May 2017 eNewsletter

The 80/30 Rule: A Study of Contradiction

Larry Grypp, President of the Goering Center

For years we have encouraged, even prodded owners of family businesses to have an outside board of advisors, to have non-family members as part of that board, and to recognize the importance of a well-understood succession plan in the event the current CEO is unable to serve.

That may have been a mistake. The error was not in the direction -- all of that still matters -- but to whom it may matter more.

We have recently completed work that assesses the needs of Goering Center member companies. These assessments, collected and analyzed over five years, asked business owners and their senior staff a range of questions designed to unearth the issues, obstacles and aspirations of those businesses so they can enroll in the right programs here at the Center. The survey covers topics ranging from engagement to strategy, and from culture to execution. All the basics of a healthy business.

What came out of that analysis was startling. The top three rated areas -- where nearly 80 percent or more of the respondents agreed or agreed strongly — had to do with whether they understand their role and responsibilities, whether they feel empowered to make decisions in that role, and that they understand where and by whom decisions were made.

Those insights stand in sharp contrast to the lowest rated items in the survey – scoring from 19 to 31 percent agreement:

  • We have an effective board advisors (or directors) that includes non-family members who are not owners of the business.
  • There is an understanding of how leadership will transition if the current CEO/President dies or is disabled.
  • A process to select, develop, and transition to the next leader(s) is in place and understood by all.

Perhaps the owner has their own way of soliciting advice, or has their own plan in mind for succession. However, it’s worth noting that nearly 90 percent of the 1,400 responses were from non-CEOs -- either other family members or non-family members on the leadership team, typically seven other people.

What jumps out here is that a typical family business leadership team member knows their job today and how the business is run today, but is in the dark about what the future holds in terms of family business leadership or outside advice.

Does that matter?  About half or more of these respondents -- again, almost all of whom were not the CEO -- felt their opinions were valued and they felt energized by being part of the enterprise. Yet, less than a third of them felt the business had an outside board to help guide their future and governance, and fewer still felt there was any discipline and focus or even clarity about how the business would transition to the next generation.

The fact that issues like this that might have been considered the province of the business owners are so evident and so poorly rated by the company’s own leadership team adds an important imperative to the persistent call for family businesses to step up to these best practices.

What is at risk in neglecting these proven measures -- succession planning and outside counsel -- is not just the business today, but its future. Particularly, such opacity around succession or ambivalence toward outside counsel can be corrosive to the energy, passion and commitment of non-family members, as much as it might be the seeds of discord within the family itself.

What lift would it bring to all the elements of the business -- engagement, focus, commitment -- if the leadership team knows the owner is actively seeking the perspectives other executives and business owners outside the family? If owners make it clear how the enterprise can continue to be led well in their unexpected absence?  If they show a determined and disciplined plan to develop the next generation of leaders? That tide of knowledge would clearly lift that business.

Staying out of the Mediocre Middle

Kara Valz, EVP of Sales & Marketing and Center for Small Manufacturers, TechSolve

How can you get the most out of a limited marketing spend? As consumers we are used to being marketed to and we know good (and bad) marketing when we see it. Because of limited budgets, the “mediocre middle” is where some small companies find themselves. Here are some marketing mistakes to avoid so your marketing efforts can be less “mediocre” and more successful.

“I will sell to everyone; I want anyone I can get as a customer.”

Have you said that to yourself? When I hear someone say that, it tells me, they don’t know their customer base and as a result, they are very likely to waste marketing dollars. The most important thing that a small business can do is define their target market and customer. Keep in mind the larger you define your target market, the more money you need to reach them. Keep it realistic and within reach. For many organizations it is best to define geographies that you want to “own” or a niche segment of the market that you can serve better than anyone. It is smart to look at your current customers and prospects, but you don’t have to limit yourself to that group. You may have products and services that will benefit other sectors. If you aren’t sure, talk to thought leaders (more than one) in your industry. Where do they see customer bases growing and why? Certainly if you can get more from existing customers you should have your sales folks making that a priority.

“We have the best service, best quality and best people.”

If I had a dollar for every time I read that on a website!   That description may be true, but that descriptor is mediocre middle” personified. Determining product claims that you can OWN is worth more than the laundry list of reused and same-old descriptions that your competitors use in their marketing efforts.

Many companies’ websites all look and sound the same. Run this test: Have your nearest twenty-something (or 14 year-old if you are really brave!) read your website and the sites of your two closest competitors. See what they can tell you afterward. See what they understand and ask them the difference between yours and the others.

  •  What are the clear differences between products and services?
  • Which company is bigger?
  • What did they like best (or least) about all three sites?

In less than 20 minutes you will have more feedback on your site than most marketing teams do. Take that feedback and start getting that website working harder for you. The first thing any prospect is going to do is look at your website. It needs to be the beginning of “your story” and your goal is to get them to want to talk to your sales team. Make sure you have calls-to-action on your pages.  Do you want them to call you, email you, or place an order?  Make sure the user has enough information from your site to do these actions.

Have you ever googled the word “quality”?

Search Engine Optimization (SEO) is extremely important for organizations’ marketing plans. Your website and SEO plan can help you with shortening the sale as well as converting prospects into buyers.  Setting KPIs (key performance indicators) and goals such as number of downloads, incoming emails, and phone calls will get you started. One way you can create the most productive keywords and content is by asking your current clients their search terms. How did they find you? Asking your clients for input will help you with creating appropriate content and creating conversion points like downloading PDFs, price sheets, and technical descriptions. In a recent B2B marketing study, Enquiro Search Solutions, Inc. described four types of buyers and corresponding information your website should offer to them:

  • The Economic Buyer – Information about price, maintenance cost and depreciation if applicable
  • The Technical Buyer – Information about installation, spare parts, maintenance
  • The User Buyer – Information on how to use the product, support services, and manuals
  • The Coach Buyer – This buyer is an influencer and is interested in performance and payback

“We haven’t seen a lot of results from our marketing efforts so far – what should we do?”

Stop and evaluate your current marketing tactics. If you are doing more than SEO (trade shows, thought leadership papers, blogs, etc.), are they being executed with excellence? Are they part of an overall marketing strategy and plan? Are you doing things because you have always done them or are you taking appropriate risks and trying something new? You might want to look at where your competition is spending their dollars. This might give you some ideas of where the market is heading. Additionally – do you have a CRM or marketing automation system that can track the success of your tactics and initiatives? By tracking your results, you can alter your plan as needed. Spending smart is always a series of learning cycles. What works this year may not work the next so stick with the goal of trying new tactics and track your learnings and results.

It doesn’t take a million dollars to get you out of that mediocre-middle – you can do the following to become a more successful industrial marketer:  benchmark, analyze, plan, track and repeat!

Three Tips for Maximizing the Sale of Your Business

Kent D. Pummel, CPA, ABV, CVA, Clark Schaefer Hackett

One of the questions I get most often from business owners is: How can I get my business ready for a potential sale? If you were selling your house, you would want to make it look as nice as possible before the first open house. In the same vein, you’ll want to get your financials in the best possible shape before you negotiate the sale of your business. Here are a three key items that will help maximize the sale price.

1. Eliminate or reduce discretionary expenses

If you can remove personal items paid by your business — including expenses for meals, entertainment, vehicles and other luxury items — and consider them discretionary, they increase the value of your business by a multiple. For example, if we assume an earnings multiple of 5x, and if you remove $20,000 in personal expenses, you just increased the value of your business by $100,000.

Discretionary expenses may also include compensation to you and/or family members, as well as rent payments for real estate owned by you (or entities controlled by you and your family). If you believe these amounts to be above the market value, you might consider adjusting these payments for the same reasons.

2. Improve your financial statements

Many business owners have limited financial statements, and manage their business by how much cash is in the bank and how much money they receive. This may work for a period of time, but potential buyers will look at your financial statements as the road map of what your business is worth.

I worked with some business owners years ago who had several companies with different year-ends. When it came time to negotiate a sale of those businesses, it was difficult to pull the information together because they had never produced combined or consolidated financial statements to see what income is being generated as a whole. While it may be expensive to have a consolidated audit or review of your financial statements, when you consider the amount as a percentage of the total value of your business, it may be worthwhile to have the right financial statements to present at negotiation.

3. Report cash receipts

I often hear from business owners, when it comes time to sell, that they have cash income that doesn’t show up on their financial statements. There are a number of reasons why this is wrong, but in this scenario, a potential buyer is going to base the value of your business on your tax returns. You cannot claim that the reported numbers are too low. Start properly reporting your actual cash receipts so you don’t have to spin a tale about your financials. The statements will show what the business really generates.

While there are many components of a business valuation, these are a few key items that can be addressed right now. Get your business sale-ready so when it comes time for your “open house,” the buyers will see the real picture and the potential value.

How Do I Validate My Life?

Mark Hogan, CWM, Principal and Senior Wealth Advisor, Madison Wealth Management, LLC

Almost everyone is familiar with the standard estate planning documents; wills, trusts, medical and financial powers of attorney, living will, etc.

Certainly these legal documents direct how, to whom, and when a person’s assets will be distributed upon their death is of great importance, but they say nothing about the moral and ethical values and wishes a person requests to leave his or her heirs.

An increasing number of people are now asking how they can preserve their most precious legacy – their values – for their loved ones.  Ethical wills, also called legacy letters or legacy wills are a way for you to record and share your family history, values, beliefs, faith, hopes, life lessons, love and forgiveness with your family friends and community.  The idea is to make it a little easier emotionally and psychologically for the person to “let go.”   However, unlike wills of inheritance or living wills, ethical wills are not legal documents.    

There are many reasons for folks to create an ethical will according to Dr. Barry Baines, MD;

  • As you create an ethical will, you can learn about yourself as you journey through the self-reflective process
  • It allows you to put your personal “signature” on what your values really mean to you
  • It opens the door to forgiving others and being forgiven
  • It can be a spiritual exercise that provides a sense of completion to your life   

In regards to a family-owned business, the most apparent transition is physical – handing over the reigns of the business to the next generation.  Often unstated and possibly more important are the owner’s family values:  honesty, integrity, hard work and passion to serve the business’ clients.  These are the real secret to the company’s success.   What a wonderful opportunity for the owners to complete their legacy to their children by handing them this written statement of sage wisdom and time-honored beliefs along with the “keys to the car.”

As with many things in life, the most difficult part of putting together an ethical will is often just getting started.  It requires some honest reflection on your past, present and future life to make it a meaningful exercise, but it will be worth it in the end.  Since there is no specific document or prototype for an ethical will, here are a couple approaches to getting started:

  1. Start with a blank piece of paper (the most open-ended approach)
  2.  Start with structured writing exercises (examples)
  • From my grandparents I learned….
  • From my parents I learned….
  • From my children I learned….
  • From my life experience I learned….

The bottom line is: don’t miss a golden opportunity to let your children, grandchildren, relatives, friends, etc. know how you really feel about them and what you wish they would remember about you.

Four Sources of Cash Flow to Fund Your Growth, Without Borrowing a Dime

Mackey McNeill, CPA, PFS, IAR, President & CEO, Mackey Advisors

For anything to grow it needs fuel. In business, that fuel is cash.

The economic climate for most businesses is positive right now, but that doesn’t mean you aren’t having cash flow challenges. In fact, if you are growing, and especially if you are growing quickly, your main concern day to day may very well be having enough cash to pay your bills and stay in business.

Here are some quick ideas that can create new fuel, quickly, without negotiating an increase in line of credit with your banker.

  • Consider your invoicing terms.
    • Consider asking for a deposit against your work. Especially if your work is custom for each client. They may very well be expecting it and surprised you haven’t asked.
    • Step back and look at your customer value.  Do you provide exceptional value?  Does that give you a reason to ask customers for terms shorter than the industry?
    • Meet with your largest customers and get their advice.  They value their relationship with you and are usually happy to help.
    • Change terms with new customers. Don’t want to upset the apple cart?  Set up new, shorter terms for new clients.
  • Pay less frequently. In most businesses, you are paying your labor long before you are generating sales and cash to cover that cost.  If you are paying weekly, can you move your payroll to bi-weekly or semi-monthly?  If your payroll is $25,000 a week, that frees up $25,000 or more immediately. Even more in that the payroll taxes are paid after pay day, so you get some float there as well. You will need to manage this with your team, getting folks personally prepared, so you don’t lose great people along the way.  Can’t move your rank and file off weekly pay? 
  • Deep dive in inventory.  It is easy to convince yourself you need a lot more inventory than you really do.
    • Start with the simple things, like what is your purchasing practice?  Is your purchasing officer looking just for low price, or are they considering cash flow impact?
    • Ask for longer terms with your key vendors.
    •  Fire sale inventory or find a strategic buyer for items you know are never going to sell.  Getting some money in is better than none and its less to manage.
    • Incentivize your team with an inventory target.  I had a client that generated new cash of $350,000 in 8 months with this one idea!  It is certainly worth a small bonus to pocket $350,000 in new cash flow.
  • Review your accounts payable practices.
    • Are you paying by the due date or when the invoice comes in?  You may be surprised by what you find.
    • Consider paying invoices by credit card with cash back.  If your vendors accept credit cards, this gives you an automatic 30 days, plus, depending on the billing cycle.  Sweeten the deal by finding a card that pays cash back.

Lastly, ask your team.  You might be surprised at how many good ideas they already have!

To your prosperity,