One of your first starting points is to be clear exactly what is being sold. This may seem obvious but many Sellers think they will deal with it when they get an offer. So let’s break this down and look a little more closely at it.

The two most important things to a buyer when looking to acquire a business, is current cash flow and the potential of the business. From the buyer’s perspective, the cash flow is the fuel that feeds the business to pay the suppliers, employees, landlord, tax man, lenders and of course, leave something left over for them after all their work and capital investment in the business.

For the buyer to achieve the above, they need to purchase all the assets of the business so they understand what each asset does and how it contributes to the cash flow and/or potential of the business. As the seller of the business, it’s therefore important that you make it clear what those assets are and present them in the best possible light.

So if you are thinking of selling your business, your immediate response to this question may have been “I am selling the business as a going concern on an ‘as is’ basis.” This is perfectly fair. But you need to do a little better than that. And I’ll explain why at the end.

So we are agreed the business is being sold. When you have your first buyer meeting at the business, the buyer will be absorbed in processing what they can see and assume they will buy with their purchase of your business. The first thing to do is therefore remove any items that are not part of the purchase price. If you have collectibles such as paintings, antique cars or items that are personal to you and not needed to make the cash flow of the business, remove these now.

If the business has inventory, make sure the inventory is fresh and as usable as possible. If a buyer sees a lot of old inventory with doubtful value, it will become a specific negotiating point in the transaction and may kill the deal. If time is on your side, start selling the inventory to your customers even if it needs to be at a reduced price. You are likely to get more from your customers than being forced to sell it as a discount as part of the purchase price to the buyer.

The next thing to do is make a list of all the Fixtures, Furniture and Equipment. Hopefully this list is already in place as your accountant would be using this list as the depreciation schedule for your tax return. If the list doesn’t exist, now’s the time to build it as when you close escrow upon selling the business this list will be required. If the list is old, now is a good time to update it by making sure you still have everything and it is in good working order and condition. If it can no longer be found, remove it from your list and talk to your accountant about writing it off for tax purposes. If it’s still on the list but it no longer works, sell it or get rid of it to make the presentation of the business better and allow the items that are working and in good order stand out to the buyer.

If your business has Works In Progress, make sure you can easily arrive at a value for those items. It will become a negotiating point in the transaction.

If the business has excess fixtures, furniture and equipment, turn those items into cash by selling them. There are plenty of options to selling the goods including eBay and Craigslist. Make sure what is being sold is as presentable as possible but again, get some cash into the business and move unwanted items. This could include vehicles and real estate and other excess items. Hopefully the business has a current list of fixtures, furniture and equipment. If a list doesn’t exist, there is your starting point as you may be surprised what you have stored away.

After the above has been played out as much as possible and the motivation is still not strong enough to keep the business open, it may be worthwhile considering selling the business with the assets that are in place and needed to run the business. For example, if the business is a restaurant or has a lot of assets built in such as a manufacturing plant, there may be value in selling the business on an “as is” basis to a buyer who will take what you have, bring some fresh capital and enthusiasm and move forward with what you have. If your business owes money to a landlord, this may also be a method to “pay” the landlord and get out of your lease.

If this is an option that makes sense to you, your best way of handling this situation is by getting a third party valuation on the machinery and equipment. A third party appraiser who is properly trained and certified can you give a written report showing the total value of the assets. You can then use this report to negotiate with other parties and settle some or all liabilities. The appraisal method used may be Fair Market Value but it could also be Fair Market Value In Continued Use. Fair Market Value In Continued Use recognizes that the equipment may have shipping costs to get to the business, may have expert labor to install and get the equipment operational, and to remove and transport the item would incur costs thereby affecting its value.

As the saying goes – beauty is in the eye of the beholder. Where assets of a business are concerned, such as inventory, machinery and equipment, prices fluctuate based on supply and demand. If the supply and demand gets too far out of balance then prices move accordingly. That is, if the supply increases it means that prices decrease and vice versa. This is influenced by one final component and that is time. If the seller wants to move quickly then the price will go down. If the seller is in no hurry to sell and the buyer wants to move quickly, the price will go up.

First, it’s rarely as simple as closing the door and handing the key back to the landlord. If your business has a lease you obviously need to discuss the situation with the landlord. If you have a good relationship and feel you can handle it on your own to save hiring help, take care as you handle the issue. Bear in mind the landlord is no different to you. They lease the real estate to make money. If you close the doors, they need to find a replacement for you which may take time to achieve. This can be a talking point with the landlord as you may be able to bring a tenant to replace you. If this is the case, make sure this is correct as the landlord may become frustrated if the person changes their mind. Similarly, the landlord is not required to accept the person you bring so be aware the landlord has options.

Second, and this is the main reason for this article, some businesses are cash poor and so are struggling to keep their doors open. That is, they are unable to generate enough sales to produce the profit that allows them to keep their doors open. However, some of these businesses are rich in assets. If this is the case, a real option is to manage down the assets to either keep the business going or get the best price possible for the assets. Here are some suggested strategies.

If the business has a lot of excess inventory but limited cash, move the excess inventory. This means going through each piece of inventory to make sure it’s in good condition. If its condition is questionable, discount it but get it sold. Better to have a few dollars in the business and free up some space than have it sit around and collect dust. This is especially true if the business is paying to store any inventory as costs can be reduced by eliminating unnecessary storage space.

Most buyers are interested in two things when buying a business; cash flow to service debt and provide an income to sustain the buyer’s lifestyle and potential. Buyers are not excited about buying a business and managing it down to a smaller business. If you own a business that is challenged by cash flow and limited potential, your buyer may be someone in the industry who is looking to add the assets of your business to their business and therefore take you out as a competitor. These buyers can be harder to find and they are almost always only motivated by paying as low a price as possible.

The first option is to take a real assessment of where you are at. One of the best ways of doing this is to talk with your accountant. Make sure your accountant is not simply filing your tax return to meet compliance but actually helps you look behind the numbers and understand how your business is performing.
What do you need to know?

Most business owners understand their gross sales. Some are adept at using this number to explain the success of their business. For example, have you spoken to a business owner that said “Sales are up 20% on this time last year.” They say this with great pride but that doesn’t tell the full story.
Some business owners can tell you the net profit of the business. Net profit is simply what they pay taxes on or gross sales less cost of goods less expenses. Some business owners like to say “Our bottom line was up 10% compared to last year.” This is good news but that doesn’t tell the full story.

A few business owners can get into their financial statements and understand what’s happening in their business. For this business owner it’s the Profit and Loss Statement. If they prepare this document themselves they know what’s going on, but most business owners have a resource such as a family member or at least a book-keeper to handle these details for them. However, that leads to a couple of points. The first point is that theft in small businesses, due to the recession, is at its highest in many years as the person handling the books is able to cook the books by stealing funds which the owner doesn’t know about. They can steal funds through a false invoice or buying certain goods, have the business pay for them and then take the goods back and get a refund and keep the money. There are many creative ways for someone to find money if they want to. So how does a business owner protect themselves? One of the ways is for the business owner to do a line by line check of the profit and loss statement at least on a monthly basis. Any item that appears and the owner can’t remember what the expense was for can be challenged to find an acceptable answer. It can then be wise to do random tests to make sure all expenses can be verified such as checking to make sure that new computer the sales person needed is still around or that special order of inventory was needed and did arrive etc. Testing the monthly profit and loss followed up with random checks creates good discipline and helps the owner stay on top of the critical aspect of the business but this doesn’t tell the full story of the financial health of the business.

The health of the business is really revealed by working with the Profit and Loss Statement and the owner that can read and understand the Balance Sheet. The balance sheet is the place that explains how the money coming into and going out of the business was used. It shows what’s owed and it shows what the business owns (or the assets of the business). It reveals the owner draw and investments and basic information about the Accounts Receivables and Accounts Payable and how they are tracking. If Accounts Receivables are growing then Accounts Payable may also grow but they should keep their ratio’s consistent.
If a business owner can understand a healthy balance sheet they are well on their way to maintaining and growing a successful business. Understanding a balance sheet doesn’t mean you need to become a CPA. It means you need to ask questions until you “get it.” Most business owners shy away from understanding the balance sheet as it’s too confusing. However, if you ask the same question month after month it will eventually makes sense.

The first area to look at is the financial statements of the business.  The first and most readily used is the Profit and Loss Statement as it shows the income and expenses of the business with hopefully the income greater than the expenses.  Just as important, however, is the Balance Sheet as this document shows the wealth of the business.  With an up to date profit and loss statement and balance sheet, a trained business appraiser can then calculate what the owner of the business could expect to get if they decided to sell it on the market.

In addition to the financial statements, the next performance area to measure and manage can be simple business metrics that include the number of incoming calls to the business (and this can be broken down into times of day if call volume is an important metric,) the number of hits to the website, volume of email, volume of faxes and volume of orders placed on-line (if important.)  Depending on the business, the total number of orders placed and/or the number of orders placed by each sales person.  In simple terms, sales can generally be easily measured.   It’s important that the sales team is clear on sales targets and agree how they are to be measured.  Sales people are motivated by getting results.  Make sure the results are measured accurately, consistently and fairly or sales people will become de-motivated; which is obviously the complete opposite from what you want to do.  It’s important to start by building Key Performance Metrics for your business.  Don’t be afraid to change and add other metrics as they are normally easy to isolate and therefore count.

Make sure all metrics are counted monthly and as many data points shared with everyone in the business as possible.  Celebrate successes and ask the team for suggestions when the performance isn’t acceptable.

The next aspect to a Performance Plan for the business and something not always done is an annual performance review.  There are different approaches to this topic; some are personal preference.  For example, some businesses tend to link the annual performance review to also a salary review.  My preferred strategy is not to link them.  My reason for this is that I don’t think they are linked.  Compensating someone on performance is important.  However, the good performance of one person does not always mean the business can afford to pay as collectively the business may not be performing well enough.  The argument goes that incentives should include as many workers as possible so if they are successful so too will the business, but you can have a top performing employee that is bring in the best sales for the business but his demeanor or attitude to co-workers may not be acceptable.  Therefore, how do you financially reward a top performer during a meeting and then point out behavior or communication problems.  Rewarding people for sales is great however, you will lose any goodwill from acknowledging and rewarding great sales and then bringing up negative issues.

If the performance of each employee is measured with an Annual Performance Review an extension of that is to include feedback from the co-workers at the same level as the employee.  This is called a Peer performance review.  It can be controversial as someone may choose to denigrate the performance of a co-worker they don’t like.  So there are risks.  However, it can provide constructive results if managed correctly.

A best practice for a Performance Review is asking an employee that reports to a manager their opinion on the performance of the manager and how the manager could do things better.  This is called a Management Review.  Once again this approach can have a downside but it can enable a business to grow and be internally stronger if open and honest communication is part of the business culture.

The final item to consider is your performance as the business owner.  Not every owner has the time or desire to put such a process in place, but if you want your business to grow and have a healthy business environment I think it’s one of the best means to enhance the success of the business.  Depending on the size of the business, the Owner Performance Review can be done by hiring an outside consultant.   An alternative suggestion is to do it by anonymous survey but this approach reduces the effectiveness as it restricts the answers that can be given and doesn’t allow an exchange to clarify things.

There is a business axiom that says “If you can’t measure it, you can’t manage it.”  The Performance of a business can mean the difference between success and failure.  Most businesses do not fail overnight.  They decline gradually, with often the decline picking up steam towards the end.  A good Performance Plan will provide warnings that if measured and managed will allow corrective action to be taken in time.

Part 11 of this article series, explains the importance of a Disaster Recovery Plan.  Most businesses don’t have the time to put this together.  That can be a mistake and this article explains why.

The Patient Protection and Affordable Care Act (the Patient Protection Act) was signed into law by President Obama on March 23, 2010. The Reconciliation Act has now passed the Senate and the House and will be signed into law by President Obama sometime during the week of March 28, 2010. Not withstanding the fact that amendments to the Act will likely occur, some minor and some significant, it is important for small business owners to understand the tax components of the Act which apply to them as it currently stands. All small businesses will be impacted with the following information hopefully of assistance to those businesses in the local Sacramento area.

For owners of small businesses and their workers, the recently enacted health reform legislation has some key provisions to pay attention to. The major ones include: tax credits; excise taxes; and penalties. But whether a business will be affected by them depends on a variety of factors, such as the number of employees the business has. This article provides an overview of the key tax provisions in the new law with the biggest impact on small business.
Tax credits to certain small employers that provide insurance. The new law provides small employers with a tax credit (i.e., a dollar-for-dollar reduction in tax) for nonelective contributions to purchase health insurance for their employees. The credit can offset an employer’s regular tax or its alternative minimum tax (AMT) liability.

Small business employers eligible for the credit. To qualify, a business must offer health insurance to its employees as part of their compensation and contribute at least half the total premium cost. The business must have no more than 25 full-time equivalent employees (“FTEs”), and the employees must have annual full-time equivalent wages that average no more than $50,000. However, the full amount of the credit is available only to an employer with 10 or fewer FTEs and whose employees have average annual full-time equivalent wages from the employer of less than $25,000.

Years the credit is available. The credit is initially available for any tax year beginning in 2010, 2011, 2012, or 2013. Qualifying health insurance for claiming the credit for this first phase of the credit is health insurance coverage purchased from an insurance company licensed under state law. For tax years beginning after 2013, the credit is only available to an eligible small employer that purchases health insurance coverage for its employees through a state exchange and is only available for two years. The maximum two-year coverage period does not take into account any tax years beginning in years before 2014. Thus, an eligible small employer could potentially qualify for this credit for six tax years, four years under the first phase and two years under the second phase.

Calculating the amount of the credit. For tax years beginning in 2010, 2011, 2012, or 2013, the credit is generally 35% (50% for tax years beginning after 2013) of the employer’s nonelective contributions toward the employees’ health insurance premiums. The credit phases out as firm-size and average wages increase. Tax-exempt small businesses meeting these requirements are eligible for payroll tax credits of up to 25% for tax years beginning in 2010, 2011, 2012, or 2013 (35% in tax years beginning after 2013) of the employer’s nonelective contributions toward the employees’ health insurance premiums.

Special rules. The employer is entitled to an ordinary and necessary business expense deduction equal to the amount of the employer contribution minus the dollar amount of the credit. For example, if an eligible small employer pays 100% of the cost of its employees’ health insurance coverage and the amount of the tax credit is 50% of that cost (i.e., in tax years beginning after 2013), the employer can claim a deduction for the other 50% of the premium cost.

Self-employed individuals, including partners and sole proprietors, two percent shareholders of an S corporation, and five percent owners of the employer are not treated as employees for purposes of this credit. Any employee with respect to a self-employed individual is not an employee of the employer for purposes of this credit if the employee is not performing services in the trade or business of the employer. Thus, the credit is not available for a domestic employee of a sole proprietor of a business. There is also a special rule to prevent sole proprietorships from receiving the credit for the owner and their family members. Thus, no credit is available for any contribution to the purchase of health insurance for these individuals and the individual is not taken into account in determining the number of full-time equivalent employees or average full-time equivalent wages.

Most small businesses exempted from penalties for not offering coverage to their employees. Although the new law imposes penalties on certain businesses for not providing coverage to their employees (so-called “pay or play”), most small businesses won’t have to worry about this provision because employers with fewer than 50 employees aren’t subject to the “pay or play” penalty. For businesses with at least 50 employees, the possible penalties vary depending on whether or not the employer offers health insurance to its employees. If it does not offer coverage and it has at least one full-time employee who receives a premium tax credit, the business will be assessed a fee of $2,000 per full-time employee, excluding the first 30 employees from the assessment. So, for example, an employer with 51 employees who doesn’t offer health insurance to his employees will be subject to a penalty of $42,000 ($2,000 multiplied by 21). Employers with at least 50 employees that offer coverage but have at least one full-time employee receiving a premium tax credit will pay $3,000 for each employee receiving a premium credit (capped at the amount of the penalty that the employer would have been assessed for a failure to provide coverage, or $2,000 multiplied by the number of its full-time employees in excess of 30). These provisions take effect Jan. 1, 2014.

The “Cadillac tax” on high-cost health plans. The new law places an excise tax on high-cost employer-sponsored health coverage (often referred to as “Cadillac” health plans). This is a 40% excise tax on insurance companies, based on premiums that exceed certain amounts. The tax is not on employers themselves unless they are self-funded (this typically occurs at larger firms). However, it is expected that employers and workers will ultimately bear this tax in the form of higher premiums passed on by insurers.

Here are the specifics: The new tax, which applies for tax years beginning after Dec. 31, 2017, places a 40% nondeductible excise tax on insurance companies and plan administrators for any health coverage plan to the extent that the annual premium exceeds $10,200 for single coverage and $27,500 for family coverage. An additional threshold amount of $1,650 for single coverage and $3,450 for family coverage will apply for retired individuals age 55 and older and for plans that cover employees engaged in high risk professions. The tax will apply to self-insured plans and plans sold in the group market, but not to plans sold in the individual market (except for coverage eligible for the deduction for self-employed individuals). Stand-alone dental and vision plans will be disregarded in applying the tax. The dollar amount thresholds will be automatically increased if the inflation rate for group medical premiums between 2010 and 2018 is higher than the Congressional Budget Office (CBO) estimates in 2010. Employers with age and gender demographics that result in higher premiums could value the coverage provided to employees using the rates that would apply using a national risk pool. The excise tax will be levied at the insurer level. Employers will be required to aggregate the coverage subject to the limit and issue information returns for insurers indicating the amount subject to the excise tax.

Continue monitoring regulatory changes. Debate over health care reform, and in particular the recent Act, will continue. Be sure to monitor ongoing health care issues as it is very probable that the new law will eventually be amended in significant ways.

If you need additional information, have questions, or need assistance navigating the sea of business confusion, call your Business Transaction Strategist, Monty W. Walker at (940) 322-5086.

As the entrepreneur looking to sell and transition out of being a business owner, it’s not a quick process. It can even drag on if the buyer wants the seller to continue in an active role in the business in some capacity. At the end of the day, however, it all needs to make sense to the entrepreneur and the best way to do that is to build a transition plan.
What should be included in the transition plan? A transition plan can overlap with an Exit Plan. An exit plan is essentially a process to exit business ownership. A transition plan is a strategy to manage the protection and eventual transfer of assets or stock in a proactive, tax efficient manner. Essentially an entrepreneur can have 5 types of assets. These are Personal Property, Real Estate, Business Interests, Insurance Plans and Employee Benefits.

Personal property includes savings, stocks, bonds and personal effects. Real estate includes both residential and commercial property. Business interests include the business legal entity such as a corporation, partnership or LLC. Insurance plans include life, health and annuities. Employee benefits include pension, 401(k), IRA and stock options.
Creating a Transition Plan touches all aspects of an entrepreneur from the obvious personal financial need and therefore personal security to matters such as tax and perhaps not always recognized, the emotional needs of the entrepreneur. At all times the emotional needs of the entrepreneur are always exposed. Things like divorce, health issues, family issues, personal safety and disability are always looming. The pressure of the business from customers, suppliers, landlords, employees, government agencies, lenders and a myriad of others constantly keeps an entrepreneur thinking, planning and reacting.

When transitioning the ownership of a business there are many options. An outright sale to a buyer is one of the most obvious but there are 4 other possible options. These are selling the business to the employees through an ESOP program, sell through a Charitable Trust, transfer to a family member and sell to a partner. In certain circumstances, the owner could take the business public and sell his interest via an Initial Public Offering or IPO but most businesses would not meet the criteria including handling the associated costs.

A quality Transition Plan is all about success. Its ultimate goal is to ensure that the business and the owner moves from one state to the next. The best analogy I like is that it’s like juggling two snowflakes. Every snowflake is unique because of temperature, the absence or inclusion of a piece of dirt, the number of water molecules, spins of electrons, hydrogen and oxygen etc. So too is a business and its owner. To preserve and maintain the business and protect its uniqueness it must be treated carefully and properly. The same applies to the owner. The owner can live without the business and the business can live without the owner as long as proper care and attention are given to each so when the next owner comes along with their uniqueness, like another snowflake, it has to make sure it can mesh with the business and both be successful.

If the entrepreneur loses the hunger to learn, be the vision and leader of the business, it’s time for a change. Because a business is so dynamic, it requires leadership. If this doesn’t happen it will shrivel and die. Capital, time and energy must keep moving otherwise it will fade away.

If the entrepreneur leading the business recognizes it’s good business to plan for a change of ownership and therefore handle the matter in a proactive way, the chances of success are so much greater and so are the chances of getting the highest price possible. There is a very simple reason for this. The buyer of a business looks at and includes many things in their decision making process. However, there are basically two ingredients, the cash flow the business generates and its potential to generate more cash flow in the future. If either one is missing, the buyer will require a discount on the purchase price of the business. If both are missing, it will be a business extremely difficult to sell.

As the entrepreneur works through their decision to sell the business, a critical component that will help them do this successfully is to start putting into place things the entrepreneur will move to after they sell the business. It can be intriguing to watch older entrepreneurs work through the process of selling a business, handling all the negotiations and questions from the buyer and just prior to signing the documents to transfer ownership to the buyer, decide not to sell. The reason they decide not to sell is because the appeal of cruising the world or playing golf 5 days a week or looking after the grandchildren all of a sudden doesn’t have the same appeal as going to work each day. So a good exit plan for an entrepreneur as its first priority needs to have a clear strategy detailing to what the entrepreneur is going to move.

The next ingredient is to make sure a good team is in place to advise and protect the transition of the business. The team can include accountants, business attorney’s, financial planners, lenders and a business broker to market and handle all buyer inquiries about the business. The most important ingredient to the entrepreneur is trust. If the entrepreneur does not have a trusting relationship with any of the people on their team, they need to be replaced.

Each entrepreneur will have a different risk tolerance to different aspects of the transaction. The current market conditions require a seller to be part of the finance of the transaction. Third party lenders can bridge the gap between the buyer down payment and the seller note, but the seller has to be willing to be in a second position on the loan.

Each exit plan will differ for each entrepreneur. My golden rule is that when selling your business, put your feet in the shoes of the other party and see things from their perspective. This is true not only for the buyer who has no history of the enterprise, has to put down a sum of money they may never see again, has to take the emotional risk of not only being good enough to own and operate the business as well as the current owner, but learn as much as possible as quickly as possible or suffer the embarrassment of it all crashing down on them.

Part 13 and the final article in this series looks at the Transition Plan and how it completes the role and responsibility of the entrepreneur.

A good form of insurance but one only the business owner can handle is creating a Disaster Recovery Plan. It doesn’t sound very attractive and it doesn’t sound like a good use of time but let’s consider the following.
If your business was hit by a severe storm, hurricane, truck or car that was out of control, flood, tornado, lightning or hail, earthquake, disease or pests, unusually high temperatures that caused damage to the building your business is in or some other unpredictable occurrence, how would this affect your business? What about a building fire, hazardous materials incident, sabotage, a loss of key staff or power disruption? Perhaps ask the same question in a different way. If something occurred to damage the business and you were out of action for a week or so, could your business survive?
The point of all this is to put a Disaster Recovery Plan together.

With each disaster there are three phases; Response, Mitigation and Recovery. With a defined Disaster Recovery Plan, each of the three phases means there is less downtime in each phase and could mean the difference in saving or losing the business.

Here are some important ingredients to include in your Disaster Recovery Plan.

1. Make sure everyone is on board with the plan and understands their role.
2. Create and train a critical management team who can plan, check and execute.
3. Document any hazardous or business critical items so a mitigation strategy is developed and agreed upon so response time is kept to a minimum and its laser focused on the critical areas.
4. Create, document and test any mitigation strategies so the business can return to normal operation as soon as possible.
5. Test, evaluate and maintain; and do this every 3 months.
6. Make sure you don’t forget step five.

This article is not an advertisement for insurance but there are many insurance products available. These include Property insurance, Flood insurance, Business Liability insurance, Workers Compensation insurance, Business Interruption insurance, Umbrella insurance, Errors and Omissions insurance, Disability insurance and Employers Liability coverage.

All disasters, by definition, only allow a certain number of things to be done in a window of time. The first thing to therefore establish is priorities and these should be people first, business criticalities for the future of the business and then things. First and foremost, people include the owner’s immediate family, the employees and customers. If home or business neighbors need help then that too should be included. Help should include knowing where and when to send people out of the danger area (don’t send them to another danger area) including an agreed place and time to all meet, having a list of readily available contacts including an agreed means of communications and tools, having the appropriate medical equipment including medications if necessary and a list of contacts to emergency centers so they can be contacted for updates. It sounds basic, but the need to avert panic and poor decisions needs to be top of the mind.

Finally, copies of all critical records require a systemic and deliberate process. If paper records are copied and archived in a different location why not make an extra copy or two and archive them elsewhere. Computer data and a deliberate back up strategy should now be part and parcel of any small business that uses computers. Online back-up services are available for little to no cost and work very well.

Disasters cannot be avoided. History repeatedly shows us that we choose to ignore disasters at our own peril. Good management includes preparing for a disaster and strategies are readily and easily available. Include making a Disaster Recovery Plan as part of your business assets. If you have one in place; congratulations! If you don’t have one, create a deadline and make sure it gets done. Consider putting a team together and have them handle all the pieces and bring a final report back to you.

At some point, all business owners will exit their business. It’s just a question of whether it’s in a wooden box and is therefore an unplanned event or on a cruise ship as a planned event.

Part 12 of this article series looks at the importance of an Exit Plan and how to put it together.

The first area to look at is the financial statements of the business. The first and most readily used is the Profit and Loss Statement as it shows the income and expenses of the business with hopefully the income greater than the expenses. Just as important, however, is the Balance Sheet as this document shows the wealth of the business. With an up to date profit and loss statement and balance sheet, a trained business appraiser can then calculate what the owner of the business could expect to get if they decided to sell it on the market.

In addition to the financial statements, the next performance area to measure and manage can be simple business metrics that include the number of incoming calls to the business (and this can be broken down into times of day if call volume is an important metric,) the number of hits to the website, volume of email, volume of faxes and volume of orders placed on-line (if important.) Depending on the business, the total number of orders placed and/or the number of orders placed by each sales person. In simple terms, sales can generally be easily measured. It’s important that the sales team is clear on sales targets and agree how they are to be measured. Sales people are motivated by getting results. Make sure the results are measured accurately, consistently and fairly or sales people will become de-motivated; which is obviously the complete opposite from what you want to do. It’s important to start by building Key Performance Metrics for your business. Don’t be afraid to change and add other metrics as they are normally easy to isolate and therefore count.

Make sure all metrics are counted monthly and as many data points shared with everyone in the business as possible. Celebrate successes and ask the team for suggestions when the performance isn’t acceptable.

The next aspect to a Performance Plan for the business and something not always done is an annual performance review. There are different approaches to this topic; some are personal preference. For example, some businesses tend to link the annual performance review to also a salary review. My preferred strategy is not to link them. My reason for this is that I don’t think they are linked. Compensating someone on performance is important. However, the good performance of one person does not always mean the business can afford to pay as collectively the business may not be performing well enough. The argument goes that incentives should include as many workers as possible so if they are successful so too will the business, but you can have a top performing employee that is bring in the best sales for the business but his demeanor or attitude to co-workers may not be acceptable.

Therefore, how do you financially reward a top performer during a meeting and then point out behavior or communication problems. Rewarding people for sales is great however, you will lose any goodwill from acknowledging and rewarding great sales and then bringing up negative issues.

If the performance of each employee is measured with an Annual Performance Review an extension of that is to include feedback from the co-workers at the same level as the employee. This is called a Peer performance review. It can be controversial as someone may choose to denigrate the performance of a co-worker they don’t like. So there are risks. However, it can provide constructive results if managed correctly.

A best practice for a Performance Review is asking an employee that reports to a manager their opinion on the performance of the manager and how the manager could do things better. This is called a Management Review. Once again this approach can have a downside but it can enable a business to grow and be internally stronger if open and honest communication is part of the business culture.

The final item to consider is your performance as the business owner. Not every owner has the time or desire to put such a process in place, but if you want your business to grow and have a healthy business environment I think it’s one of the best means to enhance the success of the business. Depending on the size of the business, the Owner Performance Review can be done by hiring an outside consultant. An alternative suggestion is to do it by anonymous survey but this approach reduces the effectiveness as it restricts the answers that can be given and doesn’t allow an exchange to clarify things.

There is a business axiom that says “If you can’t measure it, you can’t manage it.” The Performance of a business can mean the difference between success and failure. Most businesses do not fail overnight. They decline gradually, with often the decline picking up steam towards the end. A good Performance Plan will provide warnings that if measured and managed will allow corrective action to be taken in time.

Part 11 of this article series, explains the importance of a Disaster Recovery Plan. Most businesses don’t have the time to put this together. That can be a mistake and this article explains why.