Owning and Controlling a Business

Owners should know that if an owner is an indispensable part of the management of the business, the business will be less valuable to a sophisticated buyer. However, owners fear that relinquishment of management activity will mean a loss of control. Owners should know that a group decision-making process will provide better planning with better execution of planning. However, owners fear that engaging in group decision-making will mean a loss of control. These fears come from a misunderstanding of control of a business and the benefit of owning a business. To realize maximum value from a business it is essential that management activity is delegated and that group decision-making be utilized.

By appointing the appropriate policymakers over time the owners can control policy, but not necessarily immediately affect operations which are directly controlled by executive officers. The challenge for many business owners wishing to obtain maximum value for their business is to delegate the management role without losing control. Many business owners are reluctant to involve people from various aspects of the business in the decision-making process of the business fearing that the transparency involved will mean a loss of control.

Generally, the owners of a business appoint policymakers and hire executives to manage producers and carry out the policy. In the traditional governance of the business corporation, the owners are the shareholders, the policymakers are the directors (elected by shareholders) forming the board of directors, and the policy is carried out by the executive officers (president, vice president, secretary, and treasurer elected by the board of directors). The additional element of the business is the production of the product or the provision of the service. During the formation of a business, frequently all of these elements are directly accomplished by founding owners. As the business grows, owners typically decrease their participation in the production role, but often owners have difficulty in withdrawing from productive and executive roles because of a fear of loss of control.

Owners becoming policymakers fear that the creation of policies in the form of a plan, even if it is in writing and well determined, will not be enough to keep the business on track and prevent costly blunders. Often, these owners as managers have operated without strategic plans, defined goals, and milestones. They have not experienced an established group decision-making procedure. These owners have not seen how policymakers can control a business; when, in fact, policymaking can effectively control a business.

Where the board of directors provides a written plan with clearly defined goals and milestones, but only annually reviews performance and makes revisions to the plan and the execution of the plan, there is a lapse of control. But where the board reviews performance monthly and communicates its performance review to management, there is control. If the execution of the policy has no milestones except for a reevaluation of the policy at a later time, the control of the owner is diminished. However, if there are milestones for policy execution and requirements for policy reevaluation in short-term intervals, the control is enhanced.

Just as the competent manager defines projects, sets goals with appropriate milestones, monitors consistently, communicates performance reviews with producers, and revises expectations to deal with reality, the owner as a policymaker can control the executive managers and ensure the appropriate performance of the business. The owner as a policymaker must not only see to the creation and documentation of a well-determined plan, there must also be a clear and consistent communication of goals and milestones with frequent reviews and analysis of the execution of the plan, the need to revise the plan, and the need to implement changes in the way the plan is being executed.

But if the policy-making is group decision-making is there still not a significant loss of control? There is not, because the planning and execution will be stronger because of group participation. Authority does not change because of the information gathered to make a decision. The fact that collective wisdom is sought does not change the parties responsible for determining policy. However, those who were consulted about policy decisions will remember and respect that process. When it comes time to execute a plan, the consultation will be remembered, and even if there is not complete agreement with the plan, it will be executed with increased vigor.

Founding owners who have delegated the production element of the business can meet the challenge of delegating the management element of the business by understanding and effectively utilizing the policy-making element to control the business. Meeting this challenge will enhance the value of the business.