Are you thinking of the end game when managing your business?

Ever think about growing your business with the plan to sell it someday, cashing in on your hard-earned work over the years?  Or if you’re an employee with stock options, are you aware of the increases in value you can make with your efforts?

Then again, you may be an architect or doctor or other professional managing your

Dave’s book on exits. See http://www.berkus.com/shop/ or amazon for this and more from Dave

business, knowing that the end game value of your client or patient list is small and not easily transferred to any buyer without attrition.  In such a case, there is little advice here unless you think outside of your day-to-day profession and create a valuable leave-behind encasing your knowledge and experience that can be replicated and scaled to a large business – even if by others.

Is your business one that may be sold for profit someday?

Most businesses fall into the class of those that can be sold someday to a willing buyer.  Even small community service-providers can be sold to buyers hungry to get into a business already in revenue with a steady customer base.  And many businesses are created with the express purpose of growing them in size and attractiveness to be ready to sell someday to create some degree of wealth for the shareholders.

What if you’ve taken outside investors over the years?

Accepting venture or angel money is to create a contract between the investors and the entrepreneur that the business will someday be sold or even go public to create an exit for the investors.

[Email readers, continue here…] All businesses and their management should be aware and perhaps planning for the end game, and that includes boards of directors as well. It starts with each early step in the process of building the enterprise.

What creates value in a business? 

Is your value proposition for an eventual buyer that you have some secret sauce that allows you to compete more effectively against competition?  Do you already dominate a niche, no matter how small, that a buyer will someday want for itself?  Do you have intellectual property that is valuable to you but might be more so to a buyer?

These questions are just a few that I’d ask during strategic planning sessions each year to fine tune the value proposition for an eventual buyer.  And I’d go further.  Investments into the company, whether from new money or reinvesting profits, should be directed first into areas that will increase the value of the enterprise at the end game.  You do this for yourself and your shareholders, and you should be thinking of this regularly.

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Posted in Growth!, The liquidity event and beyond | Leave a comment

Is your company or department as efficient as it should be?

There is more money lost in businesses today from inefficient processes than any other single area.  Yet this is not a place where most managers feel comfortable deconstructing and rebuilding.  Somewhere out there is a consultant or future employee (or even suggestions from present employees) that will provide the roadmap toward making your processes run more smoothly, more quickly and more inexpensively.  As a byproduct, process quality is likely to improve as well.

A more efficient way to do it?

 No matter what your company produces, there is surely a more efficient way to approach the process.  Start by carefully restating the goal for the process, such as “produce 500 quality units per day” and create metrics to measure the present output and quality (rejects or time lost) with this goal.  Look inward, forming a “tiger team” from within your organization to define the steps presently taken to reach the goal, and make improvements in increments that can be put into effect and tested quickly.  The best reward for those involved in improving a process is to receive the kudos from management and themselves for making dramatic improvements in their internal processes.

Consultants, outsourcing, and scrapping the system

If internal resources cannot handle the solution, it is time to find an outside resource that can.  Either way, someone must start with creating a map of steps from start to completion, breaking it down to measurable sized increments.  Look first at whether some steps are creating a bottleneck or quality breakdown affecting subsequent steps.  If improving individual steps is not the solution, then scrap the process entirely and attempt to define a way to meet the goal through a differing route, such as outsourcing parts or the entire process, doubling the capacity of a segment of production, or redefining the goal itself.

All these efforts will help you to better know the process to a degree you never expected to achieve.  And meeting the challenge of improving productivity is a great morale lift for all, as well as good business practice for the company and management.

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Posted in Growth!, Surrounding yourself with talent, The fight for quality | 4 Comments

Business risk: Bet the farm only when the crops are on fire.

How much risk you and your company are willing and able to tolerate over time?  Most people believe that early stage companies should take risks aggressively because there is less to lose and much more to gain with each risky bet or decision.  Common thinking goes on to address large, public corporations by expressing that the relative tolerance to risk is decreased, in favor of protecting the brand or financial health of the enterprise.

Business risk and the casino experience

Either way, as in a Las Vegas casino, the numbers of times risks are taken directly affect the average outcome over time.  Take an extreme risk once, and you may win the bet. Your average is 100%.  But for any sized company to continue to take major risks the averages will surely catch up and the rate of success falls to the mean, which we will assume to be 50% of the risks result in failure.  Depending upon the size of each risk, this may be entirely acceptable, as in small bets at the gaming table.

Betting the farm on a single decision

But let’s raise the ante by addressing only those risks that are game-changing, those that “bet the farm.”  Occasionally, a CEO must make a decision that commits all the corporate resources to a successful outcome.  Using all the company’s cash and credit to produce a new product that is untested but shows every promise of success is one such bet sometimes made by CEO’s of companies large and small.  Automobile companies are famous for making such bets on cars that won’t be on the market for 18 to 36 months from decision date, arriving at a time when gas prices and consumer preferences may have changed dramatically during that time.

[Email readers, continue here…]  Some of those bets were unbelievably successful, such as the introduction of the Ford Mustang. Some were complete failures, such as GM’s emphasis upon design and production of larger cars and SUV’s even as consumers were voting with dollars for smaller, fuel efficient cars from foreign manufacturers. And how about the recent Ford decision to eliminate all but one sedan from their line-up?  What might happen when gas prices rise again to untenable levels?  SUV’s and trucks only?  Would you have made that decision?

Decisions are made with available information

We must assume that the auto company CEO’s made their decisions to build based upon all available information, including consumer tests and market surveys.  Many smaller companies just do not have the resources to do this in depth before committing resources which loom as massive to them toward a new product.  Whatever the outcome, it is a safe statement that a decision-maker should commit major resources amounting to a bet of the business only when there is little alternative, that there is so much to gain that it overcomes the crippling loss that could occur.

There are only so many times a CEO can get away with succeeding with such risky strategies.

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You are watched, mostly when decisions are tough.

If you have been in management or an entrepreneur long enough, you will have experienced the gray area of decision-making where ethics, the law, your needs and expediency all collide.  This is the time when you are paid the big bucks, and when others aware of your plight will be watching most carefully.  It is also the time when you demonstrate your true courage to your contemporaries.

Gray area decisions. Knowing the facts.

I have a Ph.D. friend who teaches a graduate course in entrepreneurism at a local university.  He uses the case method to place as many of these types of decisions in front of his students as possible each semester.  And the responses from students are predictable.  When faced with a gray area decision, the first response is to follow the letter of the law, the rules, the ‘right thing to do.’  The professor then injects one or more new facts into the case, and the students waiver, more and more as the new facts are analyzed, reducing their fervent enthusiasm for the “always right thing” stand.  By the end of each case, most everyone has a position that has modified since the first impression.  Then the professor reveals the action the company executive took to resolve the problem, often one not considered by the students.

A gray example: Is it OK to do this?

Consider the case of the company with goods on the dock ready for shipment, a company with an accounts receivable-based asset credit line that is already at its limit due to the calculation by the bank of availability based upon current receivables.  The rules for “pledging an invoice” as collateral for borrowing call for attaching signed shipping documents showing that the goods have been picked up by the carrier, at which point the title transfers to the customer and the invoice from the company is “good”.

The senior manager, whether the CEO or CFO or head of shipping, walks over to the location where the shipment sits waiting for pickup, complete with paperwork waiting signature by the carrier driver.  The manager picks up the paperwork, and using a blank page inserted into the stack, signs in place of the carrier driver.  He then pulls out the now signed company copy and returns to his office with just that copy in hand.  Within an hour, the bank receives a copy of the invoice with the signed shipping document attached, along with a very standard request to borrow the 80% of the invoice amount.  The bank clerk approves, adds the amount to the loan and company’s cash account, and all is well.  Or is it?

Adding facts to the case.  Decision changes?

[Email readers, continue here…]  Invariably the students correctly point out that the company manager falsified a document, which surely is against the law since an invoice was pledged to the bank that was not represented by a completed shipment.  After this discussion, the professor adds that he forgot to tell the students that the shipment made it to the dock minutes after the day’s carrier pick-up and that payroll is due tomorrow and the cash must be in the bank today to cover the direct deposits.  The only way to get that cash today is through the credit line borrowing, and after all, the carrier will pick up the completed shipment tomorrow morning.  Now the students debate ethics against legality against pragmatism.  Some hold their positions. A missed day of payroll is a small price to pay for even this small breaking of the law.  Others state that the reputation of the company as a reliable employer is at stake, and that the employee loyalty will be shaken if payroll is delayed for even one day.  The students divide somewhat evenly over the minor infraction.

Do we have all the facts? The balance shifts.

Then the professor reveals that the shipment on the dock is only a small partial shipment but that the invoice that was pledged to the bank was for the entire amount of the order.  Now the students debate whether the manager should be fired, or the bank informed of the obvious falsification.  And the professor adds that the manager in this case is the CEO himself.

Of course. The Kobayashi solution almost never surfaces.

Interesting enough, no student has yet suggested the Kobayashi Maru solution (remember, Star Trek?) where the CEO merely thinks outside the box or changes the rules.  The CEO could have immediately called the carrier and offered a significant sum, say $500 for a quick custom pick up of the partial order, or called for the current location of the driver and found a way to load the shipment into a car or truck to meet the driver, or even plan to drive to the carrier’s dock itself.

So, what would you have done?

You get the idea.  Decisions go from black-and-white to gray to black-and-white again, based upon relative knowledge of the facts and of course, the law.  Just as a personal test, what would you do if you were the manager?  Or if you were the shipping clerk observing this happening regularly?  Or if you were the bank auditor discovering that this was a regular practice?

A CEO or manager’s life is not simple. But there are lines, both ethical and legal, that just cannot be stepped over, difficult as the result may be. Each of us is tested in subtle and sometimes very public ways often during our careers.  It is a simplification to state that the “good guys finish first”, but looking back over long years of experience, there is a great deal of long term truth in that statement.

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Learn to never handle a paper or email twice

We all do it… to our own detriment.  So, let’s make a pact that we will try, if not succeed, to handle our incoming messages more efficiently.

Personal time management helps immensely to make a better manager of you and me.  All of us have time management tips and tricks to help us get through the day.  I have a mantra I try to live by, and it has helped me more than you know over the years.  “Never handle a paper or email twice” may be extended to include reading and acting upon other forms of messages, and any written distraction.

Fight your human nature…

It is human nature to filter through the stack or inbox, looking for the important items. And that certainly has defensible merits.  But to find what is important, we usually must at least scan a document or email, engaged for no less than a short moment and perhaps for the full reading of the document before moving on to look for important issues to resolve.

… by not doing the common things.

But there is good research to back up the statement that returning to a reading from a distraction causes the reader to lose up to 20% of his or her time in getting back to speed in mentally processing the document and its issues.

My “never twice” rule

[Email readers, continue here…]  By trying my best to adhere to the “never twice” rule, I quickly delete most copy-all emails not addressed to me, and all junk, but handle each personally addressed email as it opens in the reading pane.  The exception is an email with an attachment that appears long and involved, such as an executive summary of a business plan.  Those get shuffled into a separate inbox for later review, without exception.

Speed with efficiency?

Using this policy, I get through my several hundred non-spam emails each day faster than I used to, and with more focus upon those with response required than if reading and returning to the issue later, especially if not in the same sitting.  Of course, exempt emails from your superior and those legitimately marked as urgent, both of which should be either directed to a special handling inbox or immediately culled out from the rest.

Wouldn’t you like to regain some percentage of your time with little or no effort?  Try this one.

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Posted in Growth! | 1 Comment

How can you let a talented employee go to pursue a new career?

It is tough to lose your best employees wanting to advance their careers.  Sometimes you can be the coach, helping them even if it means losing them.  And, as in today’s story, sometimes it can mean the beginning of an amazing journey leading to a story for the ages…

We’d all like to retain our best managers and employees forever or at least for as long as possible.  But sometimes our corporate wants and needs conflict with what is best for an employee and his or her career development.  We cannot legally stand in the way of an employee resigning to pursue a dream, but we can leave a bad taste with that person and chip away at our corporate culture by not cooperating or even helping the employee move on.

Celebrate the transition

It doesn’t take much to publicly wish a departing employee well, to throw a small celebration, to coach the outgoing person if asked, and to listen and receive fair criticism at the moment of the exit interview.

Feel good about the former employee’s success

And sometimes, the story that results is one that joins the ranks of super-tales, to be told again and again.  Here is one such departure story I tell often.

Tom rose through the programming ranks to become the chief architect of my software

company, with 26 programmers in his fold.  The company had grown to 233 employees and served 16% of all automated hotels worldwide at that time.  Each week, Tom and I would have an informal lunch and discuss issues that ranged far and wide.  Tom almost always had ideas to contribute, particularly about marketing programs and opportunities.

How to handle it when a valued employee wants to move on?

[Email readers, continue here…]  One day Tom came to me and said, “I want to transfer to marketing. I am tired of programming.”  “But Tom”, I protested,” you are in charge of the family treasure.  All of us depend upon you.  Oh, the humanity…”  Tom insisted, and nothing I could say would stop him from resigning, selling his home, and moving away. Five years later, I received an email from Tom.  I keep that email in my leather note portfolio, carrying it with me wherever I go, pulling it out often to read portions to audiences during my workshops, or just for fun to fellow private equity investor friends.

An email to preserve and show

“Hello again, Dave,” it began. “After looking around a lot, I have landed as employee number seven at a Seattle-based startup called Amazon.com.”  Tom goes on to extol the opportunities, describe his job in marketing with creative opportunities at every turn, and then… “My founder is in round two of capital-seeking, looking for increments of $100 thousand, and if you’d like, I’d be happy to introduce you…”

In one of the most understated several word paragraphs in history, I responded by email, “Gee, Tom. Good to hear from you.  Keep me informed.”  After recounting this story, I then ask my audience to guess what an August 1995 angel stage investment in Amazon might have been worth at the IPO, getting lots of range in the responses.  The answer is $33 million.  $33 million return from $100 thousand investment, or 330 to1. That story always gets a laugh as most everyone of us recalls the deal we didn’t do, the investment we didn’t make, the opportunity we shunned that turned to gold.

And it can get better over time

After telling that story recently to a large audience at an international meeting of early stage investor group managers, two of them pulled me aside as I came off the stage, showing me their iPad graph of where Amazon had grown to by then. If held for all those years, that $100 thousand investment would have been worth over ten billion, then stated.

Wow!

So, you never know what good things will someday come, especially from talented, driven associates you nurtured but released into the wild when their time had come.  Or whether you should invest in those who introduce you to a new opportunity as a result.

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Posted in Depending upon others, Surrounding yourself with talent | 2 Comments

You are your company’s moral compass.

Here’s yet another story that you may identify with – or have yet to experience in your business life. It’s one of those that define your leadership for all to see, sometimes based upon decisions made in the moment – such as this one.

A story of a CEO’s snap judgment call

Years ago, when I was CEO of my record manufacturing company in Hollywood, I happened to walk around the plant into the press room just as Bobby, one of the employees’ favorite coworkers, was offering stolen merchandise to his fellow pressmen from a bag he was carrying.  He halted, and waited for me to react, obviously caught in the act.   Everyone loved Bobby, a hard worker and good friend.  But I fired him on the spot; the only possible response to the situation presented me so suddenly.  After initial shock, a number of employees came to me that day and said that they understood how hard that decision was, but that they knew it was the right thing to do.

How your decisions affect your company

You will find many times during your management years when such decisions are placed before you, requiring quick unwavering response to an ethical challenge to you or your company.  How you comport yourself in these situations is absolutely the litmus test for how your company culture will reflect your actions.  Take home company supplies for personal use?  Your employees will surely follow your lead, no matter what the policy.  Treat personal expenses at company cost, and your sales people will feel just fine doing the same until caught.

[Email readers, continue here…]  Behave without regard for an individual’s dignity when separating an employee who is a direct report, and other managers will feel little compunction to spend the extra time and energy softening their actions.  Alter any accounting result for the sake of making a month look good, and your accounting department will get the message that GAAP accounting is just for show.

It is the difficult decisions that define your leadership

It is not easy to always be the moral compass for the organization, but it is the right thing and cannot be compromised.  And you will continue to enjoy the stories of times taking the high road as retold to you by your employees over time.

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Posted in Protecting the business, Surrounding yourself with talent | 3 Comments

Have you been celebrating each victory?

Here comes another story.  Of course.  This one may be like one or more you have experienced in your company.  It is a story about focus upon the customer, first.  And about reinforcing the culture of the company in support of that important focus by senior management, and by all employees who see that leadership in action…

Some examples of celebration you can use

Growing companies give rise to many events that great managers will take advantage of to create and shape the culture of the company itself.  Each new plateau in revenue growth, each time a month’s orders hit a record, each large order from the sales department, all of these and more give rise to opportunities to celebrate publicly.  Everyone in a stressful corporate environment loves to pause and relish the latest victory.

My personal story of celebration

Each time our company would hit a new milestone, I would make a public announcement personally, then, with my payroll person in tow, walk the floors of the various company buildings handing out $50 or $100 bills to all employees as instant bonuses.  You wouldn’t believe how much people seemed to enjoy the boss’ visits.  The goodwill created and buzz that continued for days were well worth the small cost.

Everyone got the message: growth is great, and everyone is treated equally in celebrating.  Each distant or foreign office was included, although not often enough with personal delivery services.  This is different from “managing by walking around”, which requires no reason or structure other than the willingness to listen and learn from people on the line.

How about that bell on the wall?

[Email readers, continue here…] Many companies have a bell hung somewhere in or near the sales bull pen, rung each time a sale is consummated.  Managers should encourage everyone within the hearing of the bell to stop long enough to applaud, reinforcing the unanimity of approval for each new sale.

An event of extraordinary customer service

Victories that shape a company’s culture can take many forms.  Years ago, an emergency phone call was directed to my office from our distributor in Australia.  Their largest customer, Hamilton Island Resort, had just suffered a fire that destroyed the building containing their large minicomputer installation.  No-one was injured, and there was a backup from the night before stored in a safe location.  But there was no replacement machine in Australia, and each day that guests checked out without paying their bills amounted to a day where cash flow was at least temporarily reduced by at least $250,000, not a small amount as it accumulated.

Simultaneously, we had a new machine with identical specs on the shipping dock for a Florida installation at a property whose managers were pushing the company for an instant delivery.   I made the decision without pause to redirect the shipment to Australia that day.  Then I immediately called the CEO of the Florida customer to explain.  Not too happily, he acquiesced.

Everyone within the company knew of the problem and of our instant reaction to aid our customer, even in the light of pressure from the Florida customer now back in line for shipment.  We oversaw the successful installation in Australia the next day in a temporary building and our people helped key in data subsequent to the backup.

Customer first, always!

Everyone knew from management’s actions and their own efforts that the customer comes first, always.  This story has a second happy ending.  We engineered a rerouting of the Florida order a week later so that the computer to be shipped would be the 1,000th of its model.  Before packing it in its large shipping crate, we held a party in the shipping dock for all employees, with streamers and cake and the world’s largest greeting card – hundreds of sheets of continuous form computer paper, which every employee from software programmer to shipping clerk signed with a message of thanks and goodwill for the Florida customer’s sacrifice.  That week, we scored two great customer stories and more goodwill throughout the organization.  And most of all, we reinforced the culture of focusing all actions and activity on the needs of the customer.

Victories come in many shapes, sometimes when least expected.  Celebrate them all.

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Here’s a rule for companies with outstanding loans

 

Here is one that is so important to the continued health of a growing company that it cannot be overstated. It’s a bit complex for novices. But hang in there as I explain a bit about accounting classification of assets and liabilities.

Differences between types of assets and liabilities

First, let’s be sure we know what is short in term and what is long in term.  Long term debt is taken on for the acquisition of fixed assets such as equipment, cars, facilities and acquisitions of companies or their assets.   Short term debt is often composed of accounts payable to the trade or employees for expenses, payroll liabilities, accrued but unpaid vacations, customer deposits, and the portions of any loans due to be repaid within one year.

How much can you borrow against company assets?

Asset-based financing is common for companies with accounts receivable and / or inventories.  There are numerous lenders engaged in this practice, including most business banks.  Typically, companies may arrange to borrow between 70% and 80% of those non-government receivables that have not aged past 60 days from invoice, up to a maximum amount, or “credit line”.

[Email readers, continue here… ]  Other companies have both the creditworthiness and relative size to be able to borrow from private and banking sources without collateral, with unsecured loans.  Many of these lines of credit require that the borrower “clean up the line” for one month out of every year, that is to be out of debt with the lender for that period to prove to the lender that the need for the cash is not permanent, used like a long-term loan.

How to get in trouble mixing cash use and loan classes:

Numerous companies have gotten into trouble by using the easy availability of these short-term lines of credit, meant for rising and falling working capital needs, to make payments upon long term obligations such as asset loan payments when due.  And worse, some even purchase assets such as equipment with money from short term loans.  Matching the term of a loan with the life of the asset is an important business principle.

The “coffin corner” to avoid in cash management

Receivables are assets for only 60 days for the purpose of these lines of credit, and the available line can be reduced automatically as receivables reduce with payments by customers or aging beyond 60 days.  We all expect new receivables to be added to replace these, but a cyclic business; a disruption in the general economy; a reduction in the company’s revenues would each contribute to a reduction in the amount available for such borrowing.

To avoid the coffin corner of an over-borrowed asset-based line with no cash for working capital, remember that short term borrowings such as these should never be used to pay any long-term obligations or to purchase fixed assets.

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Posted in Protecting the business | 3 Comments

Have you made the mistake of hiring too soon?

Well, you may not be alone. Many executives and managers have made the mistake of using the financial and sales forecast to plan and execute hiring of new employees – so that they could be trained and up to speed when the demand arrives.

The balance between preparedness and cost

Although hiring early does add to overhead by bringing employees aboard before they

become economic contributors to the bottom line, there is much to be said about consistent or improved service quality by having trained employees already on the front line when the customers want and need them.

Perhaps it all depends upon how you want to deploy available cash during good times.  We’ll assume that you don’t have the freedom to do so when cash is tight.

Hiring when growth is steady or if unpredictable

So, there are periods in any economy or industry segment when growth seems steady and there are few warning flags ahead.  In such instances, it is much less risky for a company to execute its plans for spending in coordination with forecast revenues.

[Email readers, continue here…] But there are many more times in which the near-term future is far less predictable, and when early hiring decisions may be just the wrong move, reducing flexibility and reducing reserve resources.  It is during such more common times, that you should consider using temporary employees to fill demand as needed, even if brought aboard a bit early for pre-training.  And increasingly, there are off shore service providers able to contribute to production and service, expanding and contracting at will, with some sacrifice in control and sometimes in quality.

Your reputation with your employees at risk

Further, a company suffers in its reputation with its employees when hiring and firing in short cycles to meet short term needs, unless those brought aboard are hired as temporary or seasonal workers.  Every employee wants a stable work environment and does his or her best work in a culture of mutual trust as to continued service as a reward for good work.  Constant interruptions in the chain of command, changes within the ranks and threats of impending layoffs together combine to form one of the greatest impediments to efficiency and a strong corporate culture.

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Posted in Growth!, Protecting the business | 1 Comment