I met him more than 25 years ago. In my first meeting with Tom as his client, he asked me a crucial question: “John, what is your goal for the business?”
I didn’t really understand the question and replied, “To make money?”
“No, no, no,” Tom said. “All businesses make money or should make money. There are only three types of businesses. A lifestyle business, which simply means cash flow for the owner. A legacy business, which implies a multi-generational business, passed down to the next generation of family members. Or a build-to-sell business, which means exactly that. And the biggest mistake you can make as a business owner is to have one goal in mind while acting on a different goal.”
I asked Tom to explain.
He said it’s important to manage the business to the end game purpose. An owner will make a very different decision if the business is going to be sold, versus passed on to the next generation, versus funding a desired lifestyle.
Tom told me he encounters many clients who have great lifestyle businesses that throw off a lot of cash. However, often one of those owners wakes up and decides it’s time to sell the business, but soon realizes it has little to no value.
At that point, there are only two choices. Milk the cash cow until it dies, or take less money out and build up the assets, which will include the balance sheet and the people. If you try to buy one of these businesses before it’s truly “built,” the owner usually wants to get what’s needed to live on, not what the business is worth – often two starkly different numbers.
Or say there’s a multi-generational business, but the next generation is 30 years younger than the current “owner” generation. That owner will need to build out a different, non-family management structure, sourcing managers and executives who can bridge the generational difference. Those bridge leaders will definitely need to have a “servant leader” mentality, usually accompanied by sufficient financial motivation, to work with the family and stick with the business while it’s being built out.
“But what if my goal all along is to sell the business?” I asked Tom.
“Well, then you have added yet another stakeholder to your strategy,” he said. “In addition to your employees, customers and vendors, you’d better add potential buyers to your stakeholder list. And always keeping them in mind will definitely impact your decision-making. If the potential buyer is going to pay you on a multiple of revenue, you’d better optimize top line sales. If the multiples in your industry are based on net profit, then focus on maximizing profitability.”
Tom’s comments have had a profound impact on my career, as well as how to approach and consult with businesses. And there’s one bit of advice from Tom I didn’t take, much to my chagrin.
“John, there are many very unsexy businesses that are extremely profitable,” he said. “You may want to consider getting into a business like that and have a nice lifestyle business.”
Of course, instead, I focused on building a business to sell. And while we ultimately sold my company, Allied Computer Group, which I founded in 1983, I still dream about that business to this day. Sometimes they’re nightmares, sometimes not. But I wasn’t any happier the day after we sold than I was the day before.
Thanks to the counsel of my trusted business advisor (make sure you have a trusted advisor and coach like Tom in your business life, too), I’ve decided to build the long-term value of my current business, Allied Consulting Group.
So today, we have a professionally satisfying, ultimate lifestyle business in our consulting practice. We also have interesting, motivated clients working on big solutions in great locations like Montana, Arizona, Canada, Italy and, of course, Wisconsin.
No payroll or personnel worries. Major flexibility. All good. But I’ve come to realize I’m not really wired in a solely “lifestyle” way, so we’re now working hard on building the consultancy into a practice with long-term value that can someday be sold.
I do know why I’m in business.
Do you?
— As a serial entrepreneur, business and community leader since 1983, John Howman has led a variety of businesses, from technology to consumer products. He leads two groups for TEC, a professional development group for CEOs, presidents and business owners. He can be reached at JHowman@AlliedCG.com.
