Creating Equity Value For Your Business

Posted by Doug Davidoff

Sep 29, 2010 4:42:30 AM

This book review originally appeared in Baltimore and Washington SmartCEO Magazine October 2010 issue.

It's the dream of every entrepreneur. Start a business, build the business, grow a great team of people, have a lot of fun doing it and then sell it for millions of dollars, creating financial independence on one hand and a great feeling of accomplishment on the other.

The reality for the vast majority of entrepreneurs, however, is quite the opposite. Often saddled by meeting expenses, managing the complexities of growth and people and, today, saddled with a difficult economy most entrepreneurs ended "owning a job," and if they are even able to sell the business are able to extract the equivalent of an income for a few years; and even that is becoming increasingly difficult.

There comes a point in time when business owner must make the critical and philosophical decision:

Is my goal to build a business that will create equity value (and, hence, can be sold) or is my goal to build a cash flow stream that can support me and my family for the future?

This question has perplexed business owners and entrepreneurs since the beginning of capital markets; and there are few, if any, questions that can get the blood boiling between entrepreneurs than this one.

This is a critical question that every business owner (and I mean every one) needs to answer as early in their business career as possible (that means that if you haven't answered the question yet - do it now!) The steps you take, and the rules to follow for building a business that is designed to create cash flow are very different from the ones for building a business designed to create equity value.

The unfortunate mistake that most business owners make is that they take the middle ground, focusing on cash flow today, while hoping to create equity value in the future. Please don't misunderstand, building a business for equity value does not mean that you don't focus on creating cash flow - the key question is how is that cash flow created and managed.

If you are building a business for maximize cash flow, you should:
Exploit the capabilities of key employees - typically the founder
Focus your hiring strategies on leverage the capabilities of those key employees (this typically results in a few highly capable people and lots of support people)
Broaden your scope of services to take advantage of the unique talents of those people and to gain an advantage in the marketplace
Customize, customize, customize

Looking at this list if services oriented businesses like law firms, consultancies, engineering firms, accounting firms, etc., don't be surprised. The vast majority of services businesses fall into the category businesses that build cash flow.

If you are building a business to create equity value, you should:
Narrow the scope of your offerings so that they can be sold, delivered and serviced through the development and maintenance of process.
Build a team of people that make any one (or few) employees unnecessary. This results in building a highly capable senior team where the founder is often not even the senior officer.
Rather than customization, focus on replication and consistency.

This list, on it's surface, is often not considered to be conducive to services firms, and it is, most often, services firms that find their founders stuck in the trap of "owning a job" rather than "owning a business."

There is good news for those professional services business that desire to create equity value, rather than solely creating cash flow, in John Warrillow's new book: Built to Sell: Turn Your Business Into One You Can Sell. Built to Sell tells the story of fictional advertising agency owner Alex Stapleton.

Anyone who has ever started a business will be able to identify with Stapleton. Whether it's dealing with the under-performing employees, good performers who are primma donnas, or dealing with un-appreciative clients who don't listen to you, but produce so much revenue that you feel like your stuck with the client - Stapleton represents the hopes, dreams, and frustrations of every person who has started a business.

Stapleton's agency is stuck. Alex had hoped to build a great agency, do great advertising campaigns, and work with a group of highly talented people doing super creative work. Unfortunately, Alex spent more time dealing trying to figure out how he could get his next project to keep the team billable and continue to make ends meet.

He meets up with Ted Goran, an old family friend, who had inspired Alex to become an entrepreneur.  Ted is a successful serial entrepreneur who has built and sold several businesses in his career.  Through the book , Ted teaches Alex the keys to building a business that create equity value and we get to experience the journey of what it really takes to sell a business.

While the story itself is a bit hackneyed, the lessons taught are excellent - and valuable - to entrepreneurs who want to focus on creating a business that creates income for them or building a business that can be sold.

Topics: B2B Sales Strategy