The E Myth: essential reading for business owners.
The E Myth (or Entrepreneur Myth) is a book about the mistaken belief that most businesses are started by people with tangible business skills, when in fact most are started by “technicians” who know nothing about running a business. Hence most fail. It was written over 30 years ago but I am always surprised how many LHW clients running their own businesses have not heard of it and have not given the core concepts much thought.
The reason we as financial planners are interested in this concept is that so many LHW business owner-clients have a huge portion of their wealth tied up in their businesses. LHW is over 40 years old so we have seen far too many businesses thrive but unfortunately not survive into the long term. The common theme in these business failures has been individual business leaders that are brilliant at what they do and great at growing their business. However when their business or the wider environment starts to change, their answer is usually to work harder, buy a more efficient machine and/or sell more. As they get closer to exiting the business (retirement), they find it more difficult to mantain the energy required for this workload. Because the business is so dependent on them personally it often begins to struggle.
According to Gerber this “technical” perspective of most business owners is the reason so many businesses fail. My favourite quote from the book is: “If your business depends on you, you don’t own a business—you have a job. And it’s the worst job in the world because you’re working for a lunatic!” This is a bit harsh but there is more than a grain of truth in it!
Without going into the detail of the book, the solution is basically for business owners to “work on their business not in it.” Gerber argues that the business owner must step back from day to day operations and examine the processes that create value in the business. The goal is partly the creation of a systemic and unique “Operating System” that is not dependent on the business owner’s personality. The advantage of going through this sometimes painful process is that real value will eventually be built and a tangible asset created to sell or to pass on to the next generation. We have seen these concepts transform a professional service operation in South Dublin in recent years. From a business that was all about the husband and wife owners, It is now a highly valuable and scalable business. This value is hugely significant to our clients and the planning of their exit from the business.
As a business owner planning your exit strategy well in advance is an essential part of prudent financial planning. The concepts in this simple and clear book will give you great insight into the value in your business and how you and your family can benefit from it. So put away the John Grisham this summer and grap a copy!