Create a Customer Concentration List

A significant reliance on one or a few customers will directly impact your business's sellability. A high level of customer concentration is risky for a potential buyer who will request a customer concentration list as part of their due diligence process. A wise approach to strategically building a business that is indeed sellable and to being prepared for a future sale transaction is to create and manage a customer list as part of your ongoing business management process.

The following is a guide to help you create a customer concentration list that you could use to manage your business and present to potential buyers. This list is an excellent way to show the distribution and reliability of your revenue sources.

1. Listing Your Top Customers: This is a pivotal step. Identify the top customers who significantly contribute to your revenue, such as those who make up 5% or more of your total revenue. You may use a different threshold based on your business's size, but the key is to identify those who are the backbone of your business.

2. Revenue Contribution: Indicate each customer's percentage contribution to your revenue. This will give potential buyers a sense of your business's dependency on specific clients.

3. Contract Details: If applicable, mention if there are long-term contracts in place. Include contract duration, renewal terms, and any exclusivity arrangements. This helps buyers understand the stability of these revenue streams.

4. Customer Industry and Type: Indicate the type of industry each customer belongs to, which can show diversity across sectors and mitigate risks associated with industry-specific downturns.

5. Historical Relationship: Include the years you’ve worked with each customer. Long-term relationships indicate stability and customer satisfaction.

6. Growth Potential and Upselling: Highlight any growth potential with each customer, like opportunities for cross-selling or upselling, which can be valuable to the buyer.

7. Transparent About Risks. For instance, if you have customers who are not bound by contracts or who have been responsible for high revenue volatility, it's best to disclose this. Buyers will appreciate the honesty and transparency.

By providing this list, you're giving potential buyers a clear understanding of your customer base's reliability and concentration risk. This is crucial for them to evaluate your business's stability and growth potential. Also, if you include this level of customer analysis as an ongoing management process, you will be better prepared to tell and sell your business story when a transaction opportunity presents itself.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Challenges Faced in Moving from Founder Mode to Manager Mode

Transitioning from founder mode to manager mode presents several challenges for small business owners as they plan for their eventual exit. Different leadership styles and approaches will be required as the business grows and moves from the start-up phase to a more mature stage. Here are some key challenges associated with this transition:

1. Letting Go of Control

• Challenge: Founders are used to being involved in every aspect of the business, from strategy to daily operations. Letting go of control and delegating responsibilities can be difficult, as they may feel no one else understands the business as well as they do.

• Impact: The reluctance to delegate can lead to micromanagement, slowing decision-making and growth. It can also create bottlenecks, as the founder becomes overwhelmed with too many tasks.

2. Shifting from Visionary to Operational Focus

• Challenge: Founders typically excel in setting a vision, driving innovation, and taking risks. However, manager mode requires focusing more on operations, process optimization, and day-to-day execution, which may be less exciting for visionaries.

• Impact: Founders may struggle to pay attention to detail, follow structured processes, or deal with routine tasks, which are crucial to managing a growing company. This shift from creativity to structured management can be frustrating.

3. Building and Leading a Structured Team

• Challenge: In founder mode, the team is often small, agile, and close-knit. As the company grows, roles must be formalized, a leadership team must be built, and clear organizational structures must be implemented.

• Impact: Founders may find it challenging to hire the right people for specialized roles, trust them to lead, and give up the hands-on approach. Moving from managing a few people to leading a large team with hierarchies requires different communication and leadership skills.

4. Process and System Implementation

• Challenge: Startups often thrive on flexibility and improvisation, with founders and employees solving problems as they arise. Creating consistent processes, implementing systems, and formalizing workflows in manager mode are necessary for scalability.

• Impact: Founders may resist implementing formal processes, viewing them as bureaucracy or fearing they will stifle creativity and agility. However, the company can experience inefficiencies, errors, and miscommunication without systems.

5. Balancing Innovation with Efficiency

• Challenge: In the early stages, the focus is often on experimentation and rapid growth. However, as the business matures, the emphasis shifts to sustaining and improving existing operations, which can slow down innovation.

• Impact: Founders may feel restricted by the need for stability and consistency, leading to frustration or the fear that the company is losing its edge. They must learn how to innovate within a more structured environment and balance exploration with exploitation of existing resources.

6. Changing Decision-Making Approach

• Challenge: Founders are often comfortable making fast, instinct-driven decisions, especially in a startup’s early, chaotic phase. However, manager mode requires a more data-driven, systematic approach to decision-making, with input from multiple stakeholders.

• Impact: This change in pace can be frustrating, as it may feel slow or bureaucratic. Founders may also find adjusting to consensus-building and decision-making processes involving multiple teams or departments difficult.

7. Evolving Leadership Style

• Challenge: In the startup phase, founders often lead by example, working alongside their small team and wearing many hats. In manager mode, leadership requires more delegation, coaching, and empowering others to make decisions.

• Impact: Founders may struggle to evolve from a hands-on leader to a coach and mentor. Some may find it difficult to trust others to lead parts of the business they once controlled, or they may lack experience managing at scale.

8. Cultural Shifts

• Challenge: As a company grows, its culture evolves. A startup's casual, entrepreneurial culture may give way to a more formal environment with policies, procedures, and defined roles.

• Impact: Founders may struggle to preserve the original culture while adapting to the needs of a larger, more structured organization. If this transition is not managed carefully, it could alienate early employees or create cultural friction.

9. Increased Accountability and Reporting

• Challenge: As a business scales, there is a greater need for accountability, both internally (to employees and managers) and externally (to investors, customers, and regulators). Regular reporting, budgeting, and performance tracking become critical.

• Impact: Founders may find these new demands tedious or at odds with their entrepreneurial spirit. Learning to appreciate and manage financial statements, compliance, and performance metrics is essential but often feels like a departure from the freedom they once had.

10. Adapting to a Slower Growth Rate

• Challenge: Growth can be rapid and exhilarating in the startup phase. However, as the business matures, growth typically slows, and the focus shifts from rapid expansion to sustainable profitability and market share maintenance.

• Impact: Founders may struggle with the psychological shift from chasing hyper-growth to being content with incremental improvements. This can lead to dissatisfaction or impatience, as they may feel the business has plateaued.

11. Navigating Investor or Board Expectations

• Challenge: In manager mode, founders often have to deal with external stakeholders like investors or a board of directors who expect regular updates, transparency, and a focus on profitability and governance.

• Impact: Founders may feel constrained by these expectations and struggle with the shift from independent decision-making to being accountable to others. The pressure to meet financial targets and adhere to corporate governance can be overwhelming.

12. Emotional and Psychological Shift

• Challenge: Moving from founder mode to manager mode often requires founders to redefine their role within the company, which can lead to an identity crisis. They may feel like they are no longer driving the company’s direction or being pushed out of what they built.

• Impact: This emotional transition can result in burnout, loss of motivation, or frustration. It can also cause tension between the founder and other managers or team members, especially if the founder resists stepping back.

How to Overcome These Challenges:

• Hire Experienced Managers: Bringing in professional managers with expertise in operations, finance, and HR can help bridge the gap between founder and manager modes.

• Delegate and Trust: Learning to delegate and trust the team is essential. Founders should focus on empowering others to take ownership of critical areas.

• Focus on the Big Picture: As the company matures, founders should focus on long-term strategy for growth and exit, vision, and leadership while letting managers handle day-to-day operations.

• Develop a New Leadership Style: Founders must evolve from hands-on involvement to coaching, mentoring, and strategic guidance.

• Accept the Need for Structure: Embrace the importance of processes, systems, and data-driven decision-making to ensure long-term sustainability and growth.

This transition can be difficult, but successful navigation allows the founder to play a pivotal role in scaling the business while adapting to the new challenges and opportunities that come with a more mature company.

We can help you overcome these founder challenges, strengthen your management team, and train and equip your successor(s). Contact us today for an exploratory conversation at email@ennislp.com or 301-859-0860.

The Big Thing Holding Back Small Businesses

Small businesses stay small either by choice, or because they start chasing growth in the wrong places.

When you strip away the layers, it all comes down to darts.

Imagine a dart board with a bull’s eye and around it is a series of wider and wider circles. The bull’s eye is where the people just like you hang out. They are the people (or businesses) who feel the problem your company set out to solve. They are usually your first customers and raving fans.

The further you go outside of your bull’s eye, the less these prospects feel your exact pain.

Why do entrepreneurs go outside their bull’s eye? When you’re a self-funded start-up, you’re scrambling — just trying to bootstrap your way to a company. You don’t have a lot of money to invest in formal marketing, so you rely on word-of-mouth and referrals, which also means you’re often talking to people outside of your bull’s eye.

These prospects may experience the problem you’re trying to solve, but they are slightly different (that’s why they’re not in the bull’s eye). They like your product or service but want a little tweak to it: a customization or a different version. You don’t see the harm in making a change and start to adjust your offering to accommodate the customers outside your bull’s eye.

Your new (slightly-outside-the-bull’s-eye) customer tells her friends about how great you are, and how willing you are to listen to your customers, and she refers a prospect even further outside your bull’s eye who again, asks you for another tweak.

Making these changes to your original product or service to accommodate customers outside your bull’s eye seems innocent enough at the time, but eventually, it undermines your growth.

Why?

To grow a business beyond your efforts, you need to hire employees (or build technology) that can do the work. As humans, we are usually lousy at doing something for the first time, but can master most things with enough repetition.

Think about teaching a toddler how to tie his shoes. The first few attempts are usually rough. It’s a new skill and their tiny hands have never had to make bunny ears before. You break it down for the child and show them how to master each step. It can take weeks, but eventually they get it. As adults, we don’t even think about tying our shoes — we’ve mastered the skill by repetition.

The same is true of your employees. They need time to truly master the delivery or your product or service. Every time you make a tweak for a new customer outside your bull’s eye, it’s like changing the instructions on tying your shoe laces. It’s disorienting for everyone and leads to substandard products and services, which customers receive and are less than enthusiastic about.

Having unhappy customers often leads the owner to step in and “fix” the problem. While some founders can indeed create the customized product or service for their new, outside-the-bull’s-eye customer, they are making their company reliant on them in the process.

A business reliant on its founder will stall out at a handful of employees when the founder runs out of hours in the day.

The secret to avoiding this plateau, and continuing to grow, is to be brutally disciplined in only serving customers in your bull’s eye for much longer than it feels natural. When you want to grow, the temptation is take whatever revenue you can, but the kind of growth that comes from serving customers outside your bull’s eye can be a dead end.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Aligning Exit and Life After The Business Goals with Business Growth Goals

Sarah thought she had a great sell strategy in place until it all blew up at the deal table. She was willing to stay on for a year or two and “earn-out” a percentage of the sale price, but she was not willing to play the role of a lender in the self-financing part of the deal, and she absolutely expected an offer of a higher sale price.

In building her business, Sarah was open to the idea of delegating core responsibilities to others but instead remained central to sales and operations. She was also much more focused on reducing her personal income taxes each year rather than improving the financial performance that would be stated on business financials. Sarah’s learning now that those goals didn’t align with maximizing a sale price or sourcing the types of buyers who wouldn’t require self-financing. When she gave any thought to life after the business, she pictured an immediate exit and drinking umbrella drinks on a beach in the Caribbean. But Sarah now knows that she and her business are not positioned to realize her dreams. At least not now when she was hoping to leave. Her goals for building were not aligned with goals for exit and life after the business.

• Life after the business goals can include things like financial security, time with the family, travel, health, and wellness, launching a new enterprise, or retirement on a beach in the Caribbean.

• Exit goals can include maximizing sale value, minimizing taxes, gratitude for employees, family harmony, or a successful transfer to children.

• Business goals can include growth and profitability, freedom, control, high income, building wealth and value, influence, or social impact.

To ensure success in your eventual exit it’s critical to continually examine your goals in each of these categories making sure they are aligned. It’s not unusual for an owner to be very disciplined and systematic in establishing and executing business goals, only to learn when it’s too late that those goals didn’t produce the exit they were hoping for. Whenever you set new goals for the business, ask yourself this question, “How do these goals for business growth align with my goals for exit and life after the business???”

In an effort to help business owners like Sarah be disciplined and systematic in doing this, we created our STRATEGY RENOVATION® Value Advisor engagement.

Consider investing 12-15 minutes in the FREE ExitMap® Assessment. You will get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Are You an Active or Passive Investor....In Your Company?

I am a Passive Investor in the stock market – I use the “park it and forget it” approach.  Active investing seeks to outperform the market and requires paying constant attention to the market,  in order to buy and sell specific securities at just the right time to maximize your gain.

Every business owner benefits from the income they receive from their business, however, the business is not viewed as an asset.  Yet, for most business owners,  the most significant asset in their portfolio is their business and often plays an important role in the owner’s ability to retire.  The ability to sell the business for a good price is critical.  Unfortunately, many owners adopt the passive approach to increasing the value of that asset, and are left disappointed when the time comes to “cash in”. 

Here’s what can happen….. You start a business and learn to deliver excellent products or services to your clients at a good profit.  As your business grows, you do more of the same and your income increases.  You have succeeded!  Before long, you are at the hub of a bustling, successful business and enjoying the fruits of your labor.

However, you may have built income at the expense of building the asset.  When the time comes to sell/transfer that business, it may have minimal value – because you’ve been a passive investor – you’ve worked in the business, but not on it.  So, you may rightly ask, “What does an active investor look like?”. 

First, let’s talk about mindset – an active investor sets a goal /target for a future transaction and proactively works to hit those targets.  Likewise, active business owners must envision a desired future and act to hit that target.  It is an on-going process of assessing where you are, setting new goals and  taking steps to hit those goals.

Next, we need to understand value and what drives it  - then invest.  Here are some simple questions/steps to make the change:

1.     Assess your current value - what is your business worth?  Is it sellable?  How would the market view your business?  Get a professional 3rd party opinion.

2.     Assess your role - Is the business dependent on you?  Do you run the say-to-day operations or do you have a team that can run the business without you?  Start building a team one step at a time, and plan to delegate.

3.     Improve cash flow - Is your business profitable?  Do you invest back into the business? Do you seek to improve your cash flow?   Assess your current performance and identify areas for growth.

4.     Plan for growth - Do you have a plan for growth?  How could you expand your business? Understand your market.  Set a 5 year goal that is possible and make a plan to get there.

5.     Diligently Manage your business – do you have access to all the information needed to run your business?  Do you routinely (monthly at a minimum) assess budget vs actual performance, and make adjustments?

Rinse and repeat – It is rare to win the “Business Lotto” where you succeed overnight.  Growing busines value is a slow and steady process that requires purposeful, routine repetition of the above steps.  Each situation is different and your time is limited, but the simple steps over time will yield benefits.  An annual “state of the company” assessment, quarterly goal setting/revision, and monthly management reviews will develop a manageable “more active” approach.

The fact is many businesses are not sellable – but those that take the “active approach” will walk toward the exit with “eyes wide open” and maximize the probability of a successful sale. 

Invest 15 minutes and take our exit readiness questionnaire. We do not ask for confidential information and you will receive a 12-page report scoring you in four key planning areas.

Trust the Process of System Documentation

In business, one key aspect often separates successful ventures from those that struggle to thrive: systems documentation. It's the roadmap, the blueprint outlining how a business operates, from its day-to-day processes to long-term strategies. In a recent ExitReadiness® PODCAST episode with guest Jason Henderberg, we discussed how meticulous system documentation can significantly enhance a business's value, ultimately paving the way for a higher sales multiple.

With over 30 years of experience, Jason has witnessed firsthand the transformative power of systematizing business operations. His advice? "Trust the process."

During our conversation, he emphasized the importance of documenting systems comprehensively and likened it to crafting a playbook encapsulating every facet of your business, from customer interactions to backend processes. This documentation serves as a tangible asset, offering prospective buyers a transparent view of how the company functions efficiently and profitably.

But why does this matter? It's all about perception and value. Businesses with well-documented systems exude reliability and scalability, qualities that are immensely appealing to potential investors or buyers. When every operation is meticulously outlined, it instills confidence in a prospective buyer and mitigates risk, two factors that can significantly impact the valuation of a business.

Moreover, Jason highlighted the operational efficiencies that stem from system documentation. By streamlining processes and clearly defining roles and responsibilities, businesses can operate more smoothly, increasing productivity and profitability. This, in turn, enhances the industry's attractiveness to potential buyers who seek revenue streams and sustainable and scalable operations. He also pointed out that system documentation is not a one-time task but an ongoing endeavor. As businesses evolve, so too must their systems. Regular updates and refinements ensure that the playbook remains relevant and reflective of the current state of the company. It's a continuous improvement journey that pays dividends in the long run.

But how does one go about documenting systems effectively? It starts with a systematic approach. Strategically identify critical processes within your business and break them down into manageable steps. Document each step meticulously, leaving no room for ambiguity. Visual aids such as screen recordings or diagrams enhance clarity and comprehension. He also emphasized the importance of involving key stakeholders in the documentation process. Who better to provide insights into day-to-day operations than the individuals directly involved? By soliciting employee input at all levels, businesses can ensure that their systems documentation accurately reflects reality while fostering a sense of ownership and employee engagement.

In essence, Jason advises to "Trust the process of system documentation." It's not just a mundane task; it's an investment in the future value of your business. The sooner you start developing a company-wide culture of following best practices, the sooner you will have a safety net in case you need to sell your business during an emergency. So, roll up your sleeves and get to work following his proven methods. The value of your business depends on it.

How to Identify Your Key Employees: A Key Business Value Driver

Identifying Key Employees is a Crucial Task for Any Organization.

Key employees are the driving force behind a company's success, and recognizing and nurturing their talents is essential for sustained growth and value acceleration. In this blog post, we will explore the importance of key employees, the characteristics that define them, and how you can identify them within your organization.

Why Identifying Key Employees Matters

Key employees are pivotal in achieving your organization's goals and maintaining a positive workplace culture. Identifying them is essential for several reasons:

1. Consistent Performance: Key employees consistently perform at a high level, ensuring your organization achieves its objectives.

2. Leadership Potential: Key employees often exhibit leadership qualities that can be harnessed for future growth.

3. Knowledge Transfer: Key employees possess critical knowledge and skills that are often difficult to replace.

4. Cultural Ambassadors: They embody your organization's values and culture, setting an example for their peers.

5. Employee Retention: Recognizing and rewarding key employees can help retain top talent and reduce turnover.

Characteristics of Key Employees

Key employees exhibit specific characteristics that set them apart from their colleagues. Here are some traits to look for:

1. Consistency: Key employees consistently meet or exceed performance expectations. They deliver results time and time again.

2. Leadership: They demonstrate leadership skills, even in non-managerial roles. They inspire and motivate their colleagues.

3. Problem Solvers: Key employees are adept at finding solutions to complex problems. They tackle challenges with creativity and perseverance.

4. Commitment: They are committed to the organization's goals and values. They go the extra mile to ensure success.

5. Team Player: While they may stand out individually, key employees also work well with others, fostering a positive team dynamic.

6. Adaptability: They can adapt to changing circumstances and are open to learning and growth.

How to Identify Key Employees

Identifying key employees within your organization can be challenging. Here are some strategies to help you pinpoint those who are genuinely indispensable:

1. Performance Metrics: Review performance metrics and appraisals to identify employees consistently achieving and exceeding targets. Look for a track record of excellence.

2. Peer and Supervisor Feedback: Seek input from both colleagues and supervisors. Key employees are often praised and admired by their peers and leaders.

3. Leadership Potential: Identify employees with leadership potential by assessing their ability to influence and guide others, regardless of their official title.

4. Problem-Solving Skills: Pay attention to individuals who consistently find creative solutions to challenges, both big and small.

5. Cultural Fit: Evaluate how well employees embody your organization's culture and values. Those who align most closely are likely key contributors.

6. Commitment and Initiative: Recognize those who consistently demonstrate commitment, take initiative, and contribute to the overall success of the organization.

7. Succession Planning: Consider which employees could fill critical roles in the future and invest in their development.

Summary

Identifying key employees is a critical process for any organization. These individuals are instrumental in driving success, maintaining a positive workplace culture, and ensuring continued growth. By recognizing the characteristics that define them and using specific strategies to identify them within your organization, you can invest in their development and ensure long-term success. In the end, the success of your business is closely tied to your ability to recognize and nurture your key employees.

If you need help identifying and equipping your future successor(s) contact us about our STRATEGY RENOVATION® Successor Coaching service.

When Should I Consider an Acquisition in Growing the Value of My Business?

Considering an acquisition as a growth and value acceleration strategy for your business can be beneficial in various circumstances. Following are situations in which you should consider acquisitions:

• Market Expansion: Acquiring another business can provide a faster and more efficient route to expand into new markets. If you have identified potential growth opportunities in a different geographic region or target market, acquiring a business with an established presence in that area can give you immediate access to customers, distribution networks, and market knowledge.

• Diversification: Acquisitions can be a strategy for diversifying your business's offerings. By acquiring a complementary company that offers products or services related to your existing offerings, you can broaden your product portfolio and reach a broader customer base. This diversification can reduce your reliance on a single product or market and provide opportunities for cross-selling and upselling.

• Competitive Advantage: Acquiring a competitor or a business with a unique technology, intellectual property, or market position can help you gain a competitive advantage. It can allow you to eliminate competition, increase market share, consolidate industry resources, or access innovative technologies that give you a distinctive edge in the market.

• Talent and Expertise: Acquisitions can be a means to acquire skilled employees, specialized expertise, or talented management teams. If you want to strengthen your team or enhance your capabilities in a specific area, acquiring a business with the desired talent and expertise can provide a quick and effective solution. This can help accelerate growth, improve operational efficiencies, and drive innovation.

• Cost Savings and Synergies: Acquisitions can result in cost savings and operational synergies. By integrating the operations of the acquired business with your own, you can eliminate duplicate functions, consolidate supply chains, and leverage economies of scale. This can lead to improved efficiency, reduced costs, and increased profitability.

• Access to Resources and Assets: Acquiring a business can grant you access to valuable resources, assets, or distribution channels that would be challenging or time-consuming to develop internally. These resources may include manufacturing facilities, intellectual property, customer relationships, supplier contracts, or proprietary technology. Acquiring such assets can enhance your competitive position and accelerate your growth trajectory.

• Strategic Opportunities: Assessing market dynamics, industry trends, and competitive landscapes can reveal strategic acquisition opportunities. Identify a business that aligns well with your long-term strategic goals or fills a gap in your capabilities. An acquisition can be a strategic move to capitalize on the opportunity and strengthen your overall position in the market.

Conducting thorough due diligence and analysis before pursuing an acquisition is essential. Assess the financial viability, cultural fit, legal and regulatory compliance, and compatibility with your existing operations. Engage professionals, such as Business Brokers, Investment Bankers, and M&A Advisors, to assist you in identifying potential targets and navigating the acquisition process.

Remember, acquisitions can be complex and involve risks, so careful planning and strategic alignment are crucial to ensuring a successful integration and achieving the intended growth objectives.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

A Growth Plan Helps To Maximize Your Business Sale Price

Every sale of a business requires negotiation.  The buyer is purchasing the future potential of the company and is aware that they can only learn so much in a due diligence process.  The seller’s strong management team, documented procedures, and portfolio of recurring revenue clients, and other value drivers will move a buyer forward. And, if a seller wants to further strengthen their story at the negotiation table they will be prepared with a documented strategic plan for future growth.

What’s in a Growth Plan?

An effective growth plan is far more than numbers on a spreadsheet.  It addresses these key questions:

• What will our revenues be in the next three to five years?

• Who will our clients be, and what new markets will we pursue?

• What services will we continue to sell, discontinue?  What new services will we offer?

• What is the profitability of those products?

• What resources are required to accomplish our goals?

• Who will be responsible for each element of the plan?

The Effect of a Proven Growth Plan…

Demonstrating that the management team not only exists but can perform.

• The position of the company in the market is clearly understood.

• The projected cash flows are credible.

• Enables a higher starting point for negotiation.

This last benefit is perhaps most significant.  As we all know, the value of a company is a function of Cash Flow/EBITDA,  and this is the starting point for negotiation. 

Now consider two companies…

Both Company A and Company B have a $ 2M EBITDA and a multiplier of 5x.  The value = $10M.

Both companies say they plan to grow to $4M EBITDA in the next 5 years.  However, Company A has no track record, but Company B has demonstrated growth plans.  And they have defined this growth plan as thoroughly as they have in past years. 

While Company A has little basis to start over $10M ($2Mx5), Company B may have a credible basis to start negotiations at $20M valuation ($4Mx5). In a competitive market, developing and executing on growth planning will position your company to maximize its value at sale.   

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

What Role Will You Be Willing To Play Post-Sale?

A key element for an exiting successfully on your own terms and conditions is realizing the role(s) that you’re willing to play post-sale or transfer.

John sold to a strategic buyer and an earn-out with John working as an employee for 3 years as part of the deal. He had not planned in a way to avoid this, and after 2 years decided to forfeit the balance of his payout and leave because he was finding it too difficult to work for the new management.

Due to the small size of her business, Susan’s only option for a third-party sale was someone interested in “buying a job”. Susan did the deal and was forced to self-finance the deal and be a lender. After three years into the deal, the new owner was no longer able to make loan payments due to the weak performance of the business.

Bob planned for and was able to sell a majority stake in his business (that had very strong revenue, cash flow, and growth potential) to a financial buyer. In creating and implementing his comprehensive exit plan, Bob had decided he would be willing to be a partner in order to have a chance at “a second bite of the apple” years later.

In completing her sale to a key employee group, Sarah was willing to continue involvement as a consultant and her agreement is for 3 years.

It’s important to understand these roles and decide which of them you’d be willing to assume when selling or transferring your business. Each role is common to transactions of small businesses and at times unavoidable. However, with the right long-term planning, you might be able to avoid a role or roles you’d rather not play. For example, if you have built a business with significant revenue, a proven next-level management team, and a credible plan for future growth, you may avoid an earn-out. So, understand what roles you would be willing to play, and get started today planning for your exit because the more time you have the greater chance you will be in control when you leave.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Seven Questions Every Small Business Owner Should Answer

A company with strong value drivers can demand (and receive) a higher multiple on the same amount of EBITDA than can a company with average value drivers.  — John Brown, The Business Enterprise Institute (BEI)

Almost all of us consider the future and invest in the stock market either directly or through retirement plans to position ourselves and our families for the inevitable future.  While the above quote refers to investing in the stock market, the principle applies to your small business.  As you look ahead to the future, every small business owner should pay careful attention to the value drivers behind the business – ensuring the business portfolio increases over time.

In their book Execution, Ram Charan and Larry Bossidy speak about successful execution as “exposing reality and acting on that reality”.  So, as you consider your business investment, ask yourself the following “Value Driver questions:

 1.         Do I have a healthy management team?   It's often been said that people are our most valuable resource. Experienced leadership, that understands the business, as well as the culture of the organization, are critical to the ongoing success of the business. This is also one of the key factors behind developing business value when it comes down to selling your business.   Cultivating these employees, and ensuring that they remain even after you sell the business is significant to the events or buyer/owner of the business

2.         How effective are my operating systems?  Human resources, personnel recruitment and training, asset control, production control, and performance reports are all the key ingredients of healthy operations within any organization. If these internal mechanics are not running well, this could have significant negative consequences on the value of the organization.

3.         Are my margins equal to or better than the industry average?  If not, what actions can will it take to get them there?

4.         How diverse is my customer base?  Having one's eggs in one basket is always a risk. Having a key single customer that has more than 10% of total sales obviously is a downside for a business. Long before being ready to sell it is helpful to take a look at this and pursue diversification.

5.         Is my facility in “ship-shape”?  - keeping our home reflects our values, and our priorities. Similarly, keeping our business facility in sharp condition reflecting professionalism and effectiveness is critical to establishing business value. It was so into an outside third party, first impressions are significant. They were plucked attention to the small details.

6.         What is my growth strategy?   The roadmap for growth needs to clearly laid out, risks identified, and goals established.  Future cash flow, value and well-being of your employees is dependent on a vision for the future codified into actionable steps.  The plan alone will not get you there, but no plan will get you no-where.

7.         Do I have control of my numbers?  At the end of the day, you need to understand the financial health of your business.

Exit planning should begin the day you start your business.  And, at the core, or center of exit planning is maximizing the value of your business.  Just as you manage the value of your 401k or investment portfolio, investing time, energy and thought into building the value of your business will position you to exit in the manner you desire.  Get started today by exposing reality and assessing your business value drivers.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Expensive Sentences When Planning Your Exit

Following is a post that we’ve published in the past that we believe is good to be reminded of annually.

Following are just a few examples of “Expensive Sentences” mentioned by my friend Jack Quarles in his book, Expensive Sentences, Debunking the Common Myths that Derail Decisions and Sabotage Success.

“It’s too late to turn back now.” 

“We’re too swamped for that now.” 

“We can probably do that ourselves.” 

“It’s too crazy busy around here to make changes.” 

Jack explains how conversations and discussions containing expensive sentences most often lead to decisions that negatively impact the future of businesses, families, individuals, and nations.  And, how the faulty logic and false constraints of expensive sentences can lead to derailed and expensive decisions.  He describes how conventional wisdom such as “You get what you pay for” or “We can’t change horses in mid-stream” can be a costly and destructive trap.  Jack paints a picture as to how we can over time drift away from a disciplined analysis of a decision, and instead be drawn by a “particular idea as if pulled by gravity.” 

When it comes to Exit Planning, or designing and implementing a plan to successfully and responsibly exit from a business, there is a seemingly endless list of expensive sentences….

“I’m not ready to exit yet…I will begin planning when I’m ready “ 

“I have a pretty good idea of how much I’d pay in taxes”

“I am confident my key employee would be a good owner”

“I am confident I can sell my business for enough to live on for the rest of my life” 

“Yeah…I think we arranged it so that my spouse will get the business if I die” 

“I’m not worried about my employees leaving if I die or sell the business…I have been good to them and they’re very loyal”

“One of my friends, who is in the same business, sold for $$$$...I’m sure I will be able to sell mine for at least that much…I don’t need an outside valuation”

“I don’t need a personal financial needs analysis.  I have a good idea of how much $$$$ we would need”

“I am confident I can sell my business when I want or need to”

It’s expensive sentences like these that result from common owner misperceptions and can result in bad and expensive exits.  The author of EXIT PLANNING; THE DEFINITIVE GUIDE, and Founder of the Business Enterprise Institute, John Brown, says the following: “…your misperceptions create complacency and inaction when you should be pedaling as fast as you can.” We would agree with John Brown and would add that complacency and inaction are always expensive and at times destructive when it comes to a business exit.

Business Owner Exit Planning employs a process of assessment and analysis that will reveal expensive sentences and owner assumptions (that are then tested) helping you to instead leave on your own terms and conditions and realize a successful exit. Start planning today.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Exposing Reality and Execution in Planning Your Exit

A business book that I read the book when it was first published, and find helpful to revisit regularly, is Execution: The Discipline of Getting Things Done by Larry Bossidy and Ram Charan. The authors’ definition of “execution” is particularly insightful and helpful when considering how an owner should build a business that is transferable, and in planning their eventual exit from the business

“Fundamentally, execution is the discipline of systematically exposing reality and acting on it.”

Successful business owners understand that they need to be personally and deeply involved in facing reality, and they are systematic in exposing it.  They understand that execution is essential in closing the gap between desired results and current reality, and consider the discipline of execution as being their major responsibility.  

However, In helping business owners plan for their exit, we observe a consistent pattern of misperceptions and lack of intent in exposing reality. Common misperceptions include:

• Overestimating the sellable value of their business

• Underestimating how much $$$$ they will need or want after they leave the business

• Overestimating the rate of return they will receive on invested assets

• Underestimating the impact of taxes on sale proceeds

• Overestimating their personal and business readiness for a successful exit

• Underestimating how long it takes to prepare for a successful exit

When owners don’t systematically expose reality in planning for their exit, there is much at stake including their personal goals and objectives and financial future. We like to say that “meaningful planning requires accurate data.”

So, begin now identifying the gap between your desired exit results and your current reality. Following are a few steps you can take to get started:

• First, get skilled help with clarifying your desired results: When do you want to exit? To whom do you want to sell/transfer the business? Any values-based or legacy goals?

• Have a valuation professional quantify the sellable value of your business.

• Have your financial advisor perform a current financial needs analysis using the estimate of business valuation in their calculation.

You can also take advantage of our FREE ExitMap® Assessment which will provide you with a 12-page report scoring you in these four key planning areas: Finance, Planning, Profit/Revenue, Operations. It will take about 15 minutes of your time and we do not ask for confidential information.

ennislp.com | email@ennislp.com | 301-859-0860

Can Engagement, Leadership and Culture Really Improve the Outcomes of a Business Exit?

All business owners live in the tension between people and profits. Often times it seems like these two aspects of our businesses can sometimes be in direct opposition to each other. It’s easy to feel like a $10K investment in our people is just a $10K reduction in profits. That people and profits are a zero-sum game, with one side winning and the other side losing. But I want to lay out some data for you and see what you think about how investing in your people could actually benefit you in the sale of your business.

Most companies operate from this mental framework:

Revenue – Variable costs – Fixed costs = Profit

In this scenario, fixed costs include things like building expenses, payroll, etc.

Most business owners assume that the best way to increase profit is to increase revenue and decrease variable costs (like COGS) and reduce fixed costs (like payroll).

This viewpoint is not entirely wrong, it just fails to take into account the human factor. We all know that people are the wild card in business. I often say “if it weren’t for people, business would be easy”. The people who work for you are not machines that can be dialed up to maximum efficiency from 8 a.m. to 5 p.m. for the 261 working days a year. In fact, if your company is like the average company in the U.S. then only 30% of your employees are operating at full capacity. The term most commonly used for these employees who are connected to their work and are operating at their full potential is engagement. Employees who are operating somewhere below their full potential are referred to as disengaged or actively disengaged.

What if instead of 30% of your people operating at their full potential, 60% of the company was operating at full capacity? Do you think this would have a positive impact on the revenue and profitability of the organization?  

Well, let’s look at some numbers. According to the most recent data, disengaged employees have 37% higher absenteeism, 18% lower productivity and 15% lower profitability. When that translates into dollars, you're looking at the cost of 34% of a disengaged employee's annual salary, or $3,400 for every $10,000 they make.

 So think about it this way, the average salary in the U.S. is $47,000. If you are leaving 34% of that average employee’s productivity on the table due to low engagement you are losing close to $16,000 per-year per-employee. And that’s just for your average employees. If you apply that to your managers and higher-level employees working in the $80,000 salary range you are looking at over $27,000 in human capital (think payroll) waste per year. Not to mention that employees who work for disengaged managers are 4x more likely to be disengaged themselves. Take those numbers (somewhere between $16,000 and $27,000 per year) and multiply them by the number of employees you have working in your organization, and all of a sudden addressing the issues associated with a disengaged workforce becomes a top strategic priority. Especially when you consider that an extra dollar of sales is only equal to 50, 40, 30 cents or less contribution to your profits (after you take out taxes and COGS, etc.), but a dollar saved that you are already spending equals a full dollar of contribution to profits.

Just think about all of the potential things that you could be working on to increase the value of your business over the next 12-24 months and ask yourself where addressing engagement stacks up in comparison to all of the initiatives you have lined up for your exit. How much bottom-line impact could address any engagement, leadership and culture issues that might exist have on your business, even if you only recovered 50% of the human capital waste in your organization? And again this does not even account for the losses that you experience from employee turnover. In a study conducted in 2018, 52% of employees who left their company said their organization or their managers could have done something to keep them from leaving. Yet most employees who leave companies do so without ever having a real conversation with their managers or organizational leaders. This statistic indicates a huge gap in the trust that exists between most managers and employees. And by the way, one more stat. that might be interesting; 47% of an employee’s engagement in their work is driven by the strength of their relationship with their leader.

So what are the advantages of high employee engagement beyond just mitigating losses? According to Gallup, organizations that are the best at engaging their employees to achieve earnings-per-share growth that is more than four times that of their competitors. Compared with organizations in the bottom 25% of engagement, organizations in the top 25% of engagement realize substantially better customer satisfaction, higher productivity, better retention, fewer accidents, and 21% higher profitability. Engaged workers also report better health outcomes.

So what if by investing in your people with some of the profits you have now, you could improve their health and happiness, improve the efficiency of the payroll costs of your organization, and simultaneously see higher profits. This is what we call a positive-sum game. All parties win.

So the question is, do you think having a healthy team of employees makes your company more attractive to a potential buyer? Do you believe that a healthier workforce can really be more productive and profitable?  Do you think a healthier and more engaged workforce might improve the multiple of EBITDA that you receive at the sale of your business? How much would it be worth to you to gain an extra 1x of EBITDA?

So as you prepare to move toward the next chapter in the life of your business I encourage you to challenge the way you think. I challenge you to consider the potential impact of investing in the engagement levels of your employees, the development of your managers and leaders, and solidifying your organizational culture. Do you think of these as costs that will decrease your profitability, or as investments that will ultimately create positive outcomes, both for you and for your employees?

——————————————————————-

Guest Blogger Alan Kemper holds a BS in Management from Georgia Tech, a MBA from Auburn University, a Doctorate of Business Administration from George Fox University and a Lean Six Sigma Blackbelt from Georgia Tech. He is the President of LEAD Workforce Consulting and speaks and consults regularly on the power of engagement, leadership and culture on organizational outcomes.

Contact us today and ask about our Surveys for Work and Well-Being and Values In Action.

Answer These Questions if You Want to Accelerate Business Value in 2023

Most small business owners invest in the stock market, either directly or through retirement plans, with the goal of future financial security. However, not every business owner pays the same level of attention to the key drivers behind the value of, what is often the largest asset in their investment portfolio, their business.

In their book Execution: The Discipline of Getting Things Done by Ram Charan and Larry Bossidy, they speak about successful execution as “exposing reality and acting on that reality”.  These questions will help “expose reality” as we begin a new year, regarding your plan for building and growing the value of your business.

 1.         Do I have a healthy management team?   It's often been said that people are our most valuable resource. Experienced leadership, that understands the business, as well as the culture of the organization, is critical to the ongoing success of the business. This is also one of the key factors behind developing business value when it comes down to selling your business.   Cultivating these employees, and ensuring that they remain even after you sell the business is significant to the events or buyer/owner of the business

2.         How effective are my operating systems?  Human resources, personnel recruitment and training, asset control, production control, and performance reports are all the key ingredients of healthy operations within any organization. If these internal mechanics are not running well, this could have significant negative consequences on the value of the organization.

3.         Are my margins equal to or better than the industry average?  If not, what actions can will it take to get them there?

4.         How diverse is my customer base?  Having one's eggs in one basket is always a risk. Having a key single customer that has more than 10% of total sales obviously is a downside for a business. Long before being ready to sell it is helpful to take a look at this and pursue diversification.

5.         Is my facility in “ship-shape”?  - keeping our home reflects our values and our priorities. Similarly, keeping our business facility in a sharp condition reflecting professionalism and effectiveness is critical to establishing business value. It was so into an outside third party, first impressions are significant. They were plucked attention to the small details.

6.         What is my growth strategy?   The roadmap for growth needs to clearly laid out, risks identified, and goals established.  The future cash flow, value, and well-being of your employees is dependent on a vision for the future codified into actionable steps.  The plan alone will not get you there, but no plan will get you nowhere.

7.         Do I have control of my numbers?  At the end of the day, you need to understand the financial health of your business.

Exit planning should begin the day you start your business.  And, at the core, or center of exit planning is maximizing the value of your business.  Just as you manage the value of your 401k or investment portfolio, investing time, energy, and thought into building the value of your business will position you to exit in the manner you desire.  Get started today by exposing reality and assessing your business value drivers.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

A Month on the Beach - A Key Measure of Business Value

Can you leave your business for a month, sit on the beach and leave your phone in the beach bag?  If so, you have attained what few business owners do – a business that can run without you!  Aside from sound cash flow, the creation of a management team is the most significant driver of business value.  When the time comes for you to leave for good, a buyer wants your team, not you!  If you can’t yet take that month, here are a few simple thoughts:

 What is a management team?  This will vary dependent on business size – but it is simply a key group of leaders who can run the day-to-day operations without your oversight.  While they may seek your INPUT, they can sell, and deliver service on their own.  They hold your values, pursue excellence and treat the company as if they owned it!

 The need to delegate.   This is the tough part – you must give responsibility to others.  Every business has four basic functional roles – Executive, Sales, Finance/Admin, and Operations.  Often owners fill each of these roles and thus are critical to everything.  If you can successfully delegate these roles (except perhaps the executive function) to others, you will create a team. 

 Who do you add to the team?   Chik-Fil-A has succeeded by carefully choosing leaders who possess three “C’s”  - character, competency, and chemistry. 

Character – this is the most crucial.  The manager must hold their values and live them out in their daily work. 

Competency  - this is less about specific skills and more about the ability and desire to learn. Environments change and learners adapt.  This trait should also have a dash of “fire in the belly” – the drive to build something.

Chemistry – do they play well with others?  Team members must be team players – readily partnering with others to build a company, and able to lead.

 Look for employees who possess these traits, empower them, and test them.  Slowly give them responsibility and look for the ones that you can’t hold back.  Help them succeed, give routine feedback and get out of their way. 

 How do I build a team?  The first ingredient is time – don’t rush – build slowly and intentionally. It is an ongoing, iterative process.  Here’s where to start:

         Step 1 – make a list of roles you fill / what you do.

         Step 2 – identify what ONLY YOU can do and what you are best at – these may be different.  Identify what you can most easily delegate or are not good at; transfer these responsibilities first. 

         Step 3 – find the right people/teammates – this can include current employees, new hires or reliable vendors.

         Step 4 – prioritize and make a plan to transfer the responsibilities over time.  Seek to remove yourself from all but the Executive function. 

         Step 5 –develop a potential successor – this final step is not for everyone – however it can enable you to sell the business to an insider, or remain as a passive owner.

         Step 6 – invest in the team, measure progress and adjust course as needed.

 Giving up control is difficult but a necessary part of business maturity.  Even if you never get to the “month on the beach”, taking these steps over time will increase value of the company, provide motivation for your staff and give you more options in the future.  It’ll enable you to work ON your business and not just IN your business.

 So, make a plan, start the transition and contact your travel agent!

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

A Scientific Approach to Planning Your Business Exit

In his latest book, “Think Again, The Power of Knowing What You Don’t Know”, New York Times bestselling author Adam Grant makes a compelling case for “the critical art of rethinking: learning to question your opinions and open other people’s minds, which can position you for excellence at work and wisdom in life.”

In Part One: Individual Rethinking, the author explains how we often assume roles of Preacher, Prosecutor, or Politician, rather than that of Scientist in a key decision-making process, and how that is often detrimental. Grant describes the following cycles while recommending the RETHINKING CYCLE as a scientific approach:

THE OVERCONFIDENCE CYCLE: Pride > Conviction > Confirmation & Desirability Biases > Validation

THE RETHINKING CYCLE: Humility > Doubt > Curiosity > Discovery

We have found that owners planning for exit, who adopt a scientific, or “rethinking cycle” approach are much more likely to experience a successful transition out of their business. They indeed humbly realize and proclaim that “they don’t know what they don’t know”, and engage help in discovering what they should do and how they should do it. They understand what’s at stake and have been intentional in questioning or doubting their convictions and biases and with humility and curiosity seeking knowledge and wisdom from others who can challenge their current thinking. As a result, the chances for a successful exit, and the owner’s peace of mind, are greatly increased. The opposite almost always proves true on some level for an owner who moves forward adopting “the overconfidence cycle”.

One of Grant’s recommended “Actions for Impact” is to “Build a challenge network, not just a support network.” For an owner planning their exit, this could include business owner peers who have already walked the exit walk, as well as an expert advisor team (those who have knowledge that the owner doesn’t) who could serve in challenging the owner’s assumptions, convictions, biases, while providing needed knowledge and insight.

In planning for the most significant event in your life as a business owner, your inevitable exit from the business, you would be well-served in reading Mr. Grant’s book and adopting his proposed RETHINKING CYCLE. Please consider contacting us about playing a role on your “Challenge Network”.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Cash Flow Projection and a Successful Exit

A small business owner named Simon understands how the cash flow of the business drives his current income, and as well how it would eventually impact the valuation and sale price. However, Simon lacked awareness of elements of potential exit routes that demand cash flow. For example:

• When considering an ESOP, his business met all the basic parameters EXCEPT having the adequate cash flow to service the debt needed to fund the ESOP.

• When running a “sanity check” as to whether key employees could finance an insider purchase with a bank loan, the bank would only finance a small amount…due to projected cash flow.

• In considering a third-party sale, and as a result of Simon’s exit planner’s financial gap analysis, there was a need to invest in updated systems, new hires (next-level management), and incentive plans for key employees in order to increase the value of the business…cash flow was needed to make it happen.

Simon has said that “he’s ready to exit”, but after analyzing his business’ readiness for an exit, and projecting future cash flow, Simon will not be able to exit the way he wants to for at least five years — there’s just too much to get done to realize the value he needs. So, the moral of the story is to have a ten-year cash flow projection and keep it current for planning both growth and your eventual exit. The stronger the cash flow and its management, the greater chance of building a transferable business and having multiple options for exit.

And, begin planning today…it will take longer than you think.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Keep The End In Mind

Often business owners are exhorted to build their business with "the end", or their eventual exit in mind.  This can be a good idea in that it lends toward building your business to have "transferable value", or value that someone else will want to buy and own when you're ready to leave.  Value apart from you the owner.

It is also wise to build your exit plan with the end in mind.  The end being, not just your eventual exit from the business, but also your exit from this life.  In other words, creating your business exit plan with your "desired legacy" in mind.  Each of us leaves a legacy, but we don't all leave the legacy that we want to leave.  

We find that when thinking of legacy, business owners often focus on the transition of wealth.  And certainly, the effective distribution of wealth to future generations is a most important consideration.  At the same time, there are other significant and unique factors pertaining to the legacy of a business owner:

• Family peace and harmony

• Provision for family and others

• Sustaining the culture of the business

• Effective transfer of personal and business values to future generations

• Reputation and role of the business in the community | Family name in the community and marketplace

• Continued service to employees, customers, vendors, local economy

• Being prepared for the unexpected

• The way(s) in which the business owner wants to be remembered

This is a limited and representative list of issues and categories for reflection and planning pertaining to the legacy of a business owner.  You may have other priorities and desires.  The point is, in order to leave your desired legacy, it will take reflection, planning, and time to execute the plan.  Get started as soon as possible, as we don't know how long we have to create a plan for our desired legacy.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.