, and I was told no.  So, to operate this truck in Arizona I must

  • Fill out forms and send fee to County
  • Get inspected by County
  • Fill out forms with the same information as already sent to County and send fee to State
  • Get inspected yet again by County, but this time on the state form
  • Repeat every year

It is interesting to note that the state does nothing except file my form and bank the fee.  This is just another money and power grab -- more cash for the bureaucracy and yet another useless task (filing these forms and sending out compliance letters, etc) to justify their headcount.  Then the next time someone suggests "brutal cuts" to state budgets, everyone can scream that the rivers will run brown with sewage because the state won't have the people to collect all the paperwork that duplicates what the County already collects.

Just after wasting an hour or two of my time with this (and sending it to my managers to waste days of their time), I got a happy note from the US Census Bureau that I had been selected to file quarterly reports about my business (they have a special survey of the lodging business -- I presume they do this for other industries as well).  I wrote back:

To Whom It May Concern:

I am not sure what we have done wrong to be punished with this extra workload, but unless I hear back from you that this report is required of us by law under threat of some sort of dire consequence, we will not be filling it out.

We are a small company and only I, the President, am equipped to fill out this form.  We already fill out your annual survey and it is incredibly time-consuming for us, for it asks for data in ways we do not normally track it.  Further, it asks for our P&L in a form that does not match GAAP accounting, which causes all sorts of difficulties in completing it.  And we don’t normally compile results on a quarterly basis, only annual, so this report would be particularly onerous.  We actually have to run a business here.

Finally, I might add, I am loathe to send the government yet more data since this data will likely just be used as a justification to raise my taxes or increase our regulatory burden.

So no thanks.

PS- let's just assume the "you have a crappy job" jokes have already been made and move forward from there in the comments.

SBA Has Killed Innovation in Small Business Lending

I got a note from some advocacy group asking me to lend my voice to stopping some cut in SBA lending.  This is what they linked to:

A federal program designed to help small businesses with commercial real estate mortgages is coming to an end this week.

The U.S. Small Business Administration’s 504 loan refinancing program, which expires Thursday, allowed companies to refinance real estate and equipment loans.

SBA 504 loans for new purchases are still available.

I had a couple of thoughts

  • Why do we need a government program for commercial real estate and equipment financing?  These are the only two sectors of small business lending that are robust right now.  I get 3 calls a week trying to give me equipment financing.
  • The SBA has already pretty much killed  small business cash flow lending.  Basically, if you want a loan secured only by cash flow, the SBA is your only choice.  Why would a bank make such a loan privately when they can make it and get an SBA gaurantee paid for by the client?   As a result, no bank even has a desk for non-SBA lending, and since SBA lending is hard, many don't have an SBA desk any more.

I can't prove it, but I am convinced the SBA has killed innovation in the private lending market to small businesses.

Update:  Another thought - the SBA is the barely-useful quid pro quo cited by statists from all the fantastically expensive and time-consuming regulation that gets dumped on small businesses.  Well, I don't want it.  I don't want to give statists any cover that this is somehow an equal bargain.  It's a quarter flipped up on one side of the scale to balance ten tons of bullshit on the other side.  It's like sending flowers to someone you raped.

Bank Advice

This is a note for small businesses that deposit a lot of cash and small checks, perhaps from a retail operation.  We have found that the fees of the large banks are simply awful for retail deposit accounts.  Bank of America, Wells Fargo, US Bank, and Zions are all fairly large banks who have raised fees as high as $100+ a month just for a checking account into which we make a weekly deposit of cash and small checks. In particular, US Bank has taken over two of our small deposit banks recently, and raised our fee from $7 on one account to over $120 last month.

Even if your main banking relationship is with someone else, look for a small local bank or credit union for deposit accounts.  I have a number of such small banks around the country that charge us zero a month for our deposit account, and at worst up to $10.  Anything more, and you can probably do better.

When Julia Tried To Start A Small Business

I already had this column at Forbes in the works, but I could not resist switching the protagonist from myself to Obama's Julia.  Every tax, license, and story here are real ones I have experienced in my business.  Here is just a small sample:

So twelve registration numbers and 12 monthly/quarterly/yearly reports later, surely Julia has fulfilled all her obligations to the government.  Unfortunately, no, because she has not even begun to address licensing issues.  To begin, the County will require that she get an occupancy permit for her campground, which must be renewed annually.  This seemed surprisingly easy, until someone from the County noticed she had removed an old rotting wooden deck from the back of her store that had been a safety issue and an eyesore.   It turns out she was in violation of County law because she did not get a removal permit first.  She was required to get a permit retroactively, which eventually required payments to seven different County agencies and at one point required, for a reason she never understood, the collection and testing of a soil sample.

Because she will be selling packaged foods in her store (e.g. chips and pop-tarts), she also has to get a health department license and inspection.  She had originally intended to keep some fresh-brewed coffee for customers in the store, but it turned out that required a higher-level health license and eight hours training in food handling.  She might have been willing to pursue it, but the inspector told her that to make coffee, she would need to install a three-basin stainless steel wash-up sink plus a separate mop sink in her store, and she decided that coffee would have to wait.

Once through the general health licensing process, she then needed to obtain licenses for individual products.  She wanted to sell aspirin, so she had to get a state over-the counter drug sale license.  She knew that customers would want cigarettes, so she had to obtain a tobacco sales license.  One day as she was setting up, a state inspector noticed she had a carton of eggs in her cooler, and notified her she needed  a state license to sell eggs  (as Dave Barry would say, I am not making this up).  And then there was the problem of beer.

Markets vs. Regulation

My Forbes article is up this week and uses my company's vendors to compare the power of markets vs. government regulation.  A small excerpt:

I am assuming that many readers will have already spotted what these three vendors have in common:  all are either highly-regulated government-enforced monopolies (in the case of liquor wholesaling and electric power) or government agencies themselves.   As a consumer, I get the worst deal from my vendors in direct proportion to how heavily regulated they are.

Where Have All The Small Businesses Gone?

My column this week in Forbes is about the declining rate of entrepreneurship and startups in the US.

A recent study by the Beauru of Labor Statistics confirmed a potentially disturbing trend — that the number of new startup businesses in the United States has declined since 2006, and the number of jobs created by those startups has been in decline for over a decade.

This is not just a result of the recent recession.  These declines pre-date the current recession, and besides, startup activity has always held up well in past recessions as unemployed workers try entrepreneurship as a path back to prosperity.

There are likely a myriad of economic and demographic reasons for this decline, but certainly the growth of government power in the economy must be seen as a major contributor.  Government intervention in commerce nearly always favors large companies over small, even if that was not its specific intent, for a couple of reasons:

  1. Increasingly complex and pervasive regulations on everything from labor practices to salt content tend to add a compliance cost burden that is more easily born by larger companies
  2. Large, entrenched competitors are becoming more facile at manipulating government to create barriers to competition from upstart companies with different business models.

The role of government in throttling entrepreneurship has been evident for years, in the enormous differentials between US and European business startup rates.  Historically, the US has had entrepeneurship rates 3-4 times higher than in the large European industrial countries, due in large part to the barriers these latter countries place in the way of business creation.  But the US, with its current bi-partisan drive towards a corporate state, may soon be engaged in a race to the bottom with these other countries.

I go on to discuss each of these two points in more depth.

Bullet Dodged

It looks like the simply awful 1099 provision from Obamacare will be repealed.