Five Steps to Prospering

Prospering’s essence means we have taken care of the simple problems and are prepared to take care of the complex problems as best we can. A successful company is one that can withstand adversity. We are strong, not weak. It doesn’t mean we won’t face adversity, only that we are better prepared to do so. And we are in charge of our own preparedness.

These 5 Steps to Prospering attack our simple and avoidable problems. Simple problems are the lack of cash, the lack of organization, the lack of people stepping up to the responsibilities of their function, and the lack of demand for the organization’s capacity, as well as the predictable prospering issues of raising rich kids and transitioning the business.

Complex problems are far more serious and deal with human as well as business adversity. We prepare our businesses to withstand adversity.

Five Steps to Prosperity

Through the last twenty-five years of work with family-based businesses and the previous twenty years spent in my own family-based business, I found five common challenges that must be faced in order for family-based businesses to prosper. Regardless of the specific business, these challenges remain the same and require us to take action. So they form our five steps to prosperity.

These five steps build on each other and are in order for a reason. They start with the most basic and move upward. We must attend to step one first and then move on to step two. However, the activities of a previous step must continue until all steps are being done at the same time.

The five steps are unified. They go together. Failure in an early step can never be overcome by a greater activity in a later step. We work with businesses over a period of time rather than with single assignments, and I see companies return to significant problems when they stopped completing earlier tasks in favor of later ones. They all must be done all the time.

These steps, however, rest on some basic understandings.

Understand that the information within these steps isn’t all-inclusive. Try as I might, I have not been able to include every activity or explanation suggested by the step or answer every possible question. Luckily we live in an age where we may continue to have a dialogue on this subject.

And understand that I do not hold myself out as the “perfect person” or the “perfect business family,” or as role models of any sort. These principles have taken me a lifetime to uncover and, along the way, I violated most of them at one fork in the road or other. So I, especially, am no role model.

Like others having learned of these principles, I try to live them every day as best as I can. But principles are tough. We don’t always do what we should do every time. But that is a human defect and a reflection on me and not the principles.

From this search the development of these five steps evolved.

The five steps are:
1. Awaken
2. Get Financials
3. Get Organized
4. Understand the Battleground
5. Prosper, but Understand the Rules

Step One: Awaken

The awakening begins with accepting the challenge of Prosperity’s Litmus Test.

We must provide to our families more time and more money, not less, because we are in these businesses. It is not for the family to persist in sacrificing for the business. The business is but a means to our family’s prosperity and is not the end itself.

If our business is not allowing the family to prosper, then we must fix it, or close it up and find a real job where we can provide more for our stakeholders.

Philip C. McGraw, in his book Life Strategies, describes his Life Law #1, “You either get it or you don’t.” Unfortunately too many otherwise sane business owners just don’t get it.

We’ve seen whole families sacrificed to some artificial principle—sales growth for growth’s sake or having the biggest piece of equipment or the snazziest office—only to be foiled in the end by their own misunderstandings.

We’ve also seen many people use the business as an excuse to avoid the family. “If I went home, then what would I do?” “I have to come to the business when no one is here. That’s when I get my work done.”

Some family-based businesses I see truly are prospering. They provide more time and money, and the business has enough working capital (current assets minus current liabilities, as explained in the financial chapters) to adequately protect itself from adversity.

But this isn’t most businesses.

Most businesses do not have the working capital needed to foster prosperity or, specifically, they do not know how to get it and keep it. This failure separates truly prospering businesses from those faking it.

Working capital is the Holy Grail of business. Without it, businesses die. With enough, the business is protected and the family may prosper. However, worse than dying is having enough to survive but not enough to succeed.

That’s the highway of purgatory. That’s the living hell: working long hours, earning little money, and having no money so every day and every deal has to go just right in order to exist. But just think, you’re in business for yourself! Still, I respect people in purgatory.

There’s another class of owners who are just faking it. Those people just take more time and more money from the business, whether earned or not. Owners who are truly prospering can take the excess without ever doing damage to the business or the family, but those faking it can’t.

Owners who are faking it end up with hapless stress—living beyond the business’s means. It’s compounded when children are bought off rather than raised, intensifying the problem. The lack of working capital is not only the death of most of these businesses, but also the death of many of these business owners who fall to stress-induced heart attacks and strokes.

Men and women who accept the challenge and find themselves falling short have felt something missing for some time. They just haven’t been able to identify what was wrong. That “something” has to do with cash (specifically working capital), time, or a combination of the two.

Owners who are in denial deny the need for what these principles have to offer. They deny the existence of concerns among their family members or workers in the business. They focus everyone’s attention, energy, and time on the business itself, as if serving the business is a higher calling than serving the family. It is not.
The awakening includes other truths as well, such as awakening to the fact of who we really are and where we came from, which dispels the entrepreneurial myth. We must awaken to the fact that our prejudices affect what we do, how we do it, and how we judge those who work for us. And we must awaken to the different ways we can combine our family and business life and how it affects each of our roles.

Denial of the awakening—usually on the part of the male—can keep the enlightenment from ever occurring. The family can then spend the best twenty and thirty and forty years of their lives chasing a false god. People who are awakened to the reality but choose not to do anything about it lack courage.

“Intentions – Actions = Squat” (Blanchard and Johnson, One-Minute Manager).

Companies whose owners have not yet awakened are in a state of denial. Companies whose owners have awakened but not acted are in a stage of awareness. Failure in this step is caused by denial, lack of training, lack of desire, or lack of action.

Step Two: Get Real Financials

Like it or not, prospering is measured through real financial statements with timely and accurate information that are understandable to all.

Until the business has a real set of financials and until principal stakeholders can read and interpret them, prospering cannot occur because no map exists to show where we have been (financial statements) or where we are going (budget).

Even the way the business game’s score is kept is unknown to most. The balance sheet, not the income statement, is the scoreboard. Reading and interpreting the financial statement is the single most un-mastered skill among business owners and leads to starvation due to lack of working capital.

This is not to say that any stakeholder should spend their time as accountants at the expense of being the leader of the business. That approach wastes valuable resources.

The stakeholders, however, must know the basic language of finance and be able to read and interpret a financial statement. Fail to have this knowledge and you are lost at sea. Rowing, no matter how hard, will not rescue you from the failure to go in the right direction.

As a corollary, even those who do not know where they are going are sometimes right. These few successes give rise to much conventional wisdom that is seized upon by the untrained owner. Little if anything is ever heard from the owners who did not succeed since they carried their lessons to the grave.

Real financials and the ability to read and interpret them, however, do not make a business prosper. People doing the business of the business make the business prosper. Fail to recognize this and the business owner will succeed at being accurate, but never at being prosperous.

When stakeholders fail to know how to read and interpret financial statements, then they cannot deal with facts. If they are not dealing with facts, then they are dealing with feelings.

There is an endless battle among business families based on feelings. One feels more, faster, better, snappier, cooler, bigger, and brighter. When explored, these feelings are often found to be rooted in expanding prestige for the individual, not wealth for the family.

Another fears change. They feel uncertain and seek steadiness and risk aversion, avoiding debt and craving cash on hand. Sometimes this method has been rooted in the reality of dealing with the consequences of those who feel that more and faster is the way, yet sometimes this is an abnormal urge.

There is another way. Facts help families deal with reality without resorting to feelings, hunches, intuition, conventional wisdom, and gambling.

And some founders, when confronted with financial facts, choose to scorn, belittle, disregard, or ceaselessly debate these facts. They choose to ignore; therefore, their failure is based upon ignorance.

You may eliminate many of the stresses in a business family by educating stakeholders on financial facts and measurements, thus allowing the family to focus more on facts and less on feelings. This approach, by itself, reduces the stress of most business families.

Failure in this step can result from faulty information and/or the lack of courage to take appropriate actions once the truth is known. Failure can also occur in this stage by those who become paralyzed by analysis or by those who refuse to perform their leadership responsibilities of dealing with people. People who understand the facts but choose to ignore them act out of ignorance and disdain for the family.

Step Three: Get Organized

We must organize around functions, not people. Then the organization must be led by the leader for the benefit of the family as well as the customers of the business.

Al Ries, in his book Focus, says that the purpose of a business is to “find and keep customers.” I agree but I would add one point. The purpose of our business is to find and keep customers to benefit the stakeholders as well as the customers.

To do this we must organize. In our business world we are the victims of no organizational structure and of organizing around people, not functions.

We don’t need to manage while we walk around. We do too much of that now. We need to be intimately involved in the business of our business and need to be providing leadership to those working with us. We don’t need more communication. We need more skills in hearing what others say.

We don’t need less structure; we need a structure. We need functions reporting to other functions with real people stepping up to the responsibilities of the functions and being held accountable for performance, whether they are related to us or not. And we must begin by separating the function of owning from doing. One may own a car, but a leader still has to step up to the responsibility of driving.

A business is not an investment. It is a requirement of risk and activity on the part of the owner in return for reward. In most investments, one can only lose the investment itself. In a business, one can lose the investment as well as the house, the car, and the family’s future.

Goals, or where we are headed in the first place, are a fundamental part of the organizational step as well as an activity of the group. Surely we are greatly influenced by the leader, but the leader has no right to drive us off a cliff or into dangerous territory.

Once leadership and goals are established and a person actively performs the necessary tasks of driving the business, then others may be recruited to assist. Some of these assistants may be family members, but they don’t have to be.

Stakeholders—our family—are to be guaranteed only that they will receive more time and more money than if the person driving was doing anything else. No one stakeholder has a right to a job because of birth.

The person stepping up to the responsibility of running the business must have all of the business functions covered—operations, sales, and finance (or steering, acceleration, and braking). We must understand what each function does and how to use each function, and we must have qualified people to assist in each area—qualified, even if they are related.

Then we must understand how to delegate, not abdicate (Gerber, E-Myth Revisited), the operation of functions and, most importantly, how to hold others as well as ourselves accountable for results.

The leader’s failure to accept the responsibilities of command can cause failure in this step, as can the leader’s lack of training, skill, or courage. Or a failure can result from a lack of vision.

Lack of performance on the part of a subordinate can cause a failure. But a failure of a subordinate to perform is the failure of the leader because the leader maintains the organizational discipline.

Step Four: Understand the Battleground

Most business owners misunderstand the laws of supply and demand. They think there is a direct correlation between price and sales. There is not. That’s because they don’t understand the battleground of monopolistic competition or the rules of competition under the condition.

Further, many suggest the theoretical approach that businesses perform their marketing first. Some analysts say that we should find a need and then fill it. That’s not the way I see our world.

I find that we are already providing goods or services to an existing set of customers. And that, by itself, places blinders on us. We don’t have working capital. We aren’t getting good margins. And we are fearful of doing anything—like raising prices—with our existing set of customers because we have no options but to serve these low-margin customers with high-cost goods and services. Poor us. Since we live on the edge of failure, changes in the relationship with our customers cannot be chanced.

We do not understand the battleground.

We sit and suffer. We do not take the steps necessary to exit the condition. We do not sell anything to anyone. More formally, we do not create demand for our existing capacity. We also don’t understand what our battleground looks like, nor do we have pricing backbone.

Therefore we either assume we have no choice but to remain poor or we often choose the wrong solution option.

We frequently focus on sales growth as the ultimate answer. After all, it worked for us before. In so doing, we sometimes accept marginal business, or we discount. Or we expand what we sell to the same customers.

With an understanding of the battleground, we learn to create demand for our existing capacity and think inside our box, resulting in more cash with less work.

When management creates demand for current offerings and uses wisely the cash generated, working capital increases. As working capital increases, time and options for the leader increases.

Working capital equates with time since cash allows management more time before it must act. While that may sound curious, relate it to a person’s job. Compare if we were fired today and had nothing in the bank versus being fired but had twelve months’ worth of cash. With cash or working capital, we have more options before we have to do something. The same is true with a business. Cash is time.

Cash also means options. Without cash, we have to deal with the customers we deal with, because we can’t afford to attract better customers—and that’s because we have no cash. We’re circling the drain.

With cash, however, we can afford the luxury of having time to locate better customers. To infuse cash into our businesses, we must create more demand for our existing capacity.

Don’t add marginal business (discount) or broaden your product line (expanding capacity) as a solution at this point. Both use cash before they create cash. Instead, improve your working capital first by creating demand for your existing capacity. In short, go sell something to someone.

Once working capital is improved, then you can do your marketing. Determine what customers need (not want) and create an operating system to fulfill the need. Given enough working capital to allow underperformance while research (time and effort) is being conducted, this approach can be financially successful. But the time and effort can only come if the company has working capital (cash) in the first place. And our businesses don’t; at least, the vast majority don’t.

Within the “understand the battleground” step is also the issue contained within selling, specifically the price at which we sell our products and services. Many owners misunderstand economics and apply the wrong rules, ending up with low prices and high costs.

Others have no pricing backbone because they can’t afford to have pricing backbone, and they don’t know how to develop it. Others have no understanding of negotiation.

Marketing is not the answer for the cash-starved struggling business. Selling existing capacity is. Marketing is a prospering issue.

Business owners who misunderstand economics, have no pricing backbone or negotiation skills, or who do not apply the principles of each will remain nonprosperous forever.

Failure in this step is a result of the leader’s lack of courage to sell or their lack of understanding the basic concepts of the battleground, including the role of price or negotiation.

Step Five: Prosper, but Understand the Rules

A prospering company has owners who understand the purpose of the game. A prospering company has a good financial base and good financial information, is organized around functions not people, is aggressively involved in acquiring and keeping customers on the real battleground of monopolistic competition, and focuses on the sale of existing capacity.

They are additionally looking over the horizon, not for a savior strategy to rescue them from death, but for new thinking and new opportunities through marketing. These activities then create an environment in which the family and business can both prosper for the benefit of the customer as well as the family.

But having a well-financed, well-led, and organized selling machine that is actively acquiring and keeping customers doesn’t mean the family or the business will be able to avoid challenges. Prospering is not without problems or challenges, but it does present different problems and challenges.

Regardless of how good things are today, they will turn bad. No matter how bad things are today, a brighter day will come. That is the sine wave in nature. So, as with military strategy, we must not deal with the intent of the enemy, we must prepare for the enemy’s capabilities.

We don’t even have to have a recession for things to go bad since we live in the micro, not the macro. The macro is the overall economy. We don’t live on Wall Street (the macro); we live on Main Street (the micro). Even in the best of times, the biggest employer in town can be bought up and moved, providing a recession for us regardless of how the rest of the economy is doing.

So the foremost challenge of the prospering stage is to make sure our businesses can withstand adversity by protecting our working capital. After all, enough working capital is the core definition of prospering in the first place.

Families and businesses face two other highly predictable challenges while prospering.

Raising Rich Kids

Dr. Léon Danco (Inside the Family Business) said the most predictable crisis in any business is when we send the kids off to college, because we don’t prepare financially. We assume we will pay for education as it occurs—out of the business.

Then, while the business is being strapped for educational funds and our working capital is low, another crisis hits, such as the biggest employer in town being moved. Or the resignation of a key employee. Or the challenge of having to retool. Or a hot retail trend that falters, leaving us with unsellable inventory.

People like us, who usually come from modest backgrounds, want more for our children than we have. Couple that with our focus on the business, and it is not uncommon for us to buy our children off by exchanging time with them for gifts borne of guilt.

One result of this tradeoff is that instead of our children learning our values, they learn to obtain things without working. The result usually is rich kids—living with a rapidly increasing social and economic status—who rarely appreciate the family farm or the farmers.

This dynamic creates unusual situations like buying two non-working and college-attending sons Mercedes-Benz sports cars while the business has little working capital. Or like paying a high-school-educated son $150,000 a year for working in the business and the son telling us that he doesn’t see how either he or his wife would be able to get by on any less.

Danco adds to our understanding by stating grown children of prosperous parents do not necessarily adopt the values of the parents, although the parents assume they will.

Stanley and Danko (The Millionaire Next Door) carried out specific research on the topic and commonly found adult children with trusts as being underaccumulators of wealth, often making ends meet only through continual gifts of the parents.

I have seen many instances of underperforming businesses whose owners have trusts or anticipated inheritances and who seemingly play business in order to have something to do until they inherit. I’ve rarely found their businesses to be prosperous, probably because they don’t have to be.

In many instances, prosperous parents in their latter stages of life are resented by their children for spending money on themselves. The children—left untrained—often think the parents’ money is the children’s, and they see the parents as wasting it.

On the flip side, I have seen children that were trained who have not only successfully taken over the business of the parents, but also who have bettered the business.

One son in Tennessee has a lot of money in the bank and is on his way to retiring at forty-five instead of sixty-five as his father did. Another child in Pennsylvania turned a very good business into a $60 million-plus national sales organization—a great business. The difference was the parents learned or happened to apply some of the basic family-business principles that encouraged growth, responsibility, and a logical transition.
Transitioning the Business

Hopefully, someday we founders realize we are mortal and face the reality of planning to transition the business. Sometimes the realization comes early and sometimes it comes far too late. Sometimes we just die at our desk and let others worry about such things. Either way, transitioning is the second most predictable crisis faced by the business.

Whether this transition is in the form of the business being operated by the succeeding generation—or the business being sold and assets left to the next generation—matters little. Transition still will occur, planned or unplanned.

Little did we realize when we birthed them, but a successful transition began with raising our rich children. Their attitudes, opinions, and lifestyles all at once matter when we think transition. These things never mattered before, but that was when the next generation didn’t matter. We were working hard to provide all of us a successful life. They were just growing up. Unfortunately, many were just being bought off. Raise them with a profound understanding of exactly who they really are and what their role is on the “family farm,” and they will be better prepared to be worthy successors.

Nevertheless, they and the way they were raised matter now. And what’s worse, their life’s partners matter. And we deal with it for better or worse—usually worse but occasionally better. When the latter happens, the result is a beautiful spectacle, generations standing on the shoulders of previous generations (Danco).

Core to the problems of transition is the concept most parents possess that fairness means equal. It doesn’t. Only the equality of opportunity is fair.

Danco says we must select, train, and install a successor in our lifetime. I second that statement.

Failure during transition usually involves a lack of planning, the lack of educating children to the realities of family-based business, or a lack of courage among the parents to choose.

Our Real Objective: Strength, not Weakness

There are simple problems and complex problems. Simple problems are fixable and straightforward. Complex problems are not.

Prospering’s essence means the family and the family’s business have taken care of the simple problems and are prepared to take care of the complex problems as best they can.

A successful company is one that can withstand adversity. We are strong, not weak. It doesn’t mean we won’t face adversity, only that we are better prepared to do so. And we are in charge of our own preparedness.

Our 5 Steps to Prospering attack simple problems. Simple problems are the lack of cash, the lack of organization, the lack of people stepping up to the responsibilities of their function, and the lack of demand for the organization’s capacity, as well as the predictable prospering issues of raising rich kids and transitioning the business.

Complex problems are far more serious and deal with human as well as business adversity. We prepare our businesses to withstand adversity.

After all, our families deserve a better living because we have these businesses, not a worse one. Our families deserve more time together because we have these businesses, not less time. Our families deserve and expect us to protect our businesses as the source of our family’s income, not destroy them through our action or inaction. Therefore, we accept the challenge of Prosperity’s Litmus Test.
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We will provide to our families more time and more money, not less, because we are in these businesses. It is not for our family to persist in sacrificing for the business. The business is but a means to our family’s prosperity and is not the end itself.

If our business is not allowing the family to prosper, then we will fix it. We will fix it or we will close it and find a real job where we can provide more for our stakeholders.
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Family-based, lifestyle businesses must take five steps in order to prosper. They are the Awakening, the Financial Step, the Organizational Step, Understanding the Battleground, and the step of Prospering.

Tom Crouser