Processes drive business value and business value is a key element in a successful ownership transition.
Jen and Dylan Campbell, owners of a construction company with $6million in annual revenue, told us, “Weâ€™re burned out. We have decided to leave the business as soon as possible. We’ve got our management team in place and want to transfer of the business in the next six to twenty four months. What do we do next?”
We started by asking a question:
- Q: When was the last time the two of you left the business for at least two weeks or a month?
- A: They had never left the company for more than two weeks and that was over ten years ago. “When we left, things didn’t go so smoothly. Dylan is the only one who knows how to maintain the machinery. When something broke down, he spent hours on the phone walking the job supervisor through the repair process.”
It was clear why they were burnt out. But had they really installed a management team? If so, why couldnâ€™t they get away from the business for an extended purpose?
Dylan was also the only one who knew how to estimate and schedule projects. In addition, he was the only one who had relationships with the subcontractors. In short, the business couldnâ€™t run without him.
Dylan and Jen did indeed have key employees in charge of marketing and sales, personnel and project supervision, but they did not have a management team. There were three very important functions: product estimation, scheduling and and equipment maintenance that only Dylan could perform. Without converting these functions to processes Dylan and Jen did not have a key Value Driver in place – one that would make their company more valuable to a buyer and more readily saleable.
We have discussed the importance of having a trained and motivated management team in place before and after you leave the company. In the eyes of a buyer, a business has less value if the departure of its owner means the new owner must reinvent one. Once you are gone, the new owners must rely on processes to make your success sustainable. If they canâ€™t, the buyers may not be able to sustain the cash flow necessary to pay you off.
What is a process?
A business process is a repeatable process that employees understand and use to achieve a desired purpose. Owners implement financial, lead generation, sales, accounting, human resource, marketing, organizational, and administrative processes.
There are four prime characteristics of successful processes:
- The process must be documented. If the process isn’t written down, it may or may not exist in the mind of employees interpreted in many ways. Therefore, employees can’t be expected to follow it and a potential buyer can’t know that it truly exists. While Dylan was tempted to conduct a quick, one-time training session and consider his job done, he needed to create manuals that described in detail what decisions went into his scheduling, how he set up the programming to facilitate the schedule and how to adjust it on an as-needed basis.
- The process must be repeatable. If your processes only work if you are there to execute them, they are not “repeatable.” If you feel you can’t delegate your role in a particular process, that process is not repeatable. Your processes may be dependent on a particular position but they must be independent of any particular person to be easily repeatable. Again, Dylan had to do more than simply train one employee to do his job. He had to figure out a way to make the tasks that only he had performed in the past, easily repeatable by others in the future. In doing so, he could replace himself with processes that others could use to replicate his expertise.
- The process must have a clear purpose. What is the desired result of the process? In Dylan’s case, he needed three processes: estimating, scheduling and equipment maintenance.
- The process must be accountable. Who is responsible for executing each step of the process, at a determined time, in order for the process to accomplish its goal? How will you objectively measure the success of the process? Dylan needed to designate the positions in the company that would be responsible for executing the three new processes as well as how he would measure how successfully each process was implemented.
Processes create value. Value is a key element in a successful ownership transition.