Business Value for Sellers and Buyers

A seller says, “I want to sell my business.” “How do I make it have more value?”

A buyer asks, “What’s in it for me?”

The answer to both seller’s and buyer’s question are the same. For businesses, value to a buyer is the expectation of future earnings and cash flow. And for a seller, if the company’s expectation of future earnings can be increased, the value of the business goes up.

The seller then will ask, “How can I do it?”

Here are some answers.

Start the valuation process with a solid history of past earnings. In most cases the expectation of future earnings springs from the diving board of past earnings.

Ask yourself, “What allowed my company to create cash in the past?” Technology, people, proprietary rights, location, personal contacts, customer satisfaction, customer service, etc.? If you don’t know, then think it through, talk with your associates, ask your employees. You will find the causes.

Now, to ensure value, make sure the buyer understands that what worked in the past will work in the future.

For example, if your company uses heavy machinery, show the buyer you have kept the equipment competitive through update, replacement and maintenance. A sophisticated buyer knows that and will understand what you have done (or not done) to keep up the quality of the machinery. They will assign value, either up or down, accordingly. It’s not what will happen in the future but their perception of what will happen, that creates value.

For a distributor your success may depend on your sales and customer service people. A buyer will perceive this, and give you high marks for the quality of the people and the support given them.

For one company, technical innovation created past results. The buyer will ask you how what you do to insure innovation’s continuity. Are your people up to date, do they have the tools they need, is the budget adequate?

For retailers, advertising, promotion and merchandising are the keys. They will bring customers to your door and convert them to buyers. The question is, “Will they continue for a new buyer?” Increase the perception of value by showing continuity (and even improvement) in advertising, promotion and merchandising.

Other items heighten the perception of value. Good accounting and reporting does. Do your reports accurately show what’s happening in your business every day? Buyers perceive “good management” if you answer their questions quickly and accurately. Clear and timely financial statements create one perception while the opposite creates another.

Does your information system make your business easier to manage, or is it obsolete and of little use? If you have a delivery service and you competition adds improved software for controlling drivers, can you continue to compete with your old software? Your business will still have value, but not quite as much as before.

Back to the question, “What makes value?”

Answer, “Doing all the things you did in the past to create cash, and showing a prospective buyer that the company will continue to do so.”

Simple.

Charles R. Schaul, Partner of SixPillars Research Group, focuses on increasing business profits by resolving the problem of customer attrition. Aligning companies with their customers; generating and implementing strategic initiatives; and promoting employees’ customer focus through commitment, responsibility and accountability combine to achieve the result.

Copyright 2008 by Charles R. Schaul, Boulder, Colorado. All rights reserved.

The Value of Customer Alignment

Copyright 2008 by Charles R. Schaul, Boulder, Colorado. All rights reserved.

In a recent engagement we worked with a warehouse distributor of an automotive commodity, conducting what we call a “customer alignment” project for them. As is almost always the case, we were able to show our client that better alignment with their customers would produce substantially more profit, conservatively estimated at more than 30 times our fee for the engagement.

In speaking with customers of our client we learned that compared to competition our client had excellent inside sales personnel, provided far better delivery service, handled the few errors in shipping and pricing quickly and with no hassle, and provided excellent warranty claims handling. They also were better in helping customers keep their inventory clean and balanced.

Many customers said they were willing to pay an extra $1.00 to $3.00 per unit for the overall level of service, especially the delivery service.

A second thing we learned was that some customers purchased only low priced products, but received all the same excellent services. Adding the cost of handling the product in and out of the warehouse to the cost of the other services provided, we found the company had negative gross profit on sales of low end products. Obviously, if a customer bought only low end products, the company lost money by selling to that customer.

As a result of the study we recommended adding $1.00 to $2.00 to the selling price of high end products; and either dropping or reducing delivery service to customers buying only low end product. The increase in profit from implementing these recommendations added very significantly to the profit of this automotive commodity warehouse distributor. The margin in this industry is very thin. As a result of our work our client added some 30% to their gross margin.

As usual, we finished the engagement with a feeling of great success. We had proven once again that alignment with customers produces both quick and long term increases in profit, as well as customer loyalty.

Charles R. Schaul, Partner of SixPillars Research Group, focuses on increasing business profits by resolving the problem of customer attrition. Aligning companies with their customers; generating and implementing strategic initiatives; and promoting employees’ customer focus through commitment, responsibility and accountability combine to achieve the result.

Focus on your job - Let the experts do theirs

If you have cavities, do you fill your own teeth? Or do you let the dentist fill them?

Seems like a dumb question, doesn’t it. Of course you don’t fill you own teeth.

Here’s another one. Do you do your own bookkeeping? Or do you employ a bookkeeper or accountant to do it for you?

Not quite as dumb this time. But I know of small a business owner that keeps his own books. It seems to me he could better spend their time promoting or managing his business. (And he does a poor job of bookkeeping.)

Another question. Do you develop your own software, or buy already developed packages?

More broadly speaking, are you one of those people who thinks you will save money by doing it yourself, rather than turning to an expert, or buying the product off the shelf?

A long time ago I owned a machine shop. My employees, highly skilled production machinists, wanted to build our own equipment. “Save cost”, they said. “Faster”, they said.

So they built some special machines for us. I let them.

Slowly, over a period of years, and after they had built several machines, I learned that in most cases their work gave us machines that didn’t work as well as those available on the market, cost us much more money in the long term, (both in actual cost and in poor performance) and took longer to get up and running than if we had purchased them.

The reason? We were production machinists, producing a variety of parts for a variety of customers. We were not one-of-a-kind custom machine designers and fabricators. We were experts in what we do, but not in what they do.

The lesson -- hire the experts or buy their machines.

One friend wants to establish a Web site. To do so he’s teaching himself html, the language of Web site formatting. It will take him hours to learn it, more hours to design and lay out the site, more still to encode it, and even more to upload, edit and revise the material. All this to save $600 -- the cost of having an expert do it. So he saves $600, while taking 20 or more hours away from what he does well: being the rainmaker for his firm. How much new business could he have generated for the firm if he paid the $600 for the Web site, and used the 20 hours he saved for networking, marketing and selling?

Here’s another, even worse, example.

A client has spent two years developing a software package for operating her retail stores. Perhaps she saved some cash by developing it rather than buying an off-the-shelf package.

The question is, though, how much did she lose by having only a mediocre program? How much has revenue suffered because the inventory is poorly managed? How much extra interest has she paid as a result of being forced to finance the excess inventory? How much of her time has she spent guiding the software project instead of doing what she does best -- buying and selling apparel?

Think about it.

What do you do best?

Probably it’s working as an expert in your business and your industry. Recognize that. Focus on it.

Stay away from the odd jobs. Let the experts do them.

Charles R. Schaul, Partner of SixPillars Research Group, focuses on increasing business profits by resolving the problem of customer attrition. Aligning companies with their customers; generating and implementing strategic initiatives; and promoting employees’ customer focus through commitment, responsibility and accountability combine to achieve the result.

Copyright 2008 by Charles R. Schaul Boulder, Colorado. All rights reserved.

Leadership - The Glue That Binds

In an earlier series entitled Five Point Performance, I described five points that together create what I call Strategic Management. Four of the points are Vision, Motivation, Plans and Execution. The fifth is Leadership -- easily the most important of the five.

Leadership is the glue that binds the five points together. Leaders create the vision, communicate it and motivate others to take it up, help create the plans, and direct and control the execution of the plans. Without a leader the "ship" founders -- strategic management leads to nothing.

You may be a poor leader and have a good company, but you won't have a great company until you become a good leader.

One way to become a better leader is to emulate the practices of a known great leader. An example we can all relate to -- whether a student of history or not – is Abraham Lincoln. Some people believe him to have been the greatest leader of all time. Donald T. Phillips wrote a book, Lincoln on Leadership (Warner Books, 1992), describing the power of Lincoln' leadership.

Studying the life of Lincoln as a leader has practical benefit because the leadership traits he exhibited can be practiced by leaders at all levels, including leaders of small businesses. For Lincoln leadership meant the following practices:

He left the confines of his office to circulate among his subordinates, and among the troops. Lincoln spent more time with the army than any other president, and is the only American president to have come under enemy fire. He learned first hand about issues, not waiting for them to be filtered or spun by his subordinates.

He suggested many courses of action to his generals, but never ordered them to take them. He empowered them by delegating responsibility and authority to make their own decisions, while at the same time exhorting them to be aggressive. He persuaded rather than ordered them to move. And those who would not take the lead were removed from their place at the head of the army. He practiced leadership as a way of creating openings for other people to step through.

He had a clear vision of the future -- an undivided Union of states with equality among people and no slavery. His followers slowly came to follow the fierceness with which he held to this vision. It was the light to which he moved forward. He held tightly to this vision as he twisted and turned the government and the army toward it --even in the face of harsh criticism and mockery.

He told the truth to his followers no matter how bad the news. Leaders who are honest and forthright gain the respect of their followers, and are enabled to lead. It’s no wonder we have no great leaders in our government -- honesty seems to have gone away in the last century.

He encouraged innovation and risk taking. He constantly asked the question, “Can we do better”? He asked for suggestions, then frequently responded by saying “We will try it. If we never try, we never succeed”. Lincoln surrounded himself with people skilled in their fields, not with “yes men”. He wanted their ideas, their innovation.

These are only some of the “modern” leadership practices used by Abraham Lincoln some 135 years ago. Timeless, effective, and practical for the ordinary leader. Emulate Lincoln, and you can become an effective leader, the glue to build your organization into a great one.

Charles R. Schaul, Partner of SixPillars Research Group, focuses on increasing business profits by resolving the problem of customer attrition. Aligning companies with their customers; generating and implementing strategic initiatives; and promoting employees’ customer focus through commitment, responsibility and accountability combine to achieve the result.

Copyright 2008 by Charles R. Schaul, Boulder, Colorado. All rights reserved.

Hiring-Micromanagement-Inward Focus Problems

Frequently I hear complaints about not having enough capital, and about finding, hiring and retaining good employees. In other words, there are not enough resources, either financial or human.

I believe that underlying these problems are two others, more subtle, pervasive and damaging. Usually they either cause or magnify the problem of insufficient resources. At the same time they aren't understood or acknowledged. These are:
• poor hiring practices coupled with micro management
• inward focus and lack of creativity.

Poor hiring seems pervasive in our business world. Poor advertising attracts the wrong applicants, we then hire the best of them without regard to their fit with the job, usually train them poorly and finally, micro manage. It's no wonder human resources are the greatest challenge. Look at all the places we can make mistakes!

Micro management means not "letting go" of responsibility and authority. It means telling people how to do their jobs rather than allowing them to make their own plan and do their work without interference. It means looking over workers shoulders, unnecessarily checking progress, criticizing or finding "better" ways rather than praising and allowing them to have their way of doing things. Micro management is the characteristic of an unenlightened manager who then tells me, in private, that good employees aren't available, they have no loyalty, they take no initiative and managers are rare. "If only I could get people to take responsibility and do a good job" is the lament. Of course. No self respecting, competent employee will work for a micro manager for the long term.

Because of micro management, businesses can grow only to the size that one person, the micro manager, can manage. That manager can't "do it all" to sustain growth, can't "let go" to let others enable growth, is frustrated, frequently ill and burns out prematurely. Unfortunately, I see it a lot.

A second problem I encounter with business owners and managers is the that of inward rather than outward focus. With only a few exceptions, opportunities to advance a business reside outside the business in the market place, and not inside the business in its systems for doing business. Of course, the system must support the activity of the business, but many owners and managers seem to want to perfect the system while ignoring the external opportunities.

For example, the owner of a small dental equipment manufacturing business talked with me about setting up his own machine shop rather than buying from outside vendors. Had he done so he would have reduced total cost two percent. On the other hand, he would have continued doing the same amount of business as before, have the added burden of first learning how to and then managing a machine shop, and would have used up financial resources for at least three years. This is inward focus.

I suggested he revise his strategy to look outside the business:
• first, make a strategic alliance with two machining companies (rather then the nine he was buying from,) giving them all his work in exchange for negotiated price that meet his targets, and
• second, use the financial resources not now needed for machinery and expand his marketing and sales effort into a new niche, adding more than 30% (projected) to his sales revenue.

He followed these suggestions, turning his focus from solving a problem inside his business to seizing an opportunity outside his business. The long term benefit of the latter will five times that of the former. And, now it will be much easier to attract resources, both human and financial to his outward looking company.

So if you have problems of hiring, training and retaining employees, or if you feel tired, frustrated, and burned out, or if your business is stagnant -- maybe you are a inwardly focused micro manager. Think about it.

Charles R. Schaul, Partner of SixPillars Research Group, focuses on increasing business profits by resolving the problem of customer attrition. Aligning companies with their customers; generating and implementing strategic initiatives; and promoting employees’ customer focus through commitment, responsibility and accountability combine to achieve the result.

Copyright 2008 by Charles R. Schaul, Boulder, Colorado. All rights reserved.

Create Consistency for Greater Profit

Lack of consistency is the bane of many businesses. It is obvious in a restaurant with inconsistent quality or service. How many times will you go back if the food tastes great one week and bland the next? Or gives great service one week but is terribly slow the next? Lack of consistency is seen in many other places as well: a distributor with inconsistent inventory coverage; an on-line retailer with poor customer service; a manufacturer with inconsistent product quality or delivery performance; a law firm with inconsistent response time to client calls…. All these forms of inconsistency damage a business and drive customers away.

It is safe to say then, that firms that consistently provide customers with satisfactory products or services create more wealth for their owners than do firms that don’t do so. With profit in mind, following are four concepts that lead to consistent performance in business.

Policies, Rules and Work Instructions provide a framework for operations. Policies are corporate and usually strategic in nature. For example, one company does not want to incur the administrative cost of contracting with the government. It decided upon a Policy that it will not contract with the government. There is no question about it. It is a policy.

Rules are less strategic in nature, such as the myriad of rules that a Human Resources department imposes on a workforce.

Work Instructions tell the staff how to do the work. A work instruction might be that all inquiries are entered into the Inquiry Register that shows the inquiry details, and eventually shows if it becomes an order or why not if it doesn’t. Without policies, rules and work instruction, formal or informal, performance of tasks is hit or miss, and inconsistency reigns.

Caution! Policies, Rules and Work Instructions do not imply rigidity. They give workers a framework for doing their work in a consistent way, but do not mean to stifle creativity and empowerment.

Building consistency without training is like building a new road without a set of plans. No one seems to know what, when or where to do anything. Good training is a must when implementing work instructions. Without it the new instructions are wasted. Having people understand what is expected of them, and why, leads to consistent, repeatable application of the way the work is done. Having a team understand their instructions, and execute them well as a team, builds morale and performance.

“I’ll try.” “I’ll do my best.” “If I remember.” Theses are the words that mean NO COMMITMENT to getting a job done. If you are implementing a new set of work instruction for a particular task, and entering data in a log or register is the final step of the instruction, you must be committed to the final step, and train your staff to be equally committed. To develop consistency, and to maintain it, people must be committed to the rules, instructions and training that guide their work. Without commitment and discipline there is no consistency. In this context “discipline” does not mean punishment. It means a steady application of the instructions through persuasion and learning from mistakes, not punishing for them.

Accountability is the last step for insuring consistency. Accountability means giving clear instructions, making sure people understand them, and holding people responsible for following them. This does not mean rigidity, or punishment. It means having certain expectations for performance and holding to it through encouragement, training, gaining greater commitment.

Charles R. Schaul, Partner of SixPillars Research Group, focuses on increasing business profits by resolving the problem of customer attrition. Aligning companies with their customers; generating and implementing strategic initiatives; and promoting employees’ customer focus through commitment, responsibility and accountability combine to achieve the result.

Copyright 2008 by Charles R. Schaul, Boulder, Colorado. All rights reserved.

Accountability in Business

Copyright 2008 by Charles R. Schaul, Boulder, Colorado. All rights reserved.

In a recent workshop the participants were given a form to complete -- a self-evaluation of how accountably they live their lives -- both business and personal. The evaluation contained ten statements, and the participants rated themselves for each statement on a scale ranging from “never” to “always”. Some of the statements were:

• “You hold yourself accountable for the commitments you make.”
• “You blame others for your failures.”
• “You tell others, in advance, of the consequences should they not keep their commitments.”
• “You hold yourself accountable for the commitments others make to you.”

The participants then scored themselves on the evaluation. The results generated a typical bell curve with a few people feeling very accountable, a few feeling not accountable at all, and the rest falling somewhere in between.

Then the participants were asked to evaluate their organization (i.e., their company, department, office), using similar statements. Again the statements were rated from “never” to “always”.

Interestingly, the total of the company scores were much lower than the total of the individual scores. In other words, the individuals believed they behave more accountably than others around them in the organization. I’m told that for every group participating in the seminar, the results are the same -- the individuals believe they are more accountable than their associates.

Well, you may ask, “So what?” Or, “What is accountability, and why is it important?”

Angela Thoburn of Opportunities Management Inc. created as good a definition of accountability as I’ve read. Angela says “Accountability is an agreement to acknowledge and accept the consequences for delivering or failing to deliver certain results or behaviors.” I shorten it to “Accountability means agreeing to accept consequences for behavior.” If you are accountable you commit to produce results (or behave in a certain way) -- then take action that either does or does not produce what you wanted -- and accept the consequences for the outcome, good or bad.

Consequences can be either natural or contrived. For example, if you fail to perform a task and blame someone else, people lose trust and confidence in you. That’s a natural consequence. If on the other hand, you fail to perform a task and blame someone else, and your pay is reduced, that’s a contrived consequence. Your pay isn’t reduced because you failed, your pay is reduced because others have lost confidence in you. Natural or contrived aside, accountable persons accept the consequences of their actions, good and bad.

Why then is accountability, or acting in an accountable way, important to individuals and organizations?

Let me ask another question. Have you ever tried to get something done by people who didn’t meet their commitments, blamed others for there failures, and then were not required to accept the consequences of their action? Frustrating, isn’t it.

Not only do you not get anything done, if you allow the situation to persist unchanged, you will never get anything done.

A precedent for unaccountable behavior is established. Many businesses operate this way, and the owner wonders why he or she has to work so hard and do “everything” him or herself. It’s because their supporting staff knows they won’t be held accountable -- the owner established the precedent.

Changing a precedent requires hard work, a long time, and sometimes serious upset to an organization. Requiring people, including yourself, to change behavior to accountable from unaccountable styles, is something akin to pulling teeth. So, if your organization scores low on an evaluation of accountability, get out the pliers and start pulling. In spite of the hard work, you’ll be glad you did.

Charles R. Schaul, Partner of SixPillars Research Group, focuses on increasing business profits by resolving the problem of customer attrition. Aligning companies with their customers; generating and implementing strategic initiatives; and promoting employees’ customer focus through commitment, responsibility and accountability combine to achieve the result.

Pay Bills with Cash, Not Profit

Most new businesses and most growing businesses have the same problem. Cash, the lifeblood of business, is scarce. Meeting payment obligations is a problem. Some businesses even fail because although profit is excellent, there is not enough cash to pay the bills.

Thus, the basic principle of business: “Cash is King.” CASH, NOT PROFIT, pays the bills. Without cash the walls will tumble down. The problem is worst for three kinds of businesses: those that are starting and need cash to finance the startup; those that are growing quickly and need cash to support the growth, and those that are declining and need cash to offset losses.

It is amazing how many businesses do not forecast cash flow. Profit forecasts abound, and of course are valuable. But the basic tenet, bills are paid with cash, not profit, seems forgotten, and forecasts of cash flow frequently don’t exist – even in many well run companies.

Without a forecast of cash flow, companies react to cash shortages. With a forecast, companies can be proactive about cash flow problems and take steps in advance to alleviate cash shortages. Cash forecasting leads to cash planning.

Cash flow forecasts can be simple or very complex. For a simple forecast use a form like the one shown below. In the disbursements (payments) column show what payments are coming up, and when. Don’t forget unusual payments, like quarterly payroll taxes, or insurance premiums and annual licenses or fees. Also include payments for new equipment, inventory, WAGES, etc.

In the income column show all the expected income, and when it will be received. If the business has accounts receivable, be sure to use the date the money will come in, not when the sales are made.

Date	Item	Cash In (Received)	Cash Out (Paid)	Balance
	Beginning balance

The beginning cash balance shown in the first line is the amount of cash on hand when the forecast is begun.

If a cash shortage is seen in the forecast there are many ways to resolve the issue. Slow down the payments schedule by negotiating with vendors for extended time to pay. Speed up receipts by shortening credit terms or offering discounts for early payment. Use credit cards or establish a bank line of credit to cover the cash shortages. Use personal cash resources if necessary, or borrow from family or friends.

For fast growing businesses, even consider slowing down the rate of growth so the profit earned can stay even with the expanded need for cash

Careful cash forecasting and management can solve many problems. Forecasting discipline and spending discipline save many a business that would otherwise fail.

Charles R. Schaul, Partner of SixPillars Research Group, focuses on increasing business profits by resolving the problem of customer attrition. Aligning companies with their customers; generating and implementing strategic initiatives; and promoting employees’ customer focus through commitment, responsibility and accountability combine to achieve the result.

Copyright 2008 by Charles R. Schaul, Boulder, Colorado. All rights reserved.

Leadership, Management and Failed Growth

Many small and not so small companies grow rapidly after inception, driven by a supercharged, frequently overachieving, founder. These businesses usually are very profitable because overhead is low and control is tight and well within the span of the founder. The owner’s drive and energy permeate all activities. The company thrives.

Then, many of those same companies hit a ceiling. Growth may continue but profits decline or even disappear. Cash flow frequently turns negative. Sometimes a company fails.

What has happened? What has kept the so called “second phase” of expansion from kicking in? Why has the company HIT THE CEILING?

Out of many possible answers to this question, the most frequent is the failure of the hard driving founder to transform from manager to leader. Managing is one thing. Leading is quite another.

One source defines the work of a manager as, “directing and controlling a group of one or more people or entities for the purpose of coordinating and harmonizing that group towards accomplishing a goal,” while the work of a leader is "influencing, motivating, and enabling others to contribute toward the effectiveness and success of the organizations of which they are members."

Leading is inspiring others to do the work effectively – meaning efficiently and for a business, profitability. The key word is inspiring. In today’s business terms we would say leading means having goals (some would say “vision”) for the business and inspiring others to adopt them readily, even enthusiastically. It means getting others to “buy in” to the plans for reaching the goals. Leadership includes encouraging, teaching, learning from mistakes rather than punishing, praising, rewarding. It means selecting competent people to do the necessary jobs, training them well, giving them the resources they need and letting them accomplish results with your help, not your management. It means letting go of great chunks of control and trusting that others will do the job.

The ability to be a leader does not rest on charisma. In fact, many great leaders are far from being charismatic people. Leaders are not necessarily “born to lead,” but can learn the techniques of leadership in many ways.

The inability of an owner to “let go” and trust that others can do a job well insures a company will hit the ceiling. We call this micro-managing. Companies led by a micro-managing owner have weak middle managers who turn to the “Boss” when problems arise. Frequently middle managers are punished for mistakes. With this environment middle managers “hunker down” and turn to the Boss for all the answers. The process weakens the company and it hits the ceiling.

For example, one Boulder company grew rapidly from its inception both in sales and profits. After only five years it had reached over a million dollars per year in profit. Then it broke through the ceiling of the founder’s managerial ability and almost doubled in size. Unfortunately, although control requirements expanded beyond the span of one person, there was no “letting go” by the founder. He never became the leader the company needed. The result – control slipped, and then fell apart. The firm lost more in its next two years “above the ceiling” than it made in all its years “below the ceiling.”

Some company founders recognize they are not the leader that can drive their company into the future. They are smart enough though to hire others to do that, while they remain the technical innovator, the marketing maven, the great salesperson or some other specialist that drove the company to the point of hitting the ceiling. Then the company prospers because leadership is good; the founder prospers because someone else is leading the parade.

Other founders may not want to give up control, and are smart enough to stop expansion when the company nears the point of hitting the ceiling. A Phoenix micro circuit company has operated very profitably for many years with 15 or so employees and very little growth in sales. The owner, recognizing his leadership limitation, manages the firm effectively, creating a very comfortable living for himself and not risking growth beyond his span of control.

Some founders, recognizing their limited leadership ability, study the subject and train themselves and become effective leaders. Through emulation of other leaders, reading, training courses, clinics and seminars, they evolve from manager into the leader needed to continue driving their company forward. For them there is no danger of hitting the ceiling.

Charles R. Schaul, Partner of SixPillars Research Group, focuses on increasing business profits by resolving the problem of customer attrition. Aligning companies with their customers; generating and implementing strategic initiatives; and promoting employees’ customer focus through commitment, responsibility and accountability combine to achieve the result.

Copyright 2008 by Charles R. Schaul, Boulder, Colorado. All rights reserved.