Dan Reiter, CFP®, CPA, CExP, CVGA
Planning is a broad term to describe several aspects of a business. In brief, though, the planning function helps paint the picture of how you, or a prospective buyer, will achieve the desired return from your business.
An effective planning function answers several critical questions:
What are the company’s core purpose and values?
What are the company’s greatest external risks, strengths, and opportunities?
What is the company’s operating strategy to mitigate risks and/or capitalize upon its strengths and opportunities?
In this first part of our write-up on a company’s planning function, we address the question of a company’s core purpose and values. You can also read the introduction to this series on the impact of ignoring the key value drivers that buyers seek.
Business value is maximized through a relentless focus on three things: (1) transferability, (2) sustainability, and (3) predictability of cash flows.
Transferability means the ability to remove the current owner from day-to-day operations with minimal impact. Sustainability and predictability are related to cash flows and return on investment. The more sustainable and predictable cash flow and return become, the less risky a buyer will perceive the business. In the context of how business value is quantified, less risk = more value!
When our Kansas City, MO financial advisors meet with business owners, we often discover that their company has grown to a point where they have hit the ceiling. They’re working 80-plus-hour weeks, are hands-on in almost every part of the business, and feel consistently overwhelmed by everything on their plate.
These owners often launched their business with grand ideas of the freedom it would provide, only to be dismayed that they feel anything but free.
A company with a clear culture and identity at the company level has a much higher degree of transferability and flexibility for the owner. Answering the above essential planning questions today will help you create a more effective, enjoyable, profitable, and valuable business.
Core purpose is the fundamental reason for existence beyond profit. It is why your company exists in the first place. In other words, what would your employees say is the reason they come to work every day? What would the world miss if your business quit operating?
Most people need to understand how their work contributes to a larger purpose to remain motivated and effective in their roles. If your employees’ primary reason for working is simply a paycheck, they will likely jump at the opportunity to go elsewhere if the money is right. Further, defining why you do what you do will create a more compelling purchase decision for your customers.
If you effectively define and communicate why your company exists, this purpose should permeate your organization. It will dramatically improve the company’s culture and identity independent of the owner.
The “why” message should be inspirational, motivational, and concise. Consider, for example, the following examples of core purpose statements[1]:
3M: To solve unsolved problems innovatively
Merck: To preserve and improve human life
Mary Kay: To give unlimited opportunity to women
Walt Disney: To make people happy
As you can see, these statements are not about what each company does, but why it does it. Simon Sinek, in his best-selling book Start with Why, describes this critical messaging in his concept of the golden circle[2]:
Start With Why, page 37.
Sinek describes how the most inspiring leaders and organizations think, act, and communicate from the inside out—first “why,” then “how,” and then “what.” Ultimately, this approach succeeds because people do not buy what you do; they buy why you do it. This includes both employees and customers.
The reason is not random, according to Sinek. It’s related to the biology of our brains. Our limbic brains drive behavior and emotional responses. World-renowned psychologist Daniel Kahneman describes this area as the “fast thinking” part of our brain, or what people often refer to as their “gut.”[3] The neocortex, however, is the rational processor or the “slow thinking” part of our brain. It processes “what” messages, while the limbic system processes “why” messages.
Often, company messaging begins at the outside of the golden circle and works its way in. Sometimes, the company never even gets to why! However, our rational neocortex is much more deliberate and takes much longer to process information—and is a less effective system for motivating desired behaviors! As a result, our rational neocortex gives way to our more powerful, emotional limbic system.
Why drives inspiration, motivation, and action.
Further, clearly identifying a company’s core purpose is critical to sustaining and transferring company performance when a visionary leader departs. Sinek highlights this point in describing when Steve Jobs left Apple in 1985 after a power struggle with company president John Sculley.
Sculley, a competent executive well versed in what and how to do things, ultimately led the company to a period of dismal morale and uninspiring ideas. Only upon Jobs’ return in 1997 was everyone reminded why Apple existed—to create innovative products, think different, and redefine industries.
Apple learned from this experience and now embodies their why at the company level. Although Jobs passed away in 2011, Apple remains one of the most profitable and valuable companies in the world.
Core values reside at the heart of every great business and define how a company operates. They are things that should never change and should serve as the foundation on which every strategic plan is built.
Quite often, we encounter great entrepreneurs who have established great businesses—with them running it. The company’s history, culture, and core beliefs are largely shaped by the founder or key leaders. Once they leave, the business flounders or changes dramatically.
Jim Collins eloquently describes this phenomenon in his book Built to Last as “time telling” versus “clock building”:[4]
“Imagine you met a remarkable person who could look at the sun or stars at any time of day or night and state the exact time and date: ‘It’s April 23, 1401, 2:36 A.M., and 12 seconds.’ This person would be an amazing time teller, and we’d probably revere that person for the ability to tell time. But wouldn’t that person be even more amazing if, instead of telling the time, he or she built a clock that could tell the time forever, even after he or she was dead and gone?
“Having a great idea or being a charismatic visionary leader is ‘time telling’; building a company through multiple product life cycles is ‘clock building’.” [5]
On clock building, Collins goes on to describe that the truly great companies are those where the founders and other leadership successors come to believe that their greatest creation is the company, not any individual product or service. Best-in-class companies that sell for maximum value have leaders who view the management of the business itself as a creative endeavor.
So what do core values have to do with it?
Core values are the bedrock of a company’s culture—the element that gives the business a life of its own and not of its owner. The benefits are not just intangible, either. One study found that 58% of companies with clearly defined core values experienced average revenue growth rates greater than 10%!
Core values are critical, enduring tenets that drive an organization. They define company direction, critical beliefs, and acceptable behaviors. When done right, values serve to create organizational clarity and human systems that reach their full potential. They must never be sacrificed for any reason—including financial.
Unfortunately, the mention of core values often leads to derision. Why? Because quite often such values are empty and baseless, and their existence is treated as a mere box to check in the pursuit of the perfect corporate image.
Empty values statements pose a danger. Sadly, baseless values “create cynical and dispirited employees, alienate customers, and undermine managerial credibility.” [6]
As such, execution is critical. Consider four critical elements of well-executed core values:
Simple and easy to remember
Unique and fitting with company brand
Clear in communicating how decisions should be made
No less than three and no more than five (quality over quantity)
Establishing a company’s core purpose and values is more than lip service or some motivational posters on the wall. If you have been an entrepreneur for any time at all, you have likely realized the hardest thing to create is a group of highly effective people sharing the same mission and values. In other words, the right people, in the right seats, and all rowing in the same direction. This universal fact is true of almost any business—and is what makes it worth so much when it exists.
Ultimately, your leadership team should discover your core purpose and values. Nobody can discover these things for you. However, most businesses find that working with a business advisor who can effectively facilitate such a process is tremendously helpful in getting started.
Discuss your situation with a financial advisor with experience in working with business owners. Schedule a 30-minute discovery call today.
[1] https://www.rhythmsystems.com/blog/bid/149846/have-you-defined-your-core-purpose
[2]Start With Why. Sinek, Simon. Penguin Group. 2009.
[3]Thinking, Fast and Slow. Kahneman, Daniel. Farrar, Straus, and Giroux. 2013.
[4]Built to Last: Successful Habits of Visionary Companies. Collins, Jim. HarperCollins. 1997.
[5]https://www.fond.co/blog/best-company-core-values/
[6] Lencioni, Patrick. Make Your Values Mean Something. Harvard Business Review. July 2002.