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Business Value Does NOT Equal Price

When you started your business, you were more likely paying attention to the value of your product and services to command a good price. At the same time, you probably were not focusing on what would add value to the business itself.

When it comes time to monetize your business, like when you want to sell off equity or find a buyer; that’s when value becomes a serious criteria in your decision process. That’s because value plays a big part in the price anyone will pay for an ownership position in your company. But as Chris Mellon of Delphi Valuations cautioned when I interviewed him on Exit This Way: “Business value does not equal price”.

Value is commonly discussed as if you’ll execute a cash transaction. But other options such as stock transfers, notes, or earn outs with contingencies, are often involved.

A business appraiser does not know the terms of the deal that will determine the price a buyer will pay for your business. Your valuation expert will look at the overall market assuming a cash transaction to come to a value or rather a range of values. It’s called a continuum of value. For example, a business may be worth somewhere between $7M and $13M and that range will vary for different purposes. Fair Market Value (Fair Value) is somewhere in between.

Why have your business valued?

Maybe you will get a business appraisal for compliance such as in financial reporting or litigation even in shareholder disputes or a divorce; or strategic planning, such as exit planning; or for an acquisition or sale.

Business and personal situations vary. You want to consider the value of your business in your overall decision making process, as a business owner but also in terms of its value in your portfolio.

Then there are also the tax implications for various decisions that can prompt getting a valuation of your business. Three common tax reasons that can drive a valuation are to: assess gift taxes, determine estate taxes, or when you convert a C corporation to an S corporation.

When should you have your business valued?

If you are starting your business on the fast-track to an exit (a targeted acquisition or an IPO), you will want to have a valuation performed early as a benchmark.

Beyond the startup phase, most businesses will benefit from having a valuation performed regularly, even yearly in the 3-5 years leading up to your exit transaction. The valuation exercise will reveal enhancements, improvements, growth, and metrics which will demonstrate a pattern of building business value. In turn that sequence of valuations will give a seller significant leverage in any negotiations in any 3rd party transaction. Businesses put themselves at a disadvantage if they pinch pennies and expect to only go through valuation once, when they are already talking to their prospective buyer.

Building business value goes hand in glove with exit planning to achieve your objectives in the business and beyond. Valuation is an exercise to measure the return on your efforts.

Five Steps to Creating Business Value

Lisa Magloff’s article in Small Business Chron, How do I Create Business Value? is a good introduction to the concept of what constitutes value in your business. As she says, ‘It’s more than simply economic value.’ Business value comes from both tangible and intangible assets. To add business value, Magloff outlines five steps. Here are her five steps and my comments.

  1. Make and keep realistic promises on service, quality and delivery.
    This is a great example of intangible business value. Do it well and it will measurably add value to your business. In addition it will result in higher standards of performance and productivity which will produce higher profits.  But if you don’t keep these promises to employees, vendors or customers, that intangible value can slide quickly.
  2. Use information technology to create business value.
    Business owners who grew up with technology see how obvious this is. Owners in fields where technology was not available when they built their business can’t see the value yet, because they still need to invest in the technology to make their business viable for the next generation. Technology adds both tangible and intangible value to the business. It can speed up and simplify transactions, and help the business improve overall results.
  3. Develop and encourage effective decision making practices by employees
    Training and support to allow employees to take control of day-to-day decisions on their projects, helps retain them, increases their value to the business, strengthens the depth of management, and distributes responsibility throughout the organization. It prepares employees for advancement and even succession. It also frees up the owner/entrepreneur for more strategic challenges and opportunities while demonstrating that the value of the business is in the business, not in the owner.
  4. Strengthen your core competencies by investing in development and spending more time and money on those areas that are most important to your long-term success and growth.
    To leverage the full value of your business for an acquisition or sale opportunity, it is essential to be aware of your unique strengths to position every asset you have for optimum value. If your biggest asset is your team, invest in them so they committed to stay. If your biggest asset is the process to develop and launch new products ahead of the competition, invest in that, protect it and highlight the value you can monetize just from that.
  5. Increase your business value by building capability within your business
    Capacity building can be achieved in many ways. It depends on your objective and long term goals. Adding employees is one way, but that’s not just about hiring. Once you add employees, you need to nurture them with training and knowledge to cultivate innovation to continually add value to the business. Capacity building can be about your brand and market perception of your value. It can also be about the right technology or adding technology to support increased capacity to serve the market. Every one of these approaches to build capacity sets up your business to grow, increase revenue, and add value to the bottom-line.

Creating business value is a process. Systematically building both tangible and intangible value will position you better for a sale or acquisition on your terms, on your timeline.

5 Ds of Contingency Planning Add Value to Your Business and Your Exit Strategy

Contingency Planning is one of those areas most business owners would rather avoid and not think about at all. Who wants to think about worst case What-If scenarios? However, what if you were to develop your contingency plans to address the worst problem or tragedy AND DOCUMENT IT. What is the immediate impact? Those documented plans immediately add value to your business. They allow you to preserve and enhance the value of your business, add security, and streamline ongoing viability, in the face of major issues.

To build a successful business that can endure, along with growing the top line, you must also plan for and have contingencies laid out for all 5 Ds that can put the entire enterprise at risk. The 5 Ds are:

  • Death
  • Disability
  • Divorce
  • Departure
  • Disagreement

Death

It’s unavoidable. Rather than deny it, think about the consequences to the business, your team, your stakeholders and your family. You can use a range of insurance products to mitigate the risks of your death while leading your organization. Establish who pays for the various insurance products, and who owns them early. But you must also think through how to structure your buy/sell agreement and who will run the business without you. How will the business continue? Have you written down the location for all major documents and contracts? Who knows where your passwords are stored or the lock box key or the safe combination?

In addition, it’s important to keep you and your business legally separate – separate legal entities. So this discussion may include both your corporate attorney, your estate attorney and your insurance broker at the core.

Disability

Before age 65, we are all more likely to need the benefits of disability insurance than life insurance. Long before you or your executive team might need to access it, define the parameters, protection and obligations of your company disability policy. Decide early what your company must cover for disability and who is eligible. You want to avoid a knee-jerk reaction to deciding between business survival and paying an ill or handicapped owner or executive.

Director & Officer insurance is critical to securing the future of the company if something untoward were to happen to you or other board members. It is expensive but not as expensive as losing both your company and your livelihood.

Be sure you establish an employee benefits program that will handle any founder’s death, disability or retirement – even if it appears likely not to happen for another 10 years.

Divorce

The costs and risks associated with building a business are high. Marriages don’t always survive. But you don’t want the demise of your (or any founder or partner’s) marriage to destroy or handicap the business too. Divorce can also be a business partnership split, which feels like a marital divorce. It is best to define your policy on share ownership, value and votes in the bylaws from the outset.

Plan for who retains ownership in the case of a breakaway, and who gets bought out/paid off. Just like a pre-nuptial agreement, lay out a memorandum of understanding before you open your doors and bring in your first sale for each scenario.

Departure

Partners have different timelines in mind for moving on to the next venture or retiring. Where does the money come from to pay off the departing partner(s)? Who will do the work to ensure business continuity? How do fairly compensate or buy out a departing partner without handicapping the business to do so? How do you make a departure amicable or avoid contention? Do you have a partners’ contract of commitment, requirements, and constraints?

Planning for your transition to reinvention takes planning from the outset. Identify all partners/founders criteria and timelines early. Document the continuity plan for the business in the case of each one moving on.

Disagreement

Founders and Partners in a business are like spouses in a marriage. They don’t agree on everything, nor do they need to for the business to thrive. However, major unforeseen disagreements can cause rifts in the organization that may harm the company, team, even client relationships. Spelling out a policy and procedures early, before there’s an issue, to work through critical disagreements on such decisions as: reinvesting for growth or taking dividends, how to structure benefits or taxes, when to sell, which buyer option to pursue, etc.; provides expectations and structure to be able to address and resolve these issues effectively.

No one ever wants to face death, divorce, disability, departure or disagreement as a possible risk to their business when everything is going well. Contingency planning is about making strategic decisions for eventualities that may never happen, but if they do, you are prepared. You can’t buy a house or a car without insurance coverage. Developing a contingency plan for all 5 Ds takes time. Document each element as the policy is decided and executed. That’s how you can monetize the policy and reduce the risk to business continuity when faced with any of these 5 Ds.

Key Defects in Your Business (Oversights) Part 3

The problems, excuses and barriers to achieving big hairy audacious goals boil down to three underlying defects. These three primary reasons are broad umbrellas covering dozens of other reasons.

  1. Self-sabotage
  2. No strategic focus
  3. Risk averse

We complete the set here with the third reason.

 Risk Averse

Everyone who starts a business, launches a product, or opens a storefront takes a risk. It’s an inherent part of business that we take risks. So owners convince themselves that because they take the risk of being in business that they are risk-takers. That conclusion prevents consideration and recognition of all the myriad of fears, challenges, responsibilities and opportunities that they face and never resolve. Risk aversion can take many forms that are deeply rooted in our core values and our life experiences to date. For example:

  1. Afraid of failure. Fear of failure haunts many owners whose businesses – from the outside – appear to be thriving. Some fear of failure can be good – if it drives you to deliver, get resourceful and hit your numbers. But when fear of failure is a symptom of being afraid to take risks, that’s when fear of failure turns into a self-fulfilling prophesy. When owners don’t even recognize it, they make decisions based on the wrong reasons (e.g., what we did last year) and the wrong inputs (e.g., outdated research), because they’re still asking the safe wrong questions to justify their cautious decisions. (e.g., How can we get our clients to buy more replacements? vs. What can we do to provide a 100% solution for the client?)
  2. Afraid of the embarrassment of failure. When owners announce and broadcast their launch, their goal or their ambition for their business, their excitement and drive can boost the business to their first milestones. As more and more people start watching (family, friends, peers, competitors, vendors, clients, prospects, investors), pressure to deliver can get in the way of hitting the next milestones. Fear of the embarrassment of failure in the eyes of these people who trusted and respected the owners can be harder to face than an actual failure. So much so, that owners will do many things to avoid the perceived or potential shame. They’ll work harder at avoiding this embarrassment than at avoiding failure. In the extreme, they are paralyzed from setting, let alone achieving, real goals.
  3. Afraid of success. Yes, fear of success is a problem of being risk averse too. This too is a mindset issue to break through. But if it’s a blind spot owners continue to overlook, it’s a symptom of being afraid to take the risks that could result in really big successes. It’s also a symptom of self-sabotage. Fear of success, like fear of failure, can be a result of being risk averse.
  4. Afraid of wealth. Surprisingly, many people create amazing businesses of great value to their clients, with no intention or conscious effort to make money. They don’t want to be burdened by the responsibilities of wealth –  in the business, in the community or maybe in their family. They just want to do their thing so they find ways to avoid structuring the business as a business or grow the business to its full potential, thus bypassing the opportunity for wealth.
  5. Afraid of trying for big goals. This can be tied to fear of failure, fear of success, or fear of the unknown. It may be tied to past experiences of success, or striving for big goals. But if the owner settles for small goals to avoid the risk of not achieving big goals, they are shortchanging the whole business.
  6. Fixated on and paralyzed by money or lack of cash flow. Money is a tool and a measure in business. It’s a medium of exchange that’s widely accepted and understood. But many owners are consumed by the cash flow statement and don’t share concerns or tradeoffs to be made with the team. That type of extreme control and privacy can restrict choices and hinder growth. To grow a business or to achieve goals, owners have to be willing to take reasonable risks and trust the team they’ve built to support goals and growth.
  7. Refuse to ask for help or listen to advice from an expert advisor or a board of directors.Too many entrepreneurs define themselves as the business and if they ask for help, then they must be a failure for “not knowing it all’ already! Stubborn, willful controlling owners can’t hear that people around them sincerely want to help, and want them to succeed. Truly the adage applies to business owners as well: “When the student is ready, the teacher appears.”
  8. Refuse to be accountable. Many people start a business with the mistaken idea they won’t have a boss any more to tell them what to do, how to do it or when. owners who rebel against the discipline of accountability can’t build a business of any size or success. In business, to thrive and prosper, you must recognize and accept that you are always accountable to your customers. And if you want the business to produce financial independence, you must keep your financial records in a very systematic, organized way, following all the reporting rules. Rebelling against accountability is playing at business, which is another way of murdering your business.
  9. Avoid making decisions. Owners who avoid making decisions, defer decisions, or allow the group to always take a consensus, are risking the direction and drive to achieve their goals. In their attempt to avoid confrontation, avoid risks, and minimize personal risks, they are putting the business at greater risk.
  10. Afraid to take initiatives, or try a different approach. There’s a difference between leadership and management. A good manager does not always make a great leader. The organization needs both. Great leaders must be willing to take chances in propelling the business ahead of the competition, to take the steps that lead to fulfilling their vision – even if it’s a risk. An owners who is resistant to change, or avoids trying something new, is setting up the business to be bought out.
  11. Don’t know what they don’t know and are afraid to ask/find out what they’re missing. The best owners and entrepreneurs are perpetual students. Owners who deny their blind spots and don’t reach up and ask for help are not being responsible to their business. They can’t see that this face-saving mindset is crippling their businesses for no good reason. What they don’t realize is that contrary to their risk-averse beliefs, they will actually elevate themselves in the eyes of all their stakeholders when they ask for help and learn from experts to fill in the gaps.
  12. Get paralyzed by guilt and embarrassment over their indecision, or not taking action. This is another one of those circuitous arguments. Being risk averse, often owners are indecisive, doubtful and reluctant to take action. This paralysis creates guilt, awkwardness and shame, which perpetuates inaction. It’s all because they don’t recognize their deep aversion to risk.
  13. Don’t know what they don’t know and deny it. Insisting on keeping blinders on and overlooking what they don’t know handicaps the whole business. When you do this out of ignorance the first time, you learn and grow and the business benefits. When you dig in your heels and deny it, you are increasing the risk of murdering your business.

“You’ve got to jump off cliffs all the time
and
build your wings on the way down.”

Ray Bradbury: American author

So if it is important for owners to have an entrepreneurial mindset, building their business and their team around their strengths.

Key Defects in Your Business (Oversights) Part 2

The problems, excuses and barriers to achieving big hairy audacious goals boil down to three underlying defects. Dozens of other reasons can be collected under the umbrella of these three primary reasons.

  1. Self-sabotage
  2. No strategic focus
  3. Risk averse

We continue here with the second reason.

No Strategic Focus

Ninety-five percent of all owners don’t have a strategic focus for their business. They don’t know what they should be doing as the leader of their enterprise. They are more than busy, scrambling hand to mouth or from fire to fire, with no time for anything more. They believe there’s no time left for planning, strategy, scheduling, budgeting, forecasting, contingency planning or succession planning – never mind exit planning. Their priority is always tactics and today; the future can wait. For example:

  1. They don’t know what it will take or cost them to achieve their goals. They are running blind. Either they don’t know it or they avoid thinking about it so they don’t have to see their risky behavior.
  2. They are still stuck being the technician, the expert, the professional in their business. That’s a great place to start your business but based on that paradigm, you can’t build a business that will produce the wealth and financial freedom you need in the long run.
  3. They are very good at what they do but never took time to set up the business to support that expertise/offering. When your time is consumed in delivering product or services and there’s no time to structure the business to run independently, you haven’t built a business, you’ve simply hired yourself for your technical prowess. Without a strategic focus and a systematic plan to work yourself out of a job, you can never retire and you can never maximize the valuation of the business.
  4. They have no clear focus on what they should be doing. They are comfortable in the everyday “busy-ness” working in the business. Their effort has no larger, longer-term objective.
  5. They have no clear focus of what they are driving the business to achieve. When you don’t have a long-term goal, you will never know when you get there. And you can easily drift in any direction that a “new shiny object” takes you.
  6. Even if they have an overarching goal stated, it’s not broken down to meaningful and achievable milestone goals. Thus, no one takes action to achieve them. owners have the business in their head. Their team doesn’t. So even if they share their big hairy audacious goals with their team, unless they can break it down to what that means for each department and each team member, these people don’t know what action to take to achieve the owner’s goal, because it wasn’t explained in terms on which they could take direct action. Therefore, nothing happens.
  7. They have no tracking and measuring in place. Without tracking and measuring tools to monitor results, the CEO has no information on which to make decisions, develop a strategy or set even bigger goals. Without the reports and data, no decisions are made and no actions are taken.
  8. They don’t have metrics or key performance indicators in place. Every business has metrics and key performance indicators. But most owners don’t know what they should be or even ask for them. Without a dashboard of key performance indicators to focus on, the owner is left blind in making decisions to move ahead.
  9. They still run their business as a hobby, not a business. When this is the case, the marketplace treats them as a hobby business too. Sadly, too many owners excel at creating and selling their products but neglect building out the foundation for their business. By not focusing on the business as a business, they stumble forward by luck with no plan, constraining growth and minimizing the company’s value.
  10. They never accepted the mantle of ownership and leadership. Entrepreneurs who won’t lead, should not claim the title of owner of a business. Even with the best product in their market and great team players, they can’t maximize profits because they lack the business acumen to grow or sell the business. Their narrow focus prevents them from achieving the financial freedom they wanted their business to produce.
  11. They lack, or never learned, the skill sets required for leadership and team building. Not everyone is a born leader. Not everyone has an aptitude to learn these key social skills. Owners who are not interested in developing key leadership and team building skills struggle in the role, resisting what it takes to excel.

It’s natural to focus on what you know and what you do best. However, it’s irresponsible for so many owners to avoid, sidestep and procrastinate about laying a business foundation and a strategic focus that could totally prevent their demise.

“You must remain focused on
your journey to greatness.”
— Les Brown:a top Motivational Speaker and Best-Selling Author

Key Defects in Your Business (Oversights) Part 1

Clearly, 95% of all business owners (large corporations, small businesses, even family businesses) are still in denial of why their businesses are not growing explosively, achieving the goals they laid out in their business plans. Otherwise, they would have fixed these handicaps long ago.

I want to suggest that all the problems, excuses and barriers to achieving big hairy audacious goals boil down to three underlying defects in their thinking.

When you take ownership of these key defects in your mindset and take action to banish them from your business, only then can you break through to grow your business faster (and easier) than you ever thought possible. These defects are a minefield for all size businesses.

These are the same gaps in mindset, skill set and knowledge that ultra-wealthy owners experience in their businesses. The difference is that to join the 5 percent-ers, they were willing to take action to purge these defects in their business in order to achieve their wealth and abundance.

Three Crippling Reasons

There are dozens of reasons why owners don’t achieve the goals they set for their business. I only want to discuss the overarching problems that prevent the majority of owners from building the business they wanted to lead, businesses that would provide financial independence and the lifestyle of their dreams.

Dozens of other reasons can be collected under the umbrella of these three primary reasons.

  1. Self-sabotage
  2. No strategic focus
  3. Risk averse

Some of you will immediately say, “but that’s not me, I don’t have that problem.”

Let’s explore each one in more detail to see if any of these are relevant to why you are not on course to achieve the goals and growth needed to make a planned, financially independent exit from your business. Each one is a flag (some obvious, some subtle) that you are murdering your business.

  1. Self-sabotage

Owners frequently self-sabotage any lofty dreams and goals they had when they started the business. It’s certainly not intentional and sometimes not even conscious. They hurt themselves and the business in a myriad of big and small ways. If it was only one little thing, their strengths would carry them through to lofty heights. Instead, it’s a range of self-defeating beliefs and habits, one on top of another, that bring them down. A few of them are: attitudes, assumptions, ego, capacity, strengths, resources and timing.

In addition, what allows owners to perpetuate this self-sabotage is that every one of these beliefs is a blind spot. They don’t see it. Or if they do see it, they are good at denying that it’s a problem. For example:

They think it takes great luck to achieve big goals. This is a nice safe excuse to avoid looking in the mirror. Owners who believe this self-talk aren’t serious about doing what it takes to achieve the profitability that will provide their financial independence and true wealth.

They try to go it alone. In my book, this is the most crippling sabotage problem and the easiest to fix. Owners who try to do everything themselves, wear every hat in the business and control everything, limit the business potential simply by their own capacity and the hours in the day. They persist in taking the hardest road possible in the mistaken belief that that’s the role of the entrepreneur.

They are rigidly settled in current routines. Have they ever heard of the definition of insanity?

“If you always do what you always did, you’ll always get what you always got.” — High-tech variation

You can’t grow a business to get the returns you seek by perpetuating a business model or systems that you learned 10 or 20 years ago or in a different industry. Being close-minded cripples any business. Business vitality and inspiration starts with the owner. The owner’s indifferent attitude and assumptions about what can be done, how to get things done, and their lassitude about what it will take to achieve goals and success can wipe out all opportunities for growth and revenues.

They don’t know how to plan for and implement a plan for goal achievement. Owners who leap into business without a plan have no direction, no preparation, no forecast, and no expectations. They launch like a ship without a rudder. They can’t steer. And if they could steer, they don’t know where to point their ship because they don’t have a goal to aim for. Arrogance and ego can help them bluff for a while. But soon, without planning and systems implementation to achieve clear goals, the business can turn to dust or disappear. The market will move on.

They burn out, go broke or give up before building a foundation to support the business of their dreams. Most owners launch their business with all the passion, commitment, and drive they possess. After the honeymoon, they get consumed in all the work – often more work than they ever thought possible – but don’t see the rewards.

Because of sheer love of the business and dedication, this can go on a long while. Without laying a business foundation under every element of the business, the business is coming up short of their expectations and they get disheartened. When they are too tired, too strapped for cash, have a really bad day or their health fails, they want to quit instantly. They haven’t set the business up as a business. These owners are still integrally involved in everyday operations – they’re a prisoner of the business. They haven’t built up cash or equity in the business. They haven’t cleaned up or documented systems in the business. As a result, they’ve put themselves in the worst possible position to sell their business on the least appealing terms.

They lack confidence in their ability to succeed. They are unsure that all their efforts will pay off. Self-doubt is a poison that seeps into every decision, every action and every dream. When owenrs perpetuate a lack of confidence it permeates the entire organization, setting up a self-fulfilling prophesy of failure.

Regardless of how self-sabotage presents itself in your business; it boils down to a lack of absolute clarity and commitment to your goals. You’re just going through the motions.

“The critical ingredient is getting off your butt and doing something. It’s as simple as that. A lot of people have ideas, but there are few who decide to do something about them now. Not tomorrow. Not next week. But today. The true entrepreneur is a doer, not a dreamer.”
Nolan Bushnell: Founder of Atari and Chuck E. Cheese’s

Three Fatal Flaws Business Owners Don’t Know They Make

Three Fatal Flaws

Most entrepreneurs have blind spots. Before we even address the core mistakes entrepreneurs consciously make, I want to expose the three fundamental flaws most business owners don’t even know they are making. They are:

  1. Weak Plan
  2. Weak Team
  3. No Communication

Indeed, there are other factors. We’re focusing on the three most widespread. And they are connected. How well, or how poorly, you do any of these feeds the other two.

These three flaws are almost universal in businesses where owners are consumed with crisis management and operational details on a daily basis. These flaws are so prevalent because of the blind spots we’ll address in a later post.

Weak Plan

Talented, educated people with 10-20 years industry experience leap into starting their own business, creating a product, or hanging out their shingle in the previously disproven belief “if I build it, they will come.

In their past lives, they never had to prepare product plans, project plans, marketing campaigns, cost and sales projections for the company’s product or service. They had a team and resources in the company to do the research and prepare these plans.

In their own business, they have a choice. Either shoulder all these jobs/responsibilities themselves and slow down the release of their product or hire a team to help.

The Opportunist, without planning beyond a conversation or back-of-the-envelope bullet list:

  • Boldly leaps into building product
  • Confidently closes sales
  • Maybe racks up huge credit card bills to finance the company with no short-term or long-term plan determining:
    • Who or what constitutes their market
    • The size of the market
    • The revenue potential for the company
    • Their break-even point or
    • Any other key performance indicator

This is the No. 1 flaw in the foundation of more than 90% of all businesses (not just startups or small businesses). If this describes your business, you are not alone.

Weak Team

Far too often, that same Opportunist who’s reaching for the brass ring is the owner who leaps into his or her business willing to do everything, wear every hat, with a solid “do whatever it takes” attitude to make the business a success.

In principle, that is a necessary commitment to ensure the business will succeed. However, there’s a secret these entrepreneurs learn fast or the hard way. I want you to learn it fast.

The sooner and faster you ask for help and
surround yourself with experts
so you can focus on what you do best,
the farther you will take your business.

That’s a key element to long-term goal achievement and every success in your business and beyond.

Very often, the entrepreneur who gets overwhelmed and recognizes it, will proactively hire a team. But there’s still a problem, it’s still the wrong team.

They need a team they can delegate pieces of the business to who will “own” the job and get things done, and not require close supervision and training. This applies equally to your:

  • webmaster
  • graphic designer
  • office manager

as it does to your:

  • Design engineer
  • Sales manager
  • Marketing manager
  • Attorney
  • Tax advisor
  • Experts on your Board of Directors

That is,

you need to surround yourself
with experts – not subordinates.

Good owners lead their teams well. A great business owner inspires team members to lead themselves to excellence.

Other entrepreneurs, in the false belief that they are being responsible and frugal, don’t hire anyone. They don’t ask for help and drag the business down by getting no help, or relying completely on books and courses, attempting to become a master of all things in their business.

This is the No. 2 flaw in the foundation of more than 90% of all businesses.

No Communications

A lack of communication can be a serious obstacle to taking the business all the way. It can be a hidden flaw owners don’t even know they have.

Most companies fumble communications because most entrepreneurs do not have a background or focus on communications. Communication seems trivial and not the best use of the owner/engineer/inventor’s time. Entrepreneur/owners are so consumed with the business, holding the entire business in their head, that even when they do speak, they know all the implications and facets of what they are saying – but no one else does. They know what they’re talking about but their various audiences don’t!

Because they have no communication skills, never developed a communications plan and do not implement communication procedures, it’s a problem for everyone else. The problem is that no one else has any context for any announcement, decision, plan or offer the owner does remember to share.

Admittedly, most entrepreneurs are so busy in the business that they feel they can’t afford to take “time off” to document everything about the business, never mind debrief the team after a major milestone or client success. Lack of good communication creates the following risks:

  1. It creates a void between the entrepreneur and everyone around them (staff, advisors, investors, vendors, clients, media, Board of Directors). That void opens the opportunity for misunderstandings, miscommunications and totally preventable problems.
  2. This lack of communication to/with any stakeholders in any form, puts the entire business at risk until communications systems are fully implemented. This is critical, even if the CEO does not recognize it, because if that same brilliant CEO who carries the business in his or her head were incapacitated for any reason, or unreachable for any reason, no one else in the business has enough information to make a decision, take action or solve a problem.
  3. When the entrepreneur insists on tight control of intellectual property, financial data, and how to run the business, he or she actually restricts growth and reduces the market value potential of the business. It’s the exact opposite of what the entrepreneur expressly set out to do!

This is the No. 3 flaw in the foundation of more than 90% of all businesses.

Moreover, there’s actually a fourth flaw.

Develop Only an Income Plan

Most people instinctively start and launch their business as fast as they can to get revenue in the door. They implicitly understand the principle: “Nothing happens until you sell something.”

They get so busy in the business making money; they don’t develop a financial plan, living out of the checkbook. A few years down the road, they are in the same place, making good money (income), but working harder than ever, not getting ahead, with no end in sight.

That’s because their unconscious business model is based on an income plan, not a wealth plan. They are still running their finances on a cash flow statement (maybe even out of the checkbook) and never planned for or implemented any strategies to put a wealth plan into motion.

It’s the single biggest financial mistake you can make – regardless of the size of your business. That’s because you have not created your exit strategy, the essential component of the wealth plan that lets you scale or sell the business profitably.

Form your clear mental vision of what you want,
and begin to act with faith and purpose.
Wallace D. Wattles

 

How to Set Goals That Ensure a Successful Exit Strategy

It takes a big commitment to start and grow a business.

You need to be clear on your mission and vision, business model, market research, marketing and sales strategy, and operations to implement your business plan.

You take risks and set goals.

You can be consumed by the day-to-day responsibilities and urgent demands.

All of this eats up time.

There’s another critical piece that gets put off but is as essential to achieving your long-term goals. That is your exit strategy. If you include your exit strategy as part of your initial goal setting, then all of your goal achievements will line up and lead toward your ideal exit strategy and you will have a much greater likelihood of monetizing the business you built. Here are a few guidelines to start:

  1. Choose the right exit strategy for your goals
    You have monthly and annual goals for your business. Commit to these intermediate goals only if they are aligned with your long-term goals and the ultimate goal achievement of your ideal exit strategy. Otherwise, they take you down rat holes or dead end tangents.
  2. Set business growth goals aligned with your exit strategy
    Your growth goals are essential to the health, strength and survival of your business. Look at your growth goals in the context of the exit strategy you want to implement. Be sure your growth goals are taking you in the same direction. Growth that is in conflict with your exit plan or competes with your long-term goals will hurt the business and limit your ability to achieve your exit strategy.
  3. Identify goals to increase value
    The value of the business is not just in terms of assets or cash flow. It’s also in your intellectual property. A lot of your intellectual property is stuck in your head. Your intellectual property could also be in your team, your processes, and in the relationships you cultivate and maintain with clients and vendors, etc. So your objective to increase value before your exit could be to capture the intangible value in these less quantifiable areas. This will translate into a much higher valuation of the firm.
  4. Plan your exit strategy by intention rather than by default
    This sounds like a lot of work. In fact, it is. Nevertheless, if you don’t do the work to plan your exit – your dream of achieving an ideal lifestyle, living your legacy and leaving a dynasty – then you are abdicating both the responsibility and the reward. If you don’t plan your exit by design, then you will settle for what you get by default.
  5. Systematize your exit strategy to maximize value
    The more you can systematize your business so someone else can run it equally well without you, the more a buyer will be willing to pay you to keep it going.

    The better you are at systematizing everything, the easier it is for a broker to pitch and leverage that value for a higher price. This step takes discipline and consistency that starts long before you intend to exit.

That’s how you ensure your own successful exit strategy.

Pain of External Factors Discourages Business Owners Preparing to Cash Out

Are you uncertain about the future for you, your family, or your business? If so, your instincts and intuition are on target – you can’t afford to ignore the facts. There’s an unavoidable confluence of factors that require your immediate planning and action.

  1. Sellers’ Competition Increasing – 8.1M Baby-Boomer Business Owners think they will sell/scale or in some way cash out of their business by 2018. It takes 2-5 years to prepare the business so you can achieve the maximum returns. Another 8.1M Baby-Boomer Business Owners intend to sell in 5-10 years. Anyone in the first group who was slow to market will now compete with an added group of 8.1M peers – likely even more desperate to get out quickly and seeing how difficult it was for the first group of Baby-Boomer Business Owners to transition.
  2. Seller’s Window in the Market is Shrinking – 2013-2018 is a seller’s window (sellers have the advantage in a transaction, buyers have the liquidity, and this is the leading edge of a huge selloff/transition of ownership across industries). If you wait too long, you’ll miss this window. In 2018, the market itself flips and becomes a buyer’s market until 2022 (buyers will have the dominant advantage in a transaction, there will be even more sellers than buyers, and buyers will have more choice and can drive prices down).
  3. Inflation Will Wipe Out Any Leverage – Quantitative easing will not solve the US debt problem. The only option the government has is to allow inflation to rise – some say up to 50% – in order to wipe out the debt. Inflation, which is being held down artificially, will rise to heights we have not seen since the 1980s within the next five years. After that, inflation will wipe out any leverage or advantage that sellers have in a transaction.
  4. Longevity – In your retirement and investment planning, your business will likely be a dominant source of the cash to fund those plans. Do your reinvention plans assume you’ll live three years beyond your exit? Until age +/- 85 as some of the newer data suggest? Or do you want to be on the other end of the curve suggested in a recent TV commercial by Prudential and live to 100 or 110? The bigger question then becomes, have you indeed made adequate plans for your resources to provide for the lifestyle you want for another three or four decades? Or to leave a legacy that will last another 100 years?

There’s no denying these trends are happening. As much as business owners are taking a beating from all these factors, a wait and see approach is about as effective as hiding your head in the sand like an ostrich. Rather, look at these external factors as a warning bell to plan now so you get to cash out and move on to your transition on your terms and your timeline.

It’s never too early or too late to plan your exit. At Exit This Way, we can help you through this minefield with strategy, tactics, and much more, the sooner you call.

Successful Entrepreneurs as CEOs

If you really own the CEO role and responsibilities, you always have an eye out for the bigger picture of what you want your business to become with a purpose much bigger than yourself. Successful entrepreneurs know their strengths and build on those strengths to successfully achieve their vision. The most successful CEOs are very disciplined strategists who stay focused on their own goals, their own “blue sky strategy” and are not easily distracted by “new shiny object syndrome.”

If this were the only secret to being a CEO who launches a business that explodes in the marketplace, then indeed we would see the 95% failure rate dip a bit. But that’s not the only secret you need to know to make a dent in that statistic.

The problem for the majority of CEOs is that they never grasp the elements that are central to their long-term success. They unintentionally and unconsciously set themselves up to never achieve their goals and never realize the wealth and freedom their businesses could provide.

Ninety-five percent of all entrepreneurs are locked into running a business that perpetuates the three fatal flaws compounded by the three biggest oversights.

By bringing each flaw and oversight out into the open and identifying each one, entrepreneurs wearing their CEO hats can take the first steps to reverse course. Instead of murdering their business, they can lay a foundation for success, prosperity, achieving goals and transitioning out of the business on their own terms.

© 2009- 2016 This Way Out Group LLC top