Author: BcAdm

Where there is a small or medium sized business with more than one owner, there is an owner agreement. It may not be obvious – in most cases it is not written. But for any multi-owner business the owner agreement must be there for the business to function. To start a business there must be agreement about the business entity to use, the initial capital, the basic governance, and the operational functioning of the business. In various documents regarding these matters there will be writing documenting the decisions made by the owners, but most owners do not document the basic strategy that has led them to business ownership. Most of the time, business owners understand very little about what motivates the other owners of the business, and conversations among owners will not be about strategy but about urgent operational decisions. Owners often make assumptions about the motivations of other owners, and conflicts arise when these assumptions prove false. When the owners must make decisions about important issues involving funding, changing consumer behavior, training and development of management, succession (including buy-sell provisions), technological investment, and regulatory compliance (especially regarding tax issues), the motivations of the owners will have a significant influence on the decisions the owners will make. Think about the businesses you know where conflict among the owners has stymied the success of the business or caused it to go out of existence. It is important for the success of your business to discover and document an owner agreement that anticipates the foreseeable decisions the owners will have to make for business success.
Most businesses do not have a documented owner agreement among the owners because it requires consistent effort to negotiate such an agreement. Often the subject matter is difficult to discuss, and the pressures of operating an owner-managed business make it difficult to find the time needed to accomplish this task. However, the success of businesses where the owners have documented an owner agreement indicates the benefit of taking on the task. There is a detailed description of how to adopt the Prior Diligence strategy and use Dynamic Planning in the Owning a Business substack at https://rickriebesell.substack.com. As with most complex and difficult tasks, it is best to use a segmented approach and address the various issues one at a time.
The issues that owners must discuss and agree upon can be generally described. The motivations of each owner should be addressed in a written strategy for the business. The entity type of the business should be understood in terms of liability and tax consequences for each owner. Any grouping of owners (such as family or seniority) and the concerns of any such group should be described, and appropriate restrictions should be put in place. The governance of the business, including who will make policy and who will be the chief executive, should be set forth. The events (triggers) that will cause one or more owners to transfer interests in the business should be defined. The procedure of the transaction occurring after each type of trigger, including funding and payment, should be provided for in detail. For each transaction, the price of the interest transferred should be defined. If the business will act as a buyer in certain procedures, then the means of the business accumulating the funds for the transaction should be described. The final task is the consolidation of the decisions into one coherent written document.
There should be a meeting of the owners and appropriate stakeholders to discuss each one of these general issues. For each issue there should be a separate meeting. The meetings should be held at regular intervals. The results of the meetings must be documented in writing. Where issues are technical or outside resources would be helpful, they should be utilized. There is a detailed description of how to implement an owner agreement in the Owning a Business substack at https://rickriebesell.substack.com. The documented decisions resulting from these discussions among the owners as consolidated into one coherent document will constitute an owner agreement and the primary planning for the business.

As the owner of a small to medium size business, you may have felt the need to ask for help but not felt comfortable doing so. Owners of businesses are often skilled in the business they own and enjoy the respect of their family and friends. If their businesses are successful (profitable), it is usually based on their leadership and good fortune. But things change and sometimes the successful are faced with difficulties and even poor results. The humility it takes for an owner to recognize that business is a team effort and that the policy-making group of a business needs help is a principal factor in business success. What is the best way to seek help?

You probably expect me to recommend a consulting intervention. When I am consulted, the first advice I often give is to find a new way to perceive the business through all levels of the business. New perceptions come from the observations made from the experience of the employees of the business. Yet these perceptions are often not passed along to the owners or the policy-making group of the business. This is the first place to find help.

Yes, a successful business is a team effort, but the chemistry of each team is different. Within a successful business are many individuals who have contributed to that success and have observations about the business that are unique and therefore helpful to forming new perspectives. In many businesses those who are not members of the policy-making group or in executive management are not consulted about their opinions concerning the operation of the business. It is often difficult for an owner to determine if this is the case in a business. Candor is often not an encouraged trait in a business. Yet there is knowledge and wisdom in the experience and opinions of those who operate the business.

There is a reason for a chain of command, and in most businesses that hierarchy should be preserved. Yet if there is knowledge or opinion that is valuable and available only by direct contact with an employee, how should that contact be handled? There are different ways to accomplish this contact.

Perhaps the most commonly used and most dangerous is that of the respected intermediary. This is a person within the business who is trusted by most elements of the business and receives candid communication from these elements. This information is given to the policy-making group by the intermediary. The danger comes from two sources: the integrity of the intermediary individual and the difficulty of maintaining the trustworthy status of the intermediary. Does the intermediary have an agenda? How confidential can the communication remain? Once the intermediary is compromised, the resulting distrust, both for the intermediary and the policy-making group can be toxic.

The better solution, that used in Dynamic Planning, is to recruit observations on the format that also contains the operation plan, monitoring metrics, revisions, and other relevant communication. Dynamic Planning, explained in detail in the Substack, Owning A Business, http://rickriebesell.substack.com, utilizes a format that allows all elements of a business to see the plan narrative, the monitoring metrics, revisions made, and comments of all using the format. The use of this format is an exercise in leadership humility, communicating the plan, the results of the actions to realize the goals of the plan, the revisions made, and the comments of those using the format.

Among the common goals of members of a capitalistic economy is the creation of wealth. This is often a reason why people own businesses. For an individual, the concept of wealth creation is the escape from dependence on earning funds for current expenses to live a certain lifestyle to building up assets and resources that appreciate over time and are of a magnitude to sustain that lifestyle or a better lifestyle without the need to earn funds for current expenses. Creation of wealth is a reference to accomplishing financial independence through the creation of passive income from investments.

There is also the concept of risk involved with the creation of wealth. To be independent from the need to earn income it is ideal not be at risk for the source of that income. Risk cannot be eliminated, and the safety of certain types of passive investments can be debated; however, there is no question that an income source from a business has more risk than an income source from most passive investments. Business risk is significantly more because even over short periods of time the business arena is constantly changing, with markets evolving, management transitioning over time, and other unforeseen changes. A business which is not changing or that is making poor decisions will become unprofitable. This business risk, although variable for each business, will usually be far greater than the risk of carefully making passive investments.

For a business owner, the path to wealth creation is to transfer the value created by the profitable operation of the business from the business to the owner taking that value out of business risk. This enables the creation of wealth through the acquisition of safer passive investments that sustain a desirable lifestyle.

How does the business owner accomplish the transfer of the maximum value possible out of business risk and into personal investments at lower risk? A sale to a buyer outside the business will accomplish the maximum value transfer of value from out of the business to the business owner. The strategy to accomplish a deriving maximum value from a business through a sale to a buyer outside the business is Prior Diligence.

Prior Diligence is the basic strategy for planning to sell the business to a sophisticated buyer who will investigate the business as part of a due diligence process prior to sale. Prior Diligence places the business owner in the view of the prospective buyer and asks, “would I buy this business – if not, why not?” The business owner reviews a diligence checklist and addresses deficiencies of the business accomplishing improvements through Dynamic Planning.

The details of the Prior Diligence strategy and the Dynamic Planning method are described in the substack, Owning A Business, https://rickriebesell.substack.com. By utilizing this strategy and method the business owner can accomplish deriving maximum value from a business and transfer that value to the personal investments of the owner enabling the creation of wealth.

Traditional planning is static. If there is a written plan, we see the plan formulated, documented in writing, presented at a meeting, and then put on the shelf to be consulted for next year’s retreat. This is the opposite of a forceful and changing dynamic plan. A dynamic plan can accomplish continuous improvement in business performance over time resulting in increased profitability. How does a static plan become dynamic?

The answer is in the format of the plan. To be forceful a plan must be understood and implemented at all levels of the business – operational as well as management. The actions to realize plan goals must be monitored and the results known at all levels of the business – especially the policy-making group. A plan is dynamic when the format of the plan narrative provides complete and immediate notice of all of the following: the plan narrative, actions to be taken, results of the monitoring of those actions, and revisions to the plan.

The plan starts with the decisions of the policy-making group about strategy. The action plans are implemented by the executive officers. As the action plans are being executed, those charged with executing the action plans will change the plans to accomplish the task. The plan format should allow changes to the plan to be known at all levels of the business.

The plan experience will be evaluated, frequently by those from the policy-making group. At the highest level, the policy-making level where strategic planning is adopted, the planning does not have to be revised as much as at the operational level where action plans are being executed. It is at the operational level the planning is frequently changed, but often the changes are not documented. These informal changes are often what accomplishes the action plan, but others in the business, especially those in the policy-making group, do not know about these changes. Frequently that is because those who change the plan are not sure they have authority to change the plan but the changes are done extemporaneously to accomplish the task. These changes at the operational level should be documented on the format and encouraged. This is done with the understanding that operational adjustments often are necessary and need to be made expeditiously, but these changes also should be known by management and the policy-making group. The plan format should support the communication of these changes as they are made.

If the members of the policy-making group do not know about changes to the action plan at the operational level, their evaluation of actions taken and implementing revisions and further planning will be flawed. Those taking action should be able and required to amend the action plans. In this way, changes are communicated up and down the hierarchy of management. Moreover, changes are occurring with experience, and revisions to the plan are written coterminously with the decision to change at the operational level. Those charged with execution of action should be empowered and required to change the action planning. When this is in place, the plan becomes an effective form of communication within the business.

Planning is more than creating a plan narrative, it is providing the format for the communication of the decision-making process of the business. The constant questioning of goals, selection of actions, identification of milestones, and determining revisions should be a series of seamless, constant activity. It is this activity that will enable consistent improvement of performance over time. In business, we must establish a process to make good decisions that are documented in planning that is constantly evaluated and revised at all levels. That is the essence of excellent business performance – continuous improvement in performance over time resulting in increased profitability.

In his substack, Owning A Business, Rick Riebesell has described the implementation and execution of a dynamic planning process in a number of posts about Dynamic Planning and the Prior Diligence strategy.