Lotto? No thanks. 10 Business Strategies to Grow Wealth.
In my last article “I Just Want Out” I talked about recent conversations with business owners who have had enough and want to get out of their business.
Unfortunately for these owners, few have done any meaningful preparation for the sale, so they need to remain in the business, or sell the business for a significantly discounted amount. Neither option is particularly attractive.
We advocate running business as if it is to be sold. In other words, ‘begin with the end in mind’.
The following is a hypothetical scenario, however the examples are all taken from real life businesses:
John Smith was employed in his industry for many years and had advanced in his career. As he progressed, he found that he was working increasing hours and he felt that he was making significant money for his employer. He also felt that he was not properly financially rewarded for his contribution. In addition, he recognised a number of opportunities that the business owners were not willing to pursue. He found this frustrating because he thought that the business could be far more profitable if they changed focus.
As a result, John and his wife Mary decided to set-up their own business. They recognised the financial rewards that can be available to business owners and they liked the flexibility of being able to make their own decisions. At the outset, funding was tight so they obtained limited advice. They spoke to friends and their accountant and expressed that they wanted to minimise their personal tax liability. As a result, they decided to commence the business as a company and family trust structure.
In the early days John & Mary were responsible for everything in the business. They were the Sales Department, the Marketing Department, the Accounts Department and all other roles, including the cleaners.
Progressively, the business grew. They started employing people for various roles. Employees were taken on in sales/ marketing roles, customer service, accounting roles (and they finally employed a cleaner). At the same time, John and Mary continued to be involved in all aspects of the business – more often than not finding themselves fixing their employees problems and solving day-to-day business issues. In addition, they found themselves dealing with human resource issues that seem to follow when you employ a team of people.
John & Mary effectively became General or Operational Managers. Neither of them had a specific job focus and their roles often overlapped. Because they were dealing with a myriad of issues, their focus was on the day-to-day business however, they needed to concentrate on strategic issues.
As the business continued to grow, some of the ways that they historically did business no longer worked. Various departments were not communicating, Marketing were not talking to Sales who were not talking to Customer Service.
Customer Service were not able to deliver on promises that were being made by the Sales Team and customers started to complain. In order to counter this, John and Mary started to offer discounts.
The Accounting team started to fall behind. Various departments were asking for information and the Accounting team struggled to keep up with the number of reports that they were being asked to produce. Their major problem was that all reports were manually produced and time consuming.
John and Mary became frustrated because they could not get copies of their Management Reports on a timely basis. This frustration was magnified because the reports that they did get showed that profit was increasing however, they were having difficulties managing creditors and the ATO. Because cash was short, they reduced their own salaries and their personal finances became stretched.
They decided to talk to their bank to get an increased overdraft however, the bank said that they had concerns with their financial performance. The bank said that they would consider more funding however, before they could approve the request, they wanted an independent accounting firm to provide a business review.
The banks response made John and Mary realise that their position was serious. The bank had security over their house and they became worried that the bank might take action.
In the past, one of their competitors had expressed an interest in buying all, or a part of the business. John and Mary decided that a partial sale might be a good way to access cash. They approached the potential purchaser who indicated that they were still interested. The purchaser said that they would like their accounting firm (a “Big 4”) to do due diligence on their behalf.
The accounting firm gave John and Mary a list of information and they instructed their internal accounting team to get it ready. This took a few weeks because the list was long. Once the information was complete, the accounting firm sent a team of people into the business. They were there for two weeks.
In the meantime, the creditors became more demanding. The accounting team was distracted getting the information ready and they were not able to make payments. The bank also started to ask more questions about the state of the business.
When the accounting firm finished their investigation, John and Mary met with the purchaser who told them that whilst they are interested, they couldn’t buy into a family trust structure so this needed to be changed. They also said that their accounting firm had identified a number of business issues and they were worried that the business was too dependent on John and Mary. As a result, they indicated that they could not pay the asking price. Their valuation was approximately half of John and Marys’ estimate.
I’ll leave this example here. Clearly there could be a number of different outcomes to this scenario – some of which could be serious. I would like to concentrate on how this could have been avoided.
Starting with the end in mind:
At the outset, the wrong business structure was used. Whilst they sought outside advice, their focus was on minimising tax. This might have had some short-term benefits however, when they tried to sell part of their business the trust structure made the business impossible to sell. Trusts can be unwound however, there can be significant accounting and tax costs. It also takes time to unwind these structures.
When the business started to grow, John and Mary recruited on an ad-hoc basis. They recruited to fill specific roles however; they did not look to the long-term. None of the employees had specific role descriptions in place, therefore each of them was busy ‘doing their own thing’ and they did not operate as a team. Also, as a consequence to the lack of job definition, when problems arose, the employees relied on John and Mary to fix the issue. None of the employees were empowered to problem solve and the business was dependent on John and Mary on a daily basis.
There was no strategic view of the business, which meant that Sales, Marketing and Customer Service were not working together. Marketing was actively promoting the product, Sales were busy taking orders however Customer Service was not able to deliver. No-one was accountable for ensuring that all business areas were working together. Mary had the experience and ability to take this strategic role however, she was so busy with other issues that she did not recognise the broader problem.
The Accounting team became ‘bogged-down’ because they were answering to many masters. Numerous people within the business were asking for ad-hoc reports that were produced manually. Many of these reports were duplicated, or variants of the same theme and some of them were not actually used by the people who were requesting them. The most important reports were the monthly Management Reports for the owners however, these were delayed because of the volume of work. The lack of reporting masked the fact that margins had reduced, partly as a result of discounts that were offered to pacify customers. In addition, customers were not paying promptly which was creating the cash flow problems. John had the ability to take this strategic role, but once again, he was too involved in day-to-day issues to recognise the cause of the problem.
Hopefully, if you are in business, not too many of these examples apply to you. If some do apply, take comfort. Whilst this example can appear extreme, the issues are not actually that unusual and businesses can recover and prosper from this position.
No matter what your position, it is never too late to adopt an approach of managing with the end in sight. A proper strategic approach will cure ailing businesses and will improve good businesses.
Ten steps to improvement follow:
Review of the business, to identify issues and prioritise them in order of importance.
Identify issues that are likely to have immediate impact (often funding issues). These issues need to be dealt with as a priority and the remainder of the issues worked through in order.
The Strategic Plan needs to be refreshed. It is often a good idea to involve key staff in this process and it is essential that the plan be communicated to all staff.
A proper business structure needs to be introduced.
Roles need to be defined and accountabilities aligned to the Strategic Plan should be introduced.
Accountability should start from the top-down. In this example Mary & John need to have their roles separated and defined, then the employees.
The review should include all systems. As an example, the company may have outgrown its Accounting System or Customer Management System. The systems need to be adequate for the current business size and also be able to grow with the business.
A proper reporting regime should be introduced that provides timely reports on the key business drivers. This allows proper management decisions to be made.
Customer and supplier relationships should be reviewed and segmented appropriately. Often historical relationships exist that no-longer suit the business needs.
Finally, with the end in mind, an appropriate structure needs to be identified which will allow the eventual sale of the business, or introduction of equity.
The benefits of a methodical approach are significant. If this process is followed correctly, the business can be self-sufficient and largely independent of the owners. The owners are free to concentrate on strategy and are able to act as Company Directors as opposed to employees.
Most importantly, the business value is significantly increased. Getting back to the title of this article, the chance of winning Lotto is approximately 1 in 8,100,000 - I know which strategy I would rather pursue.