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

by Bill McBean

  In the customer area, one of the best ways to keep your current customers is to provide them with more value or, as some say, “overdeliver.” For example, if your business is selling computers, you might give free seminars to your customers to help them maximize their use of computers and the Internet. Similarly, if you own a restaurant, you can give regular customers free samples of new food or desserts, showing them you appreciate their business and giving them additional reasons to come back and to tell their friends about you. This kind of “overdelivering” comes in many forms, and is limited only by your imagination. If conquest sales is your goal, you can go after your weaker competitors’ customers by giving them something—such as lower prices or added service—that your competitors can’t afford to give. You can also find a location that you’re not penetrating and plan and implement strategies to increase sales in that area. An additional strategy to attract customers is to determine what the future growth in the market and industry will be, and try to capture this market before your competitors.

  In regard to product, process, and people, it’s important to remember that customers come to you in the first place because of the product or service you provide. However, they come back to you because of the processes that deliver what they want and when they want it, and because of their relationship with the people who deliver it. Most important, customers want all of these things to go right every time. The only way to guarantee that happening is to plan what you’re going to do and how you’re going to do it, and then implement the plan efficiently.

  Taking market share, or conquering your competition, requires good strategies as well as good tactics, both of which are key elements of planning. An excellent example of this is Walmart and how they created a competitive advantage over their competitors. Walmart claims they have the lowest prices, but their pricing strategy depends not on what they sell items for, but on how they buy and inventory them. Sam Walton understood planning and competitive advantage, and he recognized that he could use computers to be more efficient than his competitors at purchasing and inventorying what customers wanted. And he did it so well that, to date, the Walton family has made more money from the invention of the computer than anyone else—more than Steve Jobs and more than Bill Gates.

  As noted above, the fourth critical area at this level is added value. Added value is important because every owner eventually has to deal with his or her exit from the business. Whether it’s selling the business, executing a succession plan, or simply closing the business down, doing it right takes time and proper planning. There are essentially two aspects to doing this, the first and arguably most important of which is timing. If you’re talking about a sale, timing means figuring out when the business will be worth the most, balanced against your personal situation and finances. If you’re talking about succession, however, determining the best time to turn over the business depends on the successor and his or her experience and maturity level, balanced against your personal situation and the current state of the business and the industry. The point here, though, is that you have to be constantly planning and monitoring your situation so that you don’t let a good exit opportunity—much less a great one—pass you by.

  The second aspect is that you must consider what you can do to make your business more attractive to buyers. Improving the attractiveness of the facility is something that virtually all owners do, but it’s not the only thing that can be done. Trained personal, a large repeat customer base, accurate financial statements, and continued “fine-tuning” of products, processes, and services, are all important to buyers. If these things are done well, buyers will pay more money, and if you are planning a succession, it will be easier for your successor to step in. Conversely, if there are things that would turn off a buyer, they should be identified and eliminated. Added value is about making the business attractive to others and preparing for both the expected and unexpected, which is ultimately what planning is all about.

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

  Whether you want to believe it or not, there will come a time when you are going to move on. The prospect of leaving the business you’ve nurtured and made a success of may not be a pleasant one, but at some point in time you are going to have to face it. And, as I mentioned earlier, the reality is that if you don’t pick the time to do it, someone or something else will. Of course, every owner’s situation is different, but as I also mentioned earlier, it’s always important to remember that the best time to sell a business is when you don’t have to. Efficiently transferring your business to a family member, or capping your career with a big payday when you’ve sold your company, is always tremendously satisfying. But whether you decide to implement a succession plan or you sell the business, as long as you do it on your own terms, you’ve beaten the odds and won the game.

  The Benefits of Planning at Level 5

  Planning enables you to identify possible buyers and determine which the best ones are, that is, which have the capacity to pay and would benefit the most from buying your business.

  Planning helps educate you on the market value of your business by comparing how like businesses have sold, what criteria are used for setting valuations, and how these compare and relate to your own circumstances.

  Planning provides you with a time frame for improving your business’s performance before selling and gives you a time horizon for accomplishing your goals.

  Planning helps you develop guidelines for making and executing decisions that will add value to the business.

  Planning enables you to recognize that selling a business is a process and to understand the various issues of that process.

  Planning makes it possible for you to “cherry pick” their selling team, including mentors, lawyers, accountants, and bankers.

  Planning helps you select the timing of the sale as well as the conditions of the sale, which provides you with more control over the process.

  First Sale versus Last Sale

  The first time I sold a business it was because an ownership opportunity in Texas that I couldn’t pass up had presented itself, and buying the new company meant I had to sell the business I owned in Canada. It was a good business (and my first one) with good employees and good prospects. Unfortunately, I had no idea what to sell, how to sell it, who to sell it to, or how much to sell it for. I also underestimated the emotions involved. In other words, I was clueless about selling a business, and I knew it. To make matters worse, the buyer knew it, too. The result was confusion, surprises, and lots of stress. After the sale, I pledged to myself I would never be in that position again.

  Many years later, when my partner, Bill Sterett, and I sold our group of businesses in Texas, the situation was the exact opposite. Bill and I had started talking about our exit five years before we actually sold the business. We identified who the most likely buyers would be and prioritized which ones would be the best (i.e., who would pay us the most money and have the capacity to pay). We knew what these buyers liked about our business, and what they didn’t like, eliminated the negatives, and worked to improve the positives. We approached our best buyer, set the expectation level, determined an orderly selling process to follow, negotiated hard, and closed the deal with few regrets.

  We knew where we wanted to go, planned for it, found what we believed was our company’s “sweet spot,” and sold the business on our own terms. I would classify us as successful entrepreneurs, not just because we were able to accomplish what we had set out to do, but because we sold when it was right for us.

  Gathering Information at Level 5

  Planning at this level requires learning about the pros and cons of selling and succession, and how to determine the best time to exit the business. There’s a lot of information to be gathered, but it all falls into three categories.

  The first category is market information, including such things as sales trends, market and industry expansion, common conditions in buy/sell agreements, current selling prices, in
dustry goodwill (national, regional, and local), who the buyers are, bank-lending constraints on buyers, and others. You must have this kind of information if you’re selling the business. Without it you’d be exiting “blind,” which is a situation no owner wants to be in. All active owners usually have this information, but it’s always best to verify that what you think you know is correct. Where succession is the choice, family members will usually be more supportive knowing decisions have been made on current market facts and valuations.

  The second category is internal financial information. Having accurate financial statements, and being able to show how financial statements are prepared and internal processes work, is a huge plus for any seller. Doing so enables you to comment confidently on the market and the business, and have these statements supported by market and financial facts. In fact, nothing slows the momentum of a sale more than misinformation and the uncertainty of inaccurate financial statements. Accurate financial information helps you determine the selling price, its justification, the type of sale preferred—asset or share sale—and selling strategies. For buyers, knowing they are making risk and opportunity decisions based on accurate facts and information usually translates into higher selling prices, and makes it easier for a bank to lend them the money. Critical as this information is for selling, though, it’s equally critical for succession. Family members will want to know what’s in it for them, and it’s always hard to argue against facts. When this financial information is added to the market information, a complete picture of the business is presented, and, again, it becomes clear to everyone that your decisions are based on factual information and sound reasoning.

  The third category comes into play only if you are planning on succession rather than a sale. Succession is a widely used exit strategy for family businesses, but if it’s not thought out and planned in advance it can be like walking through a never-ending mine field. If you are planning a succession, then, it’s essential that you select a lawyer and an accountant who have experience in succession issues and can provide you with information and suggestions on how to accomplish your goals efficiently and eliminate any possible future ramifications that can disrupt a family.

  Analysis, Planning, and Implementation at Level 5

  As with all the other levels, at Level 5, once you have gathered the information you need, the next step is to analyze, plan, and act on it. In doing so, however, it is extremely important that you bear in mind the four realities that every business owner must face when he or she has decided to move on.

  If you don’t pick and plan the time to move on, someone or something else will.

  The best time to sell a business is when you don’t have to, and if you don’t do it then, you will have missed a golden opportunity.

  Not properly determining the market value of your business and the many tax and legal implications of passing on ownership will put you at a distinct disadvantage.

  Emotion, personal goals, and your own biases and ego can have a huge impact on the entire selling or succession process, and it’s important that you guard against it.

  There is no escaping these realities, and the cost of trying to do so can be extremely high. If, however, you recognize them, and take them into account, you’re much more likely to be satisfied when the process has been completed and you’ve successfully turned your business over to someone else.

  Let’s say, then, that you’ve done your analysis and determined that both the market and the business have been growing at a steady rate over the last number of years. But you’ve also recognized that you have, to some extent, lost your enthusiasm for the work required to continue growing the business. This lack of enthusiasm, which is very common, can unfortunately mean a decline in sales and profits. This in turn can make it difficult to get as much money as you might from selling the business or to arrange a successful succession. The old saying that “a skunk stinks from the head down” is true for the skunk and true for the owner.

  In a situation like this, the best course of action would be for you to hire someone to help you lead and operate the business, someone who will bring added enthusiasm to the company and who will work toward meeting the goals and objectives you have set for the business. An additional benefit of doing this is that it would give you the time to learn the business-selling process and address the value-added issues to achieve maximum payout. Alternatively, you can continue operating the company yourself but redouble your efforts to maintain the success you’ve already achieved. Both of these choices are easier to say than to do, but in most cases either choice is a better option than not maximizing your business exit.

  However, your analysis might have shown that your business’s sales and profits have remained flat while the market and industry have continued to grow and prosper.

  In this situation, knowing that you’d like to sell the business within a few years, the best solution for a maximum payout would be to improve the business’s performance through a short-term plan. This usually means that you would have to solve the problems that have kept the company from growing along with the market. These problems usually include personal issues (including the role of the owner), process issues, product issues, and finding ways to attract new customers and keeping them.

  The only alternative you would have in such a situation (besides hiring someone to do the job if you can’t do it yourself) would be to attempt to sell the business based on what the sales and profits could be rather than what they are. The problem with this option is that it’s hard to convince buyers to pay more money for a business than it’s currently worth. And even if you can convince someone to “pay all the money,” getting a bank to lend him or her the money is likely to be very difficult. Even though this option is hard to do, it’s not impossible, which means that you and the buyer would have to get creative when negotiating the deal. Being creative could mean your participating in some of the buyer’s future profits, leasing the building or equipment rather than selling it outright, entering into some type of management buyout agreement, or changing the sale from an asset purchase to a share purchase. Deals like this take place much more often than most people realize, and doing it this way can get you the price you want and give your buyer the business he or she wants.

  Good things rarely come to those who sit and wait. Hoping that a great candidate to whom you can turn over or sell your business will come along just isn’t realistic. As with every other stage in your business’s life, in order to get what you want, when you want it, you have to make plans. You have to gather the appropriate information, analyze it, develop a plan, and then implement that plan. In a sense, the plan you develop at Level 5 will be the most important one you’ll ever make for your business because it will determine whether all the work you put into the company, and all the time and effort you expended to build it into a successful business, was worth it.

  At the beginning of this chapter, I suggested that you imagine you are standing at an intersection with cars coming at you from every direction. You know you’re in danger where you are and that you have to move, but since all the roads look the same, you can’t tell which one will get you where you want to go. Planning—as I said and have now shown—is what enables you to determine which road is the right one for you and your business. Regardless of which of the five levels your business is on, it is only by determining where you want to go and making plans for how you’re going to get there that you will be able to achieve success. Most important, as I’ve demonstrated, you don’t need a crystal ball to do it: planning is about preparing for the future, not predicting it.

  Chapter 7

  Fact 5: If You Don’t Market Your Business, You Won’t Have One

  We have all heard marketing experts tell us not to think of marketing as an expense, but rather, as an investment. And what they say is certainly true. But instead of proclaiming the obvious, these so-called experts should be explaining to owners the two most important—and frequently forgotten—macro concept
s regarding marketing. First, marketing is not a department. Marketing, in all its many aspects, is about capturing customers and doing all you can to keep them coming back, and achieving that is not just the responsibility of one department. It must be, either directly or indirectly, the responsibility of every employee in the organization. Second, marketing is ultimately about making more money—gross profit, to be precise. And that won’t happen if the overall gross profit is not sufficient to cover costs and expenses. This might seem like a very elementary idea, but business failures occur far more often than business successes, and lack of gross profit is one of the main causes of those failures. One thing you can be sure of is that successful owners understand the importance of gross profits, and they battle hard, through pricing and product offering, to preserve them.

  There is nothing pretty about marketing—it can be a blood sport. And its function is fairly straightforward—attract them, sell them, and keep them. That’s the simple reality of marketing. Unfortunately, that definition is the only simple thing about it, because attracting customers isn’t easy to do, and the ones you do attract won’t all become loyal customers, even if you do everything right. That is, it takes marketing to bring customers in, but it also takes marketing—through businesses processes, selling skills, and employees’ interactions with customers—to keep them. Having the right product, at the right time, at the right price is one thing, but delivering it to customers in a way that provides acceptable gross profits is something altogether different.