Financial Freedom – “You Proofing” Your Business
In a previous post, I spoke about the Freedom Point and the risk in holding on to your company after you reach that point. Regardless of whether you are voluntarily choosing to retire or being forced to exit, your ability to gain financial freedom by capturing the full value of your company will depend very much upon how independent your company is and whether it is “You Proof.”
Irrespective of where your company currently stands and your future plans for it, now is the time to ensure that the business is not all about you. Whether you plan to sell your company sometime soon or in the future, or whether you plan to pass it on to your family or employees, you must continually prepare it from today to be independent and to thrive without you.
The reason many businesses fail to sell is that they are too dependent upon the owner. If the business does sell then it is often at a discount or the owner has to take the risk of working through an earn out or even providing some of the financing for the acquisition.
Our colleagues at Value BuilderTM surveyed nearly 60,000 companies from around the globe around business independence. They found two key factors that determined the type of offers the owners received and the probability of even receiving an offer.
Factor #1: You’re almost twice as likely to get an offer if your business can survive the “hit-by-a-bus” test.
If you were out of action for three months and unable to work, would your business keep running smoothly? The more your staff and customers need you, the less valuable your company will be to a potential acquirer.
Even more importantly, the hit by a bus test will tell you how free you are in relation to your business. Are you chained to your desk because the business would sink if you were to take a sick day or a holiday? Did you take the risk of starting your own business and make the sacrifices you made so you can be a slave to it?
Luckily you do not need to get hit by a bus to start making your business grow up. One good way to start making your business more independent is to begin spending less time at the office. Start by not working evenings or weekends, and do not reply if employees call. Once they get the picture, the best ones will start making more decisions independently. The shift will also expose your weakest employees, the ones that need training or that need to find another job.
As for you, it might come as a shock to find out how much your business has become such an essential part of you; but if you are going to exit your business one day, you need to look at it as an inanimate economic engine, not as something that defines who you are. After all your business exists to support your life not the other way around.
#2: Companies with a management team (as opposed to a sole manager) are getting offers at almost twice the rate.
If you do not have a management team, hiring a General Manager or COO is a good first move. A second-in-command can help you balance the demands of running your company and free up your time to spend with family or pursue other opportunities, as well as advancing your targeted exit time.
It is also a good time to bring in at least two strong sales people if you are the rainmaker for the business. Not only do you unload selling and step back from the customers (which is also a key to building value), you also bring in healthy competition to help drive business growth and independence.
Four Step Plan to hiring a CEO or COO and stepping back
Here is a four-step plan for hiring a 2nd in Command, thanks to advice from Silicon-Valley-based Bob Sutton, author of Good Boss, Bad Boss
1: Identify someone internally. “The research is clear,” says Sutton. “Unless things are totally screwed up, internal candidates have a strong tendency to outperform external leaders.”
2: Give your 2nd in Command prospect(s) a special project, one that allows them to demonstrate their leadership skills to you and the rest of your team. If your candidate or one of your candidates excels, it will be clear to your team why he or she was selected.
3: Communicate your choice. If you pick a 2nd in Command from an internal pool, explain your choice to the rest of your team. At the same time, wrap your arms around those you passed over and make it clear how much you value their contribution.
4: Shift from manager to coach. “The transition from manager to coach is a gradual evolution where the goal is to ask more questions, spend more time listening, and spend less time talking and directing,” says Sutton.
The Sophiall Solution, is geared towards transforming your business so that it supports your life and not the other way around. It is a four step plan that enables you to transform your business into an independent asset that can thrive without you. This frees you from the day-to-day grind of being chained to your business, and provides you with a better chance of being able to select from several valuable option choices for a successful exit. These are options that over 90% of other owners will never receive.
Feel free to contact us to assess your independence and how you stand on the key drivers of business value. If you would like to find out more about your Financial Freedom Point please click on the link to receive your free E-Book The Freedom Point: A Financial Planning Guide for Business Owners.
*The Value Builder SystemTM, which Sophiall incorporates, is a proven statistical system that utilises a 13 minute questionnaire to allow business owners to assess the “sellability” of their company. Those that score higher then 80 tend to receive offers 71% greater as a percentage of pre-tax profit then the average company. The researchers at The Value Builder Score analyze the data from nearly 60,000 companies in a variety of countries to understand trends in the business market, with a special focus on the liquidity of privately held businesses
