Exit Planning Tools for Business Owners

management

The First Entrepreneurial Sin – Lust

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Last week we described the Seven Deadly Sins of an Entrepreneur. This week, we’ll delve into the first Operational Sin; Lust.

The Operational Sins reduce your personal effectiveness as a business owner. They prevent you from being as operationally effective, on a day-to-day basis, as you could or should be. If you aren’t efficient in your leadership role, it cascades down through your whole organization.

lust handLust is the sin that springs from a lack of self-control. As an owner, few people in your business (if any at all) say no to you. They ask, “Boss, did you do that really important thing you were supposed to do yesterday?” You respond, “No, because something more important came up.”

What does your employee say? It’s probably something like “Oh…Okay. Please let me know when you get around to it, so I can move forward on my job.” They don’t take you to task, so if you don’t manage yourself they just have to live with it.

Lust is defined as a passionate desire, an overwhelming enthusiasm. If we don’t have it, we can’t inspire others to accomplish great things. So what are signs that your Lust has gotten out of control?

Projects never get finished. Long-time customers “disappear” because you had other things on your radar. You get nasty surprises from your financials or operating results because you were paying attention to something else. You find yourself telling employees, “I’m the owner. That doesn’t apply to me!”

Lust results in business planning driven by “Whim du Jour.” A customer requests a new product or service. Because you think you can sell something, you commit the company’s resources to creating it without considering the implications to other parts of the business. “Hey, it doesn’t look that difficult. Let’s do it!”

You can’t enunciate a clear-cut vision for yourself, and therefore for the business. “I just want to make a decent living,” or “I don’t want to work too hard,” are your only yardsticks for the future.

You trust to luck when trying new things. “Let’s just give it a try,” becomes “Why didn’t we see that coming?”

The business virtue that counters Lust is a Personal Vision. What do you want and expect from your company? You are in business for a reason; the company is supposed to provide you with certain things in life. Are you clear on what those are, and how you will get them?

Start with the material things that would indicate your success as an owner. It can be a simple list, such as:

  • Work an average 35 hours a week
  • Own a house at the lake worth $350,000
  • Travel to Europe every two years
  • Put my daughter through medical school
  • Help lead a community agency dedicated to providing decent food for the poor
  • Teach a high school class in entrepreneurship

Be specific. Your goals should be solid enough to allow measurement of your progress. Once you have it nailed down, your Personal Vision starts to become a vision for your business.

How much revenue is needed to generate your target income? How many employees will it take to accomplish that goal? What growth rate is needed to get there by your target date?

Write it down, with all the specifics. Every coach and motivational author says to WRITE IT DOWN! Keep it in front of you, and refer to it often. Then start paying close attention to your daily activities as an owner.

How much of your time is spent moving the company forward? How many distractions are really necessary? Could you be doing things to realize your vision if someone else did what you are doing this moment? Is the business moving in a direction that will fulfill your Personal Vision, or is it holding you back?

A strong, written Personal Vision will help you prioritize your activities, set natural limits on interruptions, and keep your eye on the ball.

Defeating Lust is the first step towards success. As Cheshire Cat famously said; “If you don’t know where you are going, any road will get you there.”

Thanks for reading Awake at 2 o’clock. Please share it with another business owner.

The 7 Deadly Sins of an Entrepreneur

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The Seven Deadly Sins are alive and well in small businesses today. Far from being a hoary religious holdover from the Dark Ages, they are practiced assiduously by entrepreneurs everywhere.

devil dancing in suitThere is something to be said for any concept that catches the public imagination for fifteen centuries. First postulated by Saint John Cassian around 400 AD, the sins were codified by Pope Gregory the Great in the late sixth century, and popularized by Dante Alighieri in “The Divine Comedy” in 1315. They remain present on a daily basis in many businesses  through the 21st century, 700 years on.

The Seven Deadly Sins are Lust, Gluttony, Sloth, Wrath, Greed , Envy and Pride. In a business, they can be divided into Operational, Tactical and Strategic sins.

The Operational Sins are Lust and Gluttony. Lust is present when the owner uses his or her power of position to pull the business in any direction he or she chooses. Gluttony is a tendency to hoard all authority and decision-making for yourself.

The Tactical Sins are Sloth, Wrath and Greed. Sloth in business is settling for “good enough,” when a bit more effort would produce a far better result. Wrath is using adrenalin to replace critical thinking, and reacting to problems by ratcheting up your emotional drive. Greed presents itself as the belief that every issue in the business could be solved by “just a little more.”

The Strategic Sins of Envy and Pride stem from the owner’s personal belief structures. Envy is the belief that no one has the same problems as you do. Pride is a conviction that the company can’t survive on a day to day basis without your special talents.

Christianity, of course, has corrective actions for the Seven Deadly Sins. Each sin has its counteracting virtue. For Lust there is Chastity. For Gluttony; Temperance. The sin of Sloth is counteracted by the virtue of Zeal, and that of Wrath by Kindness. Greed is foiled by Generosity, Envy by Love and Pride by Humility.

When applied to business ownership, the Entrepreneurial Sins also have corresponding “virtues” that can reduce or eliminate their negative effect on your business.

The Operational Sins require behavioral changes. The counter to Lust comes with having a Personal Vision. Gluttony is defeated with Delegation.

The Tactical Sins dissipate in the face of internal organizational  practices. Sloth can be overcome by Metrics; the use of clear goals and objectives. Wrath is far less of a problem in the presence of Planning. Greed lessens when there is objective Budgeting.

Strategic Sins are those that can be defeated with more long range initiatives. Envy falters in the face of Knowledge about your industry and your markets. Pride dies a natural death when you engage in Exit Planning.

The Seven Deadly Sins of Entrepreneurs is a fun way to look at much of what we do in our business. I’ve presented it a number of times as a workshop for local and national business groups, and the idea is catchy enough to have landed me an Easter Sunday television interview a few years ago.

You may not be inclined to New Year’s resolutions (I’m not, myself) but most of us start a fresh calendar with some level of intent to “do better.” We’ll spend the remainder of January examining the indicators of these sins in your business, and what you can do about them.

If you know a business owner who might benefit from correcting one or more of the Seven Deadly Entrepreneurial Sins, please forward this column so he or she can subscribe. Thanks!

 

Not Just Workers…Qualified Workers

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A few weeks ago I attended one of Trinity University’s Policy Maker breakfasts. Although living in a large city has its drawbacks, it is great for access to events such as these. It takes substantial ticket sales to justify top-rank speakers, and Trinity’s series brings the best.

The speaker was Richard W. Fisher, immediate past President and CEO of the Federal Reserve Bank of Dallas, as well as almost 11 years on the Federal Open Market Committee, where he voted on monetary policy under Alan Greenspan, Ben Bernanke and Janet Yellen.

In Q&A time, I had the opportunity to ask how he could project robust growth over the next 20 years with the large number of Baby Boomers leaving the workforce and scaling back their consumerism.

Mr. Fisher had already warned the audience that he had no intention of making controversial or otherwise newsworthy statements, so his answer surprised me a bit.

He said that he remained confident that productivity gains through technology could offset much of the drop in workforce growth. The real problem, he said, was the failure of our educational system to prepare a generation of workers with the skills they need to succeed.

I’ve written previously about how small businesses are being saddled with the job of teaching young workers basic job skills. Just getting them to understand that cutting class doesn’t carry over into cutting work, that there are no unlimited extra credit assignments to make up for lack of effort, and that everyone doesn’t always get a passing grade, can be a real challenge.

Some years ago I employed a young Dutch woman who had come to the USA as a student in a top university. She also apparently had sufficient financial support that dropping out and taking a part-time job with me wasn’t a hardship. Eventually, more out of boredom than need, she enrolled again in the local state university.

She came to me one day to coordinate her class schedule with work for the semester. (I think it was her second half of sophomore year.) These were her courses:

  • Great Women in Architecture
  • Diversity in Art
  • The Sociology of Class Distinction
  • World Geography

I asked why she bothered going back to college if she wasn’t going to study anything that prepared her for a career. She laughed, and informed me that she was just catching up on the core courses required before she could declare any liberal arts major.

I’m sure each of those topics were interesting, and contributed to a well-rounded world view. What they contributed as far as preparation for the workplace, however, remains a mystery to me.

A recent survey of college students found 21% believe that the First Amendment to the Constitution should be modified to exclude free speech that is offensive.

A widely circulated essay on Vox.com expresses a liberal professor’s fear of violating the “safe place” of university learning by teaching offensive literature such as the writings of Mark Twain.

bright studentUniversities now publish their 6-year graduation rates (fewer than half graduate a majority of students in 4 years.) Students with failing grades receive almost daily emails as final exams loom, reminding them that they can drop classes without penalty (except, of course to their parents’ wallets — refunds aren’t offered.)

It may be helicopter parents, politically correct coursework or just a general corruption in the education system driven by billions in student loans that require no accountability. Whatever the cause or causes, a college education no longer seems to carry with it an assumption of career-readiness.

There are certainly many good colleges, and an excellent education is still a great beginning for a successful career. As an employer, however, I’ve long since stopped assuming that a six-figure degree is, by itself, any sort of qualification for a job.

Boomers and the Lost Generation

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Those who read this column regularly are well aware of the huge shifts underway as a result of the Baby Boomers’ coming exodus from the workplace. Those who aren’t familiar with the issue are invited to download my free, 45-page eBook Beating the Boomer Bust.

Almost four years ago I mused about the chances of Generation X, smaller in numbers and less accustomed to competition than the generations immediately before (Boomers) or following (Millennials) becoming another Lost Generation, much like that of the F. Scott Fitzgerald era.

Now, I’m seeing and hearing more evidence that such may be the case. A friend who works closely with the large corporations in the oil and gas industry noted a different trend in the layoffs that are accompanying the fall in prices. The Great Recession, like previous downturns, saw buyouts of many workers who were approaching retirement. This time around, companies are getting leaner by cutting less experienced workers, and keeping their more experienced core regardless of age.

older workerI see a similar trend in smaller businesses as well. Owners who traditionally filled lower and mid-level positions by seeking younger workers are now much more inclined to hire people in their 50s and 60s. What is causing this shift?

First, there is a new expectation about employee retention. It’s well documented that workers from GenX and the Millennials are far less likely to take a job for life. Regardless of how well they are treated, younger workers take a position with the expectation that they will be moving on when they find a better opportunity, or simply when the job interferes with their chosen lifestyle.

The majority of small businesses are still owned by Boomers, and they are often more comfortable with employees who share their experience and attitudes. If a young employee has an employment life expectancy of, say, five years, why not have that position filled by someone who understands that paid time off is something that has to be accrued before it’s taken?

If you have to accomplish more work with fewer people, employers naturally want people who will stretch to get things done. Most Boomer workers accept the need to work late on occasion, and are accustomed to planning personal activities around the job. Younger people often see that as being too docile, or foolishly loyal when “It’s only a job.” Employers, on the other hand, cherish such dedication.

Boomers are generally healthier than preceding generations. They haven’t been great savers, and most plan to work longer than their predecessors. As the pace of change accelerates in almost every industry, a worker who needs little ramping up and can be expected to produce for another ten years looks better and better, regardless of any gray hair.

Not all Boomers have the skills necessary to function in today’s workplace. If you are looking for technical abilities, however, someone in their 30s (a Millennial) is likely to be faster and more savvy than someone in their mid-40s. That’s why Generation X is getting squeezed in the middle.

Of course, as another friend says, “A Millennial will figure out how to use technology to accomplish in a single day what would take a Boomer three. Of course, then he wants the other two days off.”

Owners Live in Two Different Worlds

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Business owners live in two different worlds. If you are a Baby Boomer, the title of this column might bring memories of any one of the many covers of the song by the same name. (Everyone from Nat King Cole to Roger Williams, and from Jerry Vale to Englebert Humperdinck recorded it.)

My application of it in business refers to the chasm between those owners who plan to sell a business valued at less than $3 million, and those who have companies valued at more than that. In M&A parlance; “main street” and “mid-market” businesses.

business presentationSome background is in order. I spent the week at two conferences. At the Business Enterprise Institute’s Exit Planners’ Conference we talk mostly about the complexities and structures of mid-market transfers. From there, I attended The Alternative Board’s International Conference for advisors who run peer advisory groups and provide coaching, principally for the owners of main street companies.

At the latter, I had the privilege of being on a panel with Bo Burlingham of Inc. Magazine, the author of Small Giants and Finish Big, and John Warrillow, the Founder ofBurlingham Warrilow Dini the Value Builder System and author of  Built to Sell. It would be challenging to find three people in the country who have spent more combined time studying how small businesses sell, and what determines their value to a buyer.

Even with two audiences of savvy professionals who are focused on the flood of business owners transitioning from their businesses, in many sessions the presenters had to explain the difference between the two markets. As an owner, it’s critical that you understand what the market is for your company. Using data from the other side of the fence is only destined to frustrate you.

Mid-Market

These are companies with a value (not revenue!) of greater than $3,000,000. To garner the interests of financial buyers (private equity groups), they have to generate pre-tax earnings of at least a million dollars a year. To attract strategic buyers, they must have some real differentiation in their industry or market. Those who are truly scalable and have already grown to over 100 employees are the hottest commodity; but according to Doug Tatum, the author of No Man’s Land, they presently account for about 30,000 of the 6.5 million private employers (2-500 employees) in the marketplace.

The acquisition outlook for these companies is wonderful. The financial market is blazing hot, with 7,000 private equity players and publicly traded acquirers chasing those 30,000 businesses, or at least any among them who will still take a phone call. Valuations  are growing quickly, with multiples in the upper end of the market up over 20% in the last two years, and well over a trillion dollars of “dry powder” waiting to be spent on buying them.

Main Street

Clearly, the odds are pretty high that you are one of the 6,470,000 owners whose company does not fit the description above. Welcome to Main Street, where differentiation is difficult or impossible to quantify. (Sorry, but in all but the rarest cases,  “service” is not a competitive differentiation.) The business exists primarily for the purpose of providing financial security for the owner and the employees.  Likely acquirers include individuals seeking to purchase an income, small competitors, or if you are close to the million dollar pre-tax mark, perhaps a private equity group looking for a “tuck-in” or “bolt-on” to an existing similar acquisition.

The news for these owners could not be more starkly different than for the chosen few in the mid-market. According to Burlingham, somewhere between 1.3 and 2 million of these businesses will come up for sale in the coming decade. According to both IBBA (the business broker’s association) and the US Chamber of Commerce, only about 20% of them will successfully sell to a third party. With the much lower population of Generation X, who have little in the way of liquid savings and eschew 50 hour work weeks, the pre-tax multiples in Main Street values are contracting, and the shrinkage grows worse the farther down the food chain you are.

The message is clear. As John Warrillow said, if you are anywhere close to the magic numbers that attract mid-market buyers, the most important thing you can do is drive your company over the top. The difference can mean double, or even triple the proceeds you receive. Here’s an exercise. A company making $700,000 a year with a valuation of 3x earnings can sell for $2,100,000. If they grow to $1,100,000 in profits with a value of 5x earnings they’d get $5,500,000 at sale. That’s 57% growth in profits for 161% growth in price.

Any questions?

Even the measurement of earnings between the two types of business is different. We’ll discuss that next week.