Epiphany! You’re Managing an Asset, Not Running a Business
By Tim Young and Michael Kenneth
We’ve all had those moments—those epiphanies—when seemingly out of the blue something becomes crystal clear. The fog lifts, the sun’s golden rays shine through, and you make that forehead-slapping realization that something has dramatically changed. And even better, you know exactly why.
In our experience, for entrepreneurs who are eventually looking to sell their businesses, that epiphany is often the realization that they’re no longer running a business, they’re managing an asset.
Small difference? No, siree. It’s an enormous shift in mindset that can unlock a businesses’ true potential and allow it to be sold for maximum value. Like many of the most valuable things in our lives, getting to that point means letting go.
Entrepreneurs are unusual animals. We’re fearless. We’re idea people. We’re builders and risk takers. We’re curious, decisive and adaptable. We’re also not above doing whatever needs to be done. Any task—small or large—we’re in.
These are all tremendous qualities. However, and maybe oddly, it’s several of these qualities and particularly the last one—doing whatever needs to be done—that might be holding us back from unleashing real value in our businesses.
As entrepreneurs, our business and our work often define us. We started from scratch—with maybe no or only a handful of employees—and pulled all the levers that made the businesses work and grow. Some processes may have been written down on paper, but certainly all of them were in your head.
When a customer or a colleague had a question and needed an answer, they didn’t go to Google. They went to you. And you provided one useable answer, not an annoying 22 million search results to sift through.
However, when a potential purchaser is looking at a company, they’re looking for an organization that has a strategy and established processes with high-level expertise behind them, not a one-person repository who sooner or later is going away. And make no mistake, either on foot or feet first, that person is going away.
A Lifestyle Business Versus a Sustainable Business
One of the first questions we often get from new or prospective clients is, “I have $XX million in revenue … what can I get for my business?” In many cases, they’re looking for confirmation of certain multiple—a whisper multiple—based on their particular industry, which they’ve gleaned from a golf buddy or a business broker.
Instead, we respond with some critical questions:
- First, tell us about your job. What do you do? How do you spend your day?
- Tell us about your organization—your leadership team. Who do you trust? Why?
There are lots of other questions, of course, but responses to these give us a solid idea if we’re working with an entrepreneur who is operating a lifestyle business—meaning a business that supports a certain lifestyle—or has an operating asset with strategies, processes and investment that can be sold for maximum value.
Don’t get us wrong, lifestyle businesses can be large and very successful businesses. However, the very nature suggests that their profits are supporting the entrepreneur’s lifestyle—nice vacations, a golf club, cars—and not being reinvested to support strategic business growth.
Serious buyers—those willing to pay maximum value—are looking for a sustainable business, an asset with an identifiable growth trajectory with the infrastructure to support it.
What Distinguishes a Sustainable Business? When Does it Happen?
Creating a sustainable business is a conscious choice. It’s not just having that epiphany, it’s acting on it. The choice comes when you make decisions on two levels:
- To work on the business rather than in the business. Or, more specifically, to stop wearing all the hats, and trust and empower the people you’ve hired to make the decisions for you. In other words, letting go of everything and focusing intently on the things that add sustainable, strategic value.
- Reinvesting capital for growth.
These decisions acknowledge that a group of empowered individuals with the proper expertise is far better than one individual who does and (thinks he) knows everything. And, that capital reinvestment will create sustainable and manageable growth.
With respect to growth, we like to tell the story of an individual who grew a company from $20 million to $40 million and eventually to $80 million, and nearly went out of business five times. The issue was capital—or lack thereof. The company was growing so quickly that it was burning through all of the cash flow it was generating. Furthermore, the company’s antique inventory system couldn’t keep up with the growth. The owner actually thought the company could grow out of its problems but that mindset compounded the issues. Nothing was corrected until the investment was made to fix that issue and others naturally created by such rapid expansion. Fortunately, the business was monetized for a significant sum but others may not be so lucky.
How could this be allowed to happen, you ask? Go ask Southwest Airlines, which is certainly something more than a lifestyle business. So far, they’ve estimated the cost of their holiday problems—related to outdated systems—to be as much as $825 million, wiping out a full nine months of earnings. A sharp decline in their share price will put the total in the billions.
The Value of Objectivity
When it’s your brainchild and your baby, objectivity is hard. Still, objectivity about the strength and strengths of your business, as well as your optimal role in it, is paramount. That’s another value of having trusted and empowered people: telling you what you might not want to hear but telling you the truth.
Whether that objectivity comes from within or outside of the company, it’s worth its weight in gold. Listen to it and take it to heart. Soon enough, those golden rays of sun will be breaking through your fog: You’re managing an asset, not running a business.