The Facts of Business Life: What Every Successful Business Owner Knows That You Dont

by Bill McBean

  The key to developing leaders is empowerment, which is enabling leaders to work without the day-to-day interference of the owner and showcase their abilities. But empowering employees is a two-edged sword, because even though it lightens your load, it comes at the cost of giving up control. And after many years of running a business, that can be very hard. Some owners find it difficult because they have favorite things they like to do, and some because they have been burned in the past when they ceded control to others. But regardless of why you may be reluctant to give up control, if you want more leaders, you have to give them responsibility. It doesn’t work any other way. Fortunately, there is one factor that should make relinquishing control somewhat easier. By the time you have reached Level 4, the chances are that you’ve already put sufficient controls into place to make sure that unpleasant surprises are unlikely to occur. And in the meantime, by developing multiple leaders and helping them learn and grow, you will have built your business into the strongest company it could possibly be.

  Level 5: Moving On When It’s Time to Go

  For some owners, making an exit decision is very easy. They can’t wait until they have enough money to retire, and as soon as they do they’re very happy to wave it all goodbye.

  But for many owners, the subject is one they don’t even want to think about, much less discuss. And, to be fair, it’s entirely understandable. Leaving a business, whether it’s through sale, succession, or closing, marks the end of something owners are comfortable with, and moves them into a new area that may sound good but is still unknown territory. If that’s not complicated enough, there is the question of which route they should take on exiting, as well as hundreds of others about the business that have to be answered. And to top it off, getting out of a business is something most owners know little, if anything, about. It’s no wonder they don’t like thinking about it.

  To make matters even worse, deciding when it’s time to exit is as far from an exact science as it could be. Most owners realize a business can lose momentum, become stagnant, and begin to stumble if they stay too long. Most also know that putting a business up for sale too early, if that’s what they choose to do, can mean forgoing future profits and, possibly, a higher selling price. But it’s not just a question of the best timing for the business—owners also have to think about the best timing for themselves. It’s a difficult balance, a difficult decision, and owners have to face this reality the same way they have faced other difficult decisions in the past. Ironically, it’s the same leadership skills that enable owners to power their way into ownership at Level 1 that are needed to power their way out at Level 5.

  As I mentioned earlier, there are two unavoidable facts that every owner has to take into consideration as far as exiting the business is concerned. The first is that the best time to exit is when you don’t have to. And the second is that if you don’t pick the time to exit, someone or something else will. There is literally no escaping these two realities, which is why leadership is so important at Level 5. More to the point, after exhibiting leadership and exercising control for so many years, it doesn’t make any sense to abandon your leadership role, give up control, and leave to chance one of the most critical business decisions you can make. Avoiding this, however, requires you to take two distinct and different leadership initiatives. The first of these is to continue leading and operating the business as you did at Level 4. No matter how you choose to exit, the timing of your exit will hinge at least partly on other people, and since you can’t be sure of when it will occur, you have to stay focused and keep the business going strong until it does. The second leadership initiative you must undertake is to prepare yourself to set up the business for your exit.

  Particularly at this level, being prepared and understanding what you’re doing is the key, because selling a business, planning a succession, or closing down can be very unnerving, and you can easily end up way in over your head—and fast. Making these kinds of preparations and developing this understanding is something only a leader can do successfully. And the best way to do it is essentially by asking the right questions, making sure the answers are based on fact rather than emotion, and then using those facts as a basis for your decision making. Some of the basic questions you have to answer are the same whether you are interested in selling the business, passing it along to a family member, or closing it. Some, however, apply only to one or another of these situations.

  Regardless of which kind of exit you are anticipating, among the questions you must ask yourself are:

  Who has done what I want to do, and what is the best way for me to seek guidance from them?

  How much is my business realistically worth?

  What is a reasonable time frame to get ready to begin the exit process?

  Am I exiting because it’s a good time for me personally, because a sale is likely to bring in a particularly large amount of money now, or both?

  Who will I use for professional legal and tax advice, and how can they best help me structure the selling process to my advantage?

  How much money will I need to live out the rest of my life in the style I want to?

  Do I want a clean break, or do I want to exit gradually?

  What factors will determine the timing of implementing an exit plan?

  Do I want to sell the business outright, or do I want to implement a succession plan?

  If you are planning to sell your business, you need to answer the following questions:

  What is the selling process and how can I maximize it and control it?

  Who will be my best buyer? That is, who will pay me top dollar, who will have the most to gain by buying my company, and who will have the most to lose if someone else buys it?

  What do I have to do to make the business worth the most in potential buyers’ eyes?

  Would it be better for me to sell the shares of my business or to sell the business’ assets?

  What are the tax consequences of a sale?

  What information do I need to show a potential buyer to get the top price for my business?

  How will I represent the condition of my assets so I will not be held responsible if a buyer later determines there is some kind of problem?

  What assets have to be fixed, painted, or replaced in order to impress a would-be buyer?

  In the event that you are planning to implement a succession plan, the kinds of questions you have to answer include:

  Who will be my best successor? That is, which member of my family is most capable of stepping in and has the ability to operate the business over the long term?

  What kind of financial arrangements can I make for other family members to avoid a rift?

  What should I educate my successor about, and what will he or she have to figure out themselves?

  How will I integrate my successor into the business?

  Which key employees do I need to talk to in order to solicit their support and make the transition as smooth as possible?

  What oversight will I need to maintain during the transition process?

  What is a reasonable timetable for the total transition?

  Even if you are planning to simply close down your business, there are a number of questions that you must answer, including:

  What current liabilities and long-term debt is the business responsible for?

  What are the tax and legal consequences of closing down?

  How long will it take, from a tax and legal standpoint, to close down the business once the doors are closed?

  Is it best to slowly ramp the business down or to pick a date and then close down all at once?

  Does the business’s customer base have any value to a competitor?

  Do any of the business’s assets have value?

  Do my skills have any value to a competitor or industry association?

  These do not, of course, represent all the questions you must answer when you’re planning to exit your business. They are, however, a good starting point
and represent some of the large obstacles and issues owners will have to prepare themselves and their business for when planning an exit.

  The Benefits of Leadership at Level 5

  Being a leader enables you to prepare mentally for the transition and at the same time prepare your business to be sold, passed on, or closed.

  Being a leader enables you to ask the proper questions and, in the process, slow yourself down so the decision you make is based on facts rather than emotions.

  Being a leader helps ensure that as little as possible is left to chance in the exit process.

  Being a leader makes it possible for you to keep your employees from losing their focus and dwelling on concerns about the future.

  Achieving the Objective or Goal at Level 5

  At this level, while it’s extremely important that you keep the continuing success of the company in the back of your mind, planning and executing an exit strategy must be your main focus. The objective here, regardless of how you choose to exit the company, is to do it in as controlled and calculated a manner as possible. Like all important things, though, this is easier said than done. Perhaps surprisingly, the hardest part of the exit process is taking the first step. As discussed earlier, that first step is educating yourself and coming to grips with some of your soon-to-be realities. Not surprisingly, the more knowledge you have about your situation, the better your decision will be. For example, there is no point in contacting a potential buyer if you haven’t made sure that after paying off your debt and paying taxes you will have enough money to live on. You would certainly not want to find yourself in such a situation. But the fact is that things like this happen more often than most people realize, and it’s all because the owner didn’t take the time to make sure what his or her situation was.

  Having clearly assessed your current situation and determined that you want to move on, you have to develop a plan. At this point, even if you have not yet decided on a date for your exit, you should have a good idea of what you need to do to get the business ready to sell, pass along, or close. Developing a plan to do that starts with answering the questions I raised earlier and subsequently dealing with the hundreds of other issues that must be addressed. The important thing to bear in mind, though, is that whether you are thinking about selling, passing your company along to a successor, or closing it, the process is going to take time—usually years, in fact—if you want to do it right. And for that reason, the sooner you start developing a plan, the better—there is really no downside. Remember, too, that the goal here is to sell your business for as much as you possibly can, turn it over to a successor in such good condition that it will continue to be successful, or maximize your earning power prior to closing it down. And as the leader, you are the only one who can accomplish that.

  Building and Maintaining a Team at Level 5

  Humans are the most complex beings on the face of the earth. And business owners, like all humans, have both positive and negative traits. Some of those positive traits are likely to play a role in the exit process, such as fairness, honesty, loyalty, a sense of humor, and common sense. But some negative human traits can also come into play when exiting a business, including being overly emotional, unwilling to listen to other people’s opinions, disinclined to deal with difficult issues, and acting as if we know everything. In order to counter these less-than-positive traits, owners at Level 5 need to build a group of people around them who can remind them of the goal, help keep them focused when things go wrong or unexpected developments occur, and provide knowledge they might not otherwise have.

  One of the people you need on your team at Level 5 is an attorney. I know that, on the whole, attorneys don’t have particularly good reputations, and perhaps with some reason, but the fact remains that a good business lawyer will keep you out of trouble. There is more to a sale, succession, or closing than negotiating a price. The devil, as they say, is in the details, and where an owner’s exit is concerned, the devil can be in the contract. And since the contract has killed many a deal, making sure you have a good lawyer on your team is essential. Another important member of your team will be an accountant, particularly one who has experience in buy/sell agreements and understands the tax effects of the transaction, among other things. In addition, if negotiating is not your strong suit, it would be advantageous to have someone who can either do the negotiating for you or can at least help you set up negotiation parameters. Finally, as I mentioned earlier, you are much more likely to conclude your negotiations successfully if you have a counselor, or mentor, who has already done what you are trying to do and can provide you with advice on the entire exit process.

  Obviously, whenever you choose advisers, you want people who are both skilled and experienced in their fields. But when selecting people to assist you in exiting your business, you want professionals who also have two other attributes. The first is leadership ability. This is important because the more leaders you surround yourself with, the keener the focus on the prize. Leaders are also not shy about voicing their opinions and at certain times in the selling process both the buyer and seller need to hear from someone other than themselves. The second is creativity. Having people around you who possess this trait is important because you may not be able to get exactly what you want in the negotiation process. However, since there is always more than one way to accomplish almost anything, if you have creative people on your team, they are more likely to be able to find an alternative that is acceptable to both sides or to think of ways to make additional money that hadn’t occurred to you.

  Developing the Individual at Level 5

  At Level 5, developing the individual is a multifaceted process. As an owner, you must first develop the individual members of your team so they will work together and focus on what you need from them. And that’s not always easy. Unlike the situations at earlier levels, the members of this team are not your employees. In fact, in all likelihood they have their own businesses and their own concerns, so while they will presumably do the best they can to assist you, your company is not their first priority. It is, however, your responsibility to make sure they are there when you need them, to learn from their experiences and turn it to your advantage, and to pressure them to outperform on your behalf. In other words, it’s up to you to get the most out of them that you can. And the only way I’ve found to do this effectively is to prepare yourself by learning everything you can about the sales, succession, or closing process, knowing exactly what their roles are, defining those roles for them, making them accountable, and stepping on them when they are not.

  If you are selling your business, though, there is still another individual you may have to develop—the buyer. If the buyer is someone who already knows what he or she is doing—that is, who understands the value of what you’re selling and has a good general understanding of business—the process is likely to be easier than if he or she does not. If, though, you find yourself in a situation in which the buyer is not knowledgeable, it’s your responsibility to remedy that. The reason it’s your responsibility is that your buyer is likely to need help from bankers and/or outside investors to purchase your company, and as the leader of the sales process, your leadership has to extend through the buyer to his or her financing source. Only if your buyer has a solid understanding of your business will he or she be able to effectively present and sell it to others and guarantee that you get paid what your business is worth.

  If you are implementing a succession plan, however, it might be equally necessary for you to develop a different individual—your successor. As the owner, you are responsible for making sure the successor knows the business and has a good general understanding of basic business concepts. This may seem obvious, but we’ve all seen or heard of sons or daughters who have taken over family businesses only to see them flounder, if not entirely collapse. And the truth is that in a lot of cases like this it’s the outgoing owner who is at fault rather than the successor. But your successor doesn’t only have
to know your business—it’s equally important that he or she knows how your business operates. And there’s a difference. If your successor doesn’t understand that processes operate the business, and people operate the processes, it will be your responsibility to make sure he or she learns it.

  Finally, if you decide to close down your business, as I mentioned earlier, it is essential that you get the most you can from your attorney and your accountant. The best way to do this, as I also mentioned, is learning as much as you can about the process and then asking educated questions. Again, because these professionals are not your employees, and have their own priorities, it’s up to you to not only get their undivided attention when you need it but, even more important, their best advice and counsel. Closing down your business may well be your last act as an owner, so you should do it right by hiring the most experienced professionals you can find and take a leadership role in getting the most you can from your investment.

  It is no coincidence that the first Fact of Business Life is about leadership. Without leadership we wouldn’t know what to manage or control, what assets we should protect, which processes have to be developed, what our goals and objectives should be, who will be accountable, or about virtually any other aspect of running a business. In fact, leadership is such a powerful tool that virtually every element of success depends on it. Unfortunately, while leadership is one of those words that gets tossed around very frequently, I believe that only a small percentage of owners and businesspeople have a real working understanding of what it actually is and when and how to use it. Oddly enough, that can work to your advantage. By exercising your leadership skills you will be able to attack your market, create an opportunity, expand your ownership role, add quality to your life, and, eventually, exit your business on your own terms. If you have any doubts about this, ask yourself if you’ve ever heard anyone blame a business failure on having too much leadership. Chances are that you haven’t, and that’s because when you exhibit leadership, when you have the courage to step out from the ordinary and use it, it can mean the difference between failure and success—not only in your career but in your life as well.