It might sound like a cliché, but entrepreneurs whose businesses rely too much on them can never grow.
According to Pavlo Phitidis, CEO of Aurik Business Accelerator, 94,6% of business started never get sold. As an entrepreneur, you’ve probably poured your life savings (and in many cases even your policies) into your business. It’s your retirement plan.
The problem is that in order for your business to sustain you later in life, it needs to be an asset of value that can one day be successfully sold for a premium price. Unfortunately, too often that is not the case.
“We have many entrepreneurs that walk through our doors looking for a business evaluation, and they’re often devastated once we do it,” says Phitidis. He uses Brian, a savvy entrepreneur who he’s been working with for a number of years, as an example.
“Brian had worked for a big cellular network for a number of years before he began his business,” he says. “Because he was at the coal-face of a dynamic market where client needs either raced ahead of what the network provider offered or lagged behind, he was able to spot a gap in the market. He left a nine year corporate career to start his business and four years down the line was enjoying annual revenues of R23 million.”
From the outside, the business looked like a great success. Brian’s clients loved him. He was dynamic, engaging and had a smart business model, but once Aurik did the evaluation, it became clear that despite racing revenues, excellent forecasts and a highly innovative business the company only spluttered a valuation between R2,8 million to R3,2 million.
“Brian was naturally dismayed. He just couldn’t understand where he was going wrong,” says Phitidis. The process of the evaluation told a clear story though. “Brian was a consummate salesman and entrepreneur.
He was close to his clients, and he worked incredibly hard, taking no more than 17 days break in the last four years, including public holidays. He had also spent in excess of R300 000 in search and placement fees with three of South Africa’s best known sales-specialist recruitment agencies.
As a result he had hired some of the best sales professionals in the sector. All had resigned within three to six months of taking a position at the company. The whole situation was unsustainable.”
So what was going wrong?
“Many aspects contribute to a business valuation,” says Phitidis. “A dominant feature in any business is the people system. Brian’s had none. His operational systems were excellent, his marketing systems okay, and money management was tight. The problems were his sales systems (which were barley existent) and his people systems, which were all over the place.
“I spoke with the sales professionals he had hired and they all had the same story: Brian was a fantastic guy.
He was driven and passionate and they loved his vision, but as an employee you could do nothing right. He interfered in the sales processes and only wanted things done his way. The problem was, no-one knew what his way was.”
Phitidis touches on a danger many entrepreneurs face: that they are the business. In this case, without Brian, there were no more sales and there were no more relationships.
His single biggest strength was the business’s single biggest weakness. It made high-impact growth impossible, and it severely curtailed the value of the business, because no Brian equalled no sustainable business.
We had to fix this and fast. Brian needed to raise growth funding for his Africa strategy and, in typical style, had already secured the contracts into Tanzania and Kenya!
Getting it right
According to Phitidis, Brian’s problem is not unusual. “Entrepreneurs not only find it hard to let go, but even though they invest time and money into candidates, the follow through is often not there,” he says.
“The answer lies in not offering a job to perform a business function such as sales or marketing or buying. Instead, we should be offering jobs to run certain business systems; business systems that we have built.” Good systems include six elements:
The activities and actions that need to be taken to make something happen, organised into a sequence to deliver a measurable result within a period of time. This is then specified in a job description and supported with training materials on the activities with a carrot and stick written in a contract of employment.
“These are systems we build as the business owners,” says Phitidis. “We test them, refine them and then employ people to run them. We can quickly and accurately measure performance, effectively reward employees and remove them efficiently if they can’t get it right.”
For Phitidis, this opens up the most precious commodity for all entrepreneurs: time. “entrepreneurs at the helm of growing companies need time to focus on growing their businesses to the next level. This is their job.”
Within six months, Brian had a sales system in place employing three sales people. The systems achieved the sales and the people ran the systems. “We had in effect systematised Brian,” says Phitidis.
“We redid the valuation that year and a different number emerged. With Brian no longer the business, it drew a R8,9 million valuation.”