The Facts of Business Life (20 page)

For example, your company's lawyer or accountant may be a personal friend, but at Level 5 what you need aren't professionals who can help you in the day-to-day aspects of maintaining your business. What you need are people who are experienced specifically in business law and contracts, tax issues, and estate planning. Selling a company, implementing a succession plan, or closing a company is serious business, and unless you have the right kind of advisers, you could pay heavily in needless taxes, or find out after the fact that whatever contract you have isn't what you thought it was. And if you make those kinds of mistakes, you're likely to have to live with them for a very long time. Conversely, by bringing in people with the expertise you need, you will build a team that will be an important asset to you in presenting your business information appropriately, determining strategies and counterstrategies, doing valuations, considering possible candidates, and even keeping your emotions in check, among others.

The point is that there are people who can help you, and the quality of their advice and the calming influence they can have is something you will appreciate long after the sale. In other words, if you're banking your retirement and legacy on your exit, you should get quality help, and quality help starts and ends by controlling the people with whom you surround yourself. There are basically three ways to surround yourself with solid, experienced people. The first is to honestly analyze your own weaknesses and find people who are experts in those areas. The second is to find owners who have done what you want to do and learn from their experience. And the third is to have one or more people ready to help you through the process, however you choose to exit the business. This could be the same group as those above, or new people, or a combination of the two. In the end, the people you surround yourself with should be there not only to advise you but also to keep you, your emotions, and your mouth in check so you don't talk yourself out of a good deal.

At Level 5, even though you have made the decision to move on, there is no guarantee it will happen when you want it to, or under what conditions, or if it will happen at all. So even if there were no other reasons, this one should be enough to motivate you to stay focused and control your product or service so that you can keep up with your competition and remain innovative. And, in fact, there are many other powerful reasons to keep your business moving forward during the exit process. Perhaps the most important of these is that, at this point in a company's life, the company itself becomes a product, one that will be sold, transferred to a family member, or closed, and this new product, like any other, needs to be controlled. This is because, also like any other product, a business has value. How much value depends on the demand for the product, the supply, financial conditions, the company's facilities and assets, its past performance and future prospects, business multiples, and the “tickle factor,” that, is, how much someone wants to buy or take over the business. Because there is value to a business, controls have to be in place to protect and make sure that value, which is what makes a company attractive to buyers, is maintained.

Controlling a business's value is a priority at Level 5 because no one, especially an owner, likes unpleasant surprises. In order to avoid such surprises, at this point in a company's life, control of the business as a product will focus on:

• The business's customer base and its continued loyalty.
  
• The functionality and operating life of the business's assets.
  
• The company's facilities and their flexibility for future expansion and modernization.
  
• The business's past and current financial results.
  
• The company's prospects for continued growth in the future.
  

In making an effort to exercise control over the business as a product, the owner must start by defining for him- or herself how these areas are to be looked after. These definitions must, in turn, be communicated to the company's staff, and controls put in place to make sure the owner's plans are implemented. This is essential because when a buyer takes over a company, he or she expects it to be the company that was presented by the seller, that is, a great asset rather than a sinking ship. So if the business is going to remain an attractive “product,” its value must be maintained, and any deviation from the owner's plan must be dealt with immediately.

As I mentioned in the opening of this chapter, control essentially is management. That is, the owner gives direction to the business and defines what success will look like, then determines which areas of the business he or she wants controlled and assigns who will be accountable for the results. Once this is done, it becomes the responsibility of those individuals to move the business toward the owner's success definition. As such, control is an important and necessary tool owners must have—and use—on a daily basis, or else the business will be in a state of constant chaos. And a company in such a state will never achieve its owner's expected results.

But, as this chapter has demonstrated, control means something different at every level, and, as an owner, you must be aware of those differences and flexible enough to adapt the controls you've developed to fit whatever the current need may be. By constantly and consistently exercising control at every level over the information your company uses, the processes you've established, the people in your organization, and the product or service you provide, you will have taken an enormous step toward assuring yourself and your company of attaining success.

Protecting assets is not usually the first thing that comes to mind when you think about your company's priorities. In fact, if you asked a group of owners what they considered most important to their businesses, the vast majority would most likely say sales and profits. And I'm certainly not suggesting that sales and profits are not important. Rather, I'm saying that they aren't as important to your business as assets. If your sales and/or profits decrease, you have time to regroup, figure out what went wrong, fix it, and make up the difference in the future. But if your assets evaporate, your business is destroyed. Nothing can pull a business down faster than asset destruction, and owners, with their employees' help, have to protect those assets from being mismanaged, stolen, abused, and underappreciated. That's why understanding this Fact of Business Life is critical to your company's success.

It's upsetting to lose a customer, even your biggest customer, but not catastrophic. What is catastrophic is if your product becomes obsolete, your office manager steals a major portion of your cash and “cooks” the books, or your accounts receivables decide not to pay you. To a certain degree, most owners understand the basic principle of protecting their assets. That's why they have lawyers to make sure they and their companies are legally protected, and insurance in case their businesses are destroyed by fire, tornados, earthquakes, or similar disasters. In other words, most owners realize their assets are vulnerable and therefore need protection.

However, owners tend to focus primarily if not entirely on what might be considered
natural
catastrophes. And while protecting your company against such events is certainly essential, it is only partial protection, and leaves your business vulnerable to everyday operational issues like mismanagement, theft, and outright stupidity, to name just a few examples. It doesn't make sense to buy insurance to protect your assets from unusual occurrences and then do little or nothing to protect them from these kinds of everyday business problems. No one would leave $100,000 in cash lying around without making some effort to protect it. But every day, owners essentially do just that when they don't give their assets the care they need, and in the process leave themselves open to some very unpleasant surprises that neither insurance nor lawyers can protect them from.

When you start a company, you inject cash into the business, and for a short time cash may be your only asset. Eventually, though, that cash is used to purchase items to help create whatever you are going to sell, produce, or service, as well as to operate the business on a day-to-day basis. In turn, whatever you use the cash for becomes part of the business's assets, and there are two types of these—tangible and intangible. Tangible assets are physical in nature, something you can usually see and touch, such as plant equipment, computers, desks, supplies, and so on. Intangible assets are things that can't be seen or touched, like customer and employee relationships, your brand in the market, the operating processes you develop as part of your company's DNA, intellectual property, and others. Both of these kinds of assets, however, need to be protected because both have value.

But exactly how do you protect these assets? As already mentioned, some can be protected, at least in part, by making sure that your company is operating legally and that any and all assets that can be insured are covered. Again, though, this kind of protection essentially applies only to the most obvious sort of catastrophes a company may encounter in the course of doing business. It's the other, less obvious problems that need to be accounted for. And the most effective way of protecting those assets is to maximize them, that is, to be aware of what they are, what they are supposed to do, and how to best use them to drive internal efficiency, sales, profits, and customer satisfaction. This is the common-sense part of asset maximization. But there's another aspect of protecting and maximizing assets that is less obvious but equally important. The assets you own were bought or created to capitalize on an opportunity, and if the asset isn't maximized, neither will the opportunity be, and it will be reflected in your company's underperforming in sales and profits.

What that means in practice, for example, is that if your sales rose 40 percent, the sheer volume of the increase would be felt by every other department. One of these would be accounting, which would accordingly have to recreate its internal processes (an intangible asset) because the current ones would in all likelihood be overwhelmed, thereby eliminating any chance of maximizing their efficiency. However, if you have an expensive piece of equipment that you believe is being underutilized, you could sell it, or you could focus on how to fully use it for its original purpose or to create a new opportunity.

The Benefits of Protecting Your Company's Assets

• Protecting your assets can reduce the amount of overall capital needed to operate your business.
  
• Protecting your assets can enable you to increase output and decrease your operating costs.
  
• Protecting your assets can help you reduce obsolescence, improve maintenance, and instill in employees an overall appreciation of the importance of both tangible and intangible assets.
  
• Protecting your assets enables you to minimize potential problems and optimize potential opportunities.
  
• Protecting your assets helps you and your employees to better match what is produced or inventoried to customer demand.
  
• Protecting your assets enables you to develop better plans and implement them more efficiently and effectively.
  
• Protecting your assets helps you develop and focus attention on making the right investments in equipment, systems, and infrastructure that you need to maximize those assets.
  
• Protecting your assets adds to the overall value of the business because it forces you and your employees to identify what is working well and what isn't, and make whatever changes are necessary.
  

The Realities of Protecting Your Company's Assets

• Understanding the importance of your company's assets is difficult to make habit forming, and accordingly should be part of every job description and, in some cases, in employees' pay plans.
  
• Since asset protection lacks the sex appeal and flair of selling or producing a product, your assets' value and the purpose of maximizing them can be easily forgotten in the day-to-day activity of a business.
  
• You can protect your assets by controlling them through systems and procedures, but you still need to rely on your employees to alert you to problems.
  
• Asset protection requires discipline on your part and attention to detail by your employees.
  
• Assets will mean little to your employees if you don't identify the assets and focus your staff on them by connecting performance to rewards or consequences.
  
• Protecting and maximizing assets must be part of your company's DNA, including processes indicating how well they are being managed and used.