By: Stirling Vineyard, Guy Hatcher
1. The vision and business plan are not developed or communicated well
There is an old saying: “If you don’t know where you are going, how do you expect to get there?” Many times a business owner opens his doors for business and just expects to succeed. A business plan identifies where you want to go (i.e., vision statement) and how you intend to get there (i.e., goals, objectives, strategies and operating plan supporting the vision). A business plan contains accountability and measurement most owners do not want to endure. It is paramount to develop and communicate well the actionable business plan to all employees as it serves as the foundation for navigating the entire company in the same direction.
2. The business does not have the right people on the bus and in the right seats
It all begins with people. The company may have the best vision and goals, but without the right people, the company cannot execute the strategies. The “good-ole boy” approach of choosing the management team and employees may work in the very beginning a start-up but seldom works over the long-haul. When personnel are hired into positions misaligned with their strengths; their passion, impact and effectiveness will be minimized.
3. The under funding and lack of focus on cash flow
Cash is king. When a business is either in a start-up or high-growth stage there is never enough money. A properly developed business plan tells you exactly how much money the business requires for both start- up expenditures as well as operating expenses until cash flow is positive. Running out of cash is a result of poor planning on either the revenue or expense side of the equation and can also result from a lack of continuous measurement of actuals against the plan, especially in the early formation stages. Again, under funding is not only limited to start-up operations but also to any phase within the business life cycle, included but not limited to high-growth periods.
4.The owner believes the company cannot exist without him, driving the owner to fail in one, not working within his natural talent and passions and two, in the area of delegation
From the onset of establishing a business, the entrepreneur is the company. However, as the business grows the owner must move from a mindset of controlling to empowering while holding people accountable. Lack of delegation, control issues, hiring and training all have an impact on the future growth, profitability and value of the company. When the entrepreneur fails to acknowledge his or her natural gift set, frustration will prevail and compound as the owner diligently works in areas, where others may perform better.
5. Ineffective management team
One of the key variables in enterprise valuation is the effectiveness of the management team when the owner leaves the company. This is the team responsible for executing the business plan. When the owner harnesses the strengths of the right management team, the expertise does not leave the company when the owner exits. Hence, new opportunities can be maximized and growth achieved. Consequently, the exit multiple on a potential business sale trends upward with a solid management team in place.
6. Minimum business process improvement and lack of movement toward a more disciplined organization
As a business grows, it is no longer the same company from the days of start-up. Transaction volume increases, and the nature of the business transactions increase in complexity. To ensure an acceptable level of profits fall to the bottom line and are not mismanaged and absorbed within expense categories through operational mediocrity, the company must increase in discipline and engage in business process improvement efforts yet always remain flexible to remain efficient. Business process improvement touches all facets of the business: sales, marketing, operations, supply chain, quality and finance and administration.
7. Chasing business with poor economics
Business owners and management teams alike often chase deals containing poor margins. This stems from the fear of losing revenue. Effectively this practice compromises sustainable, profitable growth for the sake of winning sales in the short-run. Financial stability erodes, particularly if the revenue represents a significant portion of the company’s business. In his #1 best seller, Good to Great, Jim Collins contends the great companies confront the most brutal facts of the company’s current reality. Management must acknowledge not all business is worth chasing or signing. The 80/20 rule typically applies, requiring management to carefully consider which customers to pursue.
8. Expanding beyond the core too fast
When the owner begins to see the core business ramp up, it’s tempting for him to assume he’s nailed it and then begin looking for expansion opportunities. Diversification leaves the core business undefended, draining both human and financial resources. The owner must treat the expansion like he’s starting all over again. Without proper due diligence and planning, the financial drain of one of the failing businesses can sink the whole enterprise.
9. The entrepreneur cannot separate himself from the business
The owner fails to see the company as a legitimate, standalone business and co-mingles his personal checkbook with the business assets and operations. In this instance, the company never stands as an independent going concern outside the identity of the owner. Moreover, the true economics of the business are masked because the business is not isolated on its own set of books; the owner or management team is likely unaware whether the standalone business is unprofitable or lacks cash flow.
10. The business continuity plan either does not exist or is out of date
The entrepreneur had the vision to launch the company but failed to clearly define the company exit indicators. One day the business owner will exit his business either voluntarily or involuntarily (i.e., death or disability). Plans need to be developed and reviewed periodically to ensure the right person can purchase or sell the company (whatever the case may be) with the proper accounts funded (i.e., insurance policy). This important step ensures a seamless transfer, averting possible disaster.