Contrary to the title of this article… we are not going to be talking about the cult classic 1997 film I Know What You Did Last Summer starring Jennifer Love Hewitt, Sarah Michelle Gellar, Ryan Phillippe, and Freddie Prinze Jr. Well at least we will not be talking about that film after this paragraph. While we could definitely make some connections between that film and exit planning, we will hold off on the horror movie comparisons until Halloween. Instead, we will head in a different, far less frightening direction.
Suppose you were to transition the daily operations of your business over to a new owner tomorrow. Would that new owner have the processes and records needed to successfully run the organization? Could they look back at what you had done the previous summer or year, and see how the business has grown in the interim?
How Strong is Your Structural Capital?
The most robust of the four intangible capitals in every owner’s business is their structural capital. Structural Capital represents the strength of your strategy, systems, processes, capital, and financial structure. How well are these documented, proven, and are they scalable and transferrable?
Well-Documented Business Strategy
Structural Capital explains the how and why behind everything your company does. Chris Snider refers to this in his book, Walking to Destiny, as the “secret sauce.” How well is this strategy documented? Is there proof of the outcomes of these strategies and how they have been altered and updated as the business scales? A well-documented business strategy allows individual employees' best practices to be converted into company property that can be sold or transferred to the next owner. Structural capital is the knowledge, processes, and systems that make your company unique. It's what allows you to do what you do, and it's what gives you a competitive advantage.
A well-documented business strategy can help you:
- Identify your core competencies. What are you really good at? What sets you apart from your competitors?
- Develop and implement effective processes. How do you get things done? What are your best practices?
- Capture and share knowledge. How do you make sure that everyone in your company has access to the information they need to do their job?
- Measure and improve your performance. How are you doing? What can you do better?
A well-documented structural capital strategy is an essential part of any successful business. It can help you grow, scale, and compete in today's marketplace.
In-Depth Financial Records
How often do you review your business financial records? Are you actively documenting all finances to gain an understanding of business value or are your financial records used strictly for tax purposes? Clearly documented financial records that focus not only on income generation but value acceleration are more beneficial for an owner looking to exit.
From a buyer’s perspective, the value of the company as a whole is a larger factor in purchasing the business. Business owners should review their financial records regularly to gain an understanding of their business's financial health and to identify any potential problems.
Rick Krebs has noticed that financials tend to be a weakness for the businesses he works for within the $1 to $30 million range. He finds that the owners only have financial statements prepared at a minimum level for tax purposes and returns and not for growth or marketing strategies. One of his suggestions for owners is to “be more consistent with your reporting and conduct monthly financial reports in addition to quarterly and annual financial analysis.”
Owner Decentralization
Think of the daily tasks you are responsible for completing in your business. If you were to leave the business tomorrow, how many people would know how to manage your task list? Are key initiatives and processes reliant on you alone instead of a leadership team? Businesses that are heavily dependent on the owner often have weaker intangible capital, and therefore lower business value.
Chris Snider shares in Walking to Destiny, “Due to owner concerns about giving up control and confidentiality, they usually have weaker talent. Customer relationships are with the owner, not the company. They have not packaged their intellectual property. They have weaker structures, systems, and processes if any documented processes at all.”
Ultimately, when a business is dependent on its owner and the owner makes themselves central to the business operations and processes, the value of the company is intrinsically linked to the owner, not the business itself. This is because the owner's knowledge, skills, and experience are essential to the business's success. If the owner were to leave or become incapacitated, the business would likely fail. This is in contrast to a business that is well-run and has systems in place that can function without the owner's direct involvement. A business with a decentralized owner is more likely to be successful in the long run, especially once the owner exits the business.
Learn more about the importance of strong structural capital in our Four Intangible Capitals Infographic.
