The Downside of Being An Open-Book Employer
Updated: Apr 11
I’m a big fan of open book management. That is, educating and sharing financial information with your team to create more buy-in with your business.
If you want to sell your business, having a scaling up system (like what we implement in our client’s firms) is an essential ingredient. One of the elements of our scaling up system is to ensure the company can run on its own, and that means empowering your employees, especially your managers, so the business can be run by a Second in Command, General Manager, COO or Integrator.
When employees feel like they are connected to long-term goals, company culture, morale, and productivity improve – at least hypothetically.
In some cases, however, being too open with your plans can backfire.
Case In Point: American Data Company
To illustrate, let’s look at the case of Josh Holzman, CEO, and founder of American Data Company, a business technology and consulting firm based out of Santa Monica, CA.
Holzman launched the company in 2003 and built it into a $3 million business by 2011. Though they were doing well, he knew that if he ever wanted to sell, he would need to scale up to assure a better multiple. The number he came up with was $15 million. At this level, he would achieve his goals and provide ample advancement opportunities for his employees.
He brought the team together and laid it out, offering to share 15 percent of the proceeds of the sale with his staff should they reach that goal. He called the initiative “Fifteen Cubed,” and even had Fifteen Cubed bracelets made for his team to wear as a reminder of the collective mission.
Optimism was initially high and everybody embraced the challenge. Fast forward two years. The company was not much further ahead, having only advanced sales by about a million during that time, despite herculean efforts made by all.
Switching Horses in Midstream
At this point, Fifteen Cubed was looking like a longshot. Holzman decided that the only way they were going to hit their mark was to merge with another, much larger company. He swapped his majority stake in American Data for a minority share of Magnet 360, a similar company with a more significant market share.
American Data employees did well with the merger as the company did achieve its $15 million goal in combined sales. They received phantom stock options through Magnet 360, but the proceeds were a sight less than what was envisioned in the early days of Fifteen Cubed.
So, what’s the lesson in all of this? Keeping your employees informed and aligned with long-term objectives is a great idea – as long as things are going well. When steady growth towards the goal is achieved, it’s good for morale and strengthens company culture. However, if you are not hitting your marks, if you simply can’t reach your numbers, this approach can backfire and even blow up in your face.
Too Much Information?
As a business owner, you are willing to take chances and likely have a great deal of optimism for what is possible to achieve. Keep in mind that your employees are on your payroll because they choose not to run their own business. For these individuals, your enthusiasm and willingness to put yourself on the line might not be something they can get on board with.
The moral of the story, if there is one—remember, it turned out okay in the end—is that sometimes, sharing the journey does not always require telling your passengers (employees) precisely what road you’re going to take or what’s at the end of it. Incentives and goals are essential, but these goals must be attainable or morale will suffer.
Are you thinking about scaling up to sell your business? Jump on a call today, and let me show you how I can help.