What is Mentoring?

In a recent meeting of one of our groups in The Alternative Board®, the business owners discussed mentoring. One member, a partner in a large professional firm, has been tasked with mentoring a partner in training. He asked what the mentoring process should look like, and how it differed from merely sharing knowledge and experience.

Each member’s opening comment was identical. “I’ve never been formally mentored, but there was one person who taught me a lot.”

Is mentoring a special process, or is it merely a teaching role? Most of us teach our employees on an ongoing basis. On the most basic level, we want them to learn the processes and systems to do the work in our companies. We communicate our core values and visions for our businesses. We develop their skills in hopes that they can assume more responsibility.

Is that mentoring, or is it simply normal employee development? In larger organizations, mentors are assigned mentees who are expected to rise through the management ranks. Many public company CEOs credit a mentor who worked with them over a long period of time as their career progressed. The mentor helped direct their progress through positions and assignments intended to broaden both their knowledge and exposure in the organization.

mentoring chartDefinitions of mentoring vary, but all of them describe a relationship where the mentor shares experience and skills, coupled with personal guidance and advice on applying those skills and challenging the mentee to stretch for new levels of accomplishment. Mentoring, therefore, couples the skills of teaching with those of coaching. The mentor not only imparts the knowledge, but also helps the mentee understand how and when to utilize that learning in practical application.

From the responses of the owners cited above, we all accept that teaching and coaching are normal parts of a business owner’s role. None of the participants, however, apparently considered that “real” mentoring. It seems we expect something more before we apply the mentoring label. What raises the bar to this level?

I believe mentoring requires a specific goal, which is agreed at the outset between the participants. It is coaching with a clear objective. It focuses not on ongoing improvement, but rather on a specific set of improvements to be accomplished in a certain time frame.

The professional whose assignment is mentoring a partner in training is an excellent example. She is expected by the firm to learn “partner level skills” before further promotion, and failing to do so in a specified time will damage her chance for advancement. Those skills aren’t technical, she can already do the work of a partner. They are instead the application of her technical abilities, communicating them to clients, and teaching them to subordinates. The goal is Specific (learn how to apply her skills beyond personal production), Measurable (new clients, successful subordinates), Achievable (she has already demonstrated her core abilities), Resourced (the mentorship assignment), and Time sensitive.

Raising normal employee development to the level of mentorship requires that both parties agree on a SMART goal. They formalize the objective, set aside time for regular communication and progress checks, and identify the steps needed to accomplish the desired outcome.

Most importantly, mentoring requires a special commitment by its participants. “Unofficial” mentoring is merely teaching, where the employee may or may not learn successfully. Mentoring includes a pledge by both parties to make the process successful.

 
My new book, Hunting in a Farmer’s World: Celebrating the Mind of an Entrepreneur, is now available on Amazon in paperback, hardcover and Kindle. It is an ownership book, not a management book, and is illustrated with the stories of real entrepreneurs who faced challenges that apply to us all.

Posted in Entrepreneurship, Leadership, Management | Tagged , , , , , , | 4 Comments

4 Responses to What is Mentoring?

  1. David Basri says:

    I would argue that coaching and teaching are part of mentoring when there is a strategic goal of developing an employee. We have a small software company. Since not long after PEI was founded in 1996, we have had a Service Item set up in QuickBooks called “Mentoring”. It is used in many contexts.

    When an employee is assigned a project that requires new skills and I assist, my time is marked as Mentoring / Non-billable and their time is booked to the client project (billable or not). When I have to coach or teach a new skill that is booked to Mentoring. If I review internal work that an employee did (company website or whatever) and then discuss different techniques or strategy than they applied, that is Mentoring. However, the review process or asking them to fix something goes to Administration or Marketing or whatever normal business process is involved.

    It may be correct that if an employee is simply shown who to complete a specific task so that they can perform that duty, you might call that “merely” teaching. When efforts are part of a long-term strategic goal to develop an employee into something more than a cog in the machine, then the deliberate work to accomplish the goal is legitimately mentoring.

    David Basri
    Point Enterprises, Inc.
    http://www.pointent.com

    • Pam Ruster says:

      David, the idea to capture a mentoring role as a ‘job cost’ data point is an interesting one. We capture management consulting with our clients, which falls under mentoring with the teaching and coaching dynamic as discussed. With my own company staff I have not captured that in any way. Thanks for the eye opener!

  2. I have experienced all the three levels of “learning” with a person: I am mentored in a public speaking club. I have a direct and personal relationship with my mentor. She was my choice from the start. I felt that we clicked and I feel comfortable with her. She teaches me things in a focused and condensed way: all about public speaking and how to convey my message to an audience. My lessons are small assignments in the form of a speech formed in such a way for me to learn important elements of a successful speech but one at a time.

    However, I think a trainer is teaching you something much more specific rather than a mentor which connects elements from different lessons and goes a second level. The sessions can be more relaxed and a bit generalized though having one special assignment due to the varied topic of the speech and the many objectives that need to be met.

  3. Off-topic: I have just noticed the name of the blog is awake at two o’clock. It is 2.15 AM.

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When is a Bonus Not a Bonus?

We refer to many different types of payments to employees as bonuses. They range from very modest amounts paid for specific activities to substantial components of a worker’s total compensation package.

Merriam-Webster defines “bonus” as “money or an equivalent given in addition to an employee’s usual compensation.” That’s seems simple enough, but what constitutes “usual” compensation? Is a holiday gift that’s pegged to length of service a bonus? Is a specific share of the profits set aside to be divided among the employees a bonus? Since both are expected and delivered according to formulae, they are arguably part of usual compensation.

None the less, most business owners would refer to both those situations as a bonus. I have one client who celebrates any record sales month with a bonus of several hours of extra vacation for each employee. Although non-monetary; that is also clearly a bonus. It is irregular, typically outside the control of any individual employee, and can’t be anticipated.

Full bucket of golden coins / Полное ведро золотых монетThe misuse of the term bonus occurs most frequently when the amounts are a normal and contractual part of an employee’s compensation package. When the payments are regularly scheduled (monthly or quarterly), and are determined by an employee’s individual achievements, it is pay for performance.

Bonuses have a natural cut-off point. I think it’s between 10% and 20% of an employee’s total compensation. Once you exceed that level, an employee begins to budget the expected amounts into his or her lifestyle choices. A failure to reach individual goals that results in adjustments to their household budgets isn’t missing a bonus, it’s taking a cut in pay.

Commission isn’t a “sales bonus”, it’s compensation. Pegging 30% or 40% of an executive’s annual compensation to profit performance isn’t a bonus, it’s part of his pay package.Production incentives that arrive in every paycheck aren’t bonuses for the same reason.

Using the term bonus for all flavors and varieties of incentive and performance compensation isn’t by itself bad, but it is sloppy. The problem comes when some employees start to ask why they have to achieve individual objectives to receive their bonuses, while others in the company receive them without such requirements. It confuses what bonuses are really for, which is to express your appreciation for a job done well.

Pay for performance isn’t an expression of appreciation, it’s part of a deal.

 

My new book, Hunting in a Farmer’s World: Celebrating the Mind of an  Entrepreneur, is now available on Amazon in paperback, hardcover and Kindle. It is an ownership book, not a management book, and is illustrated with the stories of real entrepreneurs who faced challenges that apply to us all.

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Can You Outgrow Customers?

When you start a company, it’s like shopping at the supermarket when you are very hungry. Everything looks good. Any suspect might be a prospect. Any prospect is worth pursuing, and your ideal customer is anyone who is willing to pay you for your product or service.

As your business grows, you begin to differentiate between good customers and bad customers. Those who don’t deal with you fairly, pay late, are always denigrating your product in hope of extra discounts, or demand extra services above what they pay for are allowed to fall by the wayside. Their departure is noted with a “good riddance,” if it is noted at all.

If you are fortunate, and keep your promises, a few of your first customers become your best customers. You develop relationships. They depend on you as a trusted vendor, and you show appreciation for their loyalty by serving them as well as you can. Your company grows, based in no small part on these steady accounts.

outgrowingCan you outgrow these loyal customers? Is there a point where their business is no longer worthwhile to you? For most of us, the instinctive answer is “no.” Someone who has supported us on those first crucial steps up the ladder deserves our gratitude. But gratitude doesn’t address the other issues that come with a customer/vendor mismatch.

One of my clients owned a commercial general contracting company. When he started, they took in a few million dollars a year doing tenant improvements for strip centers and restaurant remodels. The company developed a reputation for bringing in jobs on-time and under budget, and after a few years he had built up a steady clientele of property owners.

His skill in project management landed him progressively larger jobs. He became a specialist in building bank branches, private schools and churches. Each of those jobs was about the same size as his entire revenue in the first few years, and eventually he was contracting for a dozen such buildings a year.

He remained loyal to his first customers, but fitting in a hundred thousand dollar remodel between multi-million dollar commitments grew more challenging. Each job now involved an estimator, a project manager and a supervisor, where he had once filled all those roles personally. The smaller jobs couldn’t carry the overhead. Where he once gave the restaurant owners a daily progress report by telephone, now they were scheduled between his meetings with CEOs and Boards of Directors.

Not surprisingly, his long-time customers began to complain. They didn’t have the access to or the attention from the owner that they once enjoyed. His pricing was getting more expensive. They sometimes had to wait weeks or months for a spot on the schedule.

He tried his best to address the issues. He dedicated special staff to smaller projects, and put his most senior project manager in charge of them. He couldn’t change his overhead costs, however, and that division relied on the support of the bigger jobs to cover expenses.

After years of trying to address the problem, he finally notified his small customers that he was no longer able to quote projects of less than $1,000,000. Many reacted as you might expect, perceiving his decision to be based on self-importance and greed, without any regard for their needs.

In reality, he had to let them go. He was no longer able to give them the type of service that he was known for, and that they had a right to expect. He had tried to roll back his company to a version of its earlier model, but in fact he was just subsidizing their work for old times’ sake, and still delivering at less than the expected level of service.

You’ve outgrown your customers when you can no longer serve them profitably or well. You can show your gratitude by helping them find a vendor who better serves their needs.

Picture Credit

My new book, Hunting in a Farmer’s World: Celebrating the Mind of an  Entrepreneur, is now available on Amazon in paperback, hardcover and Kindle. It is an ownership book, not a management book, and is illustrated with the stories of real entrepreneurs who faced challenges that apply to us all.

Posted in Marketing and Sales | Tagged , , , , , | 1 Comment

One Response to Can You Outgrow Customers?

  1. Steve Wells says:

    Great article on growth and customer “FIT”. Your reference to going to the supermarket when you are hungry is dead on when starting a business from scratch. Anything and everything is a good opportunity and job. As we have grown, we have been fortunate enough to improve the quality of our customers, replacing some of our original customers for many for the reasons you mentioned. As we have grown, we have also made changes for one other important reason.

    As our business has matured, we have a much clearer Vision, Mission and Strategic Plan and unfortunately, some of the customers that helped us start our business no longer align with our current and future plans. While many of us strive to support them for too long, when a customer no longer fits, it’s typically not a fit from either side and prolonging the inevitable isn’t in anyone’s best interest. It’s just a tough decision to let go of good customers that no longer fit your business!

    I totally agree with trying to match the good customers with another provider, one that better fits their needs and whom they better align with.

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What is Your Company Worth? II

Last week we discussed how business owners frequently use hearsay or incomplete information to estimate the value of their companies. They give the number to their financial planner, or include it on a personal financial statement for their banker, neither of whom bat an eyelash at the estimate. Having the amount “accepted” by financial experts, the owner starts to treat it as fact. How do you know whether it is realistic or achievable?

alchemistValuation of a small business is a combination of art and science. No two small companies are alike. A multiple of profits or cash flow is only the starting point. Take two small companies, each with $4,000,000 in revenues and $500,000 in profits. Each pays the same salary and benefits to the owner. One does it by having systems that control most day to day activities, recurring revenue from contracts, and long-term employees who are incented by profit sharing. The other does it with an owner who works 70 hours a week, hasn’t had a two week vacation in ten years, and makes every new sale personally. Which business would you pay more to own?

Beauty lies in the eye of the beholder. The multiples paid for businesses depend on the type of buyers they attract. Commonly, those that sell for less than $2,000,000 are considered “Main Street.” Their target buyers are individuals who are purchasing an income. They intend to work in the business, and to earn a regular paycheck by running it.

Main Street businesses are valued by a multiple of Seller’s Discretionary Earnings (SDE). The value of the business is based on the sum of the financial benefits resulting from ownership. That includes profits, salary, benefits and any of a long list of possible perquisites like a company car, travel, or insurance. (For more on calculating your SDE and selling a business in general, you can read my book, 11 Things You Absolutely Need to Know about Selling Your Business.)

Main Street pricing is typically between 2.1 and 2.8 times SDE. It is based on simple arithmetic. The closer you come to 3 times SDE, the less able a buyer is to pay both the bank and himself. You can run your own numbers here, to see how it works (registration required).

For larger companies, those that attract financial and industry acquirers, the multiples are higher, but the multiplier is lower. Those buyers anticipate paying for professional management, so the owner’s compensation is less of a consideration. They look at EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) to calculate available cash after all the expenses of running the business (including executive talent) are paid.

Competitors will calculate the savings they might realize from consolidation, but are usually reluctant to multiply those savings in a purchase price. Private Equity Groups (there are 7,000 in the US) and the acquisition arms of large companies seldom look at businesses with earnings of less than $1,000,000. As amazing as it seems to a small business owner, their due diligence and legal processes are too expensive to make smaller acquisitions worthwhile.

Private Equity Groups pay an average between 4.7 and 5.2 times EBITDA, year in and year out. That makes sense, because they are financial buyers with a targeted Return On Investment (ROI). Large company acquisitions of smaller businesses can range from 4 times EBITA up to around 7 or 8, although in a few cases strategic considerations (competition, exclusive contracts, proprietary methods) can drive that up substantially .

All of these are real numbers, based on actual sales data and industry surveys. Sellers often confuse the terms revenue and income, or apply EBITDA multiples to SDE. They are greatly disappointed and angry when legitimate offers fall far below their expectations. Just because your planner or your banker didn’t challenge your valuation estimate doesn’t make it fact.

My new book, Hunting in a Farmer’s World: Celebrating the Mind of an Entrepreneur, is now available on Amazon in paperback, hardcover and Kindle. It is an ownership book, not a management book, and is illustrated with the stories of real entrepreneurs who faced challenges that apply to us all.

Posted in Building Value, Entrepreneurship, Exit Options, Exit Planning, Exit Strategies, Top Blog Posts | 1 Comment

One Response to What is Your Company Worth? II

  1. John Smith says:

    I work for a small/medium sized family owned business as their CFO. When the owner went out and received his eye-widening “professionally prepared” valuation of his business I asked him the simple question; “would YOU pay that much for the right to run this place?” The follow on question is “you can pay x amount because you already know the players, products and producers. Would a buyer who does NOT have that information at hand need to discount that number to generate similar earnings ?”

    Every valuation is prepared with an end use in mind: Seller’s POV, Buyer’s POV, Tax prep POV. Each end use will result in a different number. From an owner’s perspective, look at all of them and ask yourself “would I pay that?”

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What is Your Company Worth?

A business owner hires a financial planner to help him with his retirement options. They review the owner’s current assets, his house, stock portfolio and other investments. They go over his insurance coverage. Then the planner asks, “What about your company? How much is that worth?”

The owner replies with confidence, “Oh about five million dollars. Maybe a little bit more.” The planner dutifully adds it to the asset list, and includes it in his calculations. In years of questioning financial planners about this, I’ve found that about 80% accept the owner’s estimate of the value as fact. They assume that the owner must have a pretty good idea of what his largest asset is worth. It is his business, after all.

But what if the owner is wrong? Not only wrong, but completely deluded about the value of his company? Then the planner is basing all his assumptions about retirement, family security, and future income based on assumptions that may be 50% or more off from reality. It happens far more often than you may think.

bragAn owner runs into a long-time colleague at a trade show. In reply to the “What’s new?” question his friend says “Well, I just sold my company. I got $4,000,000.” The owner knows that his company is about 25% larger than his friend’s, so $5,000,000 must clearly be his market value.

Any seller will always claim the highest number he can justify. After a lifetime of building a business, our egos are heavily invested in the bragging rights. The pleasure lies in telling the number, not presenting the details. So that $4,000,000 includes assumption of the company’s $700,000 working capital line, purchase of $1,000,000 in accounts receivable (which were collectable by the seller anyway), and payout of $500,000 in loans that the owner made to his company with post-tax dollars. Of the remaining $1,800,000, some may be conditional on future company performance, tied to continuing employment, in the form of an installment note, or in restricted stock.

Yet our business owner confidently walks away knowing that his company is worth $5,000,000. It must be accurate, since his friend wouldn’t lie and that selling price was determined in an arms-length transaction. Our owner begins planning his future around the day he receives a check for $5,000,000.

In my work with hundreds of business owners, this is a more frequent scenario than not. We have a deep-seated need to believe that our years of sacrifice and hard work are going to pay off handsomely.

Valuation, like most financial benchmarking, is an uncertain art. The professional small business appraisers whom I work with consider assets and cash flow, but also use future industry prospects, local or regional economic trends, the company’s historical revenue and profit variability in developing their opinions.

They usually don’t factor in the financial markets, but those are the most critical influencers of all. Whether lenders are seeking to finance business acquisitions (2006-2007) or avoiding them as if they were the Black Plague (2009-2011) can dramatically affect selling prices.

The buyer is also a determining factor, and not just for credit-worthiness or price negotiation. Individual buyers, competitors, private equity groups and publicly traded companies all have differing ideas of where the value is in an acquisition. They pay a wide range of  multiples, and even calculate those multiples on different financial benchmarks.

How much is your company really worth? We’ll go deeper into that next week.

My new book, Hunting in a Farmer’s World, Celebrating the Mind of an Entrepreneur, is now available in paperback and hardcover on Amazon. (Kindle next week.) It is an ownership book, not a management book, and is illustrated with the stories of real entrepreneurs who faced challenges that apply to us all.

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