by Bill McBean
The Benefits of Understanding the Marketplace War Zone at Level 5
Understanding the marketplace war zone enables you to recognize and deal with war zone fatigue.
Understanding the marketplace war zone allows you to think about what comes next in your personal life and factor it into your exit decision.
Understanding the marketplace war zone allows you to evaluate all the pros and cons of selling the business, passing it along, or closing it.
Understanding the marketplace war zone gives you time to prepare your business to be attractive to potential buyers if you choose to sell it, or to a successor if you decide to pass it on.
Understanding the marketplace war zone enables you to learn about the professional side of selling a business, the tax consequences, and the legal issues involved.
Understanding the marketplace war zone makes it possible to prepare for the new war zone and develop a selling process that will enable you to get and maintain control over it.
The Products or Services You Sell at Level 5
At Level 5, the product you are selling is your business. And as with any product or service, market preparation has to begin by focusing on price. In fact, deciding how much you want for your business should be your first step. In most cases, the money you receive from the sale will have to last through the remainder of your life, so if the company’s value doesn’t match your financial needs, you have to determine where to go from there. You options include holding off on selling the business until you can build up the value of the company, negotiating with a new owner for you to stay on for a number of years as a paid employee, or selling the business and finding a job elsewhere, among others.
It is essential, of course, that you have a clear idea of how much money you want to receive for your business before you start negotiating in the new war zone. As I’ve already mentioned, the price of a business is usually determined on the basis of three factors: the value of the company’s assets, the value of the company’s real estate, and goodwill, that is, the company’s yearly net profit multiplied by a certain number of years. Once you have determined what you consider to be a reasonable figure, you should find someone you know and trust in the industry, or an attorney or accountant who deals in buy/sell contracts, to get a second opinion on the value of your business. This is important because an owner’s opinion of his or her business’s worth is usually more optimistic than the actual market value. Once you have worked out a reasonable valuation, the next step is to see a banker or lender you trust to discuss the sale. The banker or lender should be able to tell you what type of individual or business would be able to afford to buy your company, what he or she would look for in a candidate who wants to borrow money, and what your company’s strengths and weaknesses are as far as he or she is concerned. This is a step that sellers often miss, but it’s an essential one because it helps clarify who would be an ideal candidate for your business.
The point is that your product and the market price for a business like yours go hand in hand; that is, the better the business is operated and the more money it makes, the more valuable it will be to a buyer. And the better the business, the more demand there will be for it, and the more banks will be willing to lend money to someone who wants to buy it. As you’ve learned in the war zone at earlier levels, greater demand generally means higher prices because there will be competition for the product—in this case, your business. And it’s when you get to this point that you enter the war zone at Level 5.
At the end of the day, then, the real war zone issue is how much you get paid for your business; the rest is just semantics. Unfortunately, deals like these are rarely finalized without some bumps along the way. But if you have a qualified buyer, it’s your responsibility to take a leadership role and keep the negotiations moving along. After all, the product is yours to sell. Hopefully, you will be able to strike a deal with the first serious candidate you talk to, but even if you can’t, the exercise will be good practice for the next buyer you take into the war zone.
How Your Company Operates at Level 5
As was just noted, one of the keys to a successful sale is making sure all three of the elements of the war zone—products or services, operations, and competition—are operating on all cylinders. What that means for business operations is that the company must continue running as it has all along, even with the distraction caused by the rumors that inevitably fly around the office as well as the overall market. There are two important reasons for this. The first is that it shows the prospective buyer that the business can run successfully without your active participation on a day-to-day basis. This is a major selling point because it means the business will not collapse around him or her as soon as you leave.
The second reason is that no sale is final until the last legal document has been signed and the money is in your bank. And the fact is that things happen during negotiations that can not only put a deal on hold but even stop it altogether. Let’s say, for example, that you are negotiating the sale of your company and there is another earthquake in Japan, which keeps you from getting critical parts for your product. In a situation like this, it’s possible that your buyer will say that it’s your problem and suggest you contact him or her when your business is back to normal. It’s also possible that the buyer may decide at the last minute that your business is not for him or her. The point is, if negotiations stop for any reason, the more smoothly your business is operating, the easier it will be for you to slip back into your ownership role and keep the company doing what it’s been doing all along—running well and delivering profits.
How Your Business Competes—The X Factor—at Level 5
Competitiveness—the X factor—was an integral part of your company’s success in the war zone at all the previous levels of business, and it serves the same purpose at Level 5. But there is a difference. At the earlier levels, both your competitiveness and that of your employees played a role in your success. At Level 5, though, it’s primarily your employees’ competitiveness and drive for success that’s so important, because it’s that attitude your buyer wants to purchase. In fact, when your employees demonstrate their willingness to compete in the war zone, it can be every bit as powerful a selling point as showing positive sales, gross profit, or net profit trends.
How do you demonstrate a company’s competitiveness? One way is by showing potential buyers how well your employees can attract, sell, and deliver the business’s products, as well as maintain contact with customers. Another is to demonstrate your processes and how efficiently your employees operate them. Not only do such demonstrations give your potential buyers confidence in the business, it also helps justify whatever price you’re asking for the company. Perhaps the best way to make sure potential buyers see all of this is to walk them through your business and point out what happens in different areas of the company, how you or your managers keep track of expectations, and in turn how each department supports the others in a coordinated way to achieve the expected outcome.
The war zone isn’t for everybody. And even among those who are willing to enter it, no two will attack it in quite the same way. But the reality is if you don’t recognize the war zone for what it is, and what it can do to benefit—or damage—your company, your business model will have a serious flaw that will cause your business to seriously underperform, if not fail altogether. In order to be a success in the war zone, your business has to be focused on three elements—the products and/or services you sell, how your business operates and supports your offensive weapons in the war zone, and the X factor, that is, how competitive you are. Each of these elements is an integral part of war zone success, and together they make the point that success is far more than just aggressiveness in marketing. In fact, it requires many different skills, including leadership, planning, control, and all the other Facts of Business Life, as well as understanding how to navigate your business as it moves from one level to the next.
Chapter 9
> Fact 7: You Don’t Just Have to Know the Business You’re In, You Have to Know Business
Being an entrepreneur is about making choices. Even this book is a result of choices made. For example, I have chosen the seven most important and relevant business concepts owners need to understand in order to be successful. They don’t cover every aspect of business, but that doesn’t mean the business disciplines I didn’t choose to discuss aren’t important. It simply means that some concepts are more important to business owners and their success than others. In fact, the more you know about business in general, the wider your overall understanding of business becomes, and the more likely you will be to attain the kind of success you’re looking for.
This hasn’t always been true. In the past, if you were an expert in your field, even if you had only a limited knowledge of business outside that field, it was possible for you to be business success. For example, in the 1950s, 1960s, or even 1970s, if you were a good car salesman, you could be a candidate for owning an automotive franchise. Today, though, car manufacturers judge candidates much differently, using criteria such as overall experience in business, strong capitalization, understanding of the importance of customer satisfaction, personal background, experience in leadership, and skills in accounting and finance, among other business abilities. That is, they look for well-rounded individuals with track records of business success. The reason for this, of course, is the enormous change that’s taken place in the market over the past 50 years. The increased demands of customers and employees, as well as the increased challenges of the marketplace and the pressures of a changing war zone, have forced owners to become more knowledgeable, more innovative, and more focused on their customers and employees than they ever had to before. And since this heightened level of competition is not going away, there will be more and more pressure on owners to comprehend a broader range of business issues.
Of course, it isn’t possible for any individual owner to know everything there is to know about business. Even if it was, having that much information in your head would probably gridlock your brain! What’s most important, though, is not how much you know but what you know, and what you do with that knowledge. For example, it’s important to know what’s going on in your market, but it is just as important to know what to do with that information and how you can translate it into more sales and gross and net profits. This knowledge will come from many sources, like learning from mistakes as well as successes, mentors, books, speakers, and, of course, your successful peers in other markets. In the end, though, it’s your responsibility to make sure what you’re learning is correct, as well as relevant.
The Benefits of Knowing Business
Knowing business enables you to recognize areas in which you are less knowledgeable and seek help in them.
Knowing business means understanding you can’t know it all, but you can hire good employees who do have this knowledge, and then use your combined knowledge to build a great company.
Knowing business enables you to make better hiring decisions because you will know what questions to ask of candidates and be better able to evaluate their answers.
Knowing business helps you evaluate your employees’ performance and be better at selecting those to groom for more responsibilities.
Knowing business helps improve the odds of your making a good decision because the more you know and the wider your business perspective, the more information goes into making the decision.
Knowing business and understanding how all its elements are interrelated helps you build your staff into an effective and efficient team that can move your company quickly from the survival to the success end of the spectrum and on to Level 4.
The Realities of Knowing Business
Ownership requires expertise in areas most nonowners and underperforming owners don’t appreciate.
Knowing all there is to know about your industry is a good start, but it’s not enough.
Thinking you know it all, or acting like you do, is the first step toward problems in the future.
The more you learn, the more you realize how much you don’t know.
The more you know about business, the better your chances of survival and success.
Making mistakes is expensive, but as long as you learn from them, it will have been worth it.
You always need to know the score, or at least have a very good idea of what it is, and the more business you know, the easier it is to read the scoreboard and react to it.
There are essentially four elements that owners should consistently pay attention to in order to round out their understanding of ownership or entrepreneurship. We have dealt, at least to some extent, with all of them before, but it’s in this fact that we focus in on them. These four elements are product, people, accounting and finance, and, finally, you, the entrepreneur.
Product
Although product is something I’ve discussed in virtually all the previous chapters, the fact is that you can never underestimate its importance or forget that it should always be a focal point. One of the main reasons for this is that product and the potential of an opportunity are joined at the hip and together drive net profit. For example, if you had a product that was designed specifically to be used on the NASA space shuttles, your market would be very limited and controlled by the number of shuttle flights. However, if you had a product that could be used in both military and commercial airplanes, your market would be significantly broader, as would your opportunity for success.
Product represents the sum total of all a company does to attract and sell to its customers. That is, your business can do all the right things, but doing all the right things is irrelevant if there is little or no demand for your product. It’s also essential that you always consider not just the demand for your product today but what the demand will be well into the future. For example, 10 years ago there were relatively few people who could have imagined the effect electronic books would have on the dynamics of book buying and the sustainability of the brick-and-mortar businesses that depend on books to attract customers. In situations like this, not recognizing the possibility of a decreased demand can mean more than a loss of sales revenue and profits—it can mean the loss of everything you have worked for, including the value of your business.
People
As an owner, employees represent not only one of your biggest concerns and costs, but also one of your biggest opportunities. The problem with people, however, is that they are people, and open to all the faults and attitudes human beings have, faults and attitudes they tend to bring to work with them. As one of my colleagues once told me, there is nothing like going to the storage room looking for an old file and finding two of your employees half naked on the floor. But you’ve got to love them, because they do make it so interesting—and challenging.
It’s been said that it’s an owner’s responsibility to “motivate, educate, and entertain” his or her employees. And if there is one thing that’s true about a company’s owner and its employees, this is surely it. It’s also been said that “Good owners are created, not born,” and I believe that’s true as well. But some owners clearly have a God-given ability to be great motivators and educators and to do both entertainingly. If you have this ability, it’s a valuable tool, and if you apply it skillfully, you can help employees who are only average performers become excellent employees by teaching them to maximize their abilities through a combination of confidence, knowledge, enthusiasm, and understanding that their daily performance matters to their coworkers, their customers, and the business.
This ability to motivate, educate, and entertain creates something owners without these skills can’t duplicate—transforming their business from a company to a team. Getting your employees to perform different tasks at different levels, and coordinate their efforts to focus on the same objectives and goal, is a beautiful thing. Unfortunately, this kind of teamwork is commonly uncommon in business, just as it is in sports. One of the main reason
s success eludes some businesses and sports teams while others enjoy continued success is the ability of a coach or owner to motivate, educate, and entertain. And doing so not only differentiates your business from your competitors, it also gives you a major market advantage.
Accounting and Finance
It is nearly impossible to evaluate an opportunity or effectively run and grow your business without doing financial projections and understanding your financial position. Unfortunately, although virtually all owners know this, many do not have strong accounting and finance skills, and accordingly don’t have the knowledge they need to match the demands of their businesses. To make matters worse, many owners rationalize their weakness in this area by telling themselves they can hire someone to look after it, and do little to improve themselves except, hopefully, learn when they make mistakes. But no matter how much an owner rationalizes his or her lack of knowledge in this field, there are two underlying factors that can’t be rationalized away. The first is that if you can’t measure it, you can’t manage it. And the second is that in order to know where you’re going, you have to know where you are.
There are other reasons that support the importance of understanding accounting and finance, but for an owner who is serious about being successful, these two factors say it all. Although most owners don’t start out with a strong background in the “numbers,” there are lots of ways to improve your knowledge. One way is to take your banker to lunch, ask what the bank looks for when making loans, and get him or her to explain how they analyze your statements. You can also ask your accountant for an hour of his or her time to teach you the basics. Neither of these will make you a “numbers” pro, but they are good starts, as are the numerous online courses and free information available on the Web. It’s important to remember that ownership is a career and should be treated as such.
