There’s a specific problem with many businesses that I come across and work with that I’d like to discuss in this post. A problem that’s stopping them from being a more profitable business through no fault of the owners and holding them back from achieving their full potential.
In the E-Myth, Michael Gerber explains that there is a common mis-conception, the E-Myth, that businesses are started and run by entrepreneurs. Actually most businesses are started by experts, specialists in their chosen field – what Gerber calls Technicians.
These are the solicitors, lawyers, hairdressers, engineers, mechanics, accountants, dentists, web-designers, computer programmers, plumbers, electricians, joiners, builders, butchers, bakers, architects, scientists… and the list goes on.
But it takes three personalities to start and run a business with different skills, abilities and aptitudes. We need the technicians to take care of the operational side of things, but we also need the entrepreneur, to take care of the strategy and creative aspects of marketing, sales and customer relationships. In addition, we need the manager to take care of the finances, systems, planning and control of the business. And therein lies the problem… in an owner operated business, at least to start with, the owner has to be all three until they can employ others to take on these roles.
Technician oriented businesses can and do operate very well in good times when there are loads of customers buying and money is flowing well. But, as Warren Buffet said after the recession hit in 2007-2008: “When the tide goes out, you can see who’s been swimming without a costume!”
In other words, businesses fail because they are out of balance.
If the operational aspects of a business are far stronger than the other aspects then it can be hard to find enough work when the phone doesn’t ring of its own accord. And if the financial systems aren’t robust enough then cashflow can quickly become an issue.
My colleagues and I see this every day. Businesses struggling in the current climate because they are out of balance. Usually through no fault of their own.
The problem is that our educational system creates specialists to become employees. We have an educational system born out of the industrial revolution to supply the needs of industrialists for skilled workers. So we leave education prepared for employment, but unprepared for business ownership. It’s no coincidence that many of the most successful entrepreneurs didn’t do well at school.
At some point in our employment as we become the expert, we come to the realisation that we can do better on our own.
So we give up working for the idiot who calls himself the boss and start working for a lunatic – ourselves.
Why a lunatic? Well, because we are unprepared for business ownership with a lack of knowledge in all areas of business, this lunacy results in up to 80% of all businesses failing in their first five years. Unfortunately, it doesn’t stop there, the same proportion of those that survive will fail in the next five years, leaving less than 15% of businesses to reach their 10th anniversary. Even worse, less than half of those that do survive to their 10th anniversary will be making a predictable profit.
The stress, broken relationships and loss of wealth associated with that is lunacy.
The question is, can we reduce the probability that your business will fail in the next five or even ten years so that you have a better chance of moving on to true business ownership?
To answer this question, let’s first look at what I mean by true business ownership and why we should endeavour to achieve it. In the words of Simon Sinek, let’s start with why.
In Rich Dad, Poor Dad, Robert Kiyosaki discusses how the cashflow of the wealthy differs from that of the poor and the middle class. He explains what the wealthy do that’s different to the rest, and how it concerns business.
The cashflow of the poor is that the spend everything the earn on day-to-day living. Food, accommodation, warmth, lighting.
The middle classes on the other hand, deluded in their apparent wealth, spend their disposable income on trinckets. In other words liabilities that end up costing money.
Progressively more expensive cars every few years, gadgets, toys, jewellery, houses bigger than they need to live in. Yes even the house they live in is a liability when you consider the huge cost of the mortgage compared to the future value.
The wealthy have a different cashflow. They buy assets to generate income that they then use to live on and buy liabilities with. Their assets include businesses, property, stocks & shares, commodoties, etc.
But almost without exception, the wealthy own businesses. They don’t work in those businesses, but they do own them. Why?
They own them to generate excess profits with which to buy other assets that also create an income. Businesses offer the greatest potential ROI of any of the asset classes. If you own a true business then value of that business can be several times the net profit.
Imagine in a single year making a net profit from a business and then selling it for 2, 3, 5 or even 10 times the net profit you just made. Would that be the most profitable year you’ve ever had? Take a look at your business from this viewpoint and start to think about how your life and work would be different if you owned your business instead of working in it. It’s possible if you own a true business.
So what do I mean by a true business?
At ActionCOACH, we use the following definition of a true business. A true business is: a commercial, profitable enterprise, that works, without you (the business owner) having to be there.
Commercial in that it involves selling something. Profitable in that it implicitly involves making a profit from that activity (not a loss as many businesses appear to do). And that works without you in that you have a team of people you can trust to run the business for you.
So “how do I build that?”, you might ask.
This is where the six steps come in.
It depends on where you are already in your business, but let’s start with Mastery. As we go through this, give yourself a score out of 10 at each step based on how well you think you’re doing in each area. We’re going to end up with a score out of fifty from Mastery, Niche, Leverage, Team and Synergy…
So, Mastery do you have an up to date, working business plan in place, do you operate a comprehensive financial management system, do you have consistent customer service and last but not least, do you have time management systems that maximise the use of your time as the owner as well as that of your business.
With these things in place we take a business from Chaos to Control. So score yourself out of 10 in these areas.
Next we move to Niche, which involves marketing strategy, marketing plans, sales, managing customer relationships and profitability to generate predictable cashflow in your business. Niche is all about not having to compete on price in order to maximise the profitability of your business. So score yourself out of 10 on your ability to compete without having to offer discounts and on the profitability of your business.
Step 3 involves implementing systems and technology into the business that automate and the processes developed in the first two steps and allow them to be delegated to others. So score yourself out of 10 on your level of automation and ability to delegate all aspects of the business.
Step 4 is about developing your team, your team management and leadership to allow the team to run the systems that make the business work efficiently. At this stage, we implement the six keys to a winning team as well all the procedures necessary to manage the human resources of a business. Score yourself out of 10 on team management, leadership and human resources policies and procedures.
Next we turn to continuous improvement and installing a general manager which ultimately creates the freedom for move to Step 6 so you can repeat the business building process in other businesses and buy other wealth generating assets. Score yourself out of 10 on your ability to step back from the business and allow it to run itself.
This system has been tried and tested in hundreds of thousands of businesses world-wide, taking businesses that are out of balance and rebalancing them.
At this stage you can think of this business as a self-contained entity. A business in a box with a team of people running all of the different aspects of the business. And your role is to ensure, as the builder of the box, that it does indeed generate the excess profits to invest in other businesses, property, stocks and shares, etc. and climb the next step on the ladder from business owner to Investor and Entrepreneur. Hopefully a wealthy entrepreneur that can give something back to their community.
How did you score yourself out of 50? If it was less than 40, where would you start to make changes that will allow you to achieve the goal of a business that works without you? If you’re not sure and would like to talk about it, then please get in touch. I’d love to help if I can.
If you prefer video, head over to youtube to view it there.