Some Common Misconceptions of Business Owners
“I am my own best employee.”
The founder of a business is often the majority owner of the business. Because the way the business operates was created by this owner, that owner often remains skilled in the productive area of the business and remains comfortable relying on the owner’s skills. This may remain true even if the owner goes from being a producer to a manager in the business. Many times an owner is reluctant to stop doing something the owner created and is a part of the owner’s self image. However, business growth requires the training of new employees and brings a change in the way the business operates. Surveys of successful businesses have shown that very successful business leaders are often humble and appreciate the unique contribution of a team of employees. Future success will be built on team capability not individual talent. It is important that the good faith and earnest contribution of all be recognized and appreciated. Moreover, it is important that an owner not be an integral part of the business for the succession of the business and for the potential sale of the business to an outside buyer for the highest possible value.
“The best way to create wealth from a business is to manage it well over time at a high level of profitability.”
Generally speaking, wealth is created when a business is transferred for the highest possible value and the owners receive their capital – their business interest value – free from the ongoing business risk and place that value in investment situations at a much lower risk. The longer capital is exposed to the high risk of business, the more likely that an adverse event will jeopardize the value of that capital. Often there are choices about withdrawing funds from the business or keeping capital in the business for further growth. These choices should be made with an eye on increasing the value of the business in a sale to a buyer not involved in the business at the earliest possible time. In this way the maximum value of the business can be realized with a wealth-building event.
“An airtight legally enforceable buy-sell agreement on my terms will protect my business value.”
No matter how artfully drawn, a legal document alone will not compel performance. Most people will not do that which they perceive not to be in their best interest. If the foreseeable operation of buy-sell provisions places an owner in a situation in which the owner perceives is not in that owner’s best interest, the owner will not abide by the buy-sell provisions. Given the expense and time involved with enforcing legal agreements, this can be a problem no matter what the expected litigation result. Even if the agreement has alternative dispute resolution provisions, getting someone to do something they perceive is not in their interest will be difficult. If the playing out of an owner agreement involves such a result, it would be wise to anticipate the problem and revise the agreement to provide terms acceptable to all parties. This owner agreement will align the values of the owners and the owners will be more likely to follow the provisions of the agreement providing better protection for each owner’s business interest value.
“Planning is of no use and a waste of time – it is impossible to predict the future.”
The primary purpose of planning is not to predict the future. Planning is communication about values and goals, executing the plan to reach goals, and revising the plan to realize goals. The planning process should be continuous. The creation of a business goal is based on the owners’ values as they relate to the business. The owners will not all have the same values related to the business, but if values do not align to suggest appropriate goals, the business will have severe difficulties. This can be realized through experience, but it is much better discovered through communication. Moreover, when planning is in place and the future is not what was anticipated, existing plans can be revised much more quickly than the time it takes to create new planning. The timely and effective revision of a plan is what makes execution of a plan effective and productive. It is more important to attain a reasonable revised goal than to expend time and resources chasing an unattainable idealistic goal.
The danger of misconceptions such as these is that they lead to poor decision-making. Opportunities are missed and the value of the business does not reach the optimal thereby reducing the value to be derived from the business.