Business Concern

Business risk is the risk that the business will falter and the entire investment of time and money the owner placed in the business will be lost. For most business owners the motivation for starting a business is that at some point there will be a wealth building event from business ownership. But it is a flip of the coin – half of businesses started will fail. If you own an interest in the typical small to medium sized business, there is a greater than fifty percent chance the business will fail in the first five years.¹ The four most common reasons for failure: (1) poor marketing (forecasting and adequate budget), (2) inadequate management (founders understand production or services but fail to appropriately oversee employees), (3) financing (lack of working capital), and (4) lack of effective business planning.² From my years of experience as a business consultant, I can tell you that if you engage in effective business planning, your business will not fail. If you are effectively planning, you will not make the mistakes involved in the first three reasons for business failure. Effective business planning, like most worthwhile endeavors, is not easy but for those who learn how it can be what makes wealth building possible.

The wealth building event occurs where the investment of time and money in the business is converted into cash in the owner’s personal account subject to investment risk not business risk. Compare business risk to personal investment risk. Business risk is inherent to the operation of a business – it is the uncertainty about whether a company will be successful and generate a profit. Where the business does not perform well, money and time spent on the business will be lost. For most small to medium sized businesses, the risk cannot be diversified over different markets and products. Investment risk is the risk that an investment will lose value. This can happen for a number of reasons, including factors like overall market fluctuations or inflation. However, a investment portfolio can be diversified and be managed to avoid loss of capital. While there is still a risk of loss with investment risk, as compared to business risk, the risk is greatly reduced. If money derived from the business is converted from business risk to personal investment risk, the possibility of financial independence over time becomes more likely.

The secret of planning is that you have to start at the end and work to the beginning. If you want a wealth building event in five years, envision what that looks like. For a business owner, it will most likely be a sale of the business interest for maximum value, removing the value built up in the business at business risk to cash in your personal account at investment risk. That basic strategy can be the beginning of the effective business planning that will make such a wealth building event possible. I call that strategy Prior Diligence, and I describe how to create and execute that strategy and business plan in detail at my Substack site Owning a Business (https://rickriebesell.substack.com/).

Prior Diligence is a strategy that is the basis for planning to accomplish the result of realizing the highest possible value from ownership of a business interest.The components of Prior Diligence are: separation of the owner from management, the presence of co-owners, the implementation of a buy-sell agreement among the owners, a sale to an unrelated outside buyer, and management of the business with dynamic planning. All of these components are described with more detail in the archives of Owning a Business.

You can begin the planning process at any time, no matter where you are with your business. The important thing is that if you are not planning now, you need to start. The sooner you start, the sooner you will experience the wealth building event.

1https://www.jpmorganchase.com/institute/research/small-business/small-business-dashboard/longevity

2https://www.chamberofcommerce.org/small-business-statistics/#:~:text=Many%20people%20think%20that%20small,their%20tenth%20year%20in%20business

There is a well-known Yiddish proverb (der mentsh trakht un got lakht) that man plans and God laughs. It makes you smile because even though you try to prepare for the future, there is always something unexpected happening. As we confront unforeseen obstacles, we are constantly reminded of how difficult it is to predict the future. Often this is cited as a reason not to plan. However, even though we know we cannot predict the future, there are many benefits to planning, one of which is that it enables the question, why did it not happen the way we thought? This is a very different inquiry than asking what will happen in the future. Planning will not help us be any better at predicting the future, but it does allow a better reaction when unforeseen events occur.

In a business, a plan implies a group. A business owner who plans by looking in a mirror will not create a successful plan. The essence of a business plan is the communication of the plan, and almost all the time that means the plan has to be written on some format that will support communication to the group. But the communication must go both ways. The decision-making must involve the group such that it is group decision-making.

The initial plan process is to set goals. For a business, the owners need to understand and be able to articulate their values and they need to perceive the values of the others involved in the business. These values will shape and define the usual goals of profitability and growth.

Setting the business goals will define the entire business plan, which will seek to take actions to achieve the goals. Setting the goals is a function of group decision-making. It is the totality of the actions of the group of individuals that constitute the business that will determine whether goals are met. If the goals of the plan do not make sense to some members of the group of individuals that constitute the business, it is less likely that the plan will be successful. The communication flows both ways where the sense of the group is communicated to the owners before the goals are set. We are defining what is desired as a group for the business. Note that we have not yet tried to predict the future!

The management of a business will create actions to reach the plan goals. These actions will be of varying degrees of innovation. Some actions will be tried and true, while others involve change and a new approach. These results of these actions must be monitored. The minute we rely on a tried and true action to produce results, it does not. Certainly, we cannot depend on new actions to bring reliable results. The actions taken do not have to have the result desired immediately, but the result that does happen needs to be detected as soon as possible so that if the desired result is not occurring, corrections and revisions can be made. Monitoring and revising are the hedge against unknown future events. So we are not predicting the future, but if future events affect results, we need to change our actions to obtain the desired results, the goals of the plan.

What should be the format of the writing that documents the decisions made to set the goals, to formulate the actions taken to meet the goals, to execute those actions, to monitor the effects of those actions, and to revise the actions to take into consideration unforeseen events? The format should communicate from the owners to the managers to the producing employees and back again as decisions are made. A format that supports this communication makes the planning process dynamic. A dynamic planning process eliminates the time delays involved with the traditional planning process. There are software programs that do this, but a simple spreadsheet can also serve as the basis for a dynamic planning process.

Is “strategic planning” an oxymoron? Asking that question and considering an answer gives us a clearer way to look at strategic thinking that will make our planning more effective and make our businesses more profitable. Strategic thinking involves considering the probability of future events, while planning involves detailed descriptions of actions to be taken with current resources to achieve certain goals. How do strategy and planning combine to form a strategic plan? Or do they?

An oxymoron is a figure of speech that pairs two opposing words. Examples of an oxymoron are: old news, deafening silence, organized chaos, friendly fight, completely unfinished, absent presence, and alone together. To reach oxymoron status, strategy must not just be different, it must be the opposite of planning – actions to be taken to reach goals.

Strategy is deciding what is important. It is determining where you want to be. Strategy asks: in what arena will you will do best? Strategy requires computing the probability of future events. None of this is planning. The plan narrative describes how to move toward where you want to be – how to take actions toward accomplishing certain goals – with resources that you now have.

What is important to an owner is determined by the owner’s values, and, for the business, the owner’s values with respect to the business. For an owner, the success of the business will not only be the profitability of the business, but also the receipt personally of the direct benefit of owning the business. An owner’s strategy will define what is important and what needs to be done to deliver the benefit of owning the business to the owner. A statement of an owner’s strategy might be, for example, to own the business not more than five years with a sale for maximum value of the business interest placing the sale proceeds out of business risk and into the owner’s investment account.

Yet, even when owners do strategic planning, which is not often, I do not find a statement of owner strategy in the strategic plan. There are goals, presumably based on strategy, and the “strategic plan” is drafted as a long-term plan for the business with stated goals based on unexpressed assumptions about strategy. Many times when I review such a plan, the goals reflect no strategy other than a purpose to be as profitable as possible. I think this lack of thinking about strategy occurs because thinking about strategy is hard to do. But it is well worth doing.

Creating a strategy need not take a long time but it does take some contemplative thinking – that is the hard part and the part that invokes procrastination. For the sake of clarity, I recommend taking things in order of importance. Start with the values of the owner. Can the owner articulate the owner’s values? If not, the determination of what is important becomes impossible. What are the owner’s values with respect to the business? These of course will be determined by the values of the owner.

Once the owner can make a statement about what is important about the business to the owner, the owner should share these values with respect to the business with the other owners. This sharing requires the other owners also to have the ability to articulate their values with respect to the business. This process of the owners deciding about what is important about what the business does and where it does it is strategy, not planning. Most of the time it is not done, because the strategy step is skipped and the initial step begins with the planning process. What appears to be urgent (“we need a plan”) is attended to while determining and recognizing what is important (determining strategy) is ignored.

Returning to semantics, where the phrase “strategic planning” describes a situation where there is no strategic thinking and a plan narrative is written containing goals based on assumptions, then the phrase is an oxymoron. There is no strategy in that strategic plan. On the other hand, in the sadly unique case, where strategy and planning are two separate functions and documentation of strategy is a prerequisite for setting plan goals, “strategic planning” is not an oxymoron.

Most of us do not wear our values on our sleeves. There are many reasons for this – most of them social. Regardless of social norms, in the arena of business ownership, each of the owners of a business should be able to articulate to the other owners their personal values with respect to the business principles by which the business is planned.

The planning process is well recognized. A business principle is determined by an owner from that owner’s personal values. Your personal values will control your business principles. These values with respect to the business, your business principles, are brought to your perceptions of the marketplace. From that examination, strategy planning goals are set. To implement the strategy, the planning goals are used to determine actions to accomplish those goals, initiate those actions, monitor the effect of those actions, and evaluate the results. As the need to revise the strategy and goals becomes apparent through monitoring, the process repeats.

What work needs to be done to define your values and determine business principles?

The strategic planning process begins with personal values. A value is a personal principle that informs and shapes thoughts, desires, feelings, choices, and behavior. A value is not a preference, but an enduring and essential attribute of character. Most owners are only vaguely aware of the standards and concerns that compose their personal value systems. Most unthinkingly embrace an array of normative standards to which they assume most caring and intelligent people adhere. Few have consciously attempted to resolve the tension that inevitably arises when those standards conflict with situations involving business principles and planning.

It is axiomatic that if you exercise personal choice in the development, management, consumption, and disposition of personal and community resources in harmony with your core values, you will likely experience a sense of self-fulfillment and personal well-being.

For each owner to agree with and support a strategic plan, the business principles identified from the owners’ personal values should appear to that owner to enhance the owner’s sense of well-being, including a sense of self fulfillment. Even if values that identify business principles are not articulated, owners will still have a sense of what they are. Plans which conflict with these values will not seem right and not be satisfying to the owner. To avoid this conflict and unease, it is essential for each owner to think about their values with respect to the business when identifying business principles and make these values known to the other owners. The initial and primary task of the owners must be to think about values and define their personal values.

For the corroborative effort of the owners to determine principles and plan based on values, they must engage in serious conversations and in so doing be able to articulate their values such that the principles upon which the strategic plan is based are considering each owner’s articulation of values. Doing this will provide a sense of personal well-being and self-fulfillment for all owners. For this to happen, there are two requisites. The first is that the owners have done the thinking to define their values. The second is that the owners can articulate their values to one another.

If an owner’s value system is to serve effectively as the framework for the formulation of the succession plan, the owner must do the thinking to define the owner’s values – to clarify and prioritize the components of the personal value system. To bring clarity and order to the owner’s personal value system, the owner should reflect on the circumstances and experiences that have informed and shaped the owner’s hopes, fears, and perspectives. The product of this reflection should be memorialized in writing. The writing should be reviewed and altered from time to time to reflect changing circumstances and perspectives.

Once there is a writing describing the personal value system of an owner, that system should be applied to the business and what it represents to that value system to identify the business principles. These business principles are the owner’s values with respect to the business and its specific activities. One owner may want to own the business for their entire working life. Another owner might want a family enterprise. An owner may want to build value and sell within a time frame. There are as many possibilities as there are owners.

Each owner should define that owner’s personal value system and be able to bring an articulation of that value system into conversations regarding the conduct and ownership of the business. Each owner should be aware of the principles of conducting a critical and difficult conversation so that those conversations result in increased understanding about the values and feelings of the other owners. With this competency in place, the initiation of the planning process becomes a source of cohesion among the owners and the basis for corroborative group decision making resulting in sustaining and effective business decisions.

What feeling do you have when you see something different in the workplace? What about encountering a new experience? What if someone suggests something that is “off the wall?” Is someone laughing when you do not know what is funny making you feel left out? Do you have an impulse to make fun of something that is new or different? Is your response to deride someone or something new or different? Realize that when your reaction to change is emotional and results in derisive actions, often that reaction is based on fear.

I once had a trial lawyer friend of mine tell me that he knew he was doing well in the courtroom when the opposing lawyer started raising his voice. He smelled the fear.

Wild animals are most dangerous when cornered and afraid. You can smell the fear. The remedy for the situation is to back off so the animal no longer fears being cornered. Most wild animals when given the chance will simply run away.

Many of the traits associated with arrogance, such as acting in a derisive manner toward people who are different or rejecting out of hand suggestions offered that are new, are actually ways of masking fear of inadequacy. Actions displaying arrogance often come from someone feeling cornered and attempting to hide concerns about one’s ability. You can smell the fear.

Contrast that with the actions of a humble person who has respect for the thoughts and feelings of others. The person who exhibits kindness and respect toward people representing change shows confidence and courage. These actions do not mean that there is agreement or acceptance of any given situation, but it does support an opportunity for dialogue that is necessary in a group decision-making environment. Where respect is the basis for communication, you cannot smell the fear.

When I am in situations where people are being derided or new ideas are being ridiculed, I can smell the fear. What I ask is: where is the fear coming from? What is the inadequacy that is being masked by abusive behavior? How can these fears be addressed? Realize that these actions are acts of cowardice and fear. Try to understand where the fear is coming from and address those concerns. Allow space for understanding by modeling the humility, courage, and confidence that should replace the fearful actions.

Unfortunately the reaction to boorish and aggressive behavior is often anger, which leads to a mirroring of the boorish and aggressive behavior. The urge is to be aggressive and corner the person who is acting out. It is better to recognize the fear causing the arrogant behavior and act in a humble way to allay it and foster future and more productive communication.

A traditional business plan determines action to be taken to accomplish the plan goals and monitors the effect of those actions in reaching the plan goals. If the goals are not reached, the plan is revised and the process repeated. The launch of the business plan is much like the launch of a missile, a rocket that is launched by aiming it and then launching. Of course, a higher level of performance is reached with a guided missile, a rocket that uses a guidance system to steer the missile to a target after the missile has been launched. The guidance system corrects the path of the rocket in flight to assure it intercepts the target. This guidance system may use radar, infrared, laser, or GPS technology, but what is important is that when the missile is launched, the guidance system activates, and the path to the target is tracked. The guidance system will control the missile’s flight path to make adjustments to the missile’s trajectory so that it hits the target. Similarly, a business plan becomes dynamic when the operational decisions made to take actions to accomplish the goals of the plan and results from monitoring these actions are instantly communicated to all involved in the plan such that the actions can be revised to assure plan goals are met. With the traditional business plan process it can take months before monitoring information is reviewed by the policy making group with plans often being revised on a quarterly or even annual basis. A dynamic business plan, like the guidance system of a missile, can allow the actions of the plan to be altered in a timely way to achieve the desired results, even if the initial aim is shown by monitoring to be off target.

The business planning process starts with a strategic idea that develops into a written plan after decisions are made by the policy-making group. The documented plan is communicated from the policy-making group to executive managers who create and implement an operational plan to carry out the plan by meeting its benchmarks (metrics) and goals. At some point, the experience of carrying out the plan as monitored by the executive managers will suggest that the plan be revised by the policy-making group. Traditionally, the segments of the business planning process (strategic, operational, execution, and monitoring) have been viewed as separate activities. This primarily has to do with the traditional means of communicating the plan. The creation of the operational plan by executives will be an iteration of the strategic plan which will alter the strategic plan in a variety of ways that are necessary and appropriate but those changes will not be known by the policy-making group. When the operational plan is initiated and communicated in various ways to the productive elements of the business, as a matter of practicality the effect of the business environment will also cause changes to the plan. These changes also are not brought to the attention of the policy-making group.

The more fluid and dynamic the business planning process, the more the policy-making group will be involved and the more effective the plan will be. The more segmented the planning process, the more restricted the information will be to the policy-making group and the less effective the plan will be. To the extent that the strategic plan is different from the operational plan and does not consider the realities of the marketplace, the success of the plan is in jeopardy. When the plan is changed, either by the drafting of operational planning or the practical aspect of experiencing the reality of the marketplace, it is the reaction to these changes by the policy-making group that will result in the success of the plan by keeping the actions taken to reach plan goals on target.

For a dynamic planning process to exist, any reaction to implementing actions taken to reach the goals of the strategic plan must be communicated to all involved, especially the policy-making group, in a timely manner. Whether this occurs has to do with the communication between the policy-making group, the managers, and the productive elements of the business. What format of a business plan will allow information to flow instantly between these business elements in all directions? Traditionally, it was not unusual to see a strategic plan documented in a three-ring binder that must be handed to an executive group to be read, then communicated to managers by a different means often without documentation, and then placed on a shelf. In due time, managers reported back to the policy-making group after installing and monitoring benchmarks and metrics. Then, the notebook would be pulled off the shelf and revisions would be considered. If the plan is in a three-ring notebook or a PowerPoint slide presentation, the communication of the plan provides an obstacle for the fluid implementation of the plan.

Where a dynamic planning process is in place, the same communication instrument contains the strategic plan, the operational plan, and reflects the monitoring of benchmarks. Deviations from the strategic plan indicated by the drafting of the operations plan, the establishment and monitoring of metrics, and the experience of the marketplace will be communicated to all parties, especially the policy-making group. The planning process (strategic, operational, execution, and revision) is be based on continuous communication. This communication can be done on planning format such as a spreadsheet or perhaps more elegantly by the use of business software such as Microsoft Teams.

Effective execution of the plan is improved where there is overall communication involving the policy-making group and immediate revision to the plan as the necessity is perceived. Like a guided missile.

I advocate group decision-making, but am often asked: “what exactly is the role of the leader where there is a group involved?” Not understanding that leadership role can lead to humiliation and lack of credibility – not to mention bad results. By understanding the leadership role in group decision-making and waiting for the fork, you can elevate your practice of leadership from rote activity to an art form. It is that leadership art that can bring excellent business results.

Leadership cannot function in a vacuum. For business success optimization there needs to be an established decision-making structure embedded in the business. The resulting decisions should be documented, communicated, and understood by the executives as they are made. This is the essence of dynamic planning, the most effective planning method. To make the best decision-making process, a small group of diversely informed individuals should aggregate their judgments and provide that wisdom to the decision-maker charged with determining and setting forth the policy. This group should be formed to include the elements of diversity, independence, and decentralization. Using a group in the decision-making process does not mean the group makes the decision. Where a group makes the decision, the process is too slow for most business situations. For the effective business process, group decision-making requires that an individual have the authority and responsibility to make the decision after consolation with the appropriate group. It is not always clear how that individual, the leader, evolves in the group decision-making process.

The term “fork” is used in the development of open source code for a software project, where developed code is used as the base for a new software project. To start the new project you fork the existing code by making a copy and work on the new software from there. The fork concept is analogous to the time when leadership can make the difference in the business decision-making process. If you have watched, listened, asked questions, and learned, as well as refrained from stating your belief rather than cultivating a group concept, then when something new becomes your vision, that background can allow you to fork (use that which has been developed) and take the team with you to build the new vision upon it. Great leaders recognize when to fork, and, having built trust and credibility with the team, bring the team to a place where they would not be were it not for the leader.

The leader must also manage the risk. In a business where dynamic planning is in place, where decisions are made through a group decision-making policy and immediately communicated to all involved, risks can be handled through revisions of planning when the need becomes apparent. As with most things in life, the greatest rewards go to those willing to take reasonable risks. Reasonable risks are those where actions can be taken to revise and correct based on monitored results. It is also in the art of the leader to see the fork opportunity, to understand the risk, and manage the risk.

The leader who waits for the fork, acts on the vision of the opportunity, has the trust and reliance of the team, and manages the risk can realize exceptional business results.

Most businesses are founded on assumptions. Founders with a common purpose initiate the business, and, upon its profitability, assume that all owners share the same goals and interests. What do you know about your co-owner’s plans for the business? Have you simply assumed that all of the other owners have the same interests and desires? What if this assumption is incorrect? When the assumption that all owners want the same thing proves to be wrong, there is inevitable conflict. To prevent this conflict, owners need to communicate about their values with respect to the business and develop strategic plans which honor those values. The understanding between owners should rest on conversations and not assumptions. Those conversations need to be about values with respect to the business.

A value is a normative principle that informs and shapes thoughts, desires, feelings, choices, and behavior. A value is not a preference, but an enduring and essential attribute of character. Most owners are only vaguely aware of the standards and concerns that compose their personal value systems. Most unthinkingly embrace an array of normative standards to which they assume most caring and intelligent people adhere. To bring clarity and order to the owner’s personal value system, the owner should reflect on the circumstances and experiences that have informed and shaped the owner’s hopes, fears, and perspectives. The product of this reflection should be memorialized in writing. The writing should be reviewed and altered from time to time to reflect changing circumstances and perspectives. In addition to not thinking about their personal values, most owners have given little thought as to how the business they own fits with those values. Few owners have consciously attempted to resolve the tension that inevitably arises when their personal values conflict with the conduct of the business.

The owners as a group provide the strategic planning for the business. Each owner should understand his or her value system and be able to bring an articulation of that value system into conversations regarding the conduct and ownership of the business. The discussion about owner values should establish the goals for the business. Owners will not all have the same values, and the goals for the business will have to respect those differences. When that is not the case, the discussion should turn to how can the owners go forward given the differences in values. While this may result in a separation of interests involving a change in the business, it will avoid a conflict or dispute involving a traumatic event and damage to the business interests of the owners.

Where there is no dialogue about values, realistic goals not set, and strategic planning not done, then when initial assumptions are found to be inaccurate, emotional responses will create an environment of conflict between the owners and traumatic disruption for the business.

To begin to have a dialogue with co-owners about value, ask all owners toreflect on the circumstances and experiences that have informed and shaped the owner’s hopes, fears, and perspectives. Create opportunities for the owners to articulate their value to one another. Based on those discussions, focus on the goals for the business such that those goals fit with the values of the owners. If you need help implementing this agreement among the owners, visit https://btcllc.net/shop.

Often the primary long-term goal of business ownership is to increase personal wealth to achieve financial independence. Wealth can consist of non-financial assets valued to show a high net worth. But financial independence requires liquidity. Liquidity is achieved when readily available liquid assets are held at a low risk of loss. Non-financial assets such as home equity and business equity are non-liquid and held at risk, as are financial assets such as stock and bond portfolios. How does the business owner reach this goal of financial independence? The simple and direct answer is to sell the business interest to convert non-liquid business equity to liquid assets.

The more you prepare to sell your business, the more it will be worth when the business interest transfers. This perspective is prior diligence, a unique method for analyzing your business. Manage your business to be ready for sale at the highest value.

Governance of businesses generally consists of two structures: hierarchical (pyramid) or nonhierachical (flat). Can it be determined that one structure is more conducive to effective decision-making than the other?

The hierarchical structure is the traditional legal governance structure of the corporation. That structure creates an overall executive officer (president or chief executive officer), a vice president, secretary, and treasurer. Other officers are added to the structure for administration of other common departments such as human relations and technology. Below the officers in the structure are managers who are charged with operations and report to the officers. This structure may be multilayered and quite complicated.

Nonhierarchical structures generally use teams, where each team has a responsibility or project. Team members are encouraged to self-direct and to be innovative. There are few levels of authority. Multiple teams can make organization and coordination of teams difficult. Advocates of nonhierarchical structures believe the structure makes businesses more adaptable and able to act quickly. Examples of businesses using a nonhierarchical structure are Google, Zappos, Altassian, and Netflix.