When I was growing up my parents were in the hotel business. In fact, at one point, they owned 3 hotels. My dad died when I was quite young and my mother continued operating the hotels. She did well but she soon realized that the 3 hotels were too much for her so she sold 2 of them. She proceeded to invest heavily in the remaining hotel. She expanded the dining room and introduced “sizzling steaks” which were a huge hit at the time. She completely renovated the “tap” room and introduced daily entertainment for the patrons. People were raving about what a great businesswoman my mother was! However, my mother never talked business with me. She kept everything close to the vest and I never appreciated what she had done. But then again, I didn’t really care. I was to busy playing sports and chasing girls!
The Second Generation
It didn’t really seem as if the second generation was going to play a role in this business. My sisters got married and moved away. My brother became a lawyer and moved to Boston and I decided to become an electrical engineer because they were receiving the highest salary upon graduation (not a good reason to become an engineer as you will see). Somewhere between my sophomore and junior years I got the urge to be an entrepreneur. After some research I contacted a tailor in Hong Kong and pursued importing some of their famous suits. I never implemented it because, in the final analysis, I couldn’t imagine myself measuring some guy’s inseam! By my senior year I started thinking seriously about my mother’s hotel. One day I returned from classes and learned that the hotel had burned down. So much for the hotel business!
My Uncle as my Mentor
My mother’s brother, Uncle Ken, had a very successful paper distribution business. In fact, my mother told me that in 1959 he was offered $14 million for his business. It was always a major event when Uncle Ken came to visit. He would pull up in his Cadillac and I would carry his bags in the house. He would always give me $5 and that was a lot of money at the time. When I graduated college and moved to Boston, I decided that I needed a business mentor if I was ever going to pursue my own business. My dad died when I was young and my mother never talked business with me – so Uncle Ken was the answer. I called him and we started having dinner meetings every other month or so and I would pepper him with questions about business. One evening I met him at his office and he asked me to wait while he finished a meeting. The office walls didn’t go all the way to the ceiling and I could hear their conversation. They seemed to be talking about buying my uncle’s company. I heard one of the men say “your company is only worth your equipment and we value that at $250,000”. I thought “wait a minute, it’s 1969 and 10 years ago the company was worth $14 million and now it’s worth only $250,000!”.
This is a true story, As they say “I can’t make this stuff up”! My uncle fell in love with his company and it became his “baby” and he couldn’t give his “baby” up – with disastrous results. That 5 minute “snippet” had a major impact on my business philosophy. But most business founders treat their companies as their “babies” and hold them far too long. Businesses, like everything else, have a life cycle.
The Business Lifecycle
Every company gets to a level (plateau) where, in order to get to the next level, they require a capital infusion. That capital can be new ownership, new ideas, new innovative staff – something to give the company a boost to keep growing. Otherwise, they follow the classic bell shaped curve of growth, plateauing, and declining. Just before the peak of the bell shaped curve where the business growth has slowed (but is still growing) is where a decision has to be made on how to implement a new growth surge to get to the next level. If the owner has the ability, the energy, and the motivation she/he can find the capital, either through debt or equity, to fund a new growth surge. If the owner does not have the ability, energy, and motivation hopefully they have put the company in a position to find the “right buyer”.
If the owner waits until the company’s growth begins to decline not only will it be more difficult to find the “right buyer”, but also more difficult to procure the funds for organic growth.
I can only imagine what my Uncle Ken would have realized from the sale of his company if he had followed this strategy and not treated his company as his “baby”!
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