Clemens Rettich offers advice on the subject. He’s a business consultant with Grant Thornton LLP, with an MBA from Royal Roads University and who has spent 25 years practicing the art of management, delves into the issue.
Ten years ago, I would spend about four to five hours a year talking with business owners about “the end.” By that I’m referring to the all-important topics of successions and exits. But in the past year, the number of discussions I’ve had about “the end” has increased to four or five hours a month. I can see a future coming very soon where successions and exits will become the topics of daily conversations.
Here’s the reason for the increasing interest in successions and exits: 60 per cent of Canadian business owners are now age 50 and over, and many of them are waking up to the fact that they’re twice as close to turning off the lights for the last time — and most of them have done little or nothing about it. In fact, 40 per cent of Canadian business owners have put little in place to cash in on what should be the most valuable investment in their lives.
The individual and social cost of this reality is going to be enormous. Many of these business owners have not contributed to CPP and, in my experience, many never have enough left over at the end of the year to contribute to TFSAs or other retirement investments.
There is no value in their business, and they have little or nothing set aside. So why is this?
The Perpetual Motion Myth
I think it’s because too many business owners believe their businesses are perpetual motion machines, which are the mechanical engineer’s version of alchemy (oversimplified, that’s the magic of transforming lead into gold). Perpetual motion machines are supposed to run forever without needing any more energy after an initial kickstart. It would be a beautiful idea were it not for the fact it breaks the first law of thermodynamics, which says you can’t create or destroy energy, only transfer it.
To keep a machine going, energy “in” must at least equal energy “out.” There is no machine that operates in a perfect vacuum and with zero friction or heat loss. So all machines require external energy to keep moving.
Yet too many business owners think about their businesses as perpetual motion machines: get them going, make a minor tweak here and a small investment there — and life will be grand forever.
The truth is, unless you are growing your business, you are allowing it to die. There is no standing still. Further, in the context of this column, there is a cost to doing nothing: without significant investment in growth, your business will not hold enough value for a successful exit.
The sobering reality is that for many business owners, their business is their retirement safety net.
Why Doing Nothing is Not a Good Option
So what should business owners do about this problem?
The formula for creating and sustaining a value-creating business is actually simple: your investment must generate returns that exceed the sum of inflation and other external market costs plus the sum of all internal costs including the cost of growth itself.
If we understand the first law of thermodynamics, that last phrase shouldn’t be a surprise: growth is an activity and therefore has a cost. As we say in our work, growth eats cash.
This is also why bootstrapping is so difficult. Unless your business has remarkable internal efficiency (approaching zero waste) and remarkable market efficiency (top-quartile pricing and customer retention; customer acquisition costs approaching zero), you can’t generate enough cash to reinvest back into your business as growth capital. Bootstrapping becomes its own perpetual-motion-machine trap.
If you are going to build a business that holds sufficient exit value to make the whole exercise worth it, there are several areas where doing nothing will stop you cold. They include:
1. Human Capital
Adopting a cost-based accounting attitude toward labour means we are always trying to invest as little in labour as possible — no more than needed to get the current job done. The trouble is that only getting the current job done (exactly matching work available this quarter or this year) isn’t enough. Inevitably, the owner or anyone responsible for growing the business (for creating ultimate value) is working in the engine room instead of the wheelhouse — or working in the business rather than on the business. Building a value-creation business for your future means you need to start thinking of labour as an investment, not just a cost. Razor-thin labour margins, which result in decision-makers constantly putting out fires, will stop you cold.
When we invest something now for a planned-for return in the future, we’re accepting a degree of risk. The longer the timeline at play, the higher the risk. Since we’re talking about the “ultimate business” (ultimate in the sense of “end of the journey”), we’re also talking about the ultimate risk. The only approach that works is all-or-nothing. Holding back is a false security. Holding back doesn’t reduce risk — it increases risk. The more you go for middle of the road, the more you are guaranteed an exit without a return on your lifetime investment. Be smart, be a voracious learner, but don’t be too safe. If safety is your inclination, get a job. Searching for guarantees and perfection will stop you cold.
Feedback is at the heart of all successful organisms and organizations. We act, we analyze the results of our actions and we act again, incorporating what we learned in the previous round. Feedback reduces risk because it reduces the chance of making the same expensive mistake twice. It’s the core of high performance: the ability to incorporate the learning from our last round into the next round, tweaking, dialing in, getting closer to centre. The failure to seek, provide, understand, and act on feedback will stop you cold.
Automation isn’t just robots and artificial intelligence. Automation is a nod to an irony: while perpetual motion machines are a fool’s errand, the relentless drive to get as close as possible to one is the only path toward a value-creation business. Our systems, our processes, our ability to delegate, our rejection of micro-management — the closer we can get to creating teams and systems that function on perfect autopilot, the more effectively we operate, the less energy we waste, and the more energy (capital) we have to invest in growth rather than maintenance. Automation is expensive to create initially. The costs of training, machines and systems all require a lot of front-loading. But without that investment, your organization runs on manual, and that will stop you cold.
Financial capital is the purest form of the external energy the system we call a business requires. Even human capital, the value of which is a better predictor of success than financial capital, requires cash to act at all. You can’t get great talent to invest in you for free, at least not for long. In most businesses, borrowing and equity financing are the most effective ways to get the external energy a business requires to achieve the “escape velocity” required to grow a value-creation business. Of all of the areas we have discussed, this one makes the most business owners nervous. Investing in human capital is more complex, but looking to external financial capital is more terrifying to many. The idea of going into debt, or even worse, selling fractional ownership of the business to others, stops the conversation in its tracks. But without external capital, the first law will usually stop your business cold.
A Failure to Plan
I’ve written previously about Deloitte‘s report on the lack of courage in Canadian businesses — and I’m not merely being provocative. When we look at the succession tsunami, the grey tidal wave roaring down at us, this is real. Failure to understand that growth, investment, delegation, capitalization and risk are mission-critical requirements is resulting in anxious and confusing conversations with business owners every day. The absence of any exit plan is just a natural outcome of that.
As a business owners, you need to know the real cost of doing nothing and get over the idea that simply running a solid business, day to day, is good enough. The sky isn’t falling yet, but it’s time to start exploring what an investment in your ultimate future looks like — soon and seriously.
A failure to do so will, you guessed it, stop you cold.
This article is from the August/September 2018 issue of Douglas.