Most business owners know that a well-groomed successor should have at a working knowledge of operations, sales and marketing, customer service, administration, and finance. But this knowledge, although necessary, is not sufficient if a successor is to effectively lead a company into the future. In addition to having a firm grasp of the mechanics of the business, a successor must become an effective leader, think strategically and have good judgment, have vision, and adopt an owner’s mindset.
Mistake #1: Not Developing Effective Leadership Skills
The effectiveness of a person’s leadership is determined by how they are viewed by the people they lead. A leader who is not respected or trusted can’t be very effective. In contrast, a leader who people trust and respect will always get better results.
People decide how much they trust and respect a leader based on how that leader acts and how they interact with others. When a leader demonstrates that they do what they say they’re going to do (acts with integrity) and demonstrates that they are the kind of person they claim to be (acts in integrity), people learn they can trust him or her.
When a leader interacts with people in a manner that shows they respect and value them, the leader will earn the respect of those around him or her. Leaders accomplish this by treating people like people (rather than like things) and by treating adults like adults (rather than like children).
Mistake #2: Lack of Strategic Thinking
The ability to think strategically is essential for a leader guiding an organization. Without an understanding of what a strategy is and how to develop one, leaders will often focus on goals and tactics. In the absence of a true strategy, these goals and tactics are often misguided and usually result in new challenges.
A goal is not a strategy. It’s just a metric to measure progress in the execution of a strategy. Plus, it has no emotional or inspirational component. Tactics are not strategies either. Tactics are the means by which a strategic initiative can be achieved. Tactics – like goals – also have no emotion or energy behind them. They are simply the mechanics of how things will get done.
A good strategy (in contrast to platitudes, goals or tactics) addresses a problem or takes advantage of an opportunity and provides direction for the company. Additionally, a good strategy inspires people to achieve it. By developing a true strategy, excellent results can be achieved, and the desired financial goals realized.
But an effective strategy also needs buy-in from the team. Without buy-in, a leader simply gets compliance, and compliance is not the same as commitment.
Mistake #3: Lack of Vision
For a leader to guide a company, it is essential to develop a vision for the future of the organization. A vision imagines a future which is better, different, and/or larger than the current state. Without vision, a leader will simply continue to execute the existing business model, often getting left behind as the economy shifts, customer/client preferences change, and competitors adapt.
The ability to develop vision can’t be learned from a book. It arises from within and it requires a leader to have passion and purpose for what they do. A passionless leader can only develop goals – which are uninspiring by their nature. If a leader wants to engage his or her organization, he or she must create a future that inspires people.
Mistake #4: Not Developing Good Judgment
A successor needs to develop sound judgment and become business savvy in order to make good decisions. Good judgment comes from our ability to recognize when our emotions and biases cloud our decision-making. When we allow emotions to cloud our judgment, we make decisions that are misguided. Having sound judgment – unbiased by emotions – allows an owner to make good business decisions.
Business savvy is developed by thinking broadly about all aspects of the business, by being aware of what’s going on within the company, within the economy, with customers, and with the competition. (It also helps to develop an understanding of human nature.)
Mistake #5: Not Developing an Owner’s Mindset
Up until a successor takes over as an owner, they have typically only ever been an employee. There are several differences between the way an employee thinks and the way an owner thinks, and if this shift doesn’t take place, problems will arise.
Employees tend to think narrowly. They usually focus on the task at hand and/or on their specific domain of responsibility (operations, finance, engineering, etc.). In contrast, an owner needs to consider the bigger picture and how his or her decisions impact each aspect of the business.
Employees tend to think short-term. Their focus tends to be on current matters, current revenues, current expenses, and current profits. On the other hand, an owner needs to consider both the short-term and the long-term success of the business.
Employees tend to focus on doing good work while at work but generally don’t take their work home with them. On the other hand, owners learn that the business becomes their lives, and they think about it all the time.
And finally, employees know that if they make poor decisions, the business doesn’t do well, they become dissatisfied, or they lose their job, they can always find a new job elsewhere. Owners understand that failure is not an option. Generally, there is no “Plan B.” They understand that the business is their only future, and this understanding colors their decisions and actions.
One Final Issue…
There’s one more issue that needs to be considered:
It’s nearly impossible for an owner to effectively develop their own successor!
Interpersonal Dynamics – In order for meaningful improvement to occur, open and honest conversations with the successor must take place. But it’s virtually impossible for a successor to be completely open, honest, and vulnerable when those conversations are with the owner.
Blind Spots – Regardless of the number of years of experience we have, our level of intelligence, and the amount of education we’ve had, we all have blind spots. We can’t see what we’re missing. Owners have blind spots.
Objectivity – Virtually everyone around a successor has an agenda – their co-workers, their spouse and especially the owner. They either want things to change or they want things to stay the same. In order for a successor to hone their thinking and judgment, they need an unbiased sounding board. An owner can’t be unbiased.
Time Constraints – There’s a reason it’s called successor development and not successor training. The growth that needs to occur happens over time. It won’t take place simply by attending a workshop or reading a book. And most owners simply don’t have the time.
Skill Set – Successful owners are expert at the business of their business, but the skills that got them where they are aren’t the same skills required to effectively coach and mentor a successor.
It’s critical for a successor to be properly developed so that the business thrives after the owner leaves and all purchase payments get paid. The risk of handing your company over to a poorly prepared successor is too great to leave their development incomplete.
Mike Tyson, the heavyweight boxer, was quoted as saying, “Everyone has a plan until they get punched in the mouth.” Regardless of what you may think of him as a boxer or a person, it was a great observation.
It doesn’t matter whether we’re talking about boxing or business, the truth is that owners all have a plan for a transition until they get hit with a setback. Some will give up after being derailed, but others will take a step back, correct their course of action, and find a way to succeed. Giving up on a course of action is not the same as giving up on a goal.
Having a strong attachment to the process with which to achieve a goal often undermines our success.
Let’s look at the typical transition options, the potential setbacks, and how to recover from a setback.
Typical Transition Options:
Generally, owners have two practical options – an External Sale (Exit) or an Internal Sale (Succession). (The other option is to close the doors and sell the assets.) An Exit is generally a sale to an Individual Buyer or it’s some form of Strategic Acquisition (M&A/Investment Bank/Private Equity). In contrast, a Succession is a sale to a Family Member, a Key Executive, or via an ESOP (Employee Stock Ownership Plan). A number of these options can be the right path for an owner, depending on the nature of the business and the needs of the owner. The problem is that many times, things don’t go as planned.
Potential derailers for a planned External Sale
Circumstances that can derail an Exit include:
- Can’t find a buyer or attract capital – This can be due to a surplus of businesses for sale or to the nature of the business. The greater the surplus of sellers, the more selective buyers can afford to be. Additionally, the more dependent on the owner and his/her relationships, the less attractive the business.
- Price too low – This can also be due to a surplus of businesses for sale or it can be due to business valuation issues like customer concentration, weak leadership, market concentration, etc.
- Unacceptable terms – Sometimes buyers require an owner to stay active in the business for an extended period of time and or defer payment of monies pending performance.
- Health issues (yours or a family member) – Clearly, this situation is unexpected, and a sale would be undertaken under pressure, which would result in a loss of leverage.
Potential derailers for a planned Internal Sale
Circumstances that can derail a Succession include:
- No qualified or interested successor – Either the person you had in mind to take over the business doesn’t want to, or you don’t have confidence in the person who wants to take over.
- More than one interested family member or executive – You have more than one person who wants to be the successor and it creates conflict – sometimes significant conflict.
- Too small for an ESOP – You like the idea of creating an employee-owned company, but the cost is too high and/or there aren’t enough savvy leaders to take charge.
- Health issues (yours or a family member) – Clearly, this situation is unexpected, and a transition would be required before a successor is ready.
How to Reduce the Chance of Your Plans Getting Derailed:
The best approach to planning a transition is to be proactive, well in advance of your anticipated departure. Start by pulling together a team of professionals sooner than later. Their expertise can help you choose the best exit strategy for your situation, identify and resolve potential issues, and refer you to people with any additional expertise if needed.
|• Wealth Manager
• Tax Planning Attorney
• Successor Recruiting
• Successor Development
• Succession Attorney
• Private Equity Firm
• M&A Advisor
|• Investment Banker
• Exit Planner
• Executive Coach
• Estate Planning Attorney
• Commercial Banker
• Business Broker
If your goal is an external sale, consider having a preliminary Quality of Earnings Report done along with a Quality of Leadership Report. These two reports will highlight any shortcomings and/or impediments in advance of a sale so they can be addressed before going to market. Additionally, consider selling sooner than later to avoid the surplus of Boomer-owned businesses coming to market and/or to avoid being forced to retire due to health issues.
If your goal is an internal sale, ensure you’ve identified your successor well in advance and make sure they want the role. (If there is no one, then start the process of recruiting a potential successor as soon as you can.) Once that’s done, start working on developing that person. Develop their business savvy, their leadership effectiveness, their strategic thinking, and their owner mindset. If more than one successor will be involved, objectively assess them and decide how to split/share responsibilities.
How to Recover from a Setback on an External Sale:
Basically, there are two paths to recovering from a setback on an external sale. Start by attempting to make the business more attractive. If possible, address the issues that caused the business to be less attractive, caused it to be worth less than you hoped for, or caused the terms to be undesirable. If that can’t be accomplished, then switch to an internal sales solution by choosing or finding a suitable successor and grooming them to take over.
How to Recover from a Setback on an Internal Sale:
If your plan to have a particular person take over the business fails, re-evaluate and assess alternative successors and/or start the process to recruit a successor from outside the company. Once you’ve chosen someone, begin grooming them to take over.
By the way, if you want to accelerate the development of your successor, consider bringing in a professional executive coach. Having an objective, confidential sounding board can help them gain new perspective and develop the skills they need to succeed.
Everyone’s heard about how Baby Boomer business owners will be retiring and the wave of business successions/exits that will occur as a result of those retirements. But there’s a problem that almost no one is discussing. Our research clearly shows that there aren’t enough buyers for all those businesses. Here’s why and what you can do about it.
The SBA reports that there are roughly 6,000,000 small employers in the U.S. Of those 6 million businesses, approximately 3,600,000 are owned by Baby Boomers and about 2,400,000 are owned by GenX’ers. Based on the US Census population statistics, this means about 4.5% of Boomers own a business and about 3.0% of GenX’ers own a business. Human nature being what it is, we expect the percentage of GenX’ers who want to own a business to also rise to 4.5% as they get older. None of that is especially surprising – until you think about it a bit more. And then it becomes alarming. It becomes alarming because that rise in GenX owners from 3.0% to 4.5% represents only 1/3 of the Boomer businesses that will be for sale.
The result is that 2/3 of all Boomer businesses won’t find an individual buyer!
But what about strategic acquisition and private equity money? There’s lots of money looking for a home, right?
There are always companies looking to acquire or merge with businesses that complement or expand their core business. After all, the acquisition is considered “strategic” because it expands their market share, affords economies of scale, or adds products and services that dovetail with or complete their current offerings. But only the most profitable, highest regarded, or fastest growing businesses will be strong candidates for a strategic acquisition at full market value. The reality is (and always has been) that most companies will not be good candidates for strategic acquisition.
When it comes to private equity, pretty much all private equity investors are looking for opportunities with high profit growth potential. And as we know, most businesses are more about steady growth and consistent profits. They just don’t pencil out for that big, private equity payday.
Historically, between M&A deals and Private Equity deals, only about 15-25% actually close. Even if we’re optimistic and assume 25% of the available businesses can attract private equity money or a strategic buyer, it leaves a full 50% of boomer businesses without a buyer or acquirer! (75% of the 2/3 noted above)
If owners REALLY want to sell their company to an outsider, they should work with an experienced Transition Specialist, M&A Advisor, Investment Banker, or Business Broker. It will maximize their chances of getting sold. In addition, they should get preliminary Quality of Earnings and Quality of Leadership reports done. These reports will highlight any weaknesses that need to be addressed before going to market, thereby increasing their chances of attracting a buyer and closing a deal.
So, where does that leave owners who can’t find a buyer or attract money? Here are the five options open to them:
“FIRE SALE” ACQUISITION
Businesses whose profitability and growth are weak or who aren’t quite a perfect fit for an acquiring company may still be candidates for acquisition. The problem, however, is that they won’t be able to command their full market value. Because they’re not as attractive to a strategic buyer and because there will be so many businesses on the market, the only incentive to complete a deal will be to lower their asking price – sometime significantly.
FIND A SUCCESSOR
One of the better options for many businesses will be to recruit and develop a successor, and then sell the company to them at full price. Some banks may be willing to fund a portion of the buyout, but the majority of internal sales will be paid (in part or in full) out of future cash flow. Consequently, it is critical to find a successor as soon as possible and ensure they are well-prepared to be an effective leader and a successful owner. It generally requires one to two years of development to hone someone’s leadership capabilities, their strategic thinking, and their judgment. Without that development, you run the risk of the business not being able to make those buyout payments.
KEEP THE BUSINESS
A variation of selling to a successor is to bring on a successor to run the company but not sell the stock. This option allows the owner to draw out the business’ value from the company while still owning it, but without needing to run it on a day-to-day basis. It requires finding and developing a strong successor, and then rewarding him or her for good performance.
CREATE AN ESOP OR AN MBO
In the absence of a strong successor, an option that will also yield full market value is to set up an Employee Stock Ownership Plan (ESOP) or a Management Buyout plan. This approach can increase employee loyalty and productivity, ensure business continuity, and gain some tax advantages. These solutions can be effective, but require one or two years of planning, along with the training and development of the people who will be directing the organization. Additionally, it can be expensive to establish an ESOP and is therefore not a practical option for most companies.
CLOSE THE BUSINESS
If a business can’t find an individual buyer, is not a candidate for acquisition, has no successor and isn’t able to structure an ESOP, the only course of action will be to close the business and sell off the assets. Obviously, this is the least desirable outcome. The owner will receive pennies on the dollar and the livelihood of all the employees and their families will come to an end.
We believe all too many businesses will be facing this stark reality if they don’t put plans in place at least two to three years in advance of retirement.
THE BOTTOM LINE
The bottom line is that if your businesses isn’t in high demand and you’d like to sell it for a reasonably strong price, the best course of action is generally going to be to recruit and develop a strong successor.
If you’d like help recruiting, assessing, and/or developing a successor for your business, please contact us. It’s what we specialize in.
There’s no question that a successful business owner knows his or her business better than anyone else. And as a consequence, there’s no one better to help a successor learn the business. But there are potentially several problems that occur when an owner is the only one to help a successor develop.
The first issue pertains to leadership. Learning the mechanics of a business doesn’t really help hone leadership skills. Although people generally do respect a leader’s knowledge and technical skills, that degree of respect only goes so far.
For people to fully trust and respect a leader, that leader needs to earn that trust and respect. Trust and respect aren’t automatically given because of someone’s title.
In order for a leader to earn trust, he or she needs to demonstrate that they have integrity. In other words, they do what they say they’re going to do and are the kind of person they claim to be. And, in order for a leader to earn respect, he or she needs to treat people with respect in both word and action. For example, a leader needs to treat people like people rather than like things. And they need to treat adults like adults instead of like children.
The second issue pertains to strategic thinking. Knowing how to do things really well simply means a successor has mastered the mechanics – the systems and tactics – of the business. If they don’t learn to think strategically, then several things tend to happen.
One result of not thinking strategically is that improvements will tend to be small, resulting in only modest gains. A second consequence is that a successor will tend to develop tactics that they feel are “strategies”. This also produces results that are mediocre. But the third consequence is the one that is most detrimental. They will develop strategies to address symptoms rather than underlying problems. The result of addressing symptoms instead of problems is that it almost always creates more challenges that cause a decline in revenues and profits.
The third issue pertains to blind spots. If a successor only gets guidance from an owner, they tend to end up with “group think” along with the blind spots that accompany it. Group think is what happens when people think “this is the way we do it around here”. The problem with having blind spots is that a successor can’t see what he or she is missing. Regardless of experience, intelligence or education, we all have these blind spots.
Typically, the only way to eliminate blind spots is to get outside perspective. Someone needs to point them out to us. If we don’t get past our blind spots, we miss opportunities and make poor decisions.
The solution to improving leadership competence, enhancing strategic thinking and eliminating blind spots is to have an unbiased sounding board. Someone who can offer outside perspective and help develop the needed competencies.