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NOTE: Effective January 1, 2017, I will no longer post new articles since I am now fully retired.

Sunday, September 18, 2016

Feeding and Starving the Right Parts



Getting a business owner focused on value requires some basic logic that for some reason is incredibly difficult. It has to do with the fact that no-one likes being told their baby is ugly. Many business owners are too attached to certain parts of the business, making it hard to grow the company. Think of it like a garden which produces different vegetables. Some vegetables are more profitable than others. Those vegetables that sell the most fail to get fertilizer and attention because the gardener is so in love with his tomatoes, but tomatoes make no money. Farmers who are good business people change crops according to what will bring in the highest income. 


Business owners need to think the same way about all parts of their business – pursue those parts that will grow the company. Your business consists of a set of value activities. Each has its own return on capital and each has its own needs for capital. You can plot each on a bar chart in relation to rate of return and capital requirements. Each bar should rise above your required rate of return. The short fatter bars are consuming capital and not adding value. And what typically happens is business owners will not let go of the bad (fat) bars on the chart; thus dragging value and growth down.   



If you are challenged at looking at each part of your business this way, then at least look at your marketing activities. Where are you getting the best leads that convert into profitable sales? This is a good indication of where you need to allocate more resources in growing the business. It’s also important to ensure others can run your business when you are out of the office. This is one of the biggest reasons why business owners cannot exit or sell the business; lack of a legacy team for running the business once the owner is gone.  

“We surveyed more than 1,000 business owners over the past five years, and our findings revealed that if the average business owner became incapacitated and couldn't work, their business would fail in less than 30 days.” - Why the Best Way to Do Your Job Is Not Doing the Job by Jeff Hoffman and David Finkel, Inc Magazine

Business owners need to recognize the payoff that comes with value and growth. As Chris Snider, President of the Exit Planning Institute points out – Business owners need to become enlightened about the different stages of value. It not only involves identifying different value parts, but knowing how to build it and harvest it. Snider reminds business owners that your business is worth nothing (zero), if you can’t harvest the value of your business. This alone should jolt business owners into understanding valuation and how best to grow the business.

Astute business owners set targets on what compels them to exit and the best strategies tend to be highly strategic, i.e. the business continues under new ownership, but can grow and prosper in more meaningful way. This process takes considerable time and effort. So it’s important to plan for both growth and a transfer of ownership. Additionally, there are tools to help facilitate the process such as the Entrepreneurial Operating System, CoreValue, Value Builder System or Value Opportunity Profile. Even simple tools such as Finagraph can help illuminate key issues for the business owner.

A final point concerns your people. If you want to grow a business, you need to grow your people. Employees should understand plans for the company going forward. The best employees are those who think and act like the business owner. This usually requires some form of incentive so employees are not just showing up for work to collect a paycheck, but instead have a vested interest in the future of the company and understand the benefits of growth including the exit event.  

Recommended Reading:
Scale: Seven Proven Principles to Grow Your Business and Get Your Life Back by  David Finkel and Jeff
Scaling Up: How a Few Companies Make It...and Why the Rest Don't by Varne Harnish
Traction: Get a Grip on Your Business by Gino Wickman
Built to Sell: Creating a Business That Can Thrive Without You by John Warrillow

5 comments:

  1. Nice blog! the content which is mention in this blog is really understandable and informative. I really like this blog and thanks for sharing.
    Financial Management

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