The Facts of Business Life (19 page)

There is also another potential trap for owners at this level, and it's a trap that can derail even the strongest company. While it's true that you must have controls if you want to get to Level 4—much less stay there—if you exercise too much control, it will eventually become a negative factor. And that's because, at this level, while strict controls are needed in some areas of the business, relatively little control is needed in others. For example, it is particularly important to maintain strict control over accounts receivables, inventories, equipment, and financial records, among others. Without such controls a company can find itself in serious difficulties. However, it is equally important at this level to not exercise a great deal of control in other areas, including personal management, daily decision making, and training. This is because doing so can have a negative effect on employee satisfaction, company and product innovation, and empowerment.

Too much control can also affect the primary reason a business is successful in the first place—its customers. The vast majority of customers do not want to do business with a company that appears to be robotic and sterile. Customers want to feel appreciated, to enjoy the buying process, to have fun, and to experience a little excitement. And too much internal control interferes with the pleasure they get from doing that. So it's important for owners to take into account what their customers expect and want when they're looking for ways to increase efficiency. Controls are an invaluable tool to attaining and maintaining success, but only when they are used judiciously.

Although every level is different in several ways from every other level, Level 5 is different from all the others in a unique way. It's the only time the owners' goals for themselves and their goals for their businesses do not mirror each other. For the first time since the company began, the owner and the business are no longer joined at the hip as far as the future is concerned. Because the owner will be going one way and the business another, at this level the owner has to control two unrelated issues—his or her exit from the business and keeping the company running as it has been.

Wearing these two hats, and the control issues they create, is a formidable challenge. In fact, it's a lot harder than most people understand, largely because both roles demand time, energy, and patience. In addition, there is a huge emotional issue for most owners at Level 5, one that obviously does not exist at other levels. To overcome these challenges, the first thing an owner must do is recognize the dual nature of what he or she is facing. But it will also require the owner to change how he or she personally oversees the company, and to develop a new set of skills, that is, learn how to understand and control the selling or the succession process.

The Benefits of Control at Level 5

• Being in control helps you decide which of the two major issues you are facing need their attention at any given time.
  
• Being in control helps you balance your time, energies, and priorities between your two roles.
  
• Being in control warns you of impending internal problems well before they becomes crises, which is especially important when your attention is divided between the exit process and maintaining the company.
  
• Being in control enables you to turn oversight over to subordinates and free yourself to deal with exit issues.
  
• Being in control helps you see quickly where action is needed to refocus and reassure employees when the company has been sold or you are implementing a succession plan.
  

As I mentioned earlier, there are also two important realities that have to be taken into account at this level. The first reality is that if you don't pick your time to exit, someone or something else will. That is, you could be in a crippling accident or worse, you could develop health issues as you grow older, or your passion and energy for the business may lessen. In fact, there are any number of things that can occur over which you have no control. By the time you've reached Level 5, however, you will have run the race and done it well. So you should finish well, that is, pick your time before someone else does. The second reality is that the best time to sell your business or implement a succession plan is when you don't have to. When your business is doing well, you don't have to sell, and you can afford to wait for your price. And if you are implementing a succession, it's best to do so when the company is doing well, because it makes the transition a great deal easier, on both you and your successor. At Level 5 your goal has changed, and it is in periods of change that control is more important than ever.

When you are considering moving on, whatever the reason may be, there are a number of important questions you have to ask yourself, including:

• How much is the business worth?
  
• How do I calculate the value of the company's goodwill in setting a price?
  
• Can I live off the sale for the rest of my life?
  
• What happens after I leave?
  
• How will my life change?
  

Answering these questions and many others like it depends on information and, of course, the accuracy of that information. And since it is likely that the answers you arrive at—and the decisions you make based on them—will affect the rest of your life, it is very important to have a good grip on that information, that is, to have control over it.

In fact, controlling the kind of information you use and the accuracy of that information are the two most important factors in making an exit decision. For example, just because an owner feels that his or her business is worth several million dollars does not make it a fact. It just doesn't work that way, even if the buyer is willing to pay the price. In most cases buyers need a bank's support, and a bank won't lend money to a buyer unless it makes sense based on pertinent and accurate information, such as past sales, gross and net profits, current and long-term assets, real estate, and industry and regional multiples, among other factors.

But there are also other benefits of making sure the information you gather is appropriate and correct. For example, doing it provides the substantiated facts you need during any buy/sell negotiation, without which you and the buyer may not be able to come to an agreement. It can also help you determine the best time for your exit in light of possible changes in the tax code that might make it advantageous for you to slow down or speed up the process. If you are passing the company along rather than selling it, having the most up-to-date information about taxes can also play a major role in determining how the transition is completed and over what time frame.

Exercising control over information begins, of course, with making sure that you have all you need and that it's accurate and up to date. But the real value of information lies not in collecting it but in how you use it. If you decide to put your company up for sale, for example, information can be rearranged in new or different ways to present your business in a more positive light, highlight future opportunities, or play down whatever weaknesses it might have. It's really just a matter of understanding the significance of the information and making the best possible use of it. Whatever you do, though, it is essential at this level to maintain control over the information you're using, because during the exit process there is a lot of information being passed back and forth, and it's only by maintaining control that you will be able to guarantee the most successful results for yourself and your business.

I mentioned earlier that at this level, owners have to change how they personally oversee their companies, which means they have to either restructure existing processes or develop new ones to make sure the business will continue to move forward during the exit period. One thing that may change is that, due to time constraints, you will no longer have time to practice management by walking around. Similarly, you may have to delegate responsibility for conducting regularly scheduled daily or weekly meetings to a subordinate and attend yourself only as time permits. You might also turn review of balance sheets over to your comptroller and meet with him or her just a few times a month. Frankly, it's unlikely you will be entirely comfortable with changes like these, because doing these things will probably have become fundamental to your leadership and ownership style. But choices have to be made, and, as the owner, you are the only one who can make them. And there is only so much time to get everything done if you want to exit the right way and with the biggest payoff.

As I also mentioned, exercising control at this level means learning new skills, which means developing new processes that will enable you to successfully sell or pass along your company. Whenever you are selling something, the most important thing to remember is that the road to the sale has to be controlled. And this applies to selling a business as much as it does to anything else. The edge in any sale will go to the party who controls the events. In order to gain control, owners have to understand the selling process and know how to control it. The control process starts, of course, with the exit decision, but there is much more to it. There are, in fact, a number of elements that are part of the selling process, including:

• Deciding whether it's better for you to sell the business as an asset or by selling shares in your business.
  
• Deciding what is for sale—that is, business assets, real estate, and goodwill—and what isn't, and how the sale price can be justified.
  
• Determining who the best buyers are, who can afford to pay the most, and who would benefit the most from buying your business.
  
• Developing a means of upholding confidentiality of discussions and information.
  
• Deciding, once a buyer has expressed interest, the steps and timing of the sale.
  
• Determining which elements of the sale will be dealt with first, and in what order the remaining elements will be discussed.
  
• Deciding on some parameters or framework under which a deal could be made, that is, deciding what you want, what you might be willing to give up, and what would be a deal breaker.
  

This does not constitute the entire list of issues you must take into account when selling a business, but it's a good start. The key point to keep in mind is that selling a business is a process, and one in which one side or the other will have control. And the one who has that control will be the one who has prepared and developed processes for doing so.

You may, however, want to pass your company along to someone rather than sell it, and this effort also requires a process to be carried out successfully. Among the elements of the succession process are:

• Determining how a successor is chosen based on where the business is today, where it should be in the future, and the skills needed to get it there.
  
• Determining a means by which tax issues will be considered.
  
• Deciding how other family members will be handled and rewarded.
  
• Determining the timing of, and speed with which, you will step aside.
  

Again, these are just some of the important issues that must be decided during the succession process. One of the other extremely important issues, and one that is often forgotten, is teaching a successor how the business is operated. If you are implementing a succession plan, you need to think about and develop a structured process for explaining to your successor how the company's DNA was created, why processes are the way they are, how they evolved, the importance of expectations and controls, and the owner's role in the process. This is essential because, as we have all seen, many businesses decline or fail after a succession plan has been executed. And since, in many cases, the reason is the new owner's lack of knowledge concerning how the company is operated, it is imperative that a structured process to provide that knowledge be created.

Even if you decide to simply close down your business, you will have to develop a process to accomplish it, because doing so is not as simple as removing the sign and locking the door. In this situation, there are two major control issues, the first of which is timing. When you close a business, you have to select two separate and distinct end points, one being the last day of business, that is, the day you close to customers; and the second being the date by which you want to shut down the company's internal operations. The first date is straightforward, but the second can be more elusive because it takes longer than most people realize to shut down operations and close the books. For example, accounts receivable will have to be collected, assets will have to be disposed of, tax forms will have to be completed for the business and the employees, final financial statements will have to be prepared, the business will have to be legally closed, and so on. Because of this, it is essential that your lawyer and accountant be involved in closing down your company.

The second control issue concerns you—your emotions and your drive. A successful closing means picking the last day you will have customers and then concentrating on sales and profits. And when that day comes, you start doing whatever must be done to wind down the business. Mixing the two is a mistake because it's frustrating and emotionally exhausting to try to do both at the same time, and as a result neither gets done well. When you are closing down a company, the objective is the same as it is when you are selling one—getting the most money from your business, operations, and assets—and doing that requires a kind of control and mental discipline that only you can supply.

By the time you get to this point in your company's life cycle, you will certainly have figured out the importance of controlling employees through processes and how to manage those processes. At Level 5, though, control of people takes on a new and different significance, because at this level you are essentially embarking on a new journey, and it's important that the people with whom you surround yourself on that journey are the ones who will be most helpful in making it a successful one.