Start It, Grow It, Sell It: The Journey of Business

Start It, Grow It, Sell It:

The Journey of Business

By Lou D. Banach and Jeff Rasmussen

Take the Next Step

Milwaukee, WI

Copyright © 2018 Nelli and Harvey, LLC

ISBN 978-1-7234692-7-5

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Book cover design by Lauryn M. Banach

Shiny Tail Productions

Denver, CO

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Take the Next Step

Training and Coaching

https://www.linkedin.com/company/take-the-next-step-training-coaching/

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All rights reserved.

Printed in the United States of America.

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Except as permitted under the United States Copyright Act of 1976, no part of this book may be reproduced or distributed in any form or by any means, or stored in a data base or retrieval system, without the prior written permission of the authors.

Preface

In today’s global economy, the language of business is as necessary to our survival as air and water. Our schools and universities teach this language, though primarily to business majors who may tend to focus on Fortune 500 companies—even though local ‘Main Street’ companies, schools, and not-for-profits will employ most of us and our neighbors.

The purpose of this guide is to help readers to develop functional business literacy and deliver an understanding of the Journey of Business to the non-business reader by digging deeper into the languages of business. As parents and mentors, we want to guide our children in making decisions, whether financial or otherwise. However, we won’t always be around or near enough to aid them. This book will give them a start.

The core of this book focuses on business literacy and interconnection of the Biz Fab Five™ topics (Economics, Accounting, Finance, Law, and Communication) in the Journey of Business. All risk and investment decisions start with a broader, macro understanding of the economy. Gauging where the economy stands currently within our national business cycle matters greatly for those planning, borrowing, and investing. To be ill informed is to be naïve in a highly competitive business ecosystem.

We pay for college to assist our children in this vital real-world preparation. But even as our children graduate, their learning is, in some ways, just beginning, as each learns to apply his or her degree, which so often are not focused on business. The application of business theory, applied to everyday opportunities and entrepreneurial decisions, will be this book’s focus, perhaps filling a specific literacy void. So, an entrepreneur’s survival guide, such as this one, may prove a necessary and especially timely resource for someone starting a business. And while we write this in a targeted way for entrepreneurs, others can benefit as well.

Whether buying a home, planning for college, advising children on financial matters, or starting a business, the Journey of Business—coupled with principled morals—can provide structure for effective decision-making as you grow through the financial stages of your life.

Section 1:  Prologue

The themes and lessons of this book emerged from numerous assignments from over the course of both authors’ teaching and business careers. Lou served as an adjunct finance professor at a local university at the same time as working in a credit-development executive role within a bank, which served as the inspiration. He also watched from a distance as not-for-profit volunteers wrestled with business concepts and analytical tools. As an adjunct college professor, his primary teaching focus was a sixteen-week class called Venture Capital–Private Equity. (His thanks again to these senior-level students as they tolerated him for three hours each week!)

Supported by his thirty years of banking experience, both commercial and investment—as well as real-life business experience with ‘Main Street’ companies with less than $1 billion in sales—Lou developed both breadth and depth in understanding and communicating the languages of business. He discovered that as a company grows, many of the topics he had discussed in class over the years gained relevancy. Once this is realized, with practice, literacy can be achieved on each critical topic.

A stone’s throw from the university was Lou’s day job as the training development executive for his bank’s new credit-training program. The bank’s CEO understood the importance of a conservative credit culture within a bank: banks fail because of bad loans made over the business cycle. Of course, no banker purposefully makes a bad loan. Rather, it is equal parts art and science to approve a loan, and then get it repaid as agreed upon, through the ups and downs of a business cycle.

While all loan approvals start with sizing up the borrower’s character (the art), loans are repaid from cash flow—not by liquidating the bank’s security or collateral such as a fixed (illiquid) asset. Assessing the company’s ability to generate sufficient cash to repay the loan is the science part of the process.

Banks lend out deposits (cash received from savers), and banks expect loan repayment from cash flow generated by its business and consumer clients. The challenge for any bank, due in part to federal banking regulations, is to lend out its customers’s excess deposits while concurrently maintaining necessary daily liquidity (deposits and securities) should a customer write a check or need money from their savings account. To add more complication, banks make loans, such as home mortgages or car loans, which are repaid over years. So, to set the context: banks take liquid deposits and make illiquid loans!

Therefore, the creation of a conservative credit-training program, especially supported by solid financial and accounting analysis, was Lou’s commission for the next few years, as his bank lacked an entry-level credit-training course. The central focus for this yet-to-be-designed program was to assess and mitigate repayment risk in commercial- and entrepreneur-focused lending (privately owned ‘Main Street’ companies). Entrepreneurs remain a special breed, which readers will come to appreciate as they tackle the pages ahead. This cadre of risk-takers dream big and drive our economy through investments and innovations.

Jeff, this guide’s other author and a ‘recovering’ CPA, left the corporate world in the mid-1990s to satisfy his itch to first work in small and family-owned businesses and then, ultimately, buy and grow a business of his own. He began as the CFO of a printing company and found that it was important for all members of the leadership team, including those on the shop floor, to understand the financial impacts of their decisions. He implemented budgeting and strategic-planning processes to support that understanding. In addition, he introduced the concepts of fixed and variable costs to the organization and trained all members of the leadership team on the differences between types of costs, as well as the different methods by which these costs need to be managed.

It wasn’t long before Jeff’s desire to learn and be challenged led him to leave his CFO role and move into a COO position. It was at this time that he felt drawn to the study of quality theory (as taught by W. Edwards Deming, Philip Crosby, and Joseph Juran) and the philosophy of lean enterprise. As he learned about these theories and processes, it became apparent that an entirely different leadership model was going to be required if he were to lead the company’s transition using these key disciplines to drive better business results.

This leadership model was going to have to rely on effective up-stream and down-stream communication skills to model the needed changes. Driving out fear of the unknown was a critical mindset because—rightfully—employees tend to fear for their jobs when major changes are implemented. However, Jeff endeavored to make it clear that these efforts were treasure hunts, not witch hunts. It was increasingly clear that his role as a leader needed to be servant-based, not autocratic. As a side note, and as you will read later in this guide, communication is an important topic within these pages, because any time there is a common goal, good communication and coordination must come together.

Subsequent career stops landed Jeff at companies ranging in size from start-up (where he was employee number four) to international in scope. He was fortunate to lead the western U.S. division of a major yellow-page-advertisement creator.

As the economy went downhill in 2008, Jeff found it necessary to pick a new career direction, one for which all of his previous jobs (including the part-time ones in high school) prepared him. The divine intervention arrived during his career as he was presented with an opportunity to buy his own business.

Over the years, Jeff learned the necessary distinction between working in the business and working on the business as an owner of an auto-repair shop. This became crystal clear after he became a business owner. It remains very typical for small and family-owned businesses to keep their staffs minimal and just focus on the day-to-day tasks of taking care of client needs. However, over the longer term, running a business is about creating value. That is where working on the business comes into play. One must ensure that things are being done correctly today and that there is a plan for the future that accounts for the variables of innovative technologies, business-cycle shifts, and changing consumer buying habits.

Planning is a big part of making a business successful in the long term, including following ownership changes. The real value is doing everything possible for the business to be successful after one sells it. That is something for which a new owner will gladly pay, and a mindset that maximizes business value. Making decisions as if the business is always for sale is a topic we will address further in our Working through the Business section. Of course, maximizing and realizing a business’s value occurs when selling, but the hard work really begins the first day a business is formed.

Throughout these pages, we will introduce you to Nelli and Harvey, a young couple with dreams and aspirations to one day start a business that they can successfully build so that it might employ others in their community. Naturally, they also would like to transfer the business, perhaps through a sale, in the future when the time is right.

Nelli and Harvey had a good upbringing, yet they were never really taught the topics and concepts shared in Start It, Grow It, Sell It: The Journey of Business. As they will say often: Reading the business section of newspapers is like reading a foreign language. Understanding the basics of primary financial statements and budgets will be part of their journey, learning the business knowledge benefitting not only them but also many entrepreneurs across our nation.

Literacy, whether general or financial literacy specifically, remains important in many of our life’s vocations and interests. It is this business angle of the Journey of Business that will unfold in the pages ahead, which readers will be able to learn while building understanding and confidence. While the authors share many ideas and concepts here, the overarching theme is that entrepreneurs should be concurrently working in the business while working on the business to ensure strong business results and sustainable value. These efforts will then set the business up nicely in anticipation of a successful transfer of the business, Working through the Business. Our sequenced guide therefore conveys ideas and essential tools to help achieve this balanced sequencing and understanding as you accelerate your business literacy. Good and successful business owners plan an exit from the start.

Finally, in reading this guide, you only need to come equipped with an open and curious mind. Our aim is not to impose upon you free markets, nor is the reader required to have a deep math background. Rather, our aim is to simply inform you concerning the Journey of Business, its core tenets, and key lessons. We hope that as entrepreneurs, you will have the opportunity to practice and hone some of these lessons and skills with your own successful business.

It is also our hope that this guide escorts you, a promising entrepreneur, along a journey of informing, clarifying, integrating, and elevating various business subjects that are necessary in building financial awareness and business literacy. As in life, there is frequently the other side of the story, which will be taught with the introduction of many twin concepts.

Examples of some of these polar topics found throughout this guide include entrepreneurs and bureaucrats, competition and monopoly, debit and credit, risk and reward, growth and value, supply and demand, borrower and saver, and short-run and long-run. While you might understand one side of an issue, be open to learning about the other side. This question is somewhat of a metaphor for what we are doing: What’s the square root of 4? Most would answer 2, but the answer is a –/+2. Entrepreneurs need to think broadly to escape the preconceived notions in the labyrinth of business ideas in order to plan for value creation and a successful exit.

As Nelli and Harvey toggle between Wall Street and Main Street, an introduction to the Biz Fab Five™ disciplines of business is shared, expanded upon, and learned through an evolving case study for their new business, All About Health: Where food, fitness, and family come together.

As a reader, an understanding of these subjects and their interconnections will be easily achieved with the turning of each page—along with necessary business literacy. Provided, as appropriate, are chapter notes and points of reflection.

Every journey begins with a single step. So, too, it will be with your Journey of Business. Our wish is that you will read this guide before you need it! We also hope that this story will provide straightforward answers to common business questions. While the story of Nelli and Harvey provides direction today, it is also meant to serve as a reference in the future. After all, you have many career and financial decisions to make over the course of your life. We hope you enjoy this guide and find it helpful.

Notes

This book focuses on foundational business literacy and interconnection of the Biz Fab Five™ topics (Economics, Accounting, Finance, Law, and Communication) forming the Journey of Business.

Business is not dislocated from the national economy or our business cycle.

The challenge for any bank remains to lend out its customers’s excess deposits while concurrently maintaining the necessary daily liquidity (deposit) so a customer may write a check.

Application of business theory and tools, applied to everyday opportunities and decisions, remains this book’s focus.

This handbook is necessary and timely for non-business citizens, recent college business major graduates, entrepreneurs, and not-for-profit audiences.

Entrepreneurs must regularly and purposefully work in, on, and through their businesses to create and maximize value.

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Reflect

Before reading further, please take 10–15 minutes to write down what business topics you hear about routinely but don’t understand.

What business topic do you understand well that you wish you could share with others?

Section 2:  Working in the Business

As past technical and public university graduates, our young couple, Nelli and Harvey, has begun to discuss making the leap into business ownership. Having worked in careers that naturally followed their respective degrees, they now are getting a bit nervous about the lack of control each has over their future. In addition, knowing that small business creates the lion’s share of all jobs in the United States, they have developed a deep desire to be a part of that generative process in their local economy. With that in mind, they start to investigate many of the buzzwords and topics that show up in the business section of their local newspapers and elsewhere. The couple is especially interested in learning about the business cycle.

The Business Cycle

Prior to starting or buying a business, Nelli and Harvey understood the necessity of researching a number of topics. At the top of their list was the business cycle. They had noticed that business cycles attract the attention of governments, investors, business owners, and everyday citizens just like them.

Nelli found this chart by Fidelity Investments that illustrates the basics of business cycles. It is important for both consumers and entrepreneurs alike to know if we are early or mid-cycle, late, or heading into an economic recession. Raising interest rates, as you might guess, results in the Federal Reserve (or the Fed, for short) putting on the economic-growth brakes. The trick for the Fed is to go just far enough to slow down growth, but not so far as to cause a recession.

Our couple soon learns that the Fed is worried that our economy might overheat, and there may be 1) a shortage of jobs resulting in 2) wage and commodities inflation. These twins are also known as the Fed’s mandate. Some would say that the Fed prefers the tortoise adage we heard growing up: slow and steady wins the race.

Monetary policy is the primary tool that the Fed employs to slow down an overheated economy—or to speed it up. An overheated economy is like an overheated car: you probably won’t go far after it happens. Through their research, Nelli and Harvey soon learned that an overheated economy