Similar to my blog on taxes coming more that once a year, many businesses only think about risk one time a year. That time is typically when it is time to renew the property and casualty, general liability and D&O policies. For many businesses, this becomes a routine and mechanical process, when in fact it should be a very vigorous and strategic aspect of running the business on a day to day basis.
Before you even get to purchasing insurance, the first step is to identify the risks to the business. If you do not understand what the risks are, both in terms of financial and operational exposure to the business, how can you define how to mitigate these risks? Once the risks are identified and quantified, now you can develop strategies to mitigate the risks. Wait…it is still not time to call the insurance broker!
Before you even think about insurance as a risk mitigation tool, first think of other ways to avoid or control the risks facing your business. The first and obvious way is to stop doing business in a way that creates risk, or to change your business practices to reduce risk. The second might be to develop programs internally that would reduce your risk profile. This might include a safety program or training programs that over time will reduce your risk profile and experience. You could also potentially transfer the risk to your vendors or customers. This can be done contractually. Once you’ve exhausted these alternatives, then purchasing insurance could be the final component of a total risk program.
So before insurance renewal time comes, take some time to fully assess the risks surrounding your business, and identify ways that these risks can be minimized or eliminated. You might even find out that you are currently buying insurance that you don’t really need.
Management styles are typically only thought of in an interview setting. How many times have you been asked, “So what is your management style?” Most of us want to believe we are great managers, providing our employees with wonderful growth opportunities, personally and professionally. The reality is, most managers don’t do a very good job at “managing” people. Instead, they become dictators in their own business.
As you are thinking about the people you manage, ask yourself these questions.
- Do these individuals have some level of authority to make their own decisions within a certain established framework?
- Do they have the ability to choose the method by which they can accomplish a project?
- Is there an open and honest line of communication between you and your direct reports?
- Do your employees understand the purpose of their work and the value it provides to the organization?
If you really think about these questions and answer them honestly, most of us still have a lot of work to do to become better managers.
If employees are treated like citizens in a dictatorship, provided with little communication, given no authority to make their own decisions, and feel like they have no real value to the organization – ultimately they will leave. Not only will the organization not achieve full productivity from these unhappy employees, the cost of constantly turning over staff becomes significant for the business.
So next time you ask one of your direct reports to complete a project, let them know why it needs to be done and ask them how they would proposed to accomplish the project. Give your employees a purpose and a little rope to make their own decisions and you will be amazed at how their attitudes and productivity can change for the better. A small change in your behavior towards them in this regard can lead to some massive changes in the results they deliver and the attitude they have going forward – and this impacts everyone in the organization!
This is the time of year most business owners either look forward to or dread – time to update or create the strategic plan for the next 1 – 3 years.
Some embrace it and look forward to “resetting” where they are and getting some new directions for their business – the fresh start idea. Others, unfortunately the majority, dread this process and see it as a waste of time because nothing really happens or gets done on the plan and in most cases, it sits on the shelf until this time next year. Which camp do you fall into?
I have a simple recipe for both camps, but primarily for those that dread the process. It isn’t monumental but if you follow it, you will probably see some significant changes in the growth of your business over the next year. It comes down to one word – EXECUTION. This is the one word that is missing from almost every plan that fails. It fails to be executed and as such, sits on the shelf for yet another year without any action. How can you fix this?
Take baby steps – break the execution phase of the plan down into tiny steps that don’t seem so insurmountable to accomplish. What happens in many planning processes is the creation of goals and objectives that are fairly large to attack. They are so large they get pushed off to a later date to get started. This is the death of strategic planning. But if you take these objectives and break them down into very tiny pieces, they aren’t so insurmountable or difficult to get started. Then just START. If you can do a few, you will find you can do a bunch of them and before you know it, you have actually accomplished some major parts of your plan.
So start with small baby steps and actions and don’t worry about the big objectives, they will gradually take care of themselves over time if you just get started on some actions which don’t seem so large. These small steps can lead to the accomplishment of big things for your business and maybe next year you won’t dread the strategic planning process.
This past week I was talking to a friend of mine who owns a small security services business and his story was one I hear a fair amount so I thought it was worth sharing.
To me he has a classic issue – cash flow management. If someone looked at his business from the outside they would get an entirely different view than what is going on “under the covers” on the inside. Even with the recession in full swing he has managed to increase sales by about 10 – 20% each year – remarkable I know. He has also managed to control most of his short term expenses by not bringing on new employees but getting more out of his existing staff – which they are glad to do to keep busy.
If you look at it from an accounting side, he is also quite profitable. His profits are measured by the traditional methods of EBITDA and with everything going on in his business, it shows things are in great shape. But for some reason, he is struggling to make payroll and pay some bills. How can this be?
Upon further analysis, there is one small area that many overlook when viewing the “health” of the business and its ability to even survive – CASH FLOW. The part that doesn’t come out in the numbers is how much he has to pay for past debt management, past property acquisitions, paying off some previous owners, and most importantly for a growing business is the investment in working capital. He is living month to month and to a point of maybe pulling personal money into the business just to keep it running.
This is one area that during difficult and even very prosperous times needs to be analyzed at depth and managed closely. This small area to some can bring down a business faster than many other obvious factors. My advice to him was to put in place a cash flow forecasting process and update it frequently. Additionally, it makes sense periodically to reassess the capitalization structure of a business to assure that the business has enough capital to achieve its business plan. This small change in his business will probably have a bigger impact than increasing sales by another 20%. It pays to notice the little things along the way….
In a previous post, “So you want to exit the business“, I talked about exit planning and some of the things to think about before beginning the process to sell your business. I wanted to share another insight with you that is critically important and should definitely be on your “list of things to do” as you think about an exit strategy.
An area I’ve seen business owners struggle with over and over again is trying to get their arms around what the valuation is for their business and matching this up with what they would like to achieve for their business. More often than not, this number is not based on anything other than “it’s what my competitor got for his business”, or “that’s what I think my business should be worth”. Sometimes these valuations might be achievable. But in a lot of cases, these valuations are not reasonable and can stand in the way of closing a transaction.
From my experience, both as a CEO and a financial advisor, the best way to determine your number is to step back for a minute and figure out what value you need to provide the standard of living you require after the business is sold. While this might sound simple, it generally is much more involved than many realize until they get started. It takes some careful thinking, input from others (such as a spouse or others in your life), and what is “ideal” vs. what is “acceptable”.
This exercise can be done working with a financial planner, exit planning strategist, or wealth advisor. Be sure to include any expenses that are currently paid for through the company! Once you have figured out the amount of money you need after you sell the business, you will now have a firm goal you can pursue relative to valuation. You might be surprised to find out that your number was not as large as you first thought! In any case, you are now prepared to have a conversation with an investment banker to determine what needs to be accomplished to achieve your number. Enjoy the process…it can be very enlightening as well as productive.
Having worked with a substantial number of privately held companies in the past, the topic of ultimately selling the business is one that typically comes up when the owner is starting to think about retirement.
In fact, however, the preparation for this ultimate event should have probably been started years and years ago. Be that as it may, it is something that needs to be thought through and looked at from a number of different perspectives. Business owners, whether or not they have a vision to sell their business immediately or sometime in the future, should think about the following five issues if they want the process to go smoother.
- Generational wealth transfer – if this is a goal of the business owner, this plan should be put into place as early as possible, before the value of the company becomes meaningful. Even if there is a tax liability generated with this transfer, and the plan is to grow the business down the road, this tax liability will be small when compared to what it could be in the future.
- Management succession – when the time comes to sell the business, buyers will discount the value of the business if there is no one in place they feel is capable of taking the reins once the owner is cashed out. Develop a management succession plan and hire outstanding people to develop a strong management team.
- Separate personal from business – in some privately owned businesses, the line between personal expenses and business expenses can become blurred. The more you need to explain to a potential buyer that the cash flow of the business is substantially higher than it looks due to all of these expenses, the less leverage you have to negotiate a strong valuation.
- Retain strong advisors – selling a business is typically something an owner will only do once. As a result, they will not have the experience required to get the best possible deal closed. Hiring a strong investment banker and a capable M&A attorney are crucial. A good investment banker will be able to present the company for sale in the best possible light and will also know the appropriate audience to market the business to as well. M&A law is a very specific practice and hiring an attorney with this background is also a must. Otherwise, you have a strong potential of leaving money on the table and also subjecting yourself to potential future risk after the transaction.
- Don’t run the business to sell it – I’ve seen too many companies make short term decisions to try to enhance a potential transaction. Sometimes these decisions might not be the best decision for the business long term. Manage the business to grow and generate strong profits and valuation – when the time comes, it will take care of itself.
You can never start planning for an exit too soon…start now!
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