Your Key Group Has Great Value And Creates A Better ROI For Your Company’s Value!

Over the years I have written of the importance of the key group in your company is, and how they enhance your profitability and company value. Not only do they make you profitable while you are running your business, but this group is the key element to selling the business for the highest potential value in the future.  

 The inside key group creates the actions that help enhance value, such as implementing value drivers and making sure they are being applied correctly. Key management groups make sure the value drivers are implemented, working, and being enhanced constantly. 

The Key group learn about the business, in some cases better than the owner. They make business more valuable. They are so talented the competition is aware of their value, and in many cases would like to recruit them.  

It would be wise for the owners to recognize the value of the person or group (key person) and put in place strategies to keep them.  

  1. Incentive programs:  The purpose of this is to keep the key person around. To continue the growth of the person within the business. He may be the person who buys, or totally runs the company.  
  1. A vested incentive program:  This is to carry out #1, but also to protect the employer from the key person leaving.  
  1. Address the potential of your exit strategy in advance. This can be in the form of a discussion about a “stay bonus.”  The “stay bonus,” is used when an owner wishes to sell the company but would like the key person to stay on with the new owner. This enhances the value of the purchase price.  
  1. Keyman/group:  Potential purchasers of the company. It is also important to recognize that the owner may be thinking of becoming a passive owner, wishing to have the key group run the company while the owner peeks their head in occasionally.  

There are many ways to address the future knowing the key group is key to your exit strategy. This can range from incentive plans, to things like stock options.  

 Existing Key Employee  

Equity Based Incentive program:  

  • Stock Bonus 
  • Stock option 
  • Stock Purchase
  • ESOP

Cash based incentives 

  • Cash bonus 
  • Deferred compensation 
  • Phantom stock bonus 
  • Stock Appreciation Right 
  • Supplemental Employee Retirement Plan (SERP) 
  • Executive Coaching Program 

Awards based on 

  • Individual key employee performance 
  • Key employee group performance 
  • Company net income growth 
  • Company sales growth 
  • Vesting Formula 
  • Forfeiture Events 

      Agreements 

  • Non-compete 
  • Non-disclosure 
  • Non-solicitation 
  • Any other agreements that will protect the owner should the key person (group), leave 

Three Key Value Drivers  and Why Do They Matter? 

Value drivers are the elements of a business (systems and procedures), which create business value.   This post will cover  Next Level Management (NLM).  In part 2, I will cover  diversified client base  and  operational systems.  

Although there are nine transferrable value drivers, I am going to concentrate of three of them. Although all the value drivers are important, the three I will discuss are considered key drivers.  

The three value drivers are key in creating appeal to prospective purchasers of the business. They are important drivers, and at the very least, drivers’ businesses must have in order to grow.   

When a new business owner asks me when they should be thinking  about their future exit of their business, my answer always is, “the day theystarted their business is the time to start planning for an exit.”     

As you will see, the value drivers in most cases  need time to develop.  As we go through the three of them, you will see that they are strategies that can be implemented at once, but in many cases, need time to develop.    

Next Level Management (NLM):  Successful businesses with value, require business owners to delegate responsibilities to the management team.  NLM is particularly important because without a good management team, it would be hard to implement the other value drivers which are needed to create the maximum business potential value.i    

Finding and developing a  NLM  team is a challenge for many business owners. However, once the NLM is created, they usually become the team responsible to make the difference between where the business is now, and where the business would like to be.   The NLM is the key to  implementing the value drivers and the operation of them.   

Roadblocks for Business Owners in Developing Their Next Level Management

Many owners believe only they can keep and control the company’s success, since they built the business from infancy.   They  struggle  giving up even small types of control. The thought of not being involved in some of the daily business decisions, scares the daylights out of them, nor do they like the loss of control.    

Lack of installing the value drivers over time.   

 They spend their time working in the business as opposed to working on the business.   I call it their “Business DNA.”    Change is scary and thinking that someone else would be running the business is not consistent with their  fundamental  beliefs.  The possibility of someone else making decisions, which could build or ruin their business is too much for them to imagine.   

Fear of change.    Even if a business owner is not thinking in terms of an exit plan, they do like to think of creating business value. Once they are educated as to how value drivers affect the future value of their company, they become more open to  creating the value drivers, and making the changes.    

Misconception of owners:   Benefits derived to the business owners by installing value drivers is the result of the “full potential value of the business.”   The business grows as the business owner does less work, since the work has been handed off to the NLM.     However, owners have the common concern that installing value drivers will take too much of their time.  With proper planning, implementing the value drivers will create a more stable business, create better performance and scalability.   It is important that the owner understand the concept of developing the NLM team, so that team can create, implement, and manage  the value drivers, as opposed to the owner.     

It is possible for the owner to create the NLM where the owners have some control, and still can play a key role in the company.  Their leading role would be to delegate more responsibilities to the NLM, while focusing on other business responsibilities.    

 Many owners continue to do tasks they despise, just to keep a perceived control.  In many cases, the owner needs to take small steps in giving up control before they can start to feel more comfortable.  This is understandable since these are the things, they did to grow their business from day one of the business.     

The owner will see more growth in their company by implementing the value drivers, which will create more options for them when a future transition is a being considered.   

In my book, “Unlocking Your  Business  DNA,” I  discuss the problems business owners have working on their business as opposed to time spent working in it.  One of the factors missing is the value of creating value drivers for their business growth.   Once they realize value drivers create increasing company value, they get on board for future changes.  

 Through our discussions with business owners, we need to express to them that most future buyers will not want to buy the owner.   They want systems, management, and growth ability.       

Many owners think that they need to be involved with all the problems and issues of their company, thinking they have all the answers and the solutions.   Although this makes the owner feel in control and gives them  self-worth, it does absolutely nothing for the future value of the company, and in some cases may decrease the value.   

Success In Business Is Not Without Challenges!

DEFINITION OF BUSINESS GROWTH AND TRANSITION 

I often refer to my business planning as “Business Growth and Transition,” because I consider the business and the owner, as two separate and distinctive entities.  

For example, when the business is growing, the owner of the business needs to grow with the business and envision needed growth. As a business owner, he/she needs to continue to learn, ask more questions, depend on their instincts, experiment, be willing to fail, along with many other experiences to create the changes neededWithout the business owners’ creativity and involvement, the business will stop growing.  

Likewise, when planning for the business entity, we also plan for the owner personal needs. The business success creates personal challenges for the business owner, such as succession, estate taxes, family distribution, protection of the assets, and a host of financial and personal planning areas.  

STAGES OF A BUSINESS 

The business has two distinct stages it goes through which are critical; I define them as survival period and growth period 

Survival period is just what it means! Staying alive! This is where owner learns how to maneuver through the maze of “business savvy” strategies. “What doesn’t kill you, will make you stronger.” 

The survival period of business consists of: 

  • Excessive amount of time, sweat, and patience, luck, and much more.  
  • Bottom line:   Survive staying in business.  
  • Cash flow, Capital improvements, Inventory, client development create many challenges. 

The Growth Mode: 

 Not to simplify, but this is where the action is. It is up, up, and awayWhat needs to be done during this stage:  

  • Creates the opportunity for the future value of the business.  
  • To expand in all areas of the business. 
  • Inventing yourself and the company if needed, this includes building value drivers and transferable values. 
  • To become creative, reinventing of products, customers, process. 
  • To reinvent your markets and your clients. 
  • To build a customer base with loyalty, creating culture, and next level management. 
  • Much More… 

The expansion in Growth, (NOT ONLY) in markets and products, but also employees and the culture of the business. This is extremely important for the future of the business value, with the focus on growing your business value and to create transferrable value for the future. Owners need to start the process of giving up some of the control to middle management. This also means creating strategies which allow the owners to walk away and allow the business to run effectively and efficiently normally. This is my “Can you Take three months off” question, without an impact on your business profits?   

Disadvantages of Growth/ and letting Go 

You are giving up control to your management team! You are giving up things you controlled from the very infancy of the business. This is good because a future purchaser wants to buy your business as a running entity. They want a business that can run, and without YOU!  

When you start to delegate to others, things can happen. Your key people will learn how to run your business, and start thinking like an employer. They will develop greater relationships with your customers, advisors, and vendors. They will start to create profits for you, ease your time in the business, and allow you to enjoy more free time, however, there could be a price to pay!  

Tough Questions to Ask 

  1. What if your key people got to know your business so well, and they wanted to buy it from you, what would you do 
  1. What if you did not want to sell it to them at the time they want to buy? Will they walkWill they stay? Will the relationship change?  
  1. Will they go to a competitor 
  1. Will they take your customers and employees with them 

If this happened, what are you doing to protect yourself 

Consider this:  I recently had a client who went through this nightmare. The key people (2 key employees), left and started their own business. They also took other employees and customers with them.  

Unfortunately, the protection which we outlined to the owner three years prior was never implemented, and they are paying the price for it now.  

We told them to make sure they had programs in place to protect themselves from the business growth and success. 

Things Such As:   

  • Key person documents:  such as non-compete, non-disclosure and non-solicitation of customer and employee agreements.  
  • Benefits with Vesting:  We also suggested that they put in a vested benefit package for them and stagger the time where they would only have a partial vesting immediately  (we have found this to be a valuable motive to stay).  

Lesson to be learnedIf it happened to them, it could happen to you. Your key people will take over your business, which is good because as it creates transferrable value for the future. However, you must protect yourself from your business success.