Author: BcAdm

With middle-market or main street businesses, the common business entity selected has been the limited liability company instead of the corporate entity. Even though S corporations provide pass-through taxation similar to the partnership taxation of limited liability companies, a majority of businesses are doing business as a limited liability company.

Without getting into a comparison of all the advantages and disadvantages of each entity, one key difference is in the governance of the entity. Both entities can divide ownership and control. With a corporation, a president need not be a shareholder, and with a limited liability company, a manager does not need to be a member. The corporate entity, however, contemplates a board of directors. It is the board that appoints and reviews the executive officers, including the chief executive officer (CEO).

Even where a corporate entity is involved, the tendency is to put the same people on the board of directors as are executive officers of the corporation. Rarely do limited liability companies establish boards of advisors to function somewhat like the traditional corporate boards.

Most management experts recommend a review process for employees. This provides feedback in a constructive environment to clarify expectations, critique past performance, and make recommendations about future opportunities. It seems logical to ask: who reviews the chief executive officer of the typical middle-market or main street entity? Sadly, the answer usually is nobody.

The CEO is often the owner and manager of the business. For the review of the controlling person in the business, it is difficult to find objective reviewers among the other executive officers. Of course, if there were a board of advisors who were not subject to direct control of the CEO, the review might be possible. The same could be said for a corporate board of directors made up of individuals other than the corporation’s executives.

Often, the obstacle to a board review is the CEO’s own reluctance to be reviewed. The most important leadership trait of a CEO is humility. For that reason, CEOs with strong leadership capabilities should welcome a constructive review process.

I advocate for the separation of ownership and executive control for a variety of reasons. Where there is this separation, ownership should be represented on the board and participate in a review of CEO performance. I also advocate for the review of the performance of the CEO by independent board members. Boards of directors or advisors can provide reviews of CEO performance including clear expectations, critiques of past performance, and recommendations about future opportunities.

If no one reviews the CEO of your business, the owners can decide how governance should work, including who reviews the CEO, as part of the Owner Agreement Project at Business Transition Consulting (btcllc.net). Complete the contact form and arrange a free initial consultation.

In the arena of closely held businesses, owners are often the founders and the most productive elements of the business. When a business succeeds and consistently earns a profit, the owner, serving as both producer and policy-maker, can make the decision to “leave well enough alone.” Doing this, however, ensures that the owner will not realize the maximum value from the business.

Chances are, if you founded the business, you are the best producer for the business. Also, as a business owner, the success of the business is likely attributable to your ability as a manager. You have built a team and established a successful business system with your production and management skills. In a competitive business environment, your success – the business achieving profitability – will be reverse-engineered and copied. If you do not grow and improve – change – your competitors will take your profitability away. If your concern is to receive maximum value from your business, you must move out of management and at the same time improve the business. This is not “leaving well enough alone.”

As the owner of a business interest in a profitable business, your primary concern should be to realize the maximum value from that interest. To be precise, “realize maximum value” means receiving the most net cash for that interest, thereby converting the value in the business interest from a high-risk business ownership to a personal asset held at a relatively low investment risk. This occurs when the sale of a business interest is a wealth-building event.

Put yourself in the role of a sophisticated buyer of a business. What is it you want from a business? Fundamentally, you want an established system of profitable operation. If the most important part of that business, be it a producer, a manager, or both, is the selling owner who is going away right after you buy the business, that is a negative factor causing you to devalue the business or not purchase it at all. Moreover, if the business is incapable of change, it will not grow and stay ahead of competition.

An owner seeking to sell a business for maximum value will work to become less involved and instill a business process that can adapt to maintain profitability.

The change from producer and owner-manager to owner creates wealth for the owner and the owner’s family. It is not easy, but neither is founding and maintaining a successful business. Generally, owners who have created a successful business are quite capable of following Prior Diligence and executing a plan to create increased value for the business interest. Using Dynamic Planning, the strategy is implemented in a way that consistently revises and improves the actions taken to reach the goals of the business plan.

If you want increased value and wealth for you and your family, adopt a strategy that will stop your productivity and management activity. That strategy should be the basis of a business plan that will cause that change and other changes. That strategy is called Prior Diligence. The planning for that strategy is Dynamic Planning. Find out more about the Prior Diligence strategy and Dynamic Planning at the Business Transition Consulting website, (btcllc.net).

Something bad and unexpected happens. It is upsetting. Anxiety takes over. The adrenaline response is to do something, anything, right now to stop the bleeding.

Soldiers and emergency medicine physicians train for exactly this moment, and they train against the adrenaline reflex response. Reacting quickly without a decision-making process usually means doing the wrong thing quickly. The discipline: slow is smooth, smooth is fast. Slow down to a decision-making process. That process produces a good decision (smooth). A good decision, made without panic, executes faster and more effectively than a poor quick reaction ever could (fast). Effective crisis response is the result of a good decision.

Most businesses have no embedded decision-making process for a crisis. When something bad and unexpected happens, they look to an executive officer to react. One person, under pressure, is expected to have the right answer immediately. More often than not, that produces one of two outcomes: a freeze with no reaction and no communication while the damage compounds, or an immediate reaction that was not considered, stepping in the wrong direction and making the damage worse. Speed without a decision-making process is not effective.

The businesses that handle crisis well are not the ones with a quick-witted CEO. They are the ones with a decision-making process already in place before the crisis arrives — a group, not a single person, that knows how to convene, how to weigh a decision, and how to communicate it once it is made. That process must exist before the event, not get assembled during it. A group that has never met to decide anything together will not suddenly know how to do it well under pressure, on a deadline, and with real consequences riding on the outcome.

That is what Dynamic Planning does. It embeds the process ahead of time: who gets consulted, how a decision gets made, and how the result gets communicated to everyone the decision affects before a crisis, not during one. So, when the bad and unexpected event happens, the business is not inventing a response under pressure. It is executing one it already knows how to build, with people who already know their role in building it.

Slow, in this sense, does not mean slow to act. It means slow enough to decide well. The business with that discipline in place reacts faster, not slower, than the business relying on one person’s gut reaction because a considered decision does not need a correcting second attempt.

If your business does not have a group decision-making process in place before the next crisis, that is the gap to close now, while there is no fire to put out. Learn more about building it at btcllc.net.

Why Owner-Centered Businesses Sell for Less

Successful businesses are not successful solely because of the owners. In my experience, successful businesses have established a culture of performance standards and effective decision-making that enables success.

So, is it appropriate for an owner to view a business that the owner has founded and guided to success as a legacy to the owner? My argument would be that a more appropriate legacy would be the wealth derived from the business rather than the business itself.

The more the business is about an owner, the less it is worth to a prospective buyer. A sophisticated buyer is not looking for a memorial, that buyer is looking for cash flow from a business that performs well and makes good decisions.

A prospective buyer judges a business not by its current owner, but by its employees. Are the employees competent and loyal? Is there a culture of performing well and satisfying clients or customers? Will the selling owner’s absence adversely affect the business?

Consider two businesses with identical revenue. In the first, the owner is the face of the business, the one who closes every deal, answers every difficult customer call, and makes every meaningful decision. Take the owner out for a month, and performance sags. In the second, the owner has spent years pushing decisions down – employees are trusted, trained, and given the authority to act. Take the owner out for a month, and nothing changes. A buyer will pay a premium for the second business and a discount for the first, even though today’s revenue is the same. What is being priced is not this year’s cash flow – it is the risk that the cash flow disappears the moment the owner does.

This is the part owners resist. Building a business and building your name into it is emotionally satisfying. Pride of ownership is real. But pride of ownership and value from ownership pull in opposite directions once a sale is on the horizon. The wise owner is not looking for recognition for performing in the business. The wise owner who wants to derive maximum value from the business will diminish the owner’s role to allow employees to perform and excel. This may not lift the ego, but it will lift the selling price of the business.

Diminishing the owner’s role is not simply a matter of delegating tasks. Handing off work while keeping every decision on your own desk changes nothing – the business is still built around you, just busier. What has to change is decision-making itself: employees need enough information and enough authority to decide things themselves, and a structure for communicating those decisions so the business runs on a process rather than on the owner’s presence. That shift, from an owner who decides everything to a business that makes good decisions without the owner, is the actual work of building a business.

The owner’s name may not be on the sign in front of the business, but it will be on the bank account with the proceeds from the sale of the business.

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For more on building a business that runs and sells without you go to btcllc.net