Employee Stock-Ownership Plan

Planning for Increased Profits and Business Value

posted in: Blog | 0

Article #1 of 21 in the Business Value Improvement Series

To find true success in life, you need to have a written vision for what you want to achieve, prepare a plan to achieve it and implement that plan. That is true in your personal life and in business. This is especially true for Business Owners, if they are to succeed in growing the profits and the overall value of their business.

Mark McCormack illustrates this well in his book: What They Don’t Teach You at Harvard Business School. In this book, he tells of a Harvard study conducted between 1979 and 1989. In 1979, MBA graduates at Harvard were asked, ‘Have you set clear, written goals for your future and made plans to accomplish them?’ Only 3 percent of the graduates had written goals and plans. Of the remaining graduates, 13 percent had goals, but they were not in writing and the remaining 84 percent had no specific goals at all, except for enjoying the summer.

Ten years later, the same graduates were interviewed again. The 13 percent who had goals that were not in writing were earning, on average, twice as much as the 84 percent of students who had no goals at all. The most interesting result was that the 3 percent of graduates who had clear, written goals and plans to accomplish them when they left Harvard were earning, on average, ten times as much as the other 97 percent of graduates all together.

When people and companies don’t have written goals and plans to accomplish them, they tend to drift with no direction and still blame their problems on other people, companies and circumstances. They tend to think and talk about their problems, worries and what they don’t want most of the time. Brian Tracy writes the following in his book Goals!: “The biggest single obstacle to setting goals is ‘self-limiting beliefs.’ These involve areas where you believe yourself to be limited in some way. You may believe yourself to be inadequate or inferior in areas such as intelligence, ability, talent, creativity, personality, or something else. As a result, you sell yourself short. By underestimating yourself, you set either no goals or low goals that are far below what you are truly capable of accomplishing.”

Even though the study was done on Harvard graduates, I am confident the results are similar if the same study was done on small businesses. Most small businesses (with revenue of $50 million or less) are often run by their founders who are generally experts in their fields. For this reason, they don’t tend to do much planning but run their business on an ad hoc manner, setting the direction of the business on their instincts. Thus, over 80% of businesses are likely not achieving their full potential in profits and business value. Not only is increasing profits good for the overall prosperity of the business and all involved, but increasing the value of your business is important for the future of the Business Owner(s) when they eventually exit their business and need to have enough to fund their retirement and their “after business” ideal life style.

Benefits of Planning

The investment of time and money put into planning has an excellent return for businesses and their owners. Planning should be done throughout the life of a business: (1) Start-up; (2) Launching new products & services; (3) Changing the trend of stagnate growth; (4) Chart out a turnaround; and (5) Plan the transition out of the business.

In addition to the overall benefit of increasing profits and business value, planning has many other benefits. They are as follows:

  1. Documentation to apply for funding and communicate to stakeholders
  2. Focus attention of all involved in achieving objectives
  3. Increase efficiencies that lowers costs and gets more done with less
  4. Provide more peace of mind for Owners when there is less uncertainty
  5. Increase employee morale by being part of team to achieve goals
  6. Help identify risks and threats by planning to mitigate their impact
  7. Encourage innovation and creativity
  8. Provide a framework for decision making
  9. Set a clear sense of direction and specific actions to take
  10. Help to coordinate the staff and departments in harmony with the plan
  11. Guide decision making with criteria to evaluate alternatives
  12. Enable delegation of decision making to lower levels

Overall, the planning process is not only about forecasting the future, it is also about gaining focus and consensus amongst the team that assists the owner. When done properly and consistently, the planning process for a business provides direction, communication, alignment of resources, and an action plan.

When planning is done properly, it incorporates the other 20 factors that increase profits and business value to be talked about in more detail in future articles. For example, it determines how to best differentiate your business from the competition that in turn determines how to have a gross margin advantage. It also has a plan for each functional area of the business so each takes steps to support the overall objectives and implement the processes that increase the value of the business to potential buyers.

Types of Plans

There are several types of plans that Businesses should be preparing and they can be categorized into four areas: Long-term Operations, Succession, Exit and Disaster Recovery Plans.

Long-term Operations –

Generally, Business Owners have the capability to do long-term strategic planning, but most don’t because they are so absorbed in the day-to-day operation of the business that they don’t take the time to work ON their business instead of spending all the time working IN their business.

I believe the best type of Strategic Planning is the Asset-based approach which Profitable Wisdom uses. Traditional Strategic Planning focuses on the problems organizations are incurring and try to solve those problems. However, when you focus on the problem, it is very difficult to move away from that problem. Albert Einstein said, “You can never solve a problem on the level on which it was created.” Asset-Based thinking raises thought to a new level of what is possible. It focuses on the ultimate destination an organization has envisioned, which then pulls them there from where they are currently. This process doesn’t ignore problems or threats, but puts the focus on the organization’s strengths and opportunities.

A natural outcome from the strategic plan should then be the Business Plan that translates the strategies and actions into plans for the different functional areas of the business. Next, a budget should be created from the Business Plan for the coming year.

Succession Planning –

It is key to the success and continuity of your business to attract and retain superior employees. With employee turnover at a higher level than it was over a decade ago, it is difficult to retain these employees. Without a good succession plan, you may be putting your business at risk. It is also becoming more and more difficult to find the talent with the skills and attitude needed for your business to prosper and grow.

A succession plan should:

  1. Identify staff with the potential for greater responsibility;
  2. Train these staff and provide them with experiences to be able to take on more responsibility;
  3. Motivate them so they will perform better and want to stay with the company;
  4. Introduce a bonus program to gain higher engagement and increase retention.

Business Exit Planning –

It is important to plan the start-up and growth of your business, but it is equally important that Business Owners also plan their enviable exit from their business. Every Business Owner exits from their business and they will either do it voluntarily and harmoniously, or they will do it in an involuntary manner. However, with this absolute certainty of exiting, only about five to ten percent plan their exit and correspondingly, about the same percentage successfully sell their business.

In his book, 7 Habits of Highly Effective People, Stephen R. Covey states that Habit 2 is “Begin with the end in mind.” This should be true with your business as well. Professional Private Equity Investors include an Exit Strategy in their initial Business Plan, and to successfully transition out of your business, you need a thorough exit plan as well.

Profitable Wisdom defines Business Exit Planning as: A method of achieving the written goals for the succession of a business’ ownership and control, derived from a well-thought-out and properly timed steps that includes increasing the value of the business, best method to transfer, protection from unplanned events and efficient distribution of the estate.

Disaster Recovery Planning –

Many business owners neglect disaster recovery planning even when they are aware they should do it, but the day-to-day activities of running the business keeps them putting it off. However, doing one can help preserve the value of the business and help ensure its continuity. In fact, there have been several studies that show as high as 80% of businesses that experience a disaster without a plan, don’t start up again or fold within two years after the disaster.

A disaster recovery plan is a set of written procedures to protect and recover a business in the event of a disaster. It usually refers to the IT infrastructure but it can include all aspects of the business. The disasters could be natural, man-made or environmental. They could also be known disruptions to plan for such as road construction in front of a retail store for a long period of time. Plans could include alternatives to reaching customers, alternative sources of supplies, purchasing decisions and secondary locations. When a disaster strikes, there is no time to make all the decisions necessary. Having a plan in place means than many decisions have already been made, leaving the implementation of the planned decisions.

Long-Term vs. Short Term Plans

Ideally, short term plans should be a natural out come from a long term planning process. However, short term planning is better than no planning at all. Business Owners would argue that they can’t predict the future, so why plan at all? Even though actual results will likely not turn out exactly as planned, there is a much greater chance that profits will be higher than otherwise and many of the benefits listed above will be achieved.

While the planning process is about looking into the future, the greatest challenge for a Business Owner is determining how far into the future the owner can see. While the visibility of a business’ future is often difficult to see beyond one or two years, it is important to look beyond this when planning for a business and for a Business Owner’s exit.

For the few small businesses that do an annual budget, it is often an exercise that most see little benefit in doing but is done anyway. This is because it is usually not clearly tied to a long-term Strategic Plan with the proper tracking needed for all to see the progress being made to reach the organization’s goals.

A smaller number of business owners will meet with their teams and engage in multi-year planning processes. When long-term planning is done, it fundamentally changes the nature of relationships between owners, their businesses and the management team. By creatively thinking through what the business will look like in five or more years, it forces the team to think creatively about the possible future vision for the business.

Business Exit Planning Extends the Planning Horizon

One of the most challenging forms of planning is for an owner’s ultimate departure from the business’ day-to-day involvement. Not only does an owner need to look further into the future than ever before, but because this is such a personal decision, these owners are often times doing so without the input of their supporting management teams. An owner is taking on a large challenge when they can incorporate this much of their future into their current plans because business exit planning is, at some level, the ultimate form of planning for most privately-held businesses.

 

The more ‘future’ that can be incorporated into this type of planning, the more successful the overall planning process is likely to be and the better you will be at seeing your business pass on to the next owner successfully.

Taking Steps to Plan

Looking into the future is a challenging, but rewarding exercise. And it is helpful to know that owners often are aided by the counsel of others in this complex and personal process.

Professional advisors who focus on increasing the value of a business and business exit planning can be very helpful to moving an owner into a position where they are including more of the future into their overall planning.

Concluding Thoughts

The benefits of planning far exceed the cost, but many small businesses do little or no planning. When you plan, it gives your business a competitive advantage over the many companies that do little or no planning. It also helps to increase the profits and overall business value of your business, protects your business from events that could threaten the continuity of your business and substantially increase the chances of having a smooth transition out of your business with what you need to achieve your ideal retirement lifestyle.