culled from:ceo.com
Most business owners don’t have an exit strategy, which is often the result of thinking that exit planning is a luxury or simply not that important. That’s a value-destroying mindset.
A business should be designed and built — just like any big project — with an end in mind. No, I’m not suggesting that your strategy can’t be fluid and adjusted based upon economic realities, but your company needs to have a clear plan about where it allocates capital, both human and financial.
You wouldn’t build an apartment complex, a defense system, a car or anything non-trivial without a plan, so why wouldn’t you use a plan for your business? What are you using, and what are your people using, to make decisions regarding the allocation of your capital?
What if you used the same haphazard approach in producing the goods or services you deliver to your customers? Wouldn’t it cost a great deal more than necessary, destroying your margin, and perhaps destroying the quality of your work? Your capital must be allocated in your business the same way an architect would use blueprints, bricks and concrete to build a structure.
I recently interviewed Andy Walker, the co-founder and former CEO of 42Six Solutions. He sold his business to consulting giant CSC only 18 months after he and his partner founded the company. Here are a few of the relevant insights from our talk:
1. Have an exit strategy and know your business value every day
Ultimately, a business is worth what a buyer wants to pay for it, so keep in mind that measuring value will just be an estimate. I suggest a present-value calculation of your discounted future free cash flows. Use conservative numbers for your discount rate and for your growth over the next few years or in perpetuity (basically the core finance concepts that any MBA student learns).
It won’t be accurate, since it won’t tell you what someone would actually pay, but it will let you know if you aren’t focused on building value. The other advantage of doing this is that it will help you stay focused on growth strategy, customer retention, profitability and capital allocation. Let me know at my poll if you estimate and measure business value.
2. Keep your business simple, and focus on what you do best
The longer a business is in operation, the more complex it gets, regardless of whether or not the business is growing. Complexity translates into unnecessary overhead labor, which reduces your profitability. That complexity is exacerbated when changes aren’t made to manage growth or to accommodate new systems.
For example, you may have implemented a new tool that streamlines your operations, but because you didn’t properly consider the impact on those who aren’t in operations (e.g. sales or accounting), you inject complexity into your business. For instance, you may now be requiring your accounting clerk to access multiple databases to do his job, when before it was all contained in one place. His work gets delayed, which cascades into other delays, while you’re left thinking, “What the heck happened?”
Another big source of value-destroying complexity is taking on work that isn’t specifically what your business does best. I get it. Sometimes you just need to take work that will pay the bills. Just understand that when you start doing work that falls outside of your company’s strengths, you will reduce value by taking resources away from what you do best.
Be relentless about simplicity and focusing on what you do best. Complexity eats your margin.
3. Dead weight is not good for profitability or team dynamics
This one is an enigma. I’ve seen CEOs who have no problem firing anyone get simply enthralled by one really bad employee. I’ve seen other CEOs slow to let someone go who is simply not adding value. In both cases, you need to be aware of the negative impact these “deadweight” employees are having on morale and business performance.
Bad employees who won’t get fired, regardless of how they act, are obviously problematic. Your other employees posting on sites like Glassdoor will help keep great employees away.
When employees aren’t well matched to their jobs, your other employees will be annoyed at the amount of work they need to do to make up for that incompetence. Let people go when it’s time to let them go. This isn’t high school and you’re not trying to win a popularity contest. If you want a friend, get a dog.
