Two entrepreneurs each started companies in competing businesses ten years ago. Now, one company is poised for a multi-million dollar sale, while the other company is worth only a tiny fraction, if it can be sold at all.
Why did one make millions while the other made almost nothing?
They shared the same industry, same general market, began at the same time with the same bootstrap financing, suffered the same recessions, had the same opportunities, and experienced the same luck – both good and bad.
So what happened that made one company worth so much more?
The multi-million dollar company was led by an entrepreneur who learned how to employ specific strategies to build the company’s value, and he surrounded himself with a leadership team that could help him execute his plan. The “also-ran” company was too busy with the day-to-day to get around to building a complete team that could do more than he could do alone, and now he couldn’t sell even a portion of his equity if he wanted to.
The ten steps
Based on my 30 years of experience with companies that have had significant capital raises or have sold for high multiples, I’ve outlined how you can do this for your company in ten steps:
1. Decide now to be an equity growth company, not a “lifestyle business”. Do not “hide” expenses inside your P&L to pay for boats, hunting lodges, vacations, and college tuition. I’m not saying you shouldn’t take money out for personal expenses; I’m saying you can’t build a highly valuable company while draining its profits by treating it like your personal piggy bank. People who run equity growth companies consider themselves to be stewards of other people’s money. They keep the money in the business, and that boosts its value; value that is easiest to prove when you report high profits on the bottom line.
2. Get serious about taking the time to become a great hiring company. In the EOS system I teach, we call this strengthening your people component – one of the Six Key Components™ of all companies. You will never reach greatness without the right people, and you can’t get the right people if your hiring decisions are based solely on experience and qualifications. Read Good to Great and learn how to use Strengths Finder, Kolbe, DISC and other screening tools to do what author Jim Collins calls “right people, right seats”. Sure, it will take time and money to do these things, but learn to invest in finding the right people the same way you would invest in choosing the right equipment.
3. Read, believe and practice the disciplines in Patrick Lencioni’s The Four Obsessions of an Extraordinary Executive. We call this strengthening your vision component.
- Discipline 1: Build and maintain a cohesive leadership team, and let them do their thing. Know what you’re good at, and delegate things that fall outside your area of expertise to someone who excels there.
- Discipline 2: Create organizational clarity. Get away from the office with your leadership team and fight it out with them until you really are a team; a team with everyone on the same page about where the company is going and how you’re all going to get it there.
- Discipline 3: Over-communicate the vision. When you roll out the vision and how it will be achieved to the rest of the company, you must repeat yourself until you almost feel ridiculous! That’s because on average, you have to say something seven times before people will hear it once. Repeat the message at every opportunity.
- Discipline 4: Reinforce organizational clarity through human systems. Every person in the organization must know not only what the vision is, but his/her own role in accomplishing it. If you are over-communicating the vision, but you are allowing things that conflict with the vision to go on in the organization, you are sending the message that you aren’t serious. People are going to notice, and when that happens, you can say goodbye to the organizational clarity you worked so hard to create. Your vision must be reflected in everything you do. Making it a reality should be the focus of every meeting, function and process in the organization. Even your hiring, employee review, and recognition/reward systems should all have the vision at their core.
4. Use metrics to drive EBITDA, or “strengthen your data component” in EOS speak. Every department should have a scorecard, and every employee should have a number on the scorecard for which he/she is responsible. Scorecards should be reviewed every week because you can’t manage what you don’t monitor.
5. Address your problems head-on – strengthen your issues component. Do not hope problems will go away, and do not simply treat the symptoms – you have to determine the root cause. No more duct tape and baling wire, and no more allowing fear to keep you from addressing what’s at the heart of your issues.
6. Document your core business processes, or strengthen your process component. Your key processes – hiring, sales, fulfillment, customer service, etc. – must be written down in simple forms and charts to ensure that everyone sticks to the same method. Create detailed explanations and then distill them into checklists. You should be able to show these to someone at any time and say, “This is how we do things here.”
7. Incorporate value-driving principles into your leadership team’s planning cycle and accountability system. This is part of strengthening your traction component in EOS. It’s not enough for you to know how to create a high-value company; your leadership team must be taught what drives value and be held accountable for the part they play in it.
8. Get your work/life balance in order. One of the ways we do this in EOS is by taking a regular Clarity Break™. Sometimes you need to leave the trees so you can see the forest; in other words, get away from the office so you can be free of distractions, clear your mind, and work on the business instead of in it. You also need to make sure you take plenty of personal free time away from work. This is not a reward; it’s a requirement for being your best on the job.
You’re almost there!
As you’ve seen, EOS can be your ticket to accomplishing the first eight steps of this process, and it can be done in as little as two years. Once you’ve maximized your company’s value, you will need to:
9. Build a “case for value” and have it ready to be shared at any time. This means documenting your company’s track record on key metrics like revenue growth, earnings trends, a list of your top customers, customer churn rate, percentage of market share in your top product lines, etc. When a company goes to the equity markets, the investment banker prepares a physical book to display the company’s financial strength, and it takes weeks/months to prepare. If you don’t already have this when a golden opportunity comes along, you can miss out.
You need a chief financial officer to build your case for value because it is about more than a controller can usually see. Controllers can be too numbers-oriented and think only in terms of profit-loss statements; the final result of all the numbers. Your metrics are the activity measures/numbers behind the financial numbers. Find a strategic-thinking CFO who has been through a company sale. With the growth of fractional or part-time CFOs, companies of all sizes can afford to hire one.
10. Align yourself with advisors that know how all this works and will hold you accountable for doing it. You’ll need a strategic execution coach, a hiring and team-building coach, a CFO, a CPA, an attorney, a banker, an investment advisor, an exit advisor, and eventually an excellent investment banker or business broker, and perhaps one or two others.
At the end of this process, whether you choose to sell your company or keep it, there is a huge reward. I call it the EOS Life:
- The chance to do only the work you love to do
- Doing it only with people you love to be with
- Making a significant difference in the lives of others you touch
- Being well paid for your efforts and risk
- Having the time for other passions in your life
What a life! If you owned a business that allowed you to live that way, you might not want to sell it! But if you did, you can be sure it would fetch a premium price.
1) Get the book, Traction: Get a Grip on Your Business by Gino Wickman. It will show you how to use the Entrepreneurial Operating System® to build the kind of company that attracts buyers with deep pockets in as little as two years.
2) Sign up for Inner Circle Sessions (“ICS”) free videos and watch Zane Tarance’s 17 Reasons You May Not Be Able to Sell Your Equity. ICS is a Birmingham company that has become an international resource for understanding how companies are valued, funded and sold, and how to prepare for an equity sale.
3) Request my whitepaper on how the EOS Six Key Components model specifically addresses and mitigates each of the “17 Reasons”.