94,6% of businesses started do not get sold! Our purpose as entrepreneurs should be to build our business into an asset of value, which is a business that one day could be successfully sold and fetch a premium price. It’s also a business that can successfully raise growth funding.
We should be building assets of value because our businesses are our pensions and there is nothing elegant about retiring into poverty after ten, 15, or 20 years of building an unsaleable business.
Brian is one of the most charming and affable people I have met. When he walked into my office five years ago I warmed to him within minutes. He had a firm handshake and his wide smile clearly said, “I’m so pleased to meet you and thank you for your time.” This was his way with everyone he met. We sat at the table and he began speaking.
His contagious enthusiasm about his business, his excitement about the trends that were reforming the telecommunications sector in which he traded and the open ended possibilities that this change brought into his businesses got me equally excited. His insights were delivered with a wit and intelligence and I could see that Brian took his business very seriously, but not himself. This was part of his charm and I listened intently since I knew that this would also be his shadow.
He had worked in one of the big cellular networks for a number of years before he began his business. He left a nine year corporate career to start his business and four years down the line saw his business fast approaching annual revenues of R23 million.
The idea for his business emerged from his time in the cellular networks where he had been employed in business-to-business data sales. His job was that of pre-technical sales. He met clients, interpreted their data needs and translated them back into products that his company offered.
This placed Brian at the coal-face of a dynamic market where client needs either lagged or raced ahead of what the network provider could offer. The industry was undergoing stupendous growth.
Where great ideas fail
Brian was sales. Everything about him spoke it and resulted in it. I could sense his frustration and more specifically, his exhaustion. He had taken no more than 17 days of leave in the last four years, including public holidays. This was simply unsustainable.
At the same time he had spent in excess of R300 000 in search and placement fees with three of South Africa’s best known sales-specialist recruitment agencies. They had actively head-hunted some of the best sales professionals in the sector.
All had resigned within three to six months of starting at Brian’s company and were working elsewhere.
Five sales professionals in four years and none were on the ground. I looked at their CVs. They were pros. Each one had performed in their previous employ and three made big sacrifices to leave good jobs and join Brian. So why did they leave him?
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The business systems diagnostic
As impressive as Brian’s revenues and forecasts were, the valuation I did on his business horrified him. His business model was super smart. It offered a volume based, variable pricing model for clients, cold water for new competitors and an inbuilt innovation cycle that would never allow his techies to rest; a key feature of a tech company needing excellent technical skills to innovate the market.
On top of this all, once integrated into his clients’ systems, automated billing administration worked smoothly, the reporting built trust and deepened his credibility with his clients. His self-provisioning set-up allowed clients to customise many elements of their service from Brian making switching costs very high.
With all this and racing revenues, his business spluttered a valuation between R2,8 million to R3,2 million. Brian was dismayed.
Many aspects contribute to a business valuation. A dominant feature in Brian’s and any other business is the people system. Brian’s had none. The evidence was palpable.
The source of the valuation pain came from the discount rate, one of the three elements that make up a valuation calculation. His forecasts were fantastic, the business scaled and the investment needed to sustain a robust aggregation platform was accounted for. Cash flows into the future were contracted and the envy of many entrepreneurs. We ran the business systems diagnostic.
The results came onto my desk whilst I was on the phone with one of the sales professionals who had worked for Brian. His marketing systems were okay, operations rocked, money management was tight. But his sales systems were barely existent and his people systems were all over the place.
I spoke with the other sales professionals and they echoed the same story. Brian was a fantastic guy, driven, passionate, can-do. It was very exciting to work with him at first. But then you could do nothing right.He interfered in the sales processes and got angry when certain things were not done his way. The problem was, none of them knew what his way was. If they did, they would have done it.
The high discount rate was there to counter the single biggest risk in the business, Brian himself. His shadow loomed larger than ever. Brian was the business.
Without him, there were no more sales and there were no more relationships. His single biggest strength turned into the business’s single biggest weakness. I valued the business as a buyer would and no Brian equalled no sustainable business.
We had to fix this and fast. Brian needed to raise growth funding for his Africa strategy and, in typical style, had already secured the contracts into Tanzania and Kenya.
Building business systems
Brian’s problem is not unusual. When we grow we need help and we offer jobs. We look for help so that we can focus on the many other things that a growing business demands. The successful candidate comes into the business and we start to realise that this person can’t do what we thought they could do. Do we continue to invest in them and hope that it comes right or do we move them out and start again?
The investment of our time as business owners in sourcing, selecting and then engaging new staff is enormous. The risks that we open up in our business every time we do this are enormous. The hope we place on this person within our emotional framework is enormous. And then to top it all, we pay them before we pay ourselves.
The answer lies in not offering a job to perform a business function such as sales or marketing or buying. Rather, we should be offering jobs to run business systems that we have built.
Good systems include six elements: The activities and actions that need to be taken to make something happen, organised into a sequence to deliver a measurable result within a period of time. This is then specified in a job description and supported with training materials on the activities with a carrot and stick written in a contract of employment.
These are systems we build as business owners. We test them, refine them and, only then do we employ people to run them. This way, we increase our chance of getting the right person to do the ‘job’. We can measure their performance fast, reward them effectively to keep them, remove them efficiently if they can’t get it right.
In this way we get back the precious commodity of time. Time to focus on growing our businesses to the next level since if we don’t, no one else will.
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A growing business
Within six months, Brian had a sales system in place employing three sales people. The systems achieved the sales and the people ran the systems. We had in effect systematised Brian. We redid the valuation that year. A different number emerged. Brian was no longer the business and he beamed with pride at its R8,9 million valuation.