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Inadequate Infrastructure

When constructing a new building, the architect considers the size and use of the facility in order to calculate the foundation, plumbing and electrical needs. If you are constructing a building that you hope to expand one day, the architect will recommend putting in larger electrical and plumbing services as well as having land available for expansion.

A business has similar infrastructure requirements that are needed to accommodate its growth. These requirements include team talent, working capital, equipment and accounting systems.  Why are these important?  Just as electrical service is limited by its capacity, inadequate business infrastructure can limit the growth of a business.

As a business grows, the complexity of the business issues grow with it.  An entrepreneur will eventually become overwhelmed if he or she is the only decision maker or performs too many of the daily tasks.

Capital needs such as new equipment and expanded facilities can be significant in a growing business. Traditional financing requires a 20% down payment, and while 100% financing can be found, it is typically more expensive. Working capital, the amount of cash needed to support accounts receivable and inventory, can consume all of the cash in a growing business.

For accounting systems, most startups use an entry level accounting system. These systems support basic bookkeeping and some reporting. However, these systems typically have few internal controls to prevent errors or theft and lack the ability to adequately support more complex processes such as manufacturing, inventory or construction contracting. 

So, how does one build a good infrastructure? Begin by planning. Start thinking months and years ahead.  Know where you want to go and communicate that to your team and potential team members. Secondly, build a great team that buys into your vision and has a diverse skillset.  Third, retain as much cash and capital in the business as possible, especially in the early years. The businesses that survived the downturn in 2009 and 2010 had margin in their capital position enabling them to thrive while others failed. Finally, don’t wait until the business is bogged down by inadequate accounting systems. Upgrade the systems in order to provide the data necessary to make better management of the business and its assets.  

Don’t let inadequate or crumbling infrastructure limit your business.

I am a contributing author to the Evansville Business Journal. This article was recently published.

Don't leave business responsibilities to chance

At a recent event Ron Romain, President of the United Companies, said, “If you leave things undone, you are leaving them to chance.”  An entrepreneur has numerous details in his or her business that need attention. Leaving them undone means that chance is now in charge.

In his book, The E-Myth, Michael Gerber discusses numerous jobs that must be filled in a business. According to Gerber, the business needs a President and COO to direct the business, a marketing executive accountable for finding new customers, an operations executive accountable for keeping the customers, and a finance executive supporting the other executives.  Under each of these are individuals accountable for sales, advertising, production, customer service, facilities, human resources, accounts receivable and accounts payable.  Each of these jobs has tasks that must be accomplished in every business, regardless of whether the business is a start-up with one employee or a mature business with thousands of employees.

Too many times an entrepreneur does not make certain that someone is accountable for the responsibilities in each area.  It might seem silly in a business with only two employees, but someone needs to take ownership of each area.  That may mean one person has five job descriptions while the other is accountable for three.  But by assigning responsibility for each job to one specific person, the entrepreneur has someone to hold accountable thus providing a greater likelihood that the jobs will get done and the business will be successful.

So, how do you accomplish eight to ten jobs when there are only a handful of people in the business? First, define and write down each job and its responsibilities.  Secondly, assign the responsibility to a specific person.  If the business doesn’t have the skill set to accomplish the task, look to outsource the responsibility to another company. There are numerous companies in the Tri-State that can provide support in human resources, finance, accounting and marketing. Thirdly, for the person that has multiple job responsibilities, schedule the time necessary to accomplish each job. Finally, hold the individual responsible for accomplishing the assigned tasks.  Don’t leave things undone. Don’t leave your business to chance.

As originally published in the Evansville Business Journal - December 2015

Effective Meetings

At a recent C12 Group, we discussed Effective Meetings, or frankly, the lack of effective meetings.  Our materials discussed that employees admit to squandering away nearly 25% of available working time with web-based social media and surfing, boring meetings, socializing, and ‘spacing out.’1 If, as leaders in our organizations, we can find ways to cut the typical employee’s wasted time half (and our own as well), what kind of impact would it have on the business in terms of productivity, competitiveness and job satisfaction?

One of the leading causes of wasted time, confusion, and poor execution is with long, unproductive or inappropriate meetings. I’ll quickly summarize some thoughts below.

First, are there meetings we or some of our staff don’t really need to attend?  The primary reason we attend unnecessary meetings is a leader’s unwillingness or inability to release responsibility and control to qualified staff members.  To determine the appropriateness ask, “Why do I have to be in this meeting?”  “Why is that important?” Ask this one 5 times.  Then determine to stop attending unnecessary meetings.

Secondly, are the meetings properly planned or conducted?  If not, be sure before scheduling any meeting to be clear on its purpose by communicating specific objectives for the gathering. Also set a specific amount of time for the meeting and begin and start on time. Assign roles and responsibilities such as time keeper, minutes taker, etc.

Finally, be sure to never leave a meeting without first communicating an action summary that lists all follow-up responsibilities, ideas generated, and subsequent meeting plans. 

One great resource worth reading and using is Patrick Lencioni’s book, Death by Meeting. 

If you want to get some more time in you and your staff’s day, evaluate the impact and time spent in meetings. Then take action to improve the process.  Click here if you would like to learn more about the C12 Group. surveys

Take Action

Many of us struggle getting started on that daunting new task, new business opportunity, losing weight or exercising.  Over the years, too many of us say we’ll  start that tomorrow, or next week, or when I have more free time, or business slows down, or whatever other reason (excuse) we can come up with. The reality is we just need to start taking action.

A couple of years ago I read Charles Keifer and Leonard Schlesinger’s book Action Trumps Everything.   Here’s a quote from an article on the Business Innovation Factory - With so many people today paralyzed in the face of large-scale problems and high degrees of uncertainty Schlesinger says the imperative for the entrepreneur is to just plain do: Start with the means, not the ends; define affordable loss; network like crazy (with people you like); and leverage contingencies. “There’s a whole way of thinking about the world that doesn’t include fantasizing about an 85-page business plan and 12-year forecast spreadsheet.”

I help business owners create business plans and forecasts. In many cases the owner is trying to get resources for their idea, business or prepare the business for sale. Raising money for an unproven venture or to fund a business that’s been losing money is difficult at best. However, many times the owner would be better just getting started on the new idea by creating a simple plan, taking baby steps, investing small and adjusting the course based upon what’s been learned. Success with a small step can lead to much larger leaps including getting financing for the project. As stated in Action Trumps Everything -  Act. Learn. Repeat. It’s all about taking the real step of faith to get started.

I recently ran across another book, The Do! Manifesto by Kevin Kelly (click to see a summary). Here’s a quote from Kelly, “What matters isn’t what you lack. What matters isn’t your idea. What matters is what you do with your idea. What will you do?”

It’s really pretty simple – it’s all about executing the plan. So, once you’ve created a business plan, strategic plan or just have an idea, get going on executing it to the best of your abilities. Most of us don’t know everything and that includes me, but I know a lot of very smart people who are great in areas that I’m not.  So reach out and network as much as you can. Build relationships with people and offer them what skills you have.  Get going taking some steps on your idea, learn from it, adjust the course and take some new steps. Don’t bet all you have up front. Too many businesses or owners take a huge gamble by investing all they have, or what’s been given them. Or, even in the face of huge losses think that this year will be different. Sometimes you just need to throw in the towel. Try to take measured steps to see if the market will really accept your idea. Then go all in once you’re confident the idea will work. In other words, Ready – Fire – Aim. 

And while this is simple, most of us won’t take that step without some encouragement and accountability. Find a coach or advisor who can help vet your idea, not hold you back, and hold you accountable for the execution. I know that has helped me in my practice.

I hope this has gotten you motivated to get started. Decide this year that you are going Take Action.

Increase the value of your business

In my last post, I discussed the issue of the difference between what the owner thinks the business is worth and what a buyer is willing to pay for it. In order to close that gap, it’s very important that the owner start taking steps immediately to improve the business, thereby increasing the value of the business.

The process during the exit strategy process is to minimize distractions, focus on increasing sales and sales diversification, improving processes and efficiencies, and branding the business.

The sale of a business is a very time consuming event. The company’s advisors may include five to ten different individuals and companies. So, while all this is happening, the business and the owner must concentrate on what brings value to the business. Buyers are typically looking for and willing to pay a premium for businesses that exhibit the following traits:

  • Increasing sales above the market average

  • Increasing profits year over year

  • Diverse customer base – no single customer greater than 10% of business

  • Well documented human resources

  • Non-competes and non-solicitation agreements with key employees

  • Strong management team

  • Well documented systems and processes

By improving in these areas, a business can increase its EBITDA by 20% to 50%, causing not only EBITDA to increase but the multiple paid to increase. So, a business that had EBITDA of $1mm and an estimated value of $4mm before any improvements (estimated multiple of 4X) can end up with a purchase price of $6mm to $7mm with only a 20% increase in EBITDA but an increased multiple to 5-6X.  That’s a potential increase of $2,000,000 for only a $200,000 improvement in EBITDA, but also improved structure, processes and teams.

So, to prepare a business for sale in order to maximize the purchase price takes time.  Time to get systems and structures in place to reduce risk to a potential buyer.  The best time to start is a couple of years in advance. This allows time to implement the proper systems and strategies to make certain that revenues and earnings are increasing and the business is perceived in the best possible light by the buyer. An experienced exit planning advisor can help you create and implement plans to increase the value of your business. Give us a call if you'd like to learn more. 

How much is your business is really worth?

Unfortunately, probably not as much as the owner thinks it is. Business owners often feel:

  • Buyers and appraisers are intentionally undervaluing the business

  • The prospective buyer does not really understand the true value of the business

  • The various valuation methods are not realistic ways to calculate value

  • Not enough value is given to intangibles, such as employees, customers, etc.

There are 10 different valuation methods outlined in the book, Private Capital Markets, Valuation, Capitalization, and Transfer of Private Business Interests. They showed how one company’s value, using the same financial information, could have a value ranging from $2.4mm to $18.2mm.  That’s a very wide range for a business to be valued at – most owners want to know what their business is worth in a fairly tight range.  For most small to mid-sized businesses, they will be valued at a multiple of EBITDA, less any debt assumed by the buyer. 

EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization. This information can easily gleaned from a company’s financial statements. There are typically several adjustments made to increase or decrease EBITDA. A company’s advisor needs to spend time evaluating your business in order to identify any possible adjustments before any discussions with prospective buyers. Different types of buyers will pay more than others. ESOPs and management buyers are on the lower end, financial buyers in the middle, and strategic buyers usually willing to pay the most for a business. While multiples can range from 3x to 10x EBITDA, most are in the range of multiple of 3-6 times EBTIDA for most small to mid-sized businesses. Consequently, increasing EBITDA by $100,000 could net easily another $500,000 for the owner.  Adjustments typically many of the following:

  • Excessive compensation or below market compensation to owners

  • Personal expenses passed through the business

  • Excessive personal travel

  • Related party transactions that are not a market value, such as building or equipment leases

  • Write-offs of unproductive or obsolete assets

  • One time litigation costs

  • Catastrophe losses such as fires, tornado damage, etc.,

  • Opening a new facility

So, if the owner thinks his business is worth $5mm, but your advisor thinks it’s only worth $3mm, what are the next steps?  Stay tuned for my next post on how to increase the value of your business. 

Contingency Plan

Many business owners are good at contingency planning in their business. They plan for disasters hitting their physical facilities, computer networks, and perhaps the departure of key people. Surprisingly, few business owners plan for the departure of the most important person in the business and the one thing that is certain– their own eventual death or disability. Generally speaking, owners have more pleasant endings in mind when they think of exiting their businesses.

Without continuity of leadership, a business will likely fail. If ownership transition for a business is uncertain, business continuity is seriously threatened. The business owner’s death can have a significant effect upon the company’s ability to maintain its financing, relationship with its customers and vendors, its bonding status, and other key business partners.

The balance of power, particularly in a closely held business, can be very fragile. The loss of a company leader can leave a void that results in power struggles, employee turnover, managerial mistakes, lost customers, and lost profits. Even a vital and profitable company can unravel quickly when its leader is unexpectedly removed from the mix.

To minimize the chance of panic or power struggle in the business, emergency plans should be created to account for the sudden absence of leadership. Responsible individuals, such as corporate officers and board members, should be made aware of and empowered to implement the plans should the unthinkable happen.

The contingency plan should include the following:

  • Management – who should be responsible for day to day management of the organization as well as the oversight of management (typically the board of directors)
  • Compensation – develop a stay bonus plan for key managers for the transition period
  • Disposition of the business – should the business continue to be run by management, and if so, for how long?  Should the business be sold to the management team, employees or third parties?
  • Advisors – list the key advisors to assist in the disposition of the business including exit planning professionals, investment banker or business broker, attorney, and accountant
  • Possible buyers – maintain a list of people of who may have contacted you over the past few years that have expressed an interest in the business
  • Goals – list the primary and secondary goals of the disposition, such as your financial legacy, keeping the business in town, preference regarding the business name, employment of key people.

While no one likes to think about their own death or disability, a well crafted contingency plan can help provide stability and success for the business as well as peace of mind for the owner’s family.