A Simple Test That Impacts The Value of Your Business

I’ve long been a fan of Jeff Walker, who is the author of Launch. After watching a 2014 video about his time on the Colorado River, I was reminded of some simple truths about the value of any business. But watch the video first.

To quickly summarise what Jeff is not saying in the video:

• No matter what, you need a great product or service
• That product or service is dependent on a small, dedicated, self-managed team
• That small, self-managed team uses repeatable processes that work, ensuring a great customer experience more times than not

Only then can Jeff spend time away from the office navigating rivers and experiencing the wilderness as the business that serves him continues to generate value for him and his customers.

Time Away From the Office is a Byproduct of a Solid Business Model

Oddly, many of the small business owners I’ve served since 2001 love their businesses too much. I’ve never been convinced they want to spend more time outside of their business. That doesn’t mean they shun vacations. Instead, they tend to derive their energy from being around the business they created.

In the section above, I mentioned three necessary actions that allow Jeff to get away from the office: a great team, self-management, and repeatable processes that work.

The owner’s goal should not be to have more time away from the office. The goals should be perfecting the three characteristics leading to time away from the office. When that happens, time away from the office becomes a byproduct of a rock-solid underlying business model.

A Simple Litmus Test

One of my favorite CEOs is Scott. When I accepted his invitation to be his part-time CFO in 2009, I asked him a question. “Scott, how long could you be away from the business before it would start to falter in your absence.”

I could tell he had never been asked that question before because a good 20 or 30 seconds passed, which seemed like an hour before I got an answer.

That’s been so long ago that I cannot remember his exact words, but the answer was in weeks. Each year, I’d ask him the same question where. I recall him saying about three months and finally, “Mark, probably a year.”

Looking back, I think Scott was being conservative. His company already had great people and great systems. But I respected his opinions because he was taking this question seriously and approaching it holistically.

How about you? How many months away from the business could step away before it would start to deteriorate in your absence?

Buyers Love Businesses Not Dependent on the Owner

Let’s assume you have the chance to buy one of two cabinet-making businesses. Both are prime contractors for three of the large retail chains in America.

Both do about $8 million in revenue annually. Both could accept more work, but capacity constraints keep their top lines from growing higher as more plant space would be needed, along with more employees in their rural locations.

Cabinet maker number one has an owner who serves as the primary salesperson and estimator of all contracts. He is constantly fighting fires in the shop as the product is being built. He does most of the hiring and even has his hand in payroll, accounting, and banking.

Cabinet maker number two has an owner who hired a business coach early in his business career. His first key hire was a general manager to run the shop who had nearly 15 years of experience before joining the cabinet maker. Once his cash flow could handle about nine months of training a salesperson, the owner hired a sales manager who would ultimately be allowed to add to his staff within two years. Both moves were on the mark.

Cabinet maker number one works on average 65 hours weekly. Cabinet maker number two used to work that many hours, but after hiring the sales manager, he’s out of the office by 5:30 each evening. He rarely misses his kids’ ball games, and he’s able to take about five weeks of time off each year.

Without looking at the financial statements of either cabinet maker and assuming both have a strong revenue growth potential, which business would you prefer to purchase? Why?

Value is subjective. But pricing a business is subjective. I’m going to pay less for the first business because I will be required to hire a GM and a sales manager. I’ll still need a good nine to twelve months before both are up and running at full capacity.

Jeff never said this in the video, but he inadvertently has a business model that’s more sellable than the one demanding his full attention around the clock.

Just Because You Can Doesn’t Mean You Should

The primary task of every leader is to set direction, communicate his/her intentions, and do whatever is possible to create an organization that is cohesive and unified. That also means being the person to help remove barriers from the teams and departments carrying out his/her intentions.

I’m describing a full-time job. But it’s far different from cabinet maker number one mentioned above.

If I’m correct, caution needs to be exercised in taking time off from the business. I’m reminded of the 50-something business owner who is growing bored in the business and is constantly taking time off. While the business can run without him in his absence, it will begin to stagnate because direction-setting suffers. Communication suffers, too, as does cohesion and organizational unity.

Just because you can take time off doesn’t mean you should. Be wise about how much time you spend out of the office and when.

And now we come full circle on this discussion. More time from the office more than likely results in a higher price paid for the business when it’s sold to a buyer. The goal for the owner is not more time off. More time off is merely an indication of having a great team in place that’s self-managed that uses repeatable processes to service customers.

The goal should be to focus on those underlying drivers that can lead to more time off for the owner.