The Two Questions
Ask any business owner “What do you think about most often when it comes to running your business?” and the two most common responses are typically:
(1) Do I have sufficient cash to cover payroll?
(2) What is my company worth?
Cash flow management is the concern that keeps most business owners up at night. How often have you heard a story of a business owner desperately trying to meet cash demands, and in particular, covering payroll. Many years ago, as a post-graduate business student, I examined a case study on FedEx. Fred Smith, the founder and CEO, had successfully transformed his college research paper into an operational company, a package delivery service that raised $91 million in startup capital. Yet, within the first 2 years of operations he racked up $29 million in losses and faced a cash flow crisis. In a high-stakes gamble, he flew to Las Vegas and won $27,000 to cover the next payroll.[i] Obviously, not the best way to meet cash needs, but it is a good example of what a business owner faces when confronting cash flow challenges.
Cash Management is certainly a major focus for a business owner in day-to-day operations. However, when that issue does not leave enough time for a business owner to think, and plan strategically, the answer to the second question, “What is my company worth?” will always fall short of its full potential.
The unofficial organizational chart of any company consists of three types of roles and associated responsibilities, Finders, Minders, and Grinders[ii]. A Finder is one who is forward-looking, and a strategic-thinker; one who is a visionary leader and innovator. A Minder is one who is focused on what has happened, and a Grinder is one who is doing the day-to-day tasks. A Business Owner is most often a Finder, but one who is easily pulled into the tasks of Minding and Grinding far too often. A Finder is one who drives value growth.
The Iceberg Principle – The Failure Factor
Every successful entrepreneur I have known, worked with, or read about, has had a bagful of failures[iii]. Ironically, an entrepreneur that has had a life of challenges or hardships that go well beyond the norm is much more likely to have successful business ventures. Is it a prerequisite to a successful business venture to have previous failures? Maybe not, but a smart Business Owner will either draw heavily on those personal experiences, or surround himself with those that have personally navigated those challenging waters. Outsiders typically only see the successful results, and have no idea of the risks taken and challenges overcome. Much like an iceberg, there is much more below the surface of success than meets the eye of the public. The number and size of the failures and obstacles are foundational to the success of any venture.
As a principal of a family office venture fund for several years, it was my job to review every business plan and deal that came through the door. I had the opportunity to review hundreds of business plans and prospective deals. I questioned the market opportunity, the defensibility of the products, and the viability of a sustainable revenue model. Were the founders experienced enough to know how to grow a company?
Two twenty-something, recent college graduates came to my office to present their business idea. They were filled with great enthusiasm and were confident that their idea would be highly lucrative. I asked them several questions, their answers to two in particular revealed a great deal:
(1) Who are your competitors? (2) How much money are you seeking to raise? Their replies:
Our idea is so unique, we have no competitors, and we are willing to offer a 20% stake in our company for $5 million.
When I asked them if their company was worth $25 million today, they said of course not. You get the point. They had not completed their homework and did not have the foundation to know how to grow a company yet.
Planning for an Exit
Successful business owners “Begin with the End in Mind”.[iv] What is your dream? How are you going to get there? It does not mean the dream won’t or can’t change. It does mean however, that you must be on the path to that dream constantly and review your status consistently. As Alice is venturing in Wonderland she comes upon the Cheshire Cat and poses a question:
Alice: “Would you tell me, please, which way I ought to walk from here?”
The Cat: “That depends a good deal on where you want to get to,”
Alice: “I don’t much care where——”
The Cat: “Then it doesn’t matter which way you walk,” [v]
If you do not care where you take your business, your final destination will most certainly NOT be a wonderland. A vision of where you are going and how you plan to get there is critical to your ultimate success.
Contrary to what some business owners may believe, every business will exit some day! Whether planned or unplanned, it’s not question of IF, it’s a matter of WHEN. It may be unforeseen health issues, or an unexpected offer to buy your business. The time to maximize the value of your company is well before those events occur.
Let me share a story of a technology company that exited earlier than expected. The company had taken an initial investment of about $1 million and developed their first initial product over the course of about 12 to 18 months. They had just deployed an initial beta version with a local research university and things were looking very promising. The news of their product quickly spread, and a Fortune 100 company came calling with an offer to buy. No one expected an exit this quickly. The quandary was to take the cash offer now, or try to grow this into something larger. The original investors wanted to take it to the next level and continue to grow the company. The founders, a small team of engineers, who created the product saw dollar signs and wanted to sell. Unfortunately, the exit price was less than half of what it would have been with just a few months of exit strategy planning.
Planning for your business transition takes time. It takes regular, consistent effort to build and maintain an exit strategy and to maximize company value. You can forge the path to an exit plan on your own and face the uncertainty of potential unknown pitfalls, or assemble a Success Team™[vi]
Take the time to plan. I love it when a plan comes together! [vii]
[i] Brown, Abram. “10 Things You Might Not Know About FedEx Billionaire Fred Smith.” Forbes, Forbes Magazine, 23 Jan. 2014, www.forbes.com/sites/abrambrown/2014/01/23/10-things-you-might-not-know-about-fedex-billionaire-fred-smith/#288aecc84c21.
[ii] Mills, Jerry L. The Exit Strategy Handbook: the Best Guide for a Business Transition. B2B CFO, LLC, 2016.
[iii] Pilon, Annie. “21 Entrepreneurs Who Failed Big Before Becoming a Success.” Small Business Trends, Small Business Trends, 2 Nov. 2017, smallbiztrends.com/2016/01/entrepreneurs-who-failed.html.
[iv] Covey, Stephen. The 7 Habits of Highly Effective People. Simon & Schuster, 1990.
[v] Carroll, Lewis. Alice In Wonderland. Book Virtual, 1998.
[vi] Mills, Jerry L. The Exit Strategy Handbook: the Best Guide for a Business Transition. B2B CFO, LLC, 2016.
[vii] “The A-Team.” Twentieth Century Fox, 2010.