Build to Sell

A number of years ago, author Jim Collins wrote a great book, Built to Last.  Great book about building companies that can stand the test of time.  This article touches on some of the same points.

Succession planning comes into play when you want to built a company that lasts.  Obviously PEOPLE do not live forever, so their knowledge, that was accumulated for years using corporate dollars, must be integrated into the company, so when they depart, the company can survive.  This is called building the corporate knowledge base.

Some employees think by keeping this knowledge to themselves, they gain job security.  Perhaps, for a short time, they are right.  When no one knows better than you how to do something, you are the “go-to” person.  That’s fine if you want to stay there forever, doing the same job forever, and never learning anything new.  If the company sells that particular product line or component, you might still be out of a job, or might have to move to wherever.

I found throughout my career that if you can organize the information of your job into data that can be passed along to others (less experienced than you), it enables you to help them learn the new job (mentor them) and move on to something more interesting.  Back then we didn’t call it “building the knowledge base”, but that is certainly what it was.  We called them Design Manuals or Operating Procedures, for example.  And I did it on my own, without anyone asking me to do it, because I WANTED to move on to something more interesting.  Today a whole industry has been built around Business Process Management, the creation, documentation, organization, continuous improvement, and control of business processes.

I think you become more valuable to a company when you do things like that that add value to the organization, taking some initiative, like I did when creating those Manuals and Procedures.  By becoming more valuable to the organization is how you increase job security on a long term basis.  Just doing what you are told does not get you job security for very long.

Small companies often thing about succession planning, as getting life insurance, setting up a will, etc.  And, while those things are important and necessary, they are not they key to succession planning.  Building a Knowledge Base is.  Creating a system that others can use to train new employees in how you operate is.  Having a system where people continuously contribute to the knowledge base is.  Mentoring others to create multiple and intertwined personnel backups is.

The small business owners’ key responsibility (after building sales) is to mentor and train the workforce, not making products.  hopefully, he has already delegated that to the Production department.  Another great book, Michael Gerber’s E-Myth, talks more about this and the various stages of entrepreneurship.  Most owners start out as “Mechanics”, meaning they are building the products and the business, but they are not necessarily good managers.  I hope I’ve sufficiently explained above that they can’t move on until they have created a way to trust those employees to do the job first!

We all understand that you cannot truly delegate until you are sure the recipient can do the job without you.  This is why you need a system in place so employees are clear on what must be done, and you have a way to measure them against those processes.  Like Reagan always said: “Trust but verify”.

By the same token, if you do not have a son who will take over the business, or other relative, who will take over the business when you leave?  If you have thoroughly trained all levels of employees, you may wish to set up an ESOP, essentially selling the company to the employees.

You could simply close the business and auction off the assets.  This is the best way to leave the business if business value is not important to you, because closing it creates the lowest business value.  If you have no family or relatives, and do not care much about your employees and their families who all have part of their lives invested in your business, it is one option.  Obviously closing a business requires laying everyone off.  I would argue that if you are considering that, you don’t care as much about your employees as you have been telling them.

If you have been diligent in building a knowledge base, and that includes financial systems, you have also been building business value.  And guess what?  An external Buyer would be interested in your business!  Which is another path, selling the business to a third party.  You can do it if you have not built the knowledge-base, but external buyers would see your company as a value play (meaning it is undervalued, they can pick it up cheaply, and have plenty of room to fix it up).

The price you can get for your business is not the price you want.  It is the price a buyer will pay.  Any buyer will pay more for a company that is “Built to sell”.  So every day, think of something else to add to the knowledge base.  If you are always building your business with increasing its valuation in mind, then you will more than likely have a successful business.

And if you need help doing any of this, call us!

Tom Smith
Managing Director
Focused Solutions Group