Most business owners follow a somewhat reliable leadership pattern in the life cycle of their businesses. They go from working for, then in, and finally, on their business(es). Most successful CEOs and Entrepreneurs typically transition, despite occasional bumps and re-starts, through this well-worn historical path. However, far too many spend protracted time stuck in the first two phases. Because of this, when it comes time for an exit, they find themselves woefully unprepared.
This is generally because, for the most part, survival for most business owners was the first order of business in the start-up phase, generally built around a passion or good idea. Then growth became the fuel for the next phase, along with a continued validation of recurring revenues—basically, customers regularly coming back for more. This is where most get stuck working in their businesses much the way a hamster runs endlessly on its exercise wheel. Going, going, going, until they either fall off or fall over!
Ideally, after a business owner has reached some level of comfort and longevity, value maximization will hopefully lead to transfer. Then, ultimately, wealth or legacy creation should become the final crescendo of the business journey. I say “ideally” because, if you are familiar with the statistics, the numbers do not support a 100 percent success rate of well-conceived, well-intentioned, and fundamentally good businesses actually creating transferable enterprise value or wealth for their owners.
In short, you can “make it” without ever really “making it.”
Start with a Paradigm Shift
Even entrepreneurs who have” made it” and have good businesses often fail to make the fundamental shift to creating transferable enterprise value in their businesses by working on their business versus for or in their businesses. So, if acknowledging the problem is the first step toward changing behavior, the question entrepreneurs need to ask themselves constantly and vigilantly is, “Am I working for, in, or onmy business today?” This week? This month? This quarter? This year?
I have met many entrepreneurs who are gifted and indeed are the primary drivers of their businesses. However, the skills needed to start, grow, manage, and maintain it, are often not the same skills needed optimize, maximize, and create lasting value and wealth. Those preliminary skills are not what it takes to prepare the company to be an investable organization, either now or for a future buyer. And this is precisely where most entrepreneurs get tripped up.
The summary chart below offers a few characteristics that may resonate with many entrepreneurs and CEOs looking to transition their thinking from working in their businesses to working on their businesses:
As you can see a fundamental shift must occur to work on the business and position for an exit.
Also, while working IN the business, we benchmark our own performance vs. our past or near-term future performance. This year’s actual vs. last year’s performance (YOY) review or even FY actual vs. FY budget view is still a bit insular in focus.
You see buyers will benchmark your performance not only by your past and projected future but vs. your peers – other investment alternatives they can make.
You need to develop and garner a competitive mindset. How does my company benchmark against my peers in the space. Often, we hear owners say we have been growing 5%. Well, if the GDP or economy is growing at 5% then you are treading water. If for example you are an MSP growing 20% and the MSP industry growth rate is 30% you are indeed a laggard. Your banker can tell you how you are performing and develop those areas you are overperforming the market into a compelling positioning of your deal within a crowded market.
Those that want to achieve what we call an “outlier outcome”, or a premium valuation need to start filling in the blanks based on their peers or industry.
- Revenue growth rate 10% greater than my peers
- EBITDA growth rate 10% greater than my peers.
- A full and capable management team that will stay post-close and does not need me to perform.
When all three are present, and an owner that has an investor or seller mindset, companies trade for premium values. And you will notice the third bullet is the key to you walking away vs. having to stick around…but that’s another post!