Chapter 10
Building Long‐Term Value

If you've survived the gauntlet of the last nine chapters, made it out with your business, and didn't get wrapped around the wheel of some regulatory agency, well then, congratulations! You've just made it through the toughest obstacle course in business and you've now got a smooth‐running, leaned‐down business with an affordable balance sheet. You've also picked up a little scar tissue from the journey, but it looks good on you. Wear it with pride. As the thrill of the initial cash crisis and the grind of the turnaround both fade into memory, you've got a clean slate and a bright future. It's the first time in a long time that you've been able to take a full breath of fresh air and reflect on life.

You may be exhausted and simply wish to sell the business and move on. Or maybe your kids are now interested, or maybe you'd like to do an ESOP (Employee Stock Ownership Program) sale, or sell to your managers through an MBO (management buyout). Or, perhaps, you're enjoying the business again and really like the idea of holding it for the next 5–10 years. All these options and more are available to a well-run company with strong, predictable, and recurring profits, good management systems, and a strong balance sheet. Said another way, by maintaining your momentum coming out of a turnaround and being able to post 3+ years of strong, audited, earnings, then you really have every opportunity available to you as a business owner. What creates the most value for you in keeping the business also creates the most value for you in selling the business.

These are the four best things you can immediately do for your business:

1. Get rid of the turnaround consultant. He's a gun slinger and what your company needs now is a sheriff. Release the consultant back to the wild so you can focus on your own team and your own future.
2. Maintain a monastic focus on the fundamentals of running a lean and profitable company. Most importantly, stay scrappy even when times are good.
3. Gain core strength and accumulate resources. Become hard to kill, and let others take the big hits during the next recession.
4. Pick the right strategic direction now that you're lean and flexible.

The monastic return to fundamentals in recovery is often moving business management back into the ERP (computer enterprise resource planning system) and committing to be a process‐driven organization. It's also committing to annual CPA audits and building all the financial and IT safeguards to help you sleep well at night.

Gaining strength includes regular preventative and predictive maintenance schedules for equipment, employee development, training, certifications, and re‐entrenchment with your best customers. You're rebuilding the foundation of your company to make it recession proof. This is developing a lean culture and becoming process driven, which is an entirely different skillset than the firefighting nature of a turnaround.

Business Model

In Chapter 5 we covered ways to rethink your business model and become more cash and profit resilient. This might mean outsourcing your administrative functions or your sales efforts. It could mean retrofitting your product for new customers or moving into new markets as a natural hedge to your existing markets. You need to study your business, your industry, and adjacent businesses and industries that you know of. This is a good time to go slow. You're now the sharpest sword in our industry. What are you going to do with that? You don't have the balance sheet of the big boys but you're on our toes like no one else.

A review of your operational cycles can reshape your business in a way that quietly strengthens your balance sheet to the disadvantage of your competitors. For instance, parts used in the construction of nuclear power plants are big, expensive, and have “lumpy” demand, meaning that when a nuclear facility is being constructed, you have work and when there is no demand – you have no work. That's an awful business model. A better model is something with a steady pull demand; for example, bottled water. All day, every day people are buying and drinking bottled water, so there is very little “lumpiness” in orders. Bottled water has some seasonality to it, so maybe a vitamin company is a better model because people take their vitamins every day. You can set your production cycle to perfectly match that pull demand. The ideal operating cycle is probably a subscription‐based business where people pay you in advance for their vitamins or digital news content.

Now you can't turn a massive steel fabrication facility into a vitamin company, but you can understand the weaknesses of your model and seek to improve it in creative ways. Lumpy revenue streams can be flattened with progress billings, different credit terms, prebuilding or inventory holds, using consigned materials, selling to a stocking distributor, selling to more and different markets. Fixed costs can be made more variable; with a reduction in overhead, using more contract labor, accrual arrangements with utility providers, revolving lines of credit, and so on. If you bend the demand and overhead levers far enough, you could end up with a business model that dramatically improves its ability to generate cash.

Governance

Statistically, private companies with an independent board of advisors do better than those without. Note that this is a board of advisors, not directors. You assemble the best people you can find, organize them into periodic meetings, and solicit their advice. In theory, they help you make better decisions and stay out of trouble. Certainly, managing a board will help the entrepreneur think, plan, and operate at a higher level. Our family business had four outside directors and three family members, and their advice often helped us make better decisions. All four outside directors were brilliant and hugely experienced; they had all run businesses much larger and more successful than ours.

At the time of my first turnaround, we had been hit with a dramatic market shift and were in a really poor position to react. I was active in an outside CEO peer group at the time, which met monthly. With all that support, our business still ended up in a very tough predicament. “Now is when you need us the most,” said my CEO peer group. “No, before now was when I needed you the most. What I need now is time and money, neither of which I can afford for this group,” was my response. Our board took a similar hiatus during our turnaround because none of them had that expertise. That being said, I still recommend a board of outside advisors for any private business not in crisis. The frequency and structure will help you work on your business instead of just in your business. The time to develop an agenda and presentations will help you step back from your business and think more deeply. It also provides a great opportunity to develop your staff.

People

Getting the right people in the right places is critical. In the early days of a turnaround, there are two documents that I have on hand at all times: my copy of that day's cash‐flow forecast and a copy of that day's organization chart. I think the CEO has to obsess about the org chart as a sports team's general manager would, always trying to move or develop people in a way that best suits the team.

Training and development budgets are usually gutted in a turnaround, but they should be added back into the recovery budget. It's the reinvestment in your people and team that will help the company rebuild its balance sheet. Additionally, the company has already experienced the high cost of carrying too many people or the wrong people. All those layoffs you didn't think the business could withstand, they were handled just fine. This tough, leaned‐down team will be your core going forward. They've been through a lot, so don't forget to share the fruits as your company recovers.

Sales

Think of yourself as the general manager of a pro sports team. If you're capped by league rules at 20 people, some managers will hire the best 20 people they can find, then spend all their time training, coaching, motivating, inspiring, incentivizing, and begging them to sell more. I used to do that and found it exhausting. What I found works much better is to recruit the best possible team at above‐market wages, give clear directions, measure and rank them, then fire the bottom ranked person and upgrade the team with a new recruit. Your wages make recruiting a replacement pretty easy. Each time somebody leaves; rehuddle your team, give better training, better direction, then measure and fire the new bottom ranked person. Replace them and repeat, maybe quarterly. I think it's a perfectly fair trade; the company pays well, treats you with respect, offers a great opportunity, and will never ask you to carry the bottom ranked person with your hard work. The superstars will love it, the bottom ranked will avoid you, and the mass of them in the middle will be pulled toward the light.

I once hired a sales manager who immediately held a one‐week sales contest; the top‐three order writers would earn some amount of cash bonus. It worked fairly well for maybe half of the sellers, and the top five really hustled. The next week she held another contest in which the top three people to open new accounts would get some special recognition; a special parking space or trophy or something. Same thing, about half seemed motivated and a somewhat different top group really hustled. I was intrigued but far from impressed. I was paying her for strategy and long‐term results, not a series of simple little promotions. When asked, she shared the brilliance behind her strategy: “There are only three types of sales people: the ones who are motivated by money, the ones who are motivated by recognition, and the ones who are motivated by something more complex than either of those. I'm a sales manager, not a psychologist, so in two weeks we know who is motivated by money, who is motivated by recognition, and who needs to be replaced by someone that is easier to motivate. If I have a team of easy‐to‐motivate sales people, I can accomplish great things with them, and that's what we're going to do.” I walked away amazed and impressed.

Accounting

Coming out of restructuring, it is time to reestablish your rules for accounting. CPA annual audits are expensive and a lot of work, but nothing helps you sleep better at night than a squeaky‐clean set of books. Every private‐equity‐owned company I work with has audited financials, whereas few entrepreneur‐owned companies do. Any broker or investment banker will tell you that the cost of five years of audits is usually rewarded many times over in a sale because it gives the buyer great certainty in the business.

Now is the time to set guidelines with accounting and accrual policies, while also establishing proper controls to guard against embezzlement, fraud, or mistakes. Your CPA can help you with this.

The turnaround has probably focused you in on the important reports of the business. The other reports you can eliminate to reduce clutter and bring focus. For me, I just want to see upstream in the order cycle to our own sales and marketing efforts and downstream with rolling financial and cash‐flow projections – no bells and whistles, just a clear view to each horizon.

Fraud Prevention

A banker friend once pointed out to me how many middle‐aged bookkeepers are prosecuted for embezzlement. I've watched since then and it seems like several per year just in our sleepy little state, plus others I know that were not prosecuted. Embezzlement requires only weak financial controls from the entrepreneur and a lapse in honesty from the controller. It's my opinion that strong financial controls will deter even the most dark‐hearted controller. The one thing you can count on is that everyone will watch how you respect and protect your money, and then they'll do less than that.

Larger CPA firms will provide process audits to help you set up the safest protocols for managing your treasury function. There needs to be a productive check‐and‐balance system in which activities are matched and authenticated before money leaves the building. They'll help you set up appropriate checks and balances for purchases, payments, payroll, and so on. Not only does it deter theft, it's the proper way to run your business. Sloppy accounting controls are like an unlocked door in a bad neighborhood; it's a dangerous temptation.

Culture of Theft; Culture of Free

Albany, the capital of New York, had a famous family‐owned steak‐house restaurant that was the meeting place for area big shots in business, law, and government. The owner was a gregarious guy who was always quick to buy a drink for the Governor or other high‐profile guests. But he always pulled the cash out of his pocket to pay the bill. Always. His family paid for food and drinks, in cash, no exceptions. Years later he died, his sons took over, and they were more liberal with giving away drinks. The waitstaff saw this, and they became more liberal with drinks and food. The bartenders saw this, and they, too, became more generous with drinks and started skimming cash. Within a few short years the famous restaurant was out of business.

Years ago, an employee of ours was caught pretty much red‐handed selling our stolen product. One of her boyfriends convinced her that loading up a trailer of our product (from our warehouse, on the weekend) and selling it on eBay was a foolproof way to make some extra cash. We found out and had the police visit her at her desk. She admitted everything; then we fired her and sought to press charges. The district attorney said we didn't have a case (years later this same Louisiana DA and his sheriff and our mayor are now all in prison on separate corruption issues). I was flabbergasted but slowly came to understand their (weak) point; because we had given away free product before to employees (always under $100 and for fundraising purposes to a local church group or sports benefit), we had set a precedent, and this employee was “confused” between a handful of product with permission and a trailer load without permission. Right or wrong, it drove home the points about consistency, documentation, and procedures.

Once I attended an industry event with an FBI agent in charge of prosecuting corporate fraud cases. He explained the moving target of FBI priorities; sometimes terrorism, sometimes drugs or mortgage fraud, but rarely basic embezzlement in a small to midsized entrepreneurial company. The secret, he said, to getting an FBI agent to take interest in a pedestrian embezzlement case is to allow them to use their superpowers. “Think about it,” he said, “we join the FBI so we can do all the cool superpower stuff like wiretaps, warrants, undercover work, etc. Bring me a lead that needs investigation services and I'm interested. Bring me a case that is all wrapped up like a Christmas present and there's nothing left for me to do. That's not nearly as interesting to me or my bosses.”

Budget and Strategy

Strategy can be a really fancy and complicated subject if you let it. To me it's simply: what do you want to accomplish and how can you get there? Most entrepreneurs want to have a good life and a big payday when they exit the business. That may not be easy, but it does not have to be complicated. Here's an example of a family friend who has a furniture business that can produce approximately $10 million of furniture in a year. For 30 years he's maintained roughly that same $10 million revenue through all sorts of booms and busts in the business. For the same 30 years, he's been determined not to spend another dime on expanding capacity, but, instead, on maximizing the building and equipment that he owns. In good times, he raises prices enough to maximize profit. In tough times, he lowers prices to keep his crews and equipment running efficiently. He's moderated risk, eliminated debt, focused on quality, and made a great living as one of the few remaining U.S. furniture makers. You'll never get a high‐priced consultant to suggest that strategy, but it's one of the best I've ever heard.

Contrary to what many creative entrepreneurs believe, strategy is the elimination of options. Every entrepreneur has dozens of opportunities, but strategy is set by the discipline to focus in on the one or two opportunities that make long‐term sense for the business. The smartest entrepreneurs get into a business with their exit plan already mapped out. Of course, there are all sorts of surprises along the way, but these entrepreneurs know where they are headed and will get there eventually.

Profitability and Budgets

It's no great secret that running a business is all about profits. Everything else combined (multiplied even) means nothing without profitability. I've seen lauded CEOs end up on the pavement when their lucky streak ran dry and they didn't know how to do the tough work of squeezing profits from tough times. Another thing I've learned over the years is that losses are forever, whereas profits are only transient. It seems that a year of losses follows you forever, whereas a year of profits is immediately under attack by changing market conditions. The natural order of businesses is toward entropy, so every day you are defying those odds with the best thoughts and efforts you and your team can muster. The single best tool to ensure long‐term survival is the humble budget.

Financial budgets are the one single activity most positively correlated with successful businesses because budgets make you think, reduce surprises, and give you visibility. I'm lumping management accounting and performance metrics in with budgeting because they are simply steps toward achieving the business's goal. For me it's like flying a plane; I'd rather have an instrument panel in case I end up in the clouds or the dark. The budget and all the supporting measures are just that, an instrument panel to help you operate the business. And even with that said, my guess is that more than half of businesses between $5 and $50 million in revenues do not have a formal budget process that gets reviewed monthly and that leads to management adjustments.

Financials

The trick here is knowing your numbers cold. There's really no excuse for not knowing the measurements of your business as well as you know your kids. Chances are your business is paying for their college tuition and their inheritance anyway. The best CFO I've ever worked with gave me estimated financials on the 29th of every month. By the 5th day, I had finals and we were presenting results to the bank on the 10th of every month. This was a highly leveraged manufacturing job shop with mostly Defense orders, so our volumes fluctuated wildly (a 300% swing between our high and our low months). But I always knew exactly where we were, and our banker called us the best reporting credit in his portfolio. I see no reason why every business can't run like this. If your controller can't get you there, it may be time for a new controller.

Receivables – be tough. You are not a bank. I know a company that will cut off the U.S. Department of Defense over late payments, and they don't budge. That's how confident they are in their products and service.

Clean Living

Intuitively, we all know the value of good habits in our lives and businesses. Avoid smoking, alcohol, and pork rinds. Exercise, stretch, and eat your vegetables if you want to be healthy. The same mentality works in business, and the very best companies embrace and leverage improvement programs like 5S and Lean. There is a certain magic that happens when you measure and run a tidy ship. Quality and on‐time delivery improve, which sets off a wave of other positive effects: happier customers, more sales, pricing power, earnings, etc. No, I cannot draw a quantifiable linkage to these events, but I see the positive consequences of Lean and 5S everywhere they are well implemented.

Spend time building a personal relationship with your bank. Get to know everyone on the credit committee, and stay in touch with them through good times and bad. Attend their events and invite them for factory tours and management presentations. I have received calls from banks that have gone to great lengths to tell me how this troubled CEO is highly respected by the bank executives and they want to do everything possible to support the borrower through a tough patch.

Summary

If this was a book on boxing technique, you would now know exactly what to do when you step in the ring – and almost assuredly you would get beat up when you did. Although I can share the strategy and tactics of the turnaround game, what can't be taught in a book is the subtle artistry of the fight. When to bob, when to weave, when to just take the hits and when to attack. Boxers train daily and for years to hone their craft, and eventually they do more giving than receiving in the ring. Meanwhile, business owners or executives are more like mugging victims. They are not honed and trained like boxers, they are soft and distracted, dropping a trail of coins as they wander into bad neighborhoods.

And when it's over, most entrepreneurs will take all those lessons and make sure to never go near that neighborhood again. It's what I recommend; be really good at what you do and avoid trouble at all costs. That's a really safe way to steer clear of future turnarounds and all the heartache they cause.

Another option is to assume that the business world is full of bad neighborhoods and that the only security you can ever really have is in developing your street fighting skills. That takes reps, not reading. It takes getting out of your comfort zone and getting scraped up along the way.

I don't think successful entrepreneurs are the ones who make it out safely with a clean uniform. Instead, the successful entrepreneurs are the ones who thrive in the mayhem, who give as hard as they get, who protect those who need protection, and can welcome the day's tumult with a big smile.

Nothing endures but change.

Heraclitus