Changing Gears – Must read

This book is so important for NZ owner managers, I’m giving away multiple copies! (See end of article for details).

One of the benefits of spending a week in Taupo Bay was having the time to devote to my “must read” pile. While I’d scanned Changing Gears when it was published in late 2009, this time I read it cover to cover.

It’s the seminal text on how to grow your business: practical in nature and strongly NZ in context. I found a pearl of wisdom on every page.  Insights from the book that I have shared with clients over the past two weeks include:

  • Sales – Profit  = Costs: treat profit as a given rather than the hit & miss variable left over at the end of the year.
  • Your business will fail to scale if you remain overly loyal, task focused and isolated.
  • As your firm grows so must its management capability and governance.
  • Take a break – disconnect from the business (and your blackberry!)

I’m an avid follower of David Irving, one of the book’s lead authors.  You may have caught his monthly management columns in Unlimited over the past four years (unfortunately he’s just written his last one).  David often comments on my articles with a couple of recent pieces of wisdom being:

  • Always appoint board members for tomorrow rather than slip into the easier choice of one for today. Today is gone tomorrow!
  • Simplify the concept of governance by asking owners to think about their current business and the big issues. Then ask what competence they need around them to work through those issues.

After reading this book the natural progression for business owners is to invest in the Icehouse Owner Manager Programme.

Changing Gears is available through the Auckland University Press or at Paper Plus, Whitcoulls and Borders or online at Fishpond.  You won’t be disappointed.

Complimentary Copies

I’ve purchased bulk copies of this book.  If you know a NZ business owner who is committed to doubling the size of their company over the next five years then send me through their name and email: I’d be more than happy to post them a complimentary copy of Changing Gears.

**Offer ends 30 March 2013.  Ideal business size between 5 and 50 employees.

Posted in General Business, NZ Business Environment, Owner Managers, Privately Owned Businesses | 1 Comment

Bringing wisdom to your business

As business owners return from a deserved break many will have reflected on a tough 24 months. Challenged and tired they’ve found themselves sucked back in to day-to-day operations.  Well-intentioned plans to transition out of the business remain unfulfilled. “Where’s the satisfaction gone?” some ask. “What’s 2011 going to throw at us?” ask others.

Alongside the dawning of a new year, so does the realisation: “I need some support”.

Given this mood I’m predicting 2011 will see independent governance of privately owned NZ companies finally emerge from its current shadow-like existence.

Struggling with the ‘dreaded’ governance word?  Feel free to substitute with clarity, wisdom, guidance, stewardship or shared leadership.

Effective governance can be the difference between owning a good company and being the owner of a great company.  This broader stewardship brings benefits including:

– Regular time set aside for bigger picture thinking
– Constructive challenge to you as owner
– New strategies and ideas for growth
– Neutrality when holding senior management accountable
– Informed but independent perspectives during decision making
– An extra set of eyes when monitoring business risk and compliance

My experience shows that owners also personally benefit through increased stimulation and motivation as well as greater clarity and delineation of their roles as employee, director and shareholder.

For those companies seizing this opportunity here’s what I suggest:

1. Structure: determine the best governance set up for your company, now and in the medium term

Be absolutely clear about your expectations of what governance will bring. Next, examine your ownership structure now and think how is that likely to change? Envision the organisation in 5 years time – what will it look like?  What is the end goal for your involvement in the business? Analysing all this will give clear direction of the best governance structure: formal advisor, advisory board, independent director or maybe even a full board model.

2: Skill sets: confidently identify the right people with the right experience

Create a skills matrix to define the complete experience required of a governance team for your company. Mark off the owner’s current experience against this.  The resulting skills gap will form the basis of a role description and person specification. Finally, outline a process for identifying potential candidates.

3. Secure: engage the services of the best person

Cast the net as wide as possible to recruit board members.  Aim for the best – you’ll be surprised how often someone you thought unattainable is interested (or knows someone who would be). Produce a formal letter of appointment and consider the need for Directors & Officers insurance.

I always advocate payment to your advisors, even if it is somewhat token.  It formalises the relationship and creates an expectation from both parties.  The appointment becomes meaningless if it is seen as a favour or meetings and involvement begins to rank at the bottom of a very busy ‘to do’ list.

But doesn’t New Zealand need a more efficient and effective way to introduce potential advisers and directors to independently owned companies, I hear you ask.  Well we have launched appoint as a better way to find directors and board members.

Posted in Governance, NZ Business Environment, Owner Managers, Privately Owned Businesses | Leave a comment

Finance on Full Beam

“It’s like you’re speeding down a country road at midnight with only your park lights on”, I recently commented to a new client.  Scary thought.

The problem was their internal accounting team, who were ill equipped for the requirements of a rapidly growing, idea rich and cashflow poor organisation.

This is not unusual. Some of the quickest and most enduring gains I’ve implemented with clients have simply involved upgrading their internal finance function.  Not only does it result in better information on which to base decisions, but the engagement of a competent accountant helps set the tone for the rest of the business: timeliness, accuracy and insight.

What about your business? You may have your headlights on but are they at full beam?

As a business grows, it is common for the finance function not to grow with it.  The book-keeper with no formal training may have been sufficient four years ago but now…?

Here are some signs that change may be in order:

–        it’s the 20th and you’re yet to receive management accounts from the previous month

–        you’re finance person doesn’t regularly mention the word ‘cashflow’

–        they haven’t attended any external training in the past six months

–        you receive the accounts but no commentary or analysis

–        you find yourself relying on your external accountant more than your internal one

The biggest benefit in upgrading is having your financial information interpreted, not just produced.  Hopefully the interpretation will be accompanied by recommendations.  If you only have the need for one individual, and the dual role of production, interpretation and recommendation is too great, consider engaging the services of a virtual CFO.

I’ve found return to work mothers a great choice of part timer, when a full time resource is not needed.  In return for offering flexibility in working hours you tend to receive a much higher skillset than you’d get otherwise and a very competent multi-tasker!

As with a lot of roles, hire on attitude.  Skills can be learnt but approach and engagement tends not to change.  If your existing accounts person has been in the role for a number of years then trust me – a new approach and set of ideas will be amazingly refreshing.

And when it comes to accounting software, look no further than Xero. I’m a big supporter of them (no, I’m not a shareholder) and am yet to meet a convert that regrets the move from their old software.

Please drop me a note if you’d like any other ideas on illuminating your internal accounts team.

Posted in General Business, Privately Owned Businesses | 1 Comment

Who is stifiling the NZ economy?

We are a nation of small businesses…and therein lies our problem.  A greater proportion of larger companies in New Zealand would provide enhanced learning and deeper careers for our best and brightest and more opportunities for associated service providers.  This has flow on benefits to our social enterprises and, ultimately, the wellbeing of our general population. Lloyd Morrison of Infratil shares similar sentiments.

What is preventing our $1m companies turning over $5m, our $5m becoming $20m and our $20m becoming $50m companies?  Some say it is access to capital. Others will refer to the size of our domestic economy.  A few our geographic isolation.  And the old punching bag: Government red tape.

For me the impediment is people and, more specifically, the owner managers of small and medium sized NZ businesses.  The founders, who have the potential to be part of the solution, may now be part of the problem.  Our country needs business builders, not business farmers or simply more business starters.

Has the business outgrown the owner, or would it do if they were not holding back the reins? Here are some reasons why this can come about:

Fear of losing control

Sometimes an owner manager will feel their personal identity is inextricably linked with their business. The individual will only allow the company to develop at a rate that is within their comfort zone, providing a sense of control and security.

Lack of energy or motivation

They’re exhausted. After years of toil, stress, good times and bad, human nature is such that they are not the driving force they once were.

Change in risk profile

The “I’ve got nothing to lose” mentality that may have been the catalyst for forming the business has now transitioned to “let’s not lose what we’ve got.” This is often accompanied by a business owner starting to lose confidence in his or her own ability.

Lack of requisite skills

Owner managers are not noted for investment in their personal professional development, failing to justify either the expense or time away from the business. So the skills they started the company with may be the same skills they are relying on to run a significantly different company years later.

Difficulty letting go

The bloody-minded determination that got the company to where it is now is not easily relinquished in favour of empowerment and entrustment.  Core business knowledge and relationships aren’t fully shared and the concept of hiring people ‘better’ than themselves is uncommon.

So, what is the solution?

Experience shows that entrepreneurs or business starters do not typically make great business builders.  Very few have prior experience as general managers or CEOs. Neither do we have a country of Steve Jobs – founders that have the capability to successfully drive an organisation through its full lifecycle.

There comes a time when every founder needs to allow another individual to take the helm of the organisation.  But this transition shouldn’t be triggered by thoughts of retirement – it could be two years after the business is formed or twenty years. The test is “Am I the best person to build and grow this organisation over the next five years?” If the answer is ‘no’ then let the search begin. Be prepared to share ownership.  Greater success is to be had if your key executives act with the conviction and commitment of an owner.

Note that relinquishing the helm as an executive need not impact your roles as director and majority shareholder. In fact it will probably strengthen the performance of the former and bring greater clarity and expectations to the latter.

I’d also encourage the following:

Implement some form of governance

To be really effective ensure it is a person (or people) who will challenge you.  Resist the temptation to engage an acquaintance you have known for years because subconsciously you know they are unlikely to rock the boat.  Similarly, be realistic about the independent thought and challenge you would get by appointing a long time professional services provider such as your accountant or lawyer.

Broaden yourself

Take time to invest in your own skills and professional network.  You may undertake some governance training (how to be a better director) or a short course on strategic planning.  Alternatively you may engage with other commercial organisations – share your experience as a mentor and get ideas and inspiration in return.

Passion

Develop (or continue) a passion outside the business.  It will help put the business in context and negate the likelihood of idle minds wanting to become operationally involved in the business again.

So take a look in the mirror and ask: am I holding back my business?

You owe it to yourself, your business and your country!

Posted in NZ Business Environment, Owner Managers, Succession | 2 Comments

Business owners tell me what they really really want

Attention all business owners! Remove your executive and director hats. Don your shareholder hat. Close your eyes and fast forward to 2015. Think. Ponder. As a business owner, what have you achieved?

You may be surprised how similar responses tend to be.

I sat down last week and analysed all the strategic plans I’d facilitated for medium sized business owners over the past two years.  As you may know, I encourage the development of individual personal goals as a starting point and then use these to formulate a set of shareholder goals. These goals, along with the company’s values, are the foundation of any strategic planning.

Five distinct themes around shareholder goals emerged:

(Note: numbers reflect % of owners I analysed who included this as one of their five goals)

Growth (100%)

All owners want their business to grow. Their five year goals typically make reference to a target net profit figure but occasionally the yardstick is turnover.

Growth being a unanimous goal is not surprising.  Business owners are ambitious in nature and the expectation of year on year increases is a natural by product of working in a commercial environment. Also, many owners rely on dividends as their primary source of income and the main way to increase this is by growing net profits.

Autonomy (65%)

The majority of owners want their business to be able to succeed without them.

This is often driven by a desire for flexibility (time to travel, spend with family, undertake other ventures), frustration with being so operationally involved in the business, or recognition that business succession is near to impossible when they are so inextricably linked to it.

Peace of mind (50%)

Owners frequently have a goal to strengthen structure and processes within the business. Consistent, documented systems are required to give peace of mind that the business will operate effectively both as it grows (Goal 1) and as they step back operationally (Goal 2).

Linked with increased structure is a wish to implement some form of governance. Again this is recognition that ambitious growth may require external support and that governance aids the pathway for eventual succession.

Reputation (50%)

Having done the hard yards building the company (often from scratch), owners look for ongoing recognition and a safeguarding of reputation. Sometimes this is ego and personal identity driven. Other times it’s broader and more paternal in nature, focussing on the protection of the company’s brand and reputation.

The challenge for owners is that recognition has historically been derived from doing the business (as an executive). The transition required is to understand this can instead be achieved as a founder or owner (shareholder) or as an influencer and guardian (director).

Social Responsibility (45%)

Shareholders often want the business to continue to have a positive impact on New Zealand society or contribute to specific parts of the community.  Sometimes is this is aligned to an owner’s requirement that the company’s current values remain preeminent and enduring.

What can we take from this?

Irrespective of where an owner’s mindset is now, evidence suggests that they will eventually want relief from being the fulcrum around which the business revolves.  This can be partly achieved by having the confidence to hire people that are better than themselves. Taking proactive steps to identify and nurture employees with long term leadership potential and commitment to the company would also be beneficial.

Define and document processes as early in the company’s lifecycle as possible.  Create a culture around this and ensure that no business critical operations are restricted to the knowledge of just one individual (including the business owner!).

Finally, a strong set of company values, some form of external advice and an understanding that reputations needn’t derive from the “doing” will go a long way towards safeguarding personal and business reputations.

(Article title is with apologies to the Spice Girls)
Posted in Owner Managers, Privately Owned Businesses | 3 Comments

Hiring & incentivising your Managing Director

Last month’s article on succession planning led to several questions around hiring and incentivising a new Managing Director.

What comes first – the MD or the strateggy?

Tough call.  You can either undertake strategic planning and then hire an individual with the skills and experience to achieve the prescribed goals and vision. Or you can recruit the MD and get the benefit of fresh thinking and additional firepower at subsequent strategy sessions.  I prefer the former but am currently advising a client to do the latter.

Show them the money

How much is enough? While every situation is different I suggest starting from the standard base salary + performance bonus of up to 50% of base + equity.  The MD should have full P&L responsibility so consider linking the bonus to budgeted net profit. Achievement of 80% of the net profit triggers the bonus payment – below 80% and any payment is completely at the Board’s discretion. For achievement in excess of budgeted net profit you may want to implement a second tier bonus. An example would be paying 5% of net profit out as a bonus from 80% to 100% of budgeted net profit and then, say,7% of net profit paid out for anything achieved over and above the budgeted net profit.

Such a method obviously requires a robust and formalised budgeting process at the start of each financial year (not a bad thing).

Fair Equity

Over the years I’ve seen many hours wasted negotiating equity plans prior to an individual starting. Pointless!  In reality the Company only has an informed hunch of how successful the new MD will be. Similarly the MD has little idea of the true worth of the organisation – even a generous % of not much is not very much.

Include in the offer letter a paragraph outlining the Company’s intention to share ownership with the new MD and a timeframe for when this will be negotiated (I suggest the 12 month anniversary).  The paragraph should also include an acknowledgement that any valuation will be based on the start date of the MD to avoid an obvious disincentive: the more successful the MD makes the Company the greater the cost it will be for them to buy in.

If the individual is uncomfortable with the level of trust required in such an arrangement it may be a red flag for the appointment overall.

Should I sell or should I gift now (apologies to The Clash)

Another tricky one. I often advocate a combination of x% of shares available for purchase after 12 months combined with x% of options to vest over a 5 year period.  This allows the MD to have an ownership stake in the business that is meaningful.  Putting their hands in to their pocket gains a higher level of commitment and can be a welcome release of capital for the owner.  The vesting period of the options also helps promote tenure.

Exit, stage right

The incentive of equity can falter and fade if there is no defined path for it to be realised.  Discussions with any new GM or MD should include a frank discussion about plans and timeframes (if any) for a sale or other means of realising a capital gain from the investment.

GM or MD?

The title to be given to the new hire will depend on their capability and experience.  Often they may begin as the GM with their one year anniversary triggering equity participation, formalising their role on the board and giving them the title and additional responsibility of Managing Director.

Posted in Employee Shares & Incentives, General Business, Privately Owned Businesses | Leave a comment

Under (less) Pressure: 2010 Business Barometer

I continue to be impressed with the annual ANZ privately owned Business Barometer survey. If you’re a NZ business owner I’d strongly encourage you to take 15 minutes out to read their key insights summary.

Twelve months ago I shared my thoughts on the 2009 Barometer – has anything changed? Well…

2009: 60% of companies believed reducing costs would contribute to performance
2010: this has fallen to 39% with a strong return to focusing on growth by sales (72%)

As noted last year, you can only cut so much cost – it’s revenue generation based on solid client relationships that ensures true business viability.

The return to a sales focus is consistent with an increase in demand for advisers and directors with sales and marketing expertise (2010:20% – 2009:13%). I’m also seeing this in the market and predict the trend will continue over coming years.

2009: 73% of owners with a long term strategic plan had documented it
2010: this has increased to 90%

Great news – as they say: “the difference between a goal and a dream is the written word”

2009: desired attributes of a trusted advisor were strategy, independence/different thinking and trustworthiness
2010: strategy and independence still dominate with industry expertise coming in third (2010:31% – 2009:23%)

If independent thinking is so important how come 45% of those with boards have no independent directors? And only 17% have two independent directors?

2009: 25% of businesses had no succession plan
2010: now only 15% have no succession plan

There’s also been a big increase in business owners considering a staggered exit (44% to 65%). As you know, exit needn’t equate to ‘sale’ and many are considering precession before succession.

Here are my pick of other insights from the report:

On advisors….

“Your advisor should be a mentor and a tormentor – they can’t be part of the mutual admiration society.”

On cash…

“…while it might feel like the worst is behind us there is some evidence of business failures increasing on the way out of a recession. The reason is liquidity. Businesses need cash to fund growth.”

On international growth…

“Understanding the market is key – research the market, recognise that there are markets within markets and understand your niche thoroughly.”

On consumer attitudes…

“A trend towards what is often referred to as ‘authenticity’ was emerging; that is, a shift in spending towards the local, natural and personal.”

Happy reading.

Posted in NZ Business Environment, Privately Owned Businesses | Leave a comment