Last month’s article, “Family Business and the Second Generation Curse” discussed the issues of succession in family businesses. The article noted that only 30% of family businesses survive the second generation. It listed five suggestions for improving the successful transition of a family business from one generation to another. The first suggestion was to build a business that can run without you.
Whether your long-term goal is to pass your business to the next generation or to sell your business, you are not going to be very successful if you are still integral to the daily operations of your business. Any potential buyer will be able to quickly determine your daily involvement in the business operations before an offer is made. And family members involved in a family business already know. Once the secret is out, you may find that you have fewer parties interested in buying your business. The ones who are interested will not be willing to make their best offer knowing that, without your daily involvement, there will be more than a few bumps in the road in the transition.
So how do you get away from this problem? How do you build a business that can thrive without you?
Admit it. Your mind really, really wanted to read the word “simple” after that last question. But that’s just the issue. You’re looking for a simple solution to a very big problem. Depending on the amount of time that you have been running things, transitioning to a company that runs without you can be very difficult. And the biggest obstacle is very often you.
There are two schools of thought that address this issue. One school focuses more on the internal workings of your business while the other focuses more on the product or service being sold. These ideas are not mutually exclusive. In fact, I would encourage looking at both as a way to improve your business and your business’ relative value.
The Franchise Business Model
The first school of thought is the franchise business model. Think McDonald’s. The idea is to create a system for all your business processes – sales, production, payroll, etc. Your goal as a business owner is to create a business that can be easily duplicated.
When a business person buys a franchise, they are buying or leasing two basic components: the business name and the business system. Both have value. The name will attract customers because the customers will be familiar with the product. Having the business name should provide an immediate customer base, something that is in no way guaranteed for a budding small business owner.
The business system being bought is the operations manual. The system includes written policies and procedures that address everything that occurs on a daily basis within the business. It outlines, in detail, how the franchisee and their employees handle their interactions with each other, with customers, and with venders. The system is often detailed in flowcharts and checklists. The goal of the system is to produce a consistent experience with customers so that they can rely on their expectations. The system creates returning customers. Returning customers create value.
The good news about this model is that it is easy to envision. Most every industry today has at least one successful franchise. So regardless of your industry, you should not be able to say, “well, that simply won’t work in my business.” If you find yourself saying that, then you may not be willing to make the changes necessary to build a business that can run without you.
Regardless of your motivations, small business owners need to be developing their business systems. Otherwise, owners are faced with a constant barrage of “what do I do now” questions from customers and staff. As long as the system is best defined as “ask me,” then the business is not sellable.
The franchise business model is best espoused in the book “The E-Myth Revisited” by Michael Gerber.
The Recurring Revenue Model
The second school of thought is the recurring revenue model. Think Dollar Shave Club. This model focuses on delivering a one-of-a-kind product or service for the convenience of the customer, preferably through a subscription contract. Your goal as a business owner is to generate recurring revenues through the marketing of very specific products and services.
You reduce your daily involvement in business operations by focusing your efforts on developing a small number of products or services that can scale. A scalable product or service is one that is easily reproducible and repeatable. Products or services that are not scalable are eliminated from the business. Once the products or services are fully developed, the business uses specific systems (sound familiar?) to market and sell these products and services.
Remember from the franchise model – returning customers create value. The recurring revenue model focuses on this outcome above all else, streamlining the product or service line to the one or two best able to produce the best results.
The bad news about this model is that it is not easy to envision. While the franchise model has examples in every industry, the recurring revenue model does not. Yet. So you may have to get creative to find a way to generate recurring revenue in your particular industry.
The recurring revenue model is excellently presented in the book “Built to Sell” by John Warrillow.
The Upside to Having a Business That Can Survive Without You
Regardless of whether you choose to focus on your internal systems, your product, or both, building a business that can thrive without you will have one immediate benefit. Once accomplished, you will be running the business instead of the business running you. Both models address being trapped in a small business due to the business’ over-reliance on the owner for all decision making.
In a way, these two models are two different ways of presenting the same idea. Namely, that the business must work without the owner to be valuable. Furthermore, both models focus on meeting customer expectations to provide consistent experiences. Happy customers produce recurring revenues. Recurring revenues provide immediate value to a company because the potential buyer can measure the expected future revenue stream of the company.
If you desire to build this kind of business, then I strongly suggest looking at both books. Furthermore, I suggest a business coach to help guide you through the process. Interestingly enough, both books focus on the struggling business owner who engages with a business coach to transition their business to the model. A book on the bookshelf will never hold your feet to the fire.