Where Might Your Business Goal Take You?

Guys – it is time to ditch the old ‘build a business and sell it for zillions’ goal!

Just as easy credit has passed into history so too have the dreams of becoming instant dot.com millionaires as a result of a few lucky breaks and some unknown buyer waving cheque books.

As most successful entrepreneurs know, it doesn’t really happen like that – unless you are incredibly lucky.

But, it is a common battle cry from entrepreneurs that they want to sell their business for £5m in 3 years time – or some similar sort of goal.

This type of goal seems to be partly a response to the need to ask for funding – which inevitably invites the question ‘why would I fund your company’ to which the prepared reply can be ‘because I’ll make you rich and here is how…’

So, now that the old credit flows have dried up and we are living a more chastened business life, what kind of business goals should a successful entrepreneur set him or herself?

This is a tough question.

Okay, it has taken me about 1 year to come up with an answer – and here it is

£1.5m / 10 / 3

Okay – it looks simple, it seems simple, but what on earth does it mean?

Well, it is a ratio.

It is a ratio that ensures that the business is strong, sustainable and adaptable – it has the flexibility to adapt to abrupt economic impacts or changes in customer behaviour.

To explain – the first number – £1.5m – in this case, is the annual revenue or turnover.

The last number – 3 – is the number of employed staff. Now, I include myself in this – and you should include yourself too. So, that leaves two more staff – one of whom will be your right hand man/ woman and probably a very able PA/ Marketer/ Credit Controller / Fixer – who can help hold everything together.

So, what is the middle number – 10? Well, that is the number of equivalent staff (including the 3 actual full-time employees). That is, the number of freelance or contractor staff based in your office or at home that regularly provide you with 5 full days work per week. Now, probably you’ll have 15 to 20 part-time or periodically hired contractors – but these are equivalent to 7 full-time posts – which make 10 in total.

Right – enough of the explanations. Why?

Simple, the goal is to build sustainable businesses with strong market positions, great products and a really efficient and effective way of delivering them.

If you have revenue of £1.5m and an equivalent full-time staff of 10 – then you have £150k per revenue per employee. So, unless you are paying exceptionally high wages – on average – then you have a strongly profitable company.

You also have the flexibility to grow the company to £3 or £4m – or if you lose a contract to temporarily reduce to 8 or 5 full-time equivalents.

With a broad and experienced freelance workforce, your business can respond to changes in the market place with minimum difficulty and equally, be ready to exploit any opportunity that presents itself.

You now have a fantastically strong company. And, one that will be very easy to sell – because you have minimum employment issues and it is highly portable – so the new owner can pick it up and merge it into an existing office.

Your business sale costs will be low – because the legal due diligence will be simple – and most importantly, your business sale has a much higher chance of going through.

Best of all, because you have a highly flexible business, it is unlikely that you’ll be the exhausted / flaked-out entrepreneur desperate to sell – so you can sit tight, happily, and choose your moment to sell.

The point is that no matter how your business grows or shrinks (as it will) your job remains the same – to keep the same ratio. So…

£4m / 20 / 6 is good too, as is
£1m / 6 / 2
£0.5m / 3 / 1
etc…

So, the new goal of successful entrepreneurs is no longer to sell for £zillions, but to build sustainable and strong businesses – and then let the dividends roll in while you wait for a preferred buyer. And so long as you keep focusing on this ratio – you’ll be fine.

The great thing about this ratio is that it tells us one other thing too – that is, you are on your own until you get to £500k turnover – and only then do you think about a second full-time employed member of staff.

In the meantime, get building your local freelance talent pool. Your are going to need them.

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ps. If you subscribe to the slightly tougher view that entrepreneurs should never employ anyone, then just put your ‘full time’ staff on long term freelance contracts. The effect is the same – continuity – need for a small office space – etc…. but the flexibility remains.

Three special questions every successful entrepreneur asks

Successful entrepreneurs are constantly asking three key questions –

1. ‘what isn’t working’
2. ‘why isn’t it working’ and
3. ‘can I do anything about it’?

These three questions are the most important questions in the entrepreneurs vocabluary and a lifetime can be spent on developing the skills and abilities to answer those as successfully as possible.

So, what might these questions mean in practice? Let’s have a look…

Well, you might say that the European labour market isn’t working. That is, unemployment levels are much higher than in Asian countries or the US and the long term unemployment rates are far higher too. Why isn’t employment working? Well, mainly due to taxes, costs and the bureacratic burden of employees.

But is there anything you can do about this? Well, taxes are political – so let’s not go there – but knowing how the structure of the labour market works means that companies would be attracted to simple and cost efficient ways to hire staff. So, the freelance and contractor sectors of employment are the growth areas. And, therefore, can you build a business to meet this increasing demand?

Another typical complaint – house prices – might lead to a different answer. That is, house prices in the UK are very high – relative to earnings - and therefore it is hard to sell your property and move to another. This has all sorts of macro-economic disadvantages, but leaving those aside, it has lead many entrepreneurs to believe that the solution lies in either a direct sale approach to house sales (ie. cut out the agent) or a digital online database (property portals).

Now, let’s ask why houses don’t sell easily in the UK? Well, high price is one reason, but is it the agent? Evidence todate of 10 years of would be websites dedicated to cutting out the no-win/ no-fee agent – and replacing with a fixed adverting charge have failed to make any inroads into the market.

In fact, as it becomes harder to sell property, so it seems that the commission motivated agent in the middle is critical to ensuring that the two parties agree and close the deal.

Equally, the rapid proliferation of property portals suggests that property sales are going online? But no… instead, property adverts are going online – but the quality of those adverts is poorer now than before. Why?

Well, the agents treat the property portals as an advertising cost and therefore, don’t want to display all their stock at once – only those properties most likely to generate sales leads.

Hence, the all comprehensive promise of property portals is falling apart and anyone wanting to buy a house now has to look at multiple websites to see what they might buy.

It seems that property and property sales are – once again – returning to the existing structure of buyers, sellers and media used to generate leads.

Hence, it seems that business plans dedicated to changing the way that we buy and sell our houses have failed.

Now, the quickest way to make houses easy to buy and sell would be to cut their price in half – and that could be achieved by a massive increase in the availability of cheap land. Ah, back to politics then.

So, as we all agree, there is something deeply inefficient about how property is transacted. But there isn’t an obvious way to change it – other than by radical politically lead reform. Which isn’t easy either. It is a bit like capitalism – it is the least worst system.

The risk is that many young entrepreneurs may spend too much time (and money) attempting to make perfect an imperfect system.  Sometimes we just have to accept that there is ‘nothing much we can do to help’. If so, then find out fast and move on.

You see, often the successful entrepreneur is portrayed as someone who never gives up – where as, in fact, he (or she) may simply be willing to give up faster – and therefore find something that works quicker.

If you perfect the use of our three special questions then you’ll get there faster, waste less money and time and achieve a greater result.

Firing the old guard?

Luke Johnson, a successful entrepreneur, wrote in the FT last week that it is important to fire your existing management team if you want your business to discover reinvention. He says that gradual revolution is not enough and that when systems are broken small steps won’t work.

Whole swathes of businesses no longer work the way they used to. Book publishing and local newspapers are at the top of the list, but other business such as estate agencies, state education, financial services are all looking for new ways to do things.

We are not looking at a gradual revolution here - we are looking at business models that no longer work.

What does the successful entrepreneur do?

So, in these situations, how does the successful entrepreneur respond? Fire your management team, says Johnson.

In effect, the proposal is that you should remove your entire management team that was linked with the old business model. Why?

Firstly, turn around situation are short on time and demand decisive action. This is hard for anyone to implement, but particularly hard for a management team that have been working hard to save the existing model – or adapt it gradually to the new circumstances.

Therefore, existing management is weakest at performing major surgery.

I saw this happen in my previous business, where it was extremely difficult to get the existing teams to accept that things had changed radically and a more direct approach – removal of all management – might have brought about change faster.

Secondly, management is probably your most expensive single cost in a business. Yes, I know we all say that staff are your biggest cost, but actually, it is probably the management that is the largest part of that cost.

Thirdly, removing management shouldn’t affect day to day operations – at least not in a situation where the business volumes have shrunk.

Therefore, your front line customer facing and sales staff remain.

Lastly, your management team is paid to develop the business. In situations where radical action is required, the existing management are actually poorly positioned to do this because of the legacy and deep relationships they have built up with co-workers.

Contrary to popular thinking…

Contrary to popular thinking then, your management do not become more valuable as time goes on – but become more and more wedded to doing things the old way – or a gradualist process of change. Therefore, a management team with years of experience is not such a great asset after all and may become a liability when markets change quickly.

Indeed, if you yourself the entrepreneur are ALSO part of the management team, then you also need to fire yourself!

So, how do you fire yourself and the management team and expect the business to survive?

Okay, this simply isn’t going to happen - because you have set the business up wrongly.

Hand over – Mr(s) Successful Entrepreneur…

Therefore, instead of the entrepreneur growing with his or her business, he should aim to hand it on to managers very early on whilst still on an early upward growth path.

This allows two things

1. you, the entrepreneur can start new businesses and bring that experience via a board role in the business back to the existing enterprise

2. you, the entrepreneur are still available should a clean sweep of management be required

Now, if we set out to run and grow our businesses in this way, then we have the capacity to implement a clean sweep of management. Then the entrepreneur take control for a short but intensive time whilst searching for the new revenue model, whilst also developing the next generation of management for the new model.

Of course, the entrepreneur then has to leave the nest and go and do something else.

Therefore, entrepreneurs must leave their businesses - either by selling them, or by handing them onto a management team. This action early on in the growth cycle is likely to give the business the greatest chance of surviving the next business downturn.

The only question we are left with is this – when is the optimal time for the entrepreneur to exit the business?

All it takes is a courageous decision

What makes an entrepreneur different from a small business man or woman?

Well, the best definition of what entrepreneurs do is provided by Peter Drucker. He said

Entrepreneurs innovate. Innovation is the specific instrument of entrepreneurship. It is the act that endows resources with a new capacity to create wealth. 

Okay, so what does that mean?

Well, if you are selling your time just as a web designer, then you are not innovating. Yes, you are in business and perhaps you have increased the chance that you might eventually innovate, but in what way are you endowing resources (here the resource is time) with a new capacity to create wealth? Unless you are offering a new service, and then perhaps hiring a team of consultants to carry out that service, then you are not endowing time with a new capacity to generate wealth.

An alternative example might be to compare opening a burger restaurant which usually is closer to creating a job for yourself than it is to being an entrepreneur. This is because providing burgers for cash in a location of establish restuarants is not a new idea – although it might be commercially wise.

Yes, you may be meeting a demand and may even make money, but the point is that the demand existed before you built the restaurant. Your role is to satisfy existing demand.

Whereas, Apple is an entrepreneurial company because their new products create new demand. I am not an Apple customer, I have never bought one of their products for myself (neither iPod nor iPhone) but soon, I will be. Yes, I will buy the iPad and the result of their innovation is that they are creating millions of new customers including me.

Hence, being an entrepreneur is about creating a new service or product that wasn’t previously available, or rather as apple do, taking mixing existing technology with new technology and coming up with a radically different product. Or take the apple iPhone, it wasn’t the first smart phone, but it was the first smart phone to do things in the Apple way – and that stimulated huge demand. It created new customers.

But, don’t stop there, you don’t need to be Apple to innovate.

You could be running a burger restaurant and create new sauces and launch those sauces – that would be innovating. If they work, then why not sell them through the supermarket and create a food brand? Or perhaps you could write and publish a book on how to cook the perfect burger? Or perhaps you start to make turkey burgers or carrot burgers or something new and different that creates a new set of customers.

You might even be selling your time as a consultant and this has the potential to be entrepreneurial if you are offering original services. If you write a book about your method and sell the idea/ concept, then you can start to train other consultants on how to do it your way.

The difference then is both very small but huge at the same time.

Peter Drucker also said

Whenever you see a successful business, someone once made a courageous decision

This is another great saying because the small step across the divide of doing what everyone else does and doing something unique and new and going out on the streets to sell your new idea, yes, that takes courage.

So, have courage, do something new and don’t look back. That is how to get from running a small business to becoming an entrepreneur.

Freelancing is a hit - even for business old boys?

The article points out that the hiring process for CEOs is ‘hopelessly inefficient’ yet ends with the old adage that

The most successful companies, such as Procter & Gamble and General Electric, are more than just ever-shifting nexuses of contracts. They are self-replicating organisms that possess distinctive cultures and unique habits—cultures and habits that are preserved and perfected by a loyal cadre of managers. You can certainly buy lots of wonderful managerial skills on the open market. But true corporate greatness is home-grown.

Now, this is an important point, but is this true?

I think firstly, it is important to distinguish between an entrepreneurial company and a huge global conglomerate or business. In the case of entrepreneurial companies, you will almost certainly want to hire on a contract basis.

Larger companies may also like to consider this – if we can deal with three key prejudices.

Firstly, a CEO directs a number of senior managers and is him or herself directed by a board of non-exec directors (or at least this is the best balanced solution).

In this scenario, it is already well established that the non-exec are part time, perhaps one day per week or one day per month. It is also agreed that they are more effective in their role if they hold a number of non-exec posts.

In addition, any decent CEO is going to appear on boards on a number of other companies. Hence, the idea of freelancing or contracting or part time work is well established and considered to have benefits.

Secondly, if the board and the directors of the business do their job well, then the CEO is not the be all and end all of the company. Therefore, continuity in this particular seat is an overblown concern.

Lastly, if a company hires a team of senior execs to launch a new product and that project comes to an end, then one of two things will happen. Either the management of the project will be considered a success or failure. In the later case, the contract will no doubt be completed. But in the case of a success, then the key players may be offered a new role in a different company within the conglomerate or a part time role to maintain continuity, or the manager may leave for a new project, but return to the original company in 12 or 24 months time.

Essentially, if contractors are treated a key members of the team, then the freelance legal structure underpinning the relationship should increase the likelihood of success and the ability to maintain continuity will depend on whether both the contractor and company are happy to do so.

Which is what everyone would want wouldn’t they?

Employ or Hire Freelancers and Contractors?

Okay – here is a radical business strategy for entrepreneurs that some of you won’t like – and that is that you should not employ anyone. Please, if you disagree, please don’t switch off but take a moment to think about the argument… you can always respond below…

Work with people on a freelance and contractual basis – yes, absolutely, you simply must. You can even have an office or a factory if you must, but never sign a standard UK or European employment contract.

(I accept that employment law in the US is a lot simpler and so this does not apply to the same degree, but employment law is bad in the UK and terrible in continental Europe for the entrepreneurial business).

Here’s how to start. Find a Human Resources training company’s website and look at all the training you’ll need to go through to be allowed to hire people. Here are three I selected from the UK

1. Employment law, discrimination, grievance, discipline, dismisal, data protection, maternity, paternity rights
2. Conducting disciplinary investigations, guides to contract law, workplace stress, unions, guides to managing redundancies
3. Employment law insurance – for when you really mess it up…

Now, let’s compare all this to something we all know about – qualifying to drive a car. Well, in comparison if you thought getting a licence to drive a car was tough, this is 10 times harder and takes 10 time longer to master.

Of course hiring people is different from driving – you are allowed to do it before you pass the exam – but you’ll be sued and screwed if you don’t know and follow the letter of the law. So read through the websites above, the message is clear enough. Either you need to perfect employment law – all aspects, you never know when you’ll need it, or you need to find another way.

And, the worst of it is that the more successful you are then the more people you hire, the more work you need to do to comply with legislation. In other words, as you get bigger, so the burden becomes greater and employment law becomes stricter.

Okay, you might say, I’m in the UK and once my business gets to 50 staff, I’ll just hire an HR (Human Resources) person, won’t I?

Sounds good, but has two problems.

But ask yourself, why should you do this? This is an entirely bureaucratic role required simply because you are a growing company. It will attack your profitability weakening your company.

Hiring an HR person will also create an extra layer between you and your revenue producing team and confusion between your managers and the HR person about who is responsible for employee performance. This is truely dangerous.

Recall that in nearly all start-ups and fast growth businesses the employee costs will be the largest component and will probably make up 80% of your costs and be responsible for 100% of your revenue.

If your managers are going to be responsible for the costs of their division, then they must be responsible for the staffing costs – including the time and monetary costs of any disputes. This can not shift to a central HR person, otherwise you’ll find the the HR person is actually running the business, which is your job or your Managing Director’s job.

Okay, I’ll make it simple for you – follow this link to see employment law training and note the headline quote that:

“100,000 employment tribunals in the UK each year, costing British business more than £250 million”

So, not only do traditional businesses using traditional employment need to hire a full time HR employee – who will deliver no benefit, but you also now face the risk of time consuming tribunals that could result in loss of time and more cash.

Of course, an HR person will be brought in to develop your staff, but hey, this happens when you get to 50 staff and have a successful business. How is it we are sold the idea that the HR person now adds value? Instead your aim should be to stop corporate and legalistic rot setting into your business.

So, you have the costs of the HR person. You have the cost of the tribunals or at least defending yourself and you have the distraction from the goals of the business. If you must go down the employment route then I would recommend that you put aside an additional 10% of employee costs to meet this extra drain on your time and money.

However, how much better would it be if your managers had to learn to live with large pools of freelancers and contractors who could walk out at any moment? They’d become great people managers right? And isn’t that what you want?

If you follow this business strategy then throughout your business growth, your managers would have learned to deal with staff being available and staff not being available. Staff who didn’t want to work for them anymore would just walk, and you would immediately know there was a problem with your manager because there would be a staff shortage.

Also, your managers will have to develop large networks of talented and motivated people they could call upon in an emergence. Many of those people will have developed new skills by working elsewhere which they can regularly bring back to your company (and the best part is that you didn’t pay for the training course, nor the days out of the office to take the course, nor the manager to set up and purchase the course!).

In this scenario, where is the problem now? We don’t need an HR person to ‘develop’ our staff – our managers have demonstrated an ability to do this and our ‘staff’ are actually freelancers and contractors who have an utterly different approach to work – they need to make each project work in order to get the referral for the next piece of work or contract or project. And, usually, they are improving and upgrading their skills on their own time under their own motivation.

If your managers can not develop and keep your staff, and by that I mean freelance and contracting teams, then they have no place acting or being paid as managers of staff.

If HR managers are so good at developing staff as is often claimed, then they should be hired as managers (on a contract) with a revenue or p&l responsibility and given the task of building and holding together a team whilst delivering good profit to the original shareholders and investors.

If the HR managers can not do this, then they have no place in an entrepreneurial growing business and that means you need to develop a different culture – one based on personal motivation and the freelance and contracting concepts.

You need your business managers to grow up in this freelance and contracting climate so that they can cope when the business grows strongly.

You do not, I promise you, want to trade your role as an entrepreneur to become an HR expert. You are an entrepreneur, nothing will kill your entrepreneurial spirit faster than the dead hand of employment law and the endless tribunals that they entail.

Please, if you are a true entrepreneur and dedicated to a life of discovery and adventure – carried out in the business world – then value your freedom and don’t build a traditional business based on the screwed up incentives of the employment contract. If you can avoid this horror trap, you will go a long way to keep the spirit of enterprise alive in your business and what is more, you’ll encourage like-minded people to work with you who also share that spirit.

Give up on the excitement of the enterprise and you will chase away all your best people and nothing will achieve this faster than traditional employment contracts.

Now why on earth would you want to do that?

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Please note, as an entrepreneur I find that diversity of my teams in terms of age, race, religion, disability, criminal record or sexual orientation, is no hinderance to performance. In fact, often your best people may well be people who have suffered some form of discrimination and those who have life handing to them on a plate are lazier.

And if you focus your business on performance then you will allow people to prove themselves based on what they can deliver and not what they look or sound like or how they move. So my recommendation is in no way to avoid the intention of  employment law, but is has every intention of avoiding the spirit destroying effects of employment law on an entrepreneurial business.