Exit Planning Tools for Business Owners

business strategy

Lifestyle or Legacy – Part 3

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Let’s turn to the Legacy Builders.They are the business owners who have achieved Lifestyle status (as defined in the last posting) but continue to work hard to build their businesses. Their objective is a company that does far more than merely provide a comfortable lifestyle and assure retirement.

A little bit of elimination to start, as we did with the Lifestyle owners. Just as we said a Lifestyle Business was neither a pumped-up hobby nor merely an adjunct to an alternative lifestyle, the Legacy owner isn’t a couple of things that people might normally assume.

Let’s set a baseline. The typical Legacy Builder runs a business that is very capable of continuing its day to day activities independently and indefinitely. Operations, management and sales are handled by competent employees. In fact, each is probably better than the owner at what he or she does. They are in the top 1% of American incomes. It varies widely, but we’ll call it a minimum of $500,000 a year. The Legacy Builder nonetheless chooses to work a full (45-50 hour) week to continue developing and improving the business, and not incidentally adding to its profit.

The Legacy builder is clearly not obsessive-compulsive, a workaholic, or in any other way driven unwillingly to work beyond common sense. It’s easy for observers (and sometimes family) to accuse the Legacy Builder of being enslaved to the job, unable to tear away for a personal life. That isn’t true at all. The Legacy Builders I am describing spend time with family and other pursuits. They coach Little League, attend recitals, and are active in the community. They take nice vacations (usually with family), and live in nice homes (often several of them), but are seldom ostentatious.

It is true that they are frequently missing in the devotion of time to community activities, preferring to fund the work of others. In fairness, I’ve spent a lot of time working in community organizations. There is a lot of wasted time. If I had the money to pay for someone else to do it, I probably would. Legacy Builders don’t like to have their time wasted.

They are also not greedy. Their continued push for improvement is not for the personal gain. They seek greater success for other reasons. As Bill Gates once said, “Money is just a way to keep score.”

I call them the Legacy Builders because they have an eye for a target that is beyond merely running a successful business. They have a bigger picture; a larger objective in mind. Developing an organization that lives beyond their own careers is at the core of their strategy, but it isn’t just monument-building that drives them. It is what that organization can accomplish.

Some are motivated by the benefit to the community that their talent can deliver. More jobs, more people who can provide security for their families. For others it is even a greater community responsibility, the money to form a foundation, or to fund worthwhile causes. For others their family is the motivation. They seek to change the lifestyle of their children, and their children’s children, permanently (or at least for the next few generations).

Many of the Legacy Builders are simply entrepreneurs without a limit on their creative drive. Most business owners have a difficult time looking backwards. Yesterday’s achievements are ancient history. They see no point to basking in past accomplishments when there is so much more that could be done.

Some Legacy Builders attempt things for the thrill of accomplishment. Once attained, the successes immediately become the basis for the next level, the next mountain to climb.

Admittedly, a substantial number of Legacy Builders have a head start when compared to bootstrap entrepreneurs. They achieved a substantial level of success in an existing organization, and used that as a spring board for their own purposes. They may come from a family where there was Legacy-type success in the past. They may have just been lucky. But none of those things explain their push for greater achievement in business when they are long past the point at which most owners would be satisfied; and there are plenty of bootstrap start-ups in the Legacy class to disabuse the notion that the game is fixed at the start.

Most Lifestyle owners say that they really want to reach Legacy levels, but few actually do. In my next post, the last in this series, we’ll look at what it takes to make the leap from Lifestyle to Legacy.

Lifestyle vs. Legacy – Part 1

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There are three types of business owners. The first, which encompasses the vast majority of small businesses, is the one who simply wants to make a living from running his or her business. They dream of the day that they can take vacations without worrying about the impact on their companies. Sometimes the biggest goal is to go home at five, or just to sleep through the night without worrying about the next day (thus the name of this blog).

But if you are tenacious, if you execute on your plans and are able to groom good employees, eventually you will join the owners who can take a good living for granted. Then you have to determine whether you want a lifestyle or a legacy.

I work with both lifestyle and legacy owners. Either would be considered successful, in the sense that they have a comfortable lifestyle, expect to retire at a time of their choosing, and, barring mishaps, should be able to enjoy their retirement doing what they wish. They run their businesses very differently, however.

It doesn’t matter what type of business you own. I coach legacy builders in manufacturing, distribution and professional services. I also coach lifestyle owners in all industries. It has a lot to do with personal vision, but the legacy builders aren’t driven by merely a “bigger” vision. They see their companies and their lives as having a different objective.

The differences are pronounced and complex enough to warrant several columns on the subject, of which this is just the first.

First, let’s define wealth, since the perception of wealth is a substantial part (although not by any means all) of the difference. A few years ago my family was skiing at Deer Valley, Utah. For those of you who haven’t been there, Deer Valley is a beautiful resort. It’s one of those that was developed as a ski resort, not as a ski mountain that eventually generated other development nearby. That means, like a golf resort, prime home sites were incorporated near the ski runs for those who could pay a premium for the location.

As you go up the main lift, the homes along the lift line are lush, and some are breathtaking. Three and four stories, 15,000 feet or more, some with indoor pools on separate glassed-in floors that are integrated into the main structure. I can’t even estimate the prices, but they are astronomical.

My younger son, who was 14 or so at the time, gaped at some of the houses as we went up. He turned to me in the chair and said, “Dad, what is rich? Friends come to our house and say ‘Boy, you are rich!” but you say we aren’t. The people who own these houses (he first thought they were small hotels) are clearly rich. What is rich?”

I took a few hours to formulate a response. That night over dinner I replied. “Son, in your public high school you have many classmates whose parents work hard at a job just to provide the necessities. When they come to our house ( an older 5 bedroom on a suburban acre) it is much more than they have, so they think we are rich.”

“There are three kinds of rich. The first is well-to-do. That’s what we are. We go out to dinner in a restaurant not just for special occasions, but whenever we don’t feel like cooking. We take vacations to see other cities, or to do fun things like ski or swim. If we need a new car, or something big fixed around the house, we just do it and don’t have to worry too much about being able to pay for it. But your mother and I both have to work very hard in the business to afford our lifestyle.”

The second kind of rich we will call ‘wealthy.’ That’s when you can live like we do, but you don’t have to go to work every day to make it possible.”

“The third kind of rich we’ll call “escape velocity.” (I think that term was coined by Bill Gates, who is probably the epitome of it.) That’s when you can pretty much do anything you want every day, and when you go to sleep you still have more money than when you woke up.”

Lifestyle business owners have reached the second kind of rich, or are approaching it. Legacy builders are seeking much more, and it isn’t merely about money. (Escape velocity depends on factors that few business owners can control.)

Next, we will look at the lifestyle of a lifestyle owner, and what your business needs to make that possible.

A Goal isn’t a Finish Line

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I was going over some productivity numbers with a long term client.

“Remember when our goal for this was 2000 man hours?” he said. “Now we are below 1200, and closing in on 1100, and with greater volume!”

Everywhere we looked his numbers were at levels we couldn’t have imagined 10 years ago. I don’t mean numbers he couldn’t have hit back then, but numbers we literally couldn’t have imagined. Some of it is the result of investments in technology, in better systems and in training.Most of it, however, is because he has developed a culture of always, always looking for the next improvement.

Note well that I said he has developed a culture. This business has about 100 employees. As the owner, he knows full well that he is not capable of setting a target and dragging every one of those 100 people to it. He has developed an expectation, at least among his management, that arriving at a goal is merely setting the starting point for the next goal.

I’ve been thinking about how unusual that is.For most small business owners goals are a normal part of managing our companies. Sales goals, production goals, efficiency goals. We work hard to make them, set employee incentives around them, and celebrate when we achieve them. But very few of us start immediately on the next goal. We want to give our people (and ourselves) a break. We are programmed to let people enjoy the achievement; to rest a bit before we start again.

I commented on how unusual it is to have built an organization where the key people look at a goal as merely proof that they can do what they set out to do, and automatically start thinking about what they can focus on next. He smiled, and related a story.

Last week one of his managers had a performance review with an employee. Not surprisingly, performance reviews are a normal and regular part of their business culture. They aren’t avoided, late, skipped or glossed over. They are an expected part of the manager’s job. They, too, have evolved over the years. They are more frequent and more detailed than they used to be.

This employee had been doing a good job. He was dependable, and skilled at his duties. He was an important part of the team, and handled his area of responsibility without problems. None the less, his supervisor had identified a half dozen areas where there was room for improvement. These were listed as goals, with a time frame for their accomplishment.

The employee didn’t object to the content of the goals. He was very unhappy that they existed at all. I’ve done everything you ever asked.” he exclaimed. “I am here every day. I cover all my responsibilities to the letter. I’ve hit every target you’ve ever given me. But you people are never happy. You always want more. I’m tired of it.”

He resigned.

Replacing him wasn’t going to be easy. Training another employee for his responsibilities would take considerable time and effort. The supervisor was faced with a choice between keeping a position covered well, or starting all over with someone new. It wasn’t really a choice. The supervisor informed his manager that the position would be weaker for some time while a new person was brought up to speed. Allowing an employee to opt out of the culture of improvement simply wasn’t an option.

How many of us have the courage to push our employees past “good enough?” How many have given our subordinates the license to tell us that they need to take a step back before they can take two steps forward? In my presentation on “The 7 Sins of an Entrepreneur” we talk about the sin of Sloth as settling for good enough, because the alternative just takes too much effort. Settling for good enough launches a creeping decay in you business. If one employee can hold a position because he or she is just good enough, then why not two? Why not all of them? Eventually you wind up with a company where everything is merely good enough.

The Japanese call it Kaizan, the constant push for improvement. Americans want to take big leaps. We look for giant increases, then fall back until we marshal our strength for another big push. Kaizan is the discipline of looking at everything, all the time, to see how it could be better.

Building a culture where a goal becomes not the finish line but a starting point, takes time and consistency. It isn’t easy but the results, like the progression of the goals themselves, are incredible.

You probably figured this out already, but this company enjoys a level of profitability that most people in their industry would consider impossible to achieve. They, however, consider it a baseline for their next goal.

Small Business can Sell in a Recession

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This was an article I had published in the San Antonio Express News yesterday.

Guest Voices: Small businesses can sell in recession

Many business owners think that the current recession has ruined their exit strategy. While the climate may be more daunting for budding entrepreneurs, there are still plenty of buyers around for small businesses.

For Main Street businesses (those selling for less than $3 million), buyers chiefly are driven by personal economics. They are seeking a business as a way to make a living. Their main objective is cash flow, the amount of discretionary income the business generates to cover bank debt and an owner’s salary.

In a recession, the most common economic buyer is an executive who has lost his or her corporate job. These buyers usually have good management skills and substantial savings, along with enough net worth to make a lender comfortable.

Be aware, however, that former corporate executives are also very cautious shoppers. The concept of going it alone can be terrifying enough in the best of times. As a buyer gets closer and closer to closing, the idea of working without a safety net looms larger.

In a giant organization, missing your budget means a poor performance review. In a small business, it could mean closing the doors. Executive buyers need extra assurance that they will succeed. If you are an entrepreneur who has risked it all for years, their concerns may generate little sympathy, but they are a fact you have to deal with.

Harsh economic times also bring out the bottom feeders. These are buyers who shop incessantly for companies that can be bought at bargain basement prices. They frequently will use the economy as an excuse to make a low-ball offer, claiming that your business will not be able to sustain its historical profitability going forward.

Unless you’re actually seeing a decline in revenues and profits, there is no reason to entertain an unfairly low offer for your company. Most small businesses have a minuscule market share and can thrive in any economy if they are careful and aggressive. Unless you are focused in an industry that is especially hard hit by the current downturn, there is no reason to think that general economic conditions will have a proportionate effect on your company.

Of course, your expectations of what constitutes a reasonable price are critical. When buyers are already nervous about financing and the future, an inflated price can scare them away quickly and permanently.

Many business owners price their companies beyond achievable expectations based upon multiples for public companies, industry rumors, their own financial needs or simple misunderstanding of the profitability measurements used in mergers and acquisitions.
There are several national databases that show actual sale prices of small businesses in relation to the profits and size of the company. Though the opinions of your accountant or attorney may be helpful, they may vary widely from the actual pricing that is being achieved in the marketplace.

Just because times are challenging, that is no reason to put your life plan on hold. Like every other aspect of owning a business, the sale of the company will be much more successful if you start with good information, plan carefully and have realistic expectations about the outcome.

John F. Dini is president of MPN Inc. He also operates the nation’s largest franchise of The Alternative Board. He can be contacted at jdini@mpninc.com.