Start an Internal Risk/Opportunity Management Program for Your Business

As a seller, you want to anticipate the buyer’s assessment questions so you can prepare answers in advance. You need to be able to respond well to those questions. You now understand that the nature of the buyer’s questions will be risk/opportunity based, even if they don’t conduct a full assessment. The best way to prepare will be to implement an internal risk/opportunity management program for your business that continuously reviews the business for potential risk/opportunity areas. Once potential risks or opportunities are identified, plans should be put into place by implementing risk avoidance and mitigation strategies. Or, when a new opportunity is identified, strategies should be drawn to capture the new opportunity. This program is a good way to manage the strategic direction of a business, even if it is not currently for sale. Then, when you do decide to sell your business, this program will have improved your operations and will give you solid answers to a buyer’s operations assessment questions.

To be successful, experience shows that either the owner or senior staff with the authority to implement the plans should be directly involved in the internal assessment.

“Jim, we are a small business and only have three employees. . .. This just won’t work for us.”

My response is that all businesses should watch for things that could go wrong and for new opportunities that might come along. Some just don’t formalize their risk assessment process. If you truly don’t look for risk or opportunity, it’s like running a marathon blindfolded. Sooner or later you’re going to run into something. At the beginning of the book I recommended that, even if an activity seemed too formal, rather than just blowing it off you should try it or modify it. This would be a good place to try it. Formalize what you do (e.g., write down a short procedure) and then try to do what you said you were going to do.

In our two-person business, a mistake in bidding a job could be very costly. When an opportunity comes along my wife and I assess the schedule risk and adjust our proposal to mitigate the risk. Over time this has caused us to modify the way we charge our customers and the type of agreements we will enter into. We don’t submit a bid or proposal unless we have gone through this risk assessment.

Buyers know there is risk in any business, and the fact that you have a process for managing risk shows them a level of maturity in the way the business is operated. It also creates a channel to talk about any tough issues that exist and any opportunities you may want to tell them about. Try it! You may like it.

What Is the Scope of the Enterprise?

Most small business owners don’t think about their business in terms of its operations infrastructure, yet all functioning businesses have some set of guidelines that define the way they do things, whether they have formalized those guidelines or not. Bills get paid, invoices are sent, payroll is met, supplies are ordered, employees are hired (and fired), sales are made, and products and services are delivered, and if these things happen the same way each time they are done, your business has an operations infrastructure. A buyer will want to know what that infrastructure is, how your business works, and whether it will keep working.

When you look at your business in this manner you will realize there are many tasks that get done the same way each time they’re performed. Preparing your operations to be assessed means organizing all those activities in a manner that will make sense to a buyer. Accomplishing that organization is also one of those things that will tell a buyer, “this business has their stuff together.” It will reflect well on you as well as the business. To quote one bright young MBA graduate who sat in the front row in one of my presentations:

“OMG, this preparation includes a lot of stuff!”

Yes, it is a lot of stuff. I am often asked if the amount of work required for an assessment can be cut back. Yes, it can, but you may lose an opportunity to discover a latent risk (there’s that pesky risk word again!) or an opportunity to optimize your operations. Even worse, the buyer may catch something you missed because it was too much work to fully prepare. I run into buyers all the time who want to “move due diligence along” and ask if it can be accelerated. When you are planning to invest a large sum of money, you might think it’s worth the time to perform an effective operations assessment.

Since “operations” covers such a broad scope of business activities it is difficult to define exactly what the scope of the enterprise is. I recommend looking at the nine infrastructure areas that follow when preparing your business for an operations assessment. This will help organize the effort and allow you to assign employees in each area (as they are the ones who know how the job is done in any case) to identify risk and opportunity and find ways to optimize in their area. By breaking the work down into nine areas it minimizes the impact on the work any employee must do.

Optimizing the operations of your business should include assessing and improving each of the following areas:

Challenge employees to find improvements in each of these areas and formalize their findings by publicizing them internally. You will likely be surprised to see what they find. The most common response we hear is “no one ever gave us the chance to do this before.”

Preparing for a Customer Satisfaction Infrastructure Assessment

The customer satisfaction infrastructure defines the role of functions such as product support, requirements definition, and quality assurance. One of the key questions a customer satisfaction assessment will ask is whether the infrastructure is an integral part of the business. It should be “built in” and not simply included like a facade over the front door.

Customer satisfaction drives recurring sales, and most businesses rely, to some degree, on making more than one sale to a customer. Recurring sales are the most direct form of marketing. If customers have a good experience and were satisfied with your product or service, they will come back the next time they are looking for a similar product. If they had problems with the product they purchased, or they didn’t have a good experience with your business, they are less likely to return. Businesses that don’t rely on return customers are the exception. Retail businesses, such as automobile repair shops, rely heavily on return sales, as do many technology businesses, such as software-as-a-service (SaaS) companies that count on customers who typically allow automatic renewal of their subscriptions—if they are satisfied with the product and supplier support they receive. When your customer satisfaction risk is assessed, the buyer will also want to assess the dependence level the business has on recurring customers. To be prepared to tell buyers the percentage of your sales that are recurring, you need to start tracking which sales are being made to returning customers.

Buyers frequently request to speak with some of your current customers to determine their level of satisfaction. This can be a tricky and dangerous step and in general, my recommendation is to say no. Bringing a buyer to visit customers can cause the customer to panic and start looking around for another company to fill your business’s void. If it is a strategic buyer who is otherwise one of your competitors, you can offer to do an introduction after the sale. Keep in mind the customer may well have decided to buy from you instead of them for reasons you know nothing about.

If the buyer insists, I would first offer some alternate approaches. It is possible to poll customers through surveys and questionnaires but these items themselves tend to annoy customers. The people who respond are often not happy while those who are happy don’t see a need to respond. This type of market approach requires real care in how the survey is constructed. Your best approach is to request testimonials from customers to post on your website and provide those to potential buyers.

Preparing for a Production/Services Infrastructure Assessment

The production/services infrastructure includes the methods that are used for the delivery of all products and services and ensures that this is being done in a safe, compliant, and consistent manner, capable of bringing all products and services fully to market. In preparation for a production/services infrastructure assessment you must be able to show that you either can deliver products to meet the projections you are providing to the buyer or provide a detailed plan to show how this will be accomplished. Optimize this infrastructure by improving your production efficiency.

One of the key risks you may face in the production/services infrastructure results from the agreements many businesses have with suppliers for critical components and services that they have come to depend on. This risk occurs in almost any type of business that relies on critical vendors.

Of course, your buyer is calculating the new increased cost and adjusting your margins to account for the change. Lower margins mean lower earnings and a reduced valuation for your business.

When your buyer assesses production/services risks you want to be able to show that you have mitigated those risks. As you prepare, look for changes, such as vendor agreements, and don’t accept margin reductions when you are holding the cards. Look for ways to mitigate or avoid risks now so you don’t face reductions while you are trying to sell your business. This is where the effort to create a risk/opportunity management program within your business will start to make great sense.

Preparing for a Sales and Marketing Infrastructure Assessment

The sales and marketing infrastructure includes all the methods you use to identify customers (sales leads) who will be interested in purchasing your products, your services, and your strategies used to close those sales. It provides the guidance for your strategic planning, defines the sales process that guides the way orders are processed, and even provides the rationale for your future sales projections. In preparation for the sale of your business, you will want to optimize the efficiency of this process in any way possible.

Small businesses market and sell their products in a variety of ways. For example, the business I use for my home lawn care is a sole proprietorship with 135 customers. The customers come and go, and new customers are found strictly by referral. My neighbor recommended the service to me, and when there was an opening, the lawn care business owner started taking care of my yard. The owner does a good job and, as a result, people seek him out. He works mostly alone doing the outside work, and his wife supports him part time in running the office. The owner tells me that someday he expects to sell his business; I have found there is a healthy market for the sale of lawn care routes. His sales and marketing infrastructure isn’t written down, but it is a very real, very tangible, and effective way of doing business. He doesn’t change that model because it works for him. When he does decide to sell, the transferrable value of his business will be his client list (an asset) unless he finds a way to institutionalize his sales process, which would increase the transferrable value of his business.

Other small businesses simply sell over the counter to customers who walk in their front door. They offer coupons; advertise in local papers, local radio, and local TV networks; and have an online social media presence. Still other small businesses have outbound sales groups, inside sales groups, and telemarketers; they also market their products nationally and internationally through elaborate websites and search engine optimization programs intended to bring online customers to their website and establish extensive targeted lists of social medial followers. There are small businesses that rely solely on wholesale and reseller programs to sell their products and services, and they create a strong brand through events like industry conventions.

The sales and marketing infrastructure used by small businesses can include everything from the methods they use for pricing and lead flow (needed to support their sales pipeline) and the methods used to develop new product specifications, as well as their marketing approach, including the use of competitive and strategic analysis tools. By finding ways to improve the way you sell, you will improve your sales and marketing infrastructure and increase the transferrable value of your business. Can you find a way to improve the way you find sales leads and go to market with your products?

As you are preparing to sell your business, the sales and marketing infrastructure requires first that you document your sales process so that it can be explained to the buyer. Obviously, this will be easier for some businesses than others. Second, you must collect your sales metrics—such as, “how many customers,” “average sale size (where possible),” and any other metric that can help you quantify your sales. And third, you must use these metrics to justify and improve your business model (see chapter 11).

It is easy to understand why buyers want to assess your sales and marketing infrastructure but be aware they may be asking about it for different reasons than you expect. You will benefit from knowing what those reasons are as early as possible. A buyer who is planning to continue the operations using your existing infrastructure will need to know how that infrastructure works. A buyer who is acquiring your business with plans to merge it into another business may be interested in picking and choosing which parts of the infrastructure to retain. Occasionally, when your business is being acquired by a larger organization that recognizes the value in your products, they may plan to increase the sales of the product by pulling them into an existing and larger established sales and marketing organization. They want your product to become another offering in their catalog.

“We were selling $7 million in our region; after the sale they began offering our product through their national sales channel and tripled that number.”

This is a common practice of product resellers who want to acquire the supplier of a hot product to keep it away from their competition. If you have an idea of what the buyer’s plans are this can help you in your negotiation. Buyers aren’t always that forthright about their plans, unless of course they are trying to convince you to accept an “earn-out.”

Preparing for an Organizational Infrastructure Assessment

The definition of the organizational infrastructure includes the formal and informal structures of the business. It includes the organization chart that forms the command and control structure plus the informal structure that becomes the culture of the business. The organizational infrastructure in most small businesses has grown in an ad hoc manner. Optimizing this infrastructure often requires looking at your organization for the first time and restructuring it by design. That may include finally deciding what to do with cousin Jake! Does he add transferrable value to the business, or is he just an expense?

A very small business, with one to five people, may find this definition difficult to apply. Take the challenge and see what you can do with it. An organization chart for a one-person business is pretty small and makes no sense. If you’re going to sell your business to another individual, taking the time to write down a list of the jobs you do and a brief description of those jobs is probably something the new owner will find valuable.

Preparing for a Personnel Infrastructure Assessment

The personnel infrastructure supports the human resources operations of the business. It defines the working relationship between the business and its employees and the relationship among the employees. It defines the strategy used for benefits and the compensation plan, and it dictates employee actions, such as the procedures for hiring, firing, and everything in between. Changes to the personnel infrastructure of your business is the area that will generate the most questions from employees once they are aware of the sale.

Dealing with employees is where most owners start to come off the rails when selling their business. Over time you may have become friends with some of your employees, made promises to some (promises they now want to hold you to), and have benefited from their loyalty. These are some of the things that can make dealing with employees so difficult.

“Will my pay change?”

“Will I get the raise I am due?”

“Will my benefits change?”

You want to and should be fair to your employees but the reality is that the new buyer will not be motivated by the same feelings of loyalty or friendship as you and won’t have the same shared experiences with your employees that you have had with them. A buyer will want to understand what each employee’s job is and will want to ensure that you aren’t dumping problem employees on them. Buyers will want assurance that valued key employees aren’t planning to leave after the sale and immediately go back to work for you.

If this is true then it makes sense to portray your team in the best light possible. Even if you wouldn’t describe your employees as your most important asset, you will still need to explain the role of each member of your team as succinctly as possible. A potential buyer will need to learn who your employees are and what each person’s responsibilities are. Most small businesses claim:

“Our employees are one of our most important assets.”

As they prepare to sell their business, owners occasionally find themselves in a position where they know someone has been a problem employee, but instead of solving the problem, they leave it to the new owner to solve.

“Cousin Jake doesn’t actually produce much but Mom will be mad if I sack him, so I’ll let the new owner deal with it.”

Retaining a known problem employee may seem like a low pain approach for you. However, the cost for that employee can impact your sale, because you are still carrying them on your payroll (which lowers your profitability), and that can significantly impact your valuation. Do your own dirty work and clean up your staff as part of your positioning.

A word of caution here. It is not unusual for buyers to ask who your problem employees are or request to see your employee files—particularly for any employees that have had disciplinary actions. They then make the dismissal of those employees prior to closing one of the terms and conditions of their purchase. The intent of the buyer is to avoid inheriting problems after the purchase. That is why this is a good time to review employee personnel files to ensure they are accurate. You need to be honest with yourself and the buyer. Changing personnel files to protect an employee is not a good idea but be sure you have been fair. For example, someone might have had a problem and had a disciplinary action noted in their file; but since then, that person has become a stable contributing employee. So it’s important to add a follow-up note stating that the employee responded to the disciplinary action; any evidence to that fact should be included in the file.

If your employee reaction to the sale is very negative, your buyer may decide their plans for the business won’t work and back away from the deal. Your preparation for the sale should include a review of the personnel infrastructure and the impact the sale of your business will have on your employees.

Where is the strength in your management team? Buyers—or more specifically, investors—who want to hold onto a business “at arm’s length” often say what they assess is “management, management, management.” They intend to keep the management team in place; their approach to operations due diligence is to ignore almost everything but management in the belief that, if they get the management right, everything else will fall in line.

Maybe by now your mother has heard from her sister, and you have been pressured into promoting cousin Jake to VP of Employee Moral. Why? Because he leads in the company ping-pong championships, and you just had to find a title for him. Your best approach in this situation is to prepare a skills matrix that identifies the skills of the individual managers and indicates what they contribute to the combined skills of the management team. If cousin Jake’s skills don’t help the team, you may need to have a conversation with your mother and send flowers to your aunt after you either demote or fire cousin Jake.

Being prepared to hand the matrix to the buyer can build tremendous confidence in the buyer that the owner knows what they are doing and has their act together. It reflects that the business has grown by design instead of organically. Instead of just listing a set of skills, use the skills matrix to rank (with one being the best and ten being the worst) the management team member’s skills in the nine operations infrastructure areas.

Preparing for a Financial Operations Infrastructure Assessment

The financial due diligence the buyer performs and the operations assessment of the financial infrastructure are two different activities. Financial due diligence assesses the financial status of the business (the content of its financial reports) whereas a financial operations assessment looks at the infrastructure that is used for fiscal control of the business. In chapter 7 we discussed the assessment of financial reports and the financial data that discloses the past performance of the business. In this assessment the buyer will look at the financial operations infrastructure that supports your business’s day-to-day financial operations. There is a distinct difference between the financial reporting discussed in chapter 7 and the financial operations assessed here. Whereas the financial reports look toward the past, the financial operations infrastructure will also include forward-looking functions of the business, such as the preparation of budgets and sales projections.

“How do you arrive at your sales projections?”

Financial reports document the “actual” expenses and revenues incurred by the business in the past—last month, last year, or for however many past years you want to specify. Financial operations include the forward-looking functions of sales projection and budgeting because those numbers should be generated in the operational departments.

The financial operations infrastructure provides the framework for planning the continuing financial operations of the business and the financial support functions, such as the methods used for collecting the accounts payable and accounts receivable (AP/AR) and any other internal functions (such as issuing payroll checks). It also defines operating policies and procedures, such as specifying who has financial authority (Employee X can authorize that $50,000 purchase order). It includes functions that go beyond the finance department, such as cost account and project management and the generation of budgets and sales projections.

“Wow, this sounds really complex (and for some large small businesses it really is) but we run a really small, small business.”

“I do the outside work and my wife does the administration, which includes keeping the books.”

If you run a really small business where you do the outside work and your wife does the administrative functions, such as billing, your wife probably has some system she uses to track the bills, send out invoices, do the banking, and answer questions at tax time. There is the financial operations infrastructure in your business. If your buyer represents a larger corporation that is acquiring your business, they will have questions about your financial operations. Be ready to answer these questions in detail. It’s important to show discipline in the management of your financial operations, regardless of the size of your business.

In addition to the “actual” expenses and revenues for the prior three years, you will need to project the revenues (a pro forma) the business will generate for the next three years and a budget for the expenses that will be incurred to achieve these sales. Rather than being prepared by the finance department, the budgets and pro forma should be generated by the operational departments responsible for managing to them. This is a case where some small businesses operate ad hoc and never create forward-looking budgets or projections. Some larger businesses create them in their finance department and force their operational departments to live by them. Other businesses formalize the process and ask their department managers to prepare their own budgets and projections, and then hold the managers accountable for performing against these projections. Buyers will see this as a sign of the maturity of the business. They will want to understand how budgets and projections were made because they will want to hold department managers accountable for the department performance you are promising.

“Yeah, the former owner projected those sales, but the sales department never agreed to those numbers.”

“I never agreed I could run this department on that small of a budget.”

Preparing for a Legal Operations Infrastructure Assessment

The legal due diligence the buyer performs and the operations assessment of the legal infrastructure are two different activities. Legal due diligence assesses the legal status of the business (e.g., are you involved in any litigation?) whereas a legal operations assessment looks at the infrastructure that is used for legal control of the business.

As you prepared your business for a legal due diligence, you collected all the contracts and agreements, any litigation documents, all your leases or other real estate–related documents, all your employee agreements or shareholder documents, and anything else that had a signature on it. Who is authorized to sign those agreements, and how do you manage them? Do you have a single repository where they are archived either in paper or electronically? How difficult will it be to build a due diligence file?

The legal operations infrastructure forms the framework for all legal operations of the business. It defines all legal authority, professional licensing, and controls needed to support the business on a continuing basis. It defines all activities used to protect the business from legal risk and liabilities and to ensure the compliant operation of the business.

Most small businesses don’t have the luxury of a legal department. Instead they tend to leave the management of documents to the operational department that originates the document. The sales department signs nondisclosure agreements (NDAs) and customer contracts and maintains their current copies. But what happens when the engineering department sees one of the slick new functions in a vendor’s prototype, and they can’t wait to talk about it? They have divulged your vendor’s new breakthrough product before it is announced to the public, violating that NDA. And this is how a business can end up in court. When the sales manager interviews a new salesperson and tells her he would be glad to discuss commission rates, but only over dinner, he may have more than the business in mind. And this is also how businesses end up in court. The problem is that many small businesses don’t institutionalize legal operations guidelines or training programs as policies to guide the business. The legal operations infrastructure of most small businesses is treated in an ad hoc manner due to their inability to afford an in-house attorney or to pay the legal fees for an outside attorney. This becomes a tremendous source of operational risk that many buyers are not willing to assume.

If your business has grown organically and you haven’t paid attention to its legal operations infrastructure, now is the time to do so. Prepare a brief but very pointed set of legal policies and procedures that include guidelines indicating who has the authority to sign various types of documents. Have your attorney draft a basic employment agreement that includes both ethics and confidentiality expectations for all employees. Have your employees sign the agreement now and have these signed forms ready to show to a buyer.

When a buyer sees a weak legal operations infrastructure, they become leery of unknown or potential legal actions and, to protect themselves, they avoid entering into an equity acquisition and may only be willing to offer an asset acquisition instead. That could reduce your valuation, because it eliminates the value of your brand name, trademarks, and good will. You will also need to discuss the tax implications of various types of purchases with your CPA and transaction attorney prior to entering any negotiations.

If you are in an industry that requires process certification or a professional license, this would be a good time to review your certifications and licenses to make sure they haven’t expired. Be sure to review the requirements for renewal and verify that your business still qualifies. Plan to complete any necessary renewal requirements, such as continuing education, to ensure they can be completed on time. Some certifications include qualifications for upgrades, such as years of experience, dollars sold, quality records, etc. You may have achieved a basic level when you were first certified three years ago but qualify for a master level now. Achieving the higher-level certification may add value to your business. Keep in mind that some certifications and licenses are given to the individual rather than the business; use this as an opportunity to determine the status of certified or licensed individuals.

Preparing for an Information Management Infrastructure Assessment

It would seem like a tremendous understatement to say that all businesses are information intensive these days. The information management (IM) infrastructure includes all your business data, the electronic tools that support your operations and form the backbone of the business, and the documents and printed material and all other media that is used to support the business. The term information management is one of those umbrella terms that covers a lot of territory. We are familiar with the information technology (IT) groups that maintain our personal computers, but IM has a wider scope than that of the traditional IT group. IM also includes the business’s telephones (fixed and mobile), document archives and records of all types, and any kind of media. In most small businesses the IM infrastructure growth occurs more organically than by plan.

Start preparing to answer due diligence questions about your IM infrastructure by preparing a diagram of your IM systems. Having this diagram ready to show to a buyer can answer many of their questions and will show them you are working by plan rather than organically.

In the age of digital everything, nothing is free from risk. Data can be lost, hacked, stolen, corrupted, and interrupted. Data isn’t limited to what you have on your computer either. Your telephone system, alarm system, cell phone, facility power, car, and coffee pot are all likely to be hackable digital devices. Data that used to be stored in your desktop computer migrated to your server room and is now in the “cloud” (meaning you probably have no idea where it is stored or how it gets there). Whether done by accident or for commercial or even malicious purposes, you have good reason to protect the digital systems used in your business. The more data intensive your business is, the greater the risk. Even small businesses, however, have employee information, customer credit card data, contact lists, and health-care records. These days, with plenty of examples of huge fines being levied on businesses—not for stealing data, but for failing to take proper precautions for the data they have been entrusted with—buyers will want to know how your information management system is protected.

How prepared is your business to act as a custodian responsible for caring for of all this data? The bad press (and large fines) large and small businesses have received means that data security is an important issue and a significant risk that can impact any business. While you are justified in denying access to a buyer, it is becoming more common for buyers to request a security audit by an independent third party when the business stores privacy-related information.

The resiliency of data intensive businesses (i.e. the ability to recover from a man-made or natural disaster) is becoming a concern for buyers. The risk of data loss is extreme and can result in the loss of a business almost overnight. Buyers are concerned about the cost of implementing disaster recovery systems in such cases where even a short disruption in the continuity of the business is critical.

Your IM infrastructure includes all the personal privacy, security and disaster recovery controls that the buyer will want to assess. Note, we use the term “assess” not “access.” In businesses that handle financial or health-care information data the system that hosts the data must be certified for this use. Buyers should understand the requirements for protecting that data and the reason you cannot allow them access to your IM systems. If they are not willing to understand this, find another buyer. Where large data servers are in use, penetration testing—to ensure the system is secure—may also be required. If your business is data intensive, don’t wait for a buyer to make the request. Have the security test performed by a third party for your own protection and as one of your positioning tasks. Create a business resiliency plan and train your staff how to respond during business disruptions. This way, when a buyer asks, you can show them it has been done as part of your normal operations and increase the buyer’s confidence in your IM infrastructure.

Preparing for an Institutionalized Processes Infrastructure Assessment

The institutionalized processes infrastructure includes the definition of all formalized policies, procedures, and methods that guide the business’s operations. One of the resounding themes you may have noticed in this book by now is the need to define what you do, and write it down so that a buyer can understand how your business works.

What I will add to that theme is this: once you create a procedure and write down what you say what you are going to do—do it. Don’t have a buyer point out that you are not following your own published procedures or violating your own published policies.

Institutionalizing your processes is an absolute requirement in some industries. The International Standards Organization (ISO), the US’s Health Insurance Portability and Accountability Act (HIPAA), Capability Maturity Model Integration (CMMI), Six Sigma, Enterprise Risk Management (ERM), and Lean or Quality Management Systems (QMS) are examples of industry standards that a business requires certification in to qualify for operation in a process-driven market. There are numerous other government regulations that set similar professional standards to be licensed to work in various industries. It’s easy to see why large corporations with thousands of people want to define their processes and procedures. Everybody needs to have a road map to be sure they do things the same way. By improving their processes, they become more efficient, and nothing is forgotten. Process improvement programs can be expensive, and it is often hard to see the benefit. It’s little wonder why small businesses would rather ignore this infrastructure area and not waste the time or money.

“I have been doing this job for fifteen years and the only checklist I need is in my head.”

“It was only a problem when someone new started in sales, and I didn’t get the orders the way I usually do.”

“Now that we’re taking internet orders, someone needs to figure out what the commission plan is for them.”

When a buyer starts to ask questions about the way your business operates, you don’t want your answers to sound ad hoc or employee dependent. Employees should be told to write down what they do and how they do it. Assume that they are the experts at their jobs. Give them ownership of the job.

“Your requirement is to write down what you do, and then do it that way.”

Employees talk, and they will recognize potential improvements within their own work areas. They are often glad just to be asked, but rewarding them for improvements in efficiency isn’t a bad idea and may bring change about sooner. What employees generally resist is someone else telling them how to do their job. It pays to make the ideas theirs.

“We found out that customer contact information is entered into our systems at least three times before a product is ever shipped.”

Jim’s Bakery Example

Jim recognized that preparing his operations infrastructure would be a large, time-consuming activity. It was a good thing he hadn’t decided to sell his business right away and closed in a month. The time it took to prepare his operations infrastructure had added tremendous value. Even though they didn’t realize it at the time, it had also helped his employees. During the buyer’s due diligence, it was clear the employees knew their jobs and had had an input in making the business operate efficiently.

Jim’s Organizational Infrastructure Preparation Example

The organization chart (Figure 9.1) for Jim’s Bakery clearly identifies the role each person plays in the business and the responsibility for each employee. Buyers will quickly recognize the straightforward efficiency of this structure.

Note: Without knowing much about Jim’s Bakery, consider what the organization chart tells you about the business. How is the business structured? How many employees are there? How many employees are in management roles and what areas are they responsible for? How are sales supported? How are products delivered? Don’t play down the importance of creating this chart.

Figure 9.1 supports your goal of making a prospective buyer’s due diligence and deep dive analysis as easy to perform as possible. This shows why constructing an organization chart becomes a key to understanding the business. It can be used as a road map when trying to understand other areas of the business such as the structure of the financial reports and the different groups the expenses are allocated to. Put in the time, even if this is difficult or seems overdone for your business.

To demonstrate the business in operation, the buyer will use the organization chart as a simple road map to follow. The buyer will know that an interview with the three senior staff members (just below the owner) to understand the commercial operations, retail operations, and financial operations will achieve just that. If a buyer was considering growing the business, it would be easy to add a new catering operation, for instance, to this organization. Imagine a buyer’s reaction if there were dotted lines of responsibility or if all bakery operations were not clearly identified.