Last month Bill Long did an excellent job of discussing the factors that affect Business Valuation (See Bill Long’s article here). He looked at owners’ opinions and valuation experts’ opinions. He talked about what buyers are really looking for and how owners can improve the value of their businesses and make them more attractive for sale.
Under the heading “What DO buyers really look for?”, Bill talks at length about the importance of a business being able to run without the owner.
This month we’re going to discuss what it means to be an Owner-Driven business, how and why it occurs and the relative merits and challenges. We’ll then look at what it means to be Systems-Driven and compare and contrast.
When a business launches, the owner will work the most hours, make the most decisions, do the marketing, sales and accounting, and perhaps serve or pack and ship products. Even if there is enough working capital to hire a full staff, that capital is often saved for future needs.
As the business grows and with it the need for more production, more customer service, more purchasing and quality control, the owner begins to delegate. As he delegates, he teaches his employees to do things as he would and periodically checks to make sure quality is controlled. The business continues to grow, the staff continues to grow and the culture continues to be driven by the owner. Soon the business has reached $10 million in revenue with 35 employees and is what we refer to as a “Second Stage” business. Surely this is a business of which to be proud. The owner retains total control and the business consistently provides quality goods and services. But this may be a double-edged sword.
Who has final say on business deals? Who has final say on new hires? Who approves marketing materials and promotional items? Who sets the pricing? Who innovates? Who handles employee reviews? In an owner-driven company the answer is: The Owner.
What happens if the owner is forced to be away from the company for an extended period of time? Can it survive? How successful will the owner be in trying to sell the company without being part of the sale? For all intents and purposes, the owner IS the business and without the owner, what’s left may have little value.
In a recent article, a prominent business brokerage/valuation firm listed the five most important things to consider when calculating the value of a company. One of those critical considerations is:
Dependence on owner. Another important factor that can affect the results of your business valuation is how dependent the business is on the owner. Unless the business sale is a larger mergers-and-acquisitions transaction where the current ownership gets hired by the acquiring company after the sale, the owners of most small businesses do not intend to stay with the business after the sale. For small business sales, the less dependent the business is on the owner, the higher the business valuation can be.
Running a long-term business requires a solid support network that will provide high-quality results over and over again, otherwise known as a system. The value of written documentation containing your processes cannot be overstated. If you and all your employees disappeared, could a new group of people walk into an unfamiliar building, open the manuals, and be able to have the operation running smoothly with no human instruction in a few days?
Growth requires the ability to produce goods and services that are of consistently high quality every single day regardless of the number of locations you have or the number of people you employ.
Consider your favorite national or international coffee house chain. A customer in Wisconsin and a customer in Texas and a customer in Germany each order the same beverage and pastry. Each customer is greeted in the same friendly fashion. Each beverage takes the same amount of time to prepare and each pastry tastes the same. This doesn’t happen by accident.
Henry Ford knew he would never be able to build hundreds and thousands of reliable, easy to repair automobiles without standardization of parts and systems. And no one wants to fly in an airplane that is built by random people with random abilities and random parts.
Build your systems as you build your company:
- Document what you do and how you do it.
- Write down ingredients/components and edit them as you refine your products.
- Take pictures and keep drawings of the building, furniture, uniforms.
- Document the kind of personalities that interact best with your customers and hiring procedures that produce the best results.
- Make your business, on both sides of the counter, accessible to all genders, ethnicities, age groups and levels of mobility.
- Create a corporate culture that rewards a consistently high work ethic and promote from within. Today’s servers should be tomorrow’s trainers.
- Build a management training program to promote your best and brightest so they will continue to reinforce the culture.
- Standardize ordering, billing and reporting.
- Create a dashboard for your managers to use daily to chart sales and other KPIs.
The list can be exhaustive, but the message is the same.
There is nothing wrong with an owner-driven company. You can have a very fulfilling business that provides a comfortable lifestyle for your family and employees. You can pass it on to a family member when you are ready to move on and, hopefully, they will keep it running. The only values you worry about are your good name and solid cash flow.
If your goal is to create a larger company that you intend to sell or take public one day or if you want to franchise or have dozens or hundreds of locations, then making it systems-driven is critical.
Available resources and available options are always more plentiful with a highly-valued company. Keep Bill’s article handy and build a systems-driven business. “Success is not a result of spontaneous combustion, you must set yourself on fire.”
If your business or a client can benefit from our experience and knowledge, please contact us: