5 More Mistakes – Do You Want Superpremium Value?

1.  You are mishandling the communications of the corporate strategy.  You’ve got a new mission and direction as a result of your most recent off-site meeting. Great! Now how are you going to get the word out to your one thousand employees? Are you getting posters designed to illustrate your new mission, vision, or purpose? Are you stuffing paycheck envelopes with a document listing the five new goals of the organization? Most midmarket companies don’t take these actions. If they establish a vision, the CEO fails to share it with others.

Other times, a CEO does try to get the word out but does so in a way that the Reverend Bill Hybels of Willow Creek Community Church calls the “Mt. Sinai approach” because Moses came down from Mt. Sinai with the two tablets denoting the Ten Commandments and demanded that they be followed. That top-down approach might have worked for Moses, but it doesn’t work in today’s business climate.

Consider this from my upbringing on a farm. Cow paths make sense to cows. From a human perspective, the particular route cows choose for themselves may make no sense. But those routes make enormous sense to the cows themselves. People within organizations often operate in much the same way. They get work done by going to certain other people in the organization, regardless of what the organizational chart might mandate. If you try to impose a new structure from above without getting appropriate buy-in, you’ll end up with two organizations-the one on paper and the real one. Executives in midrange companies often don’t take the time to excite, coach, cajole, and mentor their stakeholders and their employees with regard to new structures, new directions, or new visions. They fail to do so at their peril.

2. Hey, we’re making money!  Often managers focus solely on operational effectiveness instead of thinking about the future. The most effective middle-market leadership teams develop two paths for strategy.  One path represents the present, and that’s operational effectiveness. The other path represents the future-value creation. Losing sight of the future and focusing only on making an operation more effective now can leave a company vulnerable to major shifts in the marketplace. If your idea of long-range planning covers only the next ninety days, then this might be an issue in your organization.
 
3. You are not an S corporation.  If you’re formed as an S corporation, you’ll have options when it comes time for your exit. C corporations and limited liability company (LLC) formations may be the right formation for your company, but my preference is still Subchapter S. If a publicly traded company (Public) buys a private company (Private), Public can write off everything that isn’t cash as goodwill. Both organizations can make what the IRS calls a 338(h) (10) election. This is a fancy term you may want to study because it could save you big bucks. In essence, the election allows Private to treat the sale of its stock as a sale of assets, paying tax only on the asset gain. Public, therefore, gets a stepped-up basis in the assets of Private at a no-tax cost of the purchase and can roll part of that tax break into the premium purchase price it can pay for Private if it chooses. Make sure your legal and accounting teams walk you through this because the benefits and burdens of a Section 338 may seriously affect the economics of a deal and may change your tax situation. The bottom line is that being structured as a Subchapter S gives you flexibility in structuring the best stock, asset, cash, or 338(h)(10) option for your company.

4. You only ask for money when you need it.  A company is only as strong as its banking relationships. A great banking relationship increases value by giving a company the flexibility to use cash when it most needs it. The worst time to ask for money, of course, is when you need it. You should sit down with your bankers monthly to tell them how great you’re doing. You probably learned somewhere along the line that it is never a good idea to surprise your boss. Bankers are similar-they don’t like surprises either. If they feel they understand the rhythm of your business, bankers are enticed to come to you with better deals, increase your credit line, and give you banking covenants you can work with.

5.  Blood is thicker than water, but not necessarily what the company needs.  A family business can often be an opportunity to find employment for otherwise unemployable relatives. Managers of such companies tend to promote individuals they like or to whom they are related instead of finding individuals who are truly suited for the job being filled. This is not a good way to run a company. In his book The Five Temptations of a CEO, Patrick Lencioni says that when CEOs abdicate the responsibility of hiring, they ultimately lose track of their team.  Family members in the company place a huge burden on everyone involved and make it nearly impossible to execute good business decisions. Sometimes those relatives need to be taken out of those jobs to create a team that acts like a group of qualified professionals.

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