One of the toughest questions we face as small business owners is whether or not we are building a business worth buying. It is a fundamental question because, whether we know it or not, we are always selling our business. Our awareness of this question is a key element in our success or failure.
Because, if we are not selling our business to someone else, we are selling it to ourselves.
It is easy to understand the importance of this issue if our business is actually for sale. It is harder to understand if we think we are going to keep it forever.
If our business is ‘for sale,’ we are consciously trying to sell it. We understand why its value is an important issue. We realize that the price paid will reflect, in some way, the benefits received. Buyers will trade their cash for perceived future benefits. We know that.
What most of us don’t realize, however, is that before that buyer shows up, or even before we put our business on the market, we are the buyers ourselves!
Every day that we go to work in our business, we are buying it! We invest our most valuable resources of our time, our energy and our talent. We also invest our money, if not in the price paid, the down payment, the monthly payments or in the working capital, then in the money we lose from other missed opportunities. We are also investing today in anticipation of future benefits.
So, the tough question is: are we building something worth buying? The question is one that makes most of us uncomfortable. If we do have our business on the market, we are usually uncertain of its value. If it is not on the market, we are usually reluctant to face the issue at all.
Facing the Issue
The problem is that we invest our time and money in our business without enough thought. As business owners, we may not have considered that, by committing our time and working capital, we are, in effect, buying our own business. We have probably never before thought about it in this way. If we do think about it, we do so with only a vague hope that it will pay off someday.
All this is done with the assumption that we are building ‘sweat equity.’ We bury ourselves in a mountain of work. In fact, our relatives can’t believe how hard we work! We never take enough time off. We settle for too little pay. Finally, most of us just burn out. What used to feel rewarding, now feels oppressive! Most of us never succeed in building the valuable business we think we are building.
The result is well known. It is estimated that 80% of all small businesses fail within the first five years! For those of us who try to sell before we burn out, we can’t believe the low offers we receive! It is less well known that most businesses offered for sale do not sell for anywhere near the listed price or within the anticipated time frame. A business is usually valued at some multiple of its profits. In reality, however, ‘profits’ exist only after a fair benefit package is provided for an owner.
Our business is valuable only if it is truly profitable, creating a good life for its owner. This is as true for us as it is for any stranger who might buy our business. If our business isn’t profitable, why should we come to work every day? Obviously, we shouldn’t! How can we expect someone else to take our place? The answer, of course, is that we can’t.
Implementing the Solution
There is a solution to these problems! We really don’t have to work that hard. We can take home more money. We can take more time off. We can build a valuable business!
For most of us though, implementing the solution to accomplish all of these things is very difficult. It is not taught in school. We can’t read about it in most business books. It is, in fact, a solution that many of us would reject without thinking about it.
To succeed in business, a small business has to act like a successful big business! Sounds crazy, doesn’t it? Well, out of context, it is crazy! However, in the proper context, it makes sense.
We certainly don’t want to build a business that is bureaucratic, bloated, complacent, corrupt, insensitive to its employees and indifferent to its customers. Many of us are escapees from this kind of big business, so why emulate it? If we liked big business, we’d still be part of it! Right?
We probably do want, however, to have a business that gives us a decent job, good pay, vacations and a comfortable retirement like a big business! Wouldn’t it be great to get a reasonable paycheck!? Wouldn’t it be better for our personal relationships if we could go home on time at night!? Wouldn’t it be better for our health to be able to take a long vacation!? Wouldn’t it make sense to be building that nest egg!? We’d sure like to have those kinds of big business benefits, wouldn’t we?!
This particular issue is the specialized subject matter of Michael Gerber, well-known national small business consultant. He is the author of The E-Myth (Revisited), which I originally read when it was first published in the 1980’s. While this article is not intended as a review of his books and tapes, I give him a generous amount of credit for my ideas on the subject, and I do endorse his sensible approach.
As Gerber points out, what we need to create is a business that functions exactly like a franchise prototype. A franchise prototype is a small business (a franchise) run like a big business (the franchisor). It is a ‘turnkey’ operation. Systems exist for each aspect of its operation. It runs independently of its owner. The key is the system. Just turn the key, and it runs by itself!
To accomplish this, we need to first ask ourselves, “What do we want to do better than anyone else so that customers will choose us over our competitors?” Bigger profits and the benefits that follow are the result of better systems: marketing systems, operating systems, administrative systems. In order to know what systems are needed to make our business more successful, we first have to know what we want to achieve.
We must have a vision of what we want and of what we need to do in our business in order to achieve it. This is a vision of what our business could be. Then, like big business, we have to design better systems to take us in the right direction to implement our vision.
A CEO Working ‘On’ Our Business
Having a vision and designing better systems is a function of top management. So, even for our small business, we have to have at least one top manager, a chief executive officer (CEO). Fulfilling this role as a CEO is, in fact, our most important job as a business owner!
It is also our biggest problem.
Unlike the big business CEO, most of us do not direct and manage our business. Instead, we just work there! Michael Gerber would say that we tend to work “in our business,” but not “on our business.”
We are the sales person. We are the purchasing agent. We are the shipping clerk. We are even the janitor! We never have time to envision our business as it could be, or to evaluate and manage it to reach that vision. Without a top manager or CEO, our business has no direction. Without direction, there are no systems. Without systems, there is never enough profit.
Without adequate profit, our business is a prison! It doesn’t work for us. When it comes time to sell, it won’t attract a good price. What would you pay for someone else’s prison term!? Most business buyers want a ‘turnkey’ business that can operate without the owner for long periods of time. Isn’t that what we want too?
Gerber perennially reminds his readers and listeners that, “The purpose of a business is to give its owner a better life!” He is right. We must claim and proclaim this purpose in our mission statements. We must decide what we will do better than anyone else and we must visualize what our business needs to look like to do that. Then we must design systems that help us achieve it.
We must spend our time designing and redesigning ‘the way we do it’ until we are profitable at it. Our employees will enjoy the satisfaction of high productivity. Our customers will delight in our effectiveness and efficiency of delivering what they want. We will make money, get some time off, and build a valuable business.
The solutions to all of the problems we have as small business owners begin with awareness. We must first be aware that we buy our business every day that we show up for work. We must be aware that there are solutions to each problem we are experiencing, because they have been experienced by others. Most importantly, we must carve out time to manage and work ‘on our business.’ Only then, will we be truly ready to take the next steps in our business growth.
By Glen Cooper, CBI, CBA, BVAL