The Facts of Business Life

by Bill McBean

  But there are also other benefits of making sure the information you gather is appropriate and correct. For example, doing it provides the substantiated facts you need during any buy/sell negotiation, without which you and the buyer may not be able to come to an agreement. It can also help you determine the best time for your exit in light of possible changes in the tax code that might make it advantageous for you to slow down or speed up the process. If you are passing the company along rather than selling it, having the most up-to-date information about taxes can also play a major role in determining how the transition is completed and over what time frame.

  Exercising control over information begins, of course, with making sure that you have all you need and that it’s accurate and up to date. But the real value of information lies not in collecting it but in how you use it. If you decide to put your company up for sale, for example, information can be rearranged in new or different ways to present your business in a more positive light, highlight future opportunities, or play down whatever weaknesses it might have. It’s really just a matter of understanding the significance of the information and making the best possible use of it. Whatever you do, though, it is essential at this level to maintain control over the information you’re using, because during the exit process there is a lot of information being passed back and forth, and it’s only by maintaining control that you will be able to guarantee the most successful results for yourself and your business.

  Control of Processes at Level 5

  I mentioned earlier that at this level, owners have to change how they personally oversee their companies, which means they have to either restructure existing processes or develop new ones to make sure the business will continue to move forward during the exit period. One thing that may change is that, due to time constraints, you will no longer have time to practice management by walking around. Similarly, you may have to delegate responsibility for conducting regularly scheduled daily or weekly meetings to a subordinate and attend yourself only as time permits. You might also turn review of balance sheets over to your comptroller and meet with him or her just a few times a month. Frankly, it’s unlikely you will be entirely comfortable with changes like these, because doing these things will probably have become fundamental to your leadership and ownership style. But choices have to be made, and, as the owner, you are the only one who can make them. And there is only so much time to get everything done if you want to exit the right way and with the biggest payoff.

  As I also mentioned, exercising control at this level means learning new skills, which means developing new processes that will enable you to successfully sell or pass along your company. Whenever you are selling something, the most important thing to remember is that the road to the sale has to be controlled. And this applies to selling a business as much as it does to anything else. The edge in any sale will go to the party who controls the events. In order to gain control, owners have to understand the selling process and know how to control it. The control process starts, of course, with the exit decision, but there is much more to it. There are, in fact, a number of elements that are part of the selling process, including:

  Deciding whether it’s better for you to sell the business as an asset or by selling shares in your business.

  Deciding what is for sale—that is, business assets, real estate, and goodwill—and what isn’t, and how the sale price can be justified.

  Determining who the best buyers are, who can afford to pay the most, and who would benefit the most from buying your business.

  Developing a means of upholding confidentiality of discussions and information.

  Deciding, once a buyer has expressed interest, the steps and timing of the sale.

  Determining which elements of the sale will be dealt with first, and in what order the remaining elements will be discussed.

  Deciding on some parameters or framework under which a deal could be made, that is, deciding what you want, what you might be willing to give up, and what would be a deal breaker.

  This does not constitute the entire list of issues you must take into account when selling a business, but it’s a good start. The key point to keep in mind is that selling a business is a process, and one in which one side or the other will have control. And the one who has that control will be the one who has prepared and developed processes for doing so.

  You may, however, want to pass your company along to someone rather than sell it, and this effort also requires a process to be carried out successfully. Among the elements of the succession process are:

  Determining how a successor is chosen based on where the business is today, where it should be in the future, and the skills needed to get it there.

  Determining a means by which tax issues will be considered.

  Deciding how other family members will be handled and rewarded.

  Determining the timing of, and speed with which, you will step aside.

  Again, these are just some of the important issues that must be decided during the succession process. One of the other extremely important issues, and one that is often forgotten, is teaching a successor how the business is operated. If you are implementing a succession plan, you need to think about and develop a structured process for explaining to your successor how the company’s DNA was created, why processes are the way they are, how they evolved, the importance of expectations and controls, and the owner’s role in the process. This is essential because, as we have all seen, many businesses decline or fail after a succession plan has been executed. And since, in many cases, the reason is the new owner’s lack of knowledge concerning how the company is operated, it is imperative that a structured process to provide that knowledge be created.

  Even if you decide to simply close down your business, you will have to develop a process to accomplish it, because doing so is not as simple as removing the sign and locking the door. In this situation, there are two major control issues, the first of which is timing. When you close a business, you have to select two separate and distinct end points, one being the last day of business, that is, the day you close to customers; and the second being the date by which you want to shut down the company’s internal operations. The first date is straightforward, but the second can be more elusive because it takes longer than most people realize to shut down operations and close the books. For example, accounts receivable will have to be collected, assets will have to be disposed of, tax forms will have to be completed for the business and the employees, final financial statements will have to be prepared, the business will have to be legally closed, and so on. Because of this, it is essential that your lawyer and accountant be involved in closing down your company.

  The second control issue concerns you—your emotions and your drive. A successful closing means picking the last day you will have customers and then concentrating on sales and profits. And when that day comes, you start doing whatever must be done to wind down the business. Mixing the two is a mistake because it’s frustrating and emotionally exhausting to try to do both at the same time, and as a result neither gets done well. When you are closing down a company, the objective is the same as it is when you are selling one—getting the most money from your business, operations, and assets—and doing that requires a kind of control and mental discipline that only you can supply.

  Control of People at Level 5

  By the time you get to this point in your company’s life cycle, you will certainly have figured out the importance of controlling employees through processes and how to manage those processes. At Level 5, though, control of people takes on a new and different significance, because at this level you are essentially embarking on a new journey, and it’s important that the people with whom you surround yourself on that journey are the ones who will be most helpful in making it a successful one.

  For example, your company’s lawyer or accountant may be a personal friend, but at Level 5 what you need aren’t professionals who can help you in the day-to-day aspects of main
taining your business. What you need are people who are experienced specifically in business law and contracts, tax issues, and estate planning. Selling a company, implementing a succession plan, or closing a company is serious business, and unless you have the right kind of advisers, you could pay heavily in needless taxes, or find out after the fact that whatever contract you have isn’t what you thought it was. And if you make those kinds of mistakes, you’re likely to have to live with them for a very long time. Conversely, by bringing in people with the expertise you need, you will build a team that will be an important asset to you in presenting your business information appropriately, determining strategies and counterstrategies, doing valuations, considering possible candidates, and even keeping your emotions in check, among others.

  The point is that there are people who can help you, and the quality of their advice and the calming influence they can have is something you will appreciate long after the sale. In other words, if you’re banking your retirement and legacy on your exit, you should get quality help, and quality help starts and ends by controlling the people with whom you surround yourself. There are basically three ways to surround yourself with solid, experienced people. The first is to honestly analyze your own weaknesses and find people who are experts in those areas. The second is to find owners who have done what you want to do and learn from their experience. And the third is to have one or more people ready to help you through the process, however you choose to exit the business. This could be the same group as those above, or new people, or a combination of the two. In the end, the people you surround yourself with should be there not only to advise you but also to keep you, your emotions, and your mouth in check so you don’t talk yourself out of a good deal.

  Control of Product at Level 5

  At Level 5, even though you have made the decision to move on, there is no guarantee it will happen when you want it to, or under what conditions, or if it will happen at all. So even if there were no other reasons, this one should be enough to motivate you to stay focused and control your product or service so that you can keep up with your competition and remain innovative. And, in fact, there are many other powerful reasons to keep your business moving forward during the exit process. Perhaps the most important of these is that, at this point in a company’s life, the company itself becomes a product, one that will be sold, transferred to a family member, or closed, and this new product, like any other, needs to be controlled. This is because, also like any other product, a business has value. How much value depends on the demand for the product, the supply, financial conditions, the company’s facilities and assets, its past performance and future prospects, business multiples, and the “tickle factor,” that, is, how much someone wants to buy or take over the business. Because there is value to a business, controls have to be in place to protect and make sure that value, which is what makes a company attractive to buyers, is maintained.

  Controlling a business’s value is a priority at Level 5 because no one, especially an owner, likes unpleasant surprises. In order to avoid such surprises, at this point in a company’s life, control of the business as a product will focus on:

  The business’s customer base and its continued loyalty.

  The functionality and operating life of the business’s assets.

  The company’s facilities and their flexibility for future expansion and modernization.

  The business’s past and current financial results.

  The company’s prospects for continued growth in the future.

  In making an effort to exercise control over the business as a product, the owner must start by defining for him- or herself how these areas are to be looked after. These definitions must, in turn, be communicated to the company’s staff, and controls put in place to make sure the owner’s plans are implemented. This is essential because when a buyer takes over a company, he or she expects it to be the company that was presented by the seller, that is, a great asset rather than a sinking ship. So if the business is going to remain an attractive “product,” its value must be maintained, and any deviation from the owner’s plan must be dealt with immediately.

  As I mentioned in the opening of this chapter, control essentially is management. That is, the owner gives direction to the business and defines what success will look like, then determines which areas of the business he or she wants controlled and assigns who will be accountable for the results. Once this is done, it becomes the responsibility of those individuals to move the business toward the owner’s success definition. As such, control is an important and necessary tool owners must have—and use—on a daily basis, or else the business will be in a state of constant chaos. And a company in such a state will never achieve its owner’s expected results.

  But, as this chapter has demonstrated, control means something different at every level, and, as an owner, you must be aware of those differences and flexible enough to adapt the controls you’ve developed to fit whatever the current need may be. By constantly and consistently exercising control at every level over the information your company uses, the processes you’ve established, the people in your organization, and the product or service you provide, you will have taken an enormous step toward assuring yourself and your company of attaining success.

  Chapter 5

  Fact 3: Protecting Your Company’s Assets Should Be Your First Priority

  Protecting assets is not usually the first thing that comes to mind when you think about your company’s priorities. In fact, if you asked a group of owners what they considered most important to their businesses, the vast majority would most likely say sales and profits. And I’m certainly not suggesting that sales and profits are not important. Rather, I’m saying that they aren’t as important to your business as assets. If your sales and/or profits decrease, you have time to regroup, figure out what went wrong, fix it, and make up the difference in the future. But if your assets evaporate, your business is destroyed. Nothing can pull a business down faster than asset destruction, and owners, with their employees’ help, have to protect those assets from being mismanaged, stolen, abused, and underappreciated. That’s why understanding this Fact of Business Life is critical to your company’s success.

  It’s upsetting to lose a customer, even your biggest customer, but not catastrophic. What is catastrophic is if your product becomes obsolete, your office manager steals a major portion of your cash and “cooks” the books, or your accounts receivables decide not to pay you. To a certain degree, most owners understand the basic principle of protecting their assets. That’s why they have lawyers to make sure they and their companies are legally protected, and insurance in case their businesses are destroyed by fire, tornados, earthquakes, or similar disasters. In other words, most owners realize their assets are vulnerable and therefore need protection.

  However, owners tend to focus primarily if not entirely on what might be considered natural catastrophes. And while protecting your company against such events is certainly essential, it is only partial protection, and leaves your business vulnerable to everyday operational issues like mismanagement, theft, and outright stupidity, to name just a few examples. It doesn’t make sense to buy insurance to protect your assets from unusual occurrences and then do little or nothing to protect them from these kinds of everyday business problems. No one would leave $100,000 in cash lying around without making some effort to protect it. But every day, owners essentially do just that when they don’t give their assets the care they need, and in the process leave themselves open to some very unpleasant surprises that neither insurance nor lawyers can protect them from.

  When you start a company, you inject cash into the business, and for a short time cash may be your only asset. Eventually, though, that cash is used to purchase items to help create whatever you are going to sell, produce, or service, as well as to operate the business on a day-to-day basis. In turn, whatever you use the cash for becomes part of the business’s assets, and there are two types of these—tangibl
e and intangible. Tangible assets are physical in nature, something you can usually see and touch, such as plant equipment, computers, desks, supplies, and so on. Intangible assets are things that can’t be seen or touched, like customer and employee relationships, your brand in the market, the operating processes you develop as part of your company’s DNA, intellectual property, and others. Both of these kinds of assets, however, need to be protected because both have value.

  But exactly how do you protect these assets? As already mentioned, some can be protected, at least in part, by making sure that your company is operating legally and that any and all assets that can be insured are covered. Again, though, this kind of protection essentially applies only to the most obvious sort of catastrophes a company may encounter in the course of doing business. It’s the other, less obvious problems that need to be accounted for. And the most effective way of protecting those assets is to maximize them, that is, to be aware of what they are, what they are supposed to do, and how to best use them to drive internal efficiency, sales, profits, and customer satisfaction. This is the common-sense part of asset maximization. But there’s another aspect of protecting and maximizing assets that is less obvious but equally important. The assets you own were bought or created to capitalize on an opportunity, and if the asset isn’t maximized, neither will the opportunity be, and it will be reflected in your company’s underperforming in sales and profits.

  What that means in practice, for example, is that if your sales rose 40 percent, the sheer volume of the increase would be felt by every other department. One of these would be accounting, which would accordingly have to recreate its internal processes (an intangible asset) because the current ones would in all likelihood be overwhelmed, thereby eliminating any chance of maximizing their efficiency. However, if you have an expensive piece of equipment that you believe is being underutilized, you could sell it, or you could focus on how to fully use it for its original purpose or to create a new opportunity.