Succession

How Owners Think Differently

Up until a successor takes over as an owner, they have typically only ever been an employee. Therefore, it is critical to help them begin adopting an Owner’s Mindset prior to handing over the keys.

Owners and employees generally think differently. I remember when I first became owner of a company. I co-owned a restaurant development company, where developed our own restaurant chain and also developed a territory for a national franchise.

Suddenly, every purchase felt like (and was) coming out of my own pocket. I spent a whole lot more time justifying expenditures that I did as an employee. And while before, my focus was on doing my job well, now, everyone’s job became my concern.

Employees typically are focused on getting their work done, while owners, in contrast, need to anticipate problems, develop strategies, and plan for growth. And while employees are concerned with their paycheck, owners are concerned with paying the bills. All the bills.

As I soon learned, owners also need to see the bigger picture – both internally and externally. An effective owner needs to be aware of the economy, the marketplace, and the competition. It will influence how they develop strategies to grow the company. (Employees tend to focus on the here and now.) Additionally, an owner soon realizes that most decisions impact almost every aspect of a business and therefore require more thought (and forethought).

I also remember that when I was an employee, I often gave thought to what other opportunities might be out there. You see, if a business doesn’t do well, or you (as an employee) become dissatisfied at work, you simply find a new job. Owners, on the other hand, understand that there is no “Plan B”. The company is their future. The future now rested on my ability to grow the company and its profits.

In short, for a new successor to succeed, they need to adopt an Owner’s Mindset. Not doing so will almost certainly lead to missteps and setbacks. Our Successor Development program helps prepare a successor to become an Owner.

How to Choose a Successor

Selecting a successor to take over your business is serious business. The future of the company rides on it. The livelihood of the people employed depends on it. And the ability to make buyout payments to you relies on it.

In order effectively choose a successor, six aspects of a person need to be considered and evaluated:

• Business Mechanics – their understanding of how the products and services get produced and delivered
• Leadership Competence – their interpersonal skills, influence abilities, and a vision for the future
• Strategic Thinking – their ability to distinguish between problems, symptoms, strategies and tactics
• Sound Judgment – their ability to make good decisions and to choose an appropriate level of risk
• Personality Traits – their drive, attitude, social skills and energy level
• Cultural Fit – their alignment with the values and behaviors that matter to the company

Of course, understanding all this and ensuring a successor has all of these traits and competencies are two different things. Here are some guidelines to help evaluate a potential successor:

BUSINESS MECHANICS
Although understanding how the business works is important, it’s the easiest of the aspects to determine and/or develop. If they’ve worked for you for a while, you’ll have a pretty good idea of whether they understand the business. If they haven’t worked in the company, then have them spend time in each area of the business and see how well they do.

LEADERSHIP COMPETENCE
As an owner, a successor will (and should) spend much of their time leading rather than producing and delivering products and services. Therefore, leadership competence becomes critical for success. Fortunately, a 360 assessment will provide an objective picture of their leadership abilities and if needed, a professional executive coach can develop any areas needing improvement.

STRATEGIC THINKING
Reacting to a symptom instead of spending time understanding the underlying problem almost always leads to worse results. The best means of evaluating whether someone can think strategically is to allow them to develop strategies and present them to you. Not only will you be able to assess their abilities, but it will allow you to coach and mentor them if needed.

SOUND JUDGMENT
The only way to know if someone’s judgment is sound is to allow them to make decisions. Start with decisions that have a minimal impact on the on the business and/or can easily be corrected. As the decisions become more impactful, have them make their decisions in stages, checking in with you at each step so you can correct and mentor them before moving on to the next step.

PERSONALITY TRAITS
Before you evaluate a potential successor’s personality, you first need to decide whether the company needs an owner with the same personality as you or, at this point in the growth of the business, it requires a different type of individual. Once you’ve defined the type of personality needed, it should become fairly clear whether the individual has the needed traits. Remember, however, that unlike the other needed competencies, personality is innate and can’t be “developed”. Either they have the personality traits or they don’t.

CULTURAL FIT
Culture is defined by the values and behaviors demonstrated by the leadership of a company. If your successor doesn’t embody the culture you’ve established over the years, a different culture will emerge and the company will change. Additionally, if a leader professes to the importance of certain values but acts in a manner at odds with those values, it demonstrates a lack of integrity. Make sure your successor is living your company’s culture.

If you’d like our help evaluating and/or developing your successor, please contact us to discuss your situation.

How to Improve a Successor’s Competence

Simply knowing how the business runs doesn’t qualify someone to be the head of a company. It also takes leadership, vision, and good judgment. Without strong leadership skills, a leader will simply get compliance from his or her team and results in mediocre performance. Without vision, the business stagnates and only grows incrementally. And without good judgment, poor decisions that may put the company in jeopardy.

Improving Ownership Competence:
Owners and employees think and act very differently. Employees tend to think narrowly, focusing on the task at hand and/or on their specific domain of responsibility. In contrast, owners need to consider the bigger picture and how their decisions impact each aspect of the business. Employees tend to think short-term and their focus tends to be on current matters, current revenues, current expenses, and current profits. Owners, on the other hand, need to consider both short-term and long-term success.

Owners understand that their business is their life and they think about it at all times, no matter where they are. Owners also feel a responsibility to provide a livelihood to the company’s employees. They understand that their decisions not only impact the bottom line but impact the people who work for the company.

And finally, employees know that if they make poor decisions or the business doesn’t do well or 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 their actions.

Here are three things you can do to prepare a successor for ownership:

Help them become knowledgeable about all aspects of the business.
They don’t need to be an expert in all areas, but they do need to be knowledgeable enough to carry on a conversation about any topic related to the running and the success of the business. Important areas are production/operations, sales/marketing, and finance/accounting. For example, if they’re going to be successful at growing the business profitably, it is essential that they understand why some marketing works and some doesn’t, and they need to be able to understand and interpret the company’s financial statements.
Help them study the competition.
It’s important for a successor to not only be aware of economic and industry trends, but also of what competitors are doing and how they are responding to the marketplace. Have them read trade publications, make note of competitors’ advertising, and pay attention to comments (both good and bad) made about the company and the competition by both customers and prospects.
Help them develop a vision for the future.
Employees tend to think about how they can improve on the existing business by maximizing revenue, profits, efficiency, and quality. And while those are all important, they generally produce only incremental improvement. Help your successor develop a vision for the future that is different and better than what already exists. It is essential they become good at this. It is the only way to make significant improvements.

Improving Leadership Competence:
In order to be effective, an owner must also be a good leader. Leaders guide the organization, inspire the organization, and bring out the best in people. A successor must earn trust and respect, reinforce the company’s culture, learn to influence others, think strategically, and develop others.

Here are five things you can do to prepare a successor for leadership:

Earn Trust and Respect.
It is essential that the successor earn the trust and respect of those around them. Make sure they act with integrity and that they show respect for others. It will help them become accepted as the new owner.
Reinforce the Culture.
The culture of a company is made up of the values and behaviors it embodies. By going out of their way to speak and act in alignment with the company’s culture, it demonstrates that a successor is well-aligned with it, that they believe in it, and that they expect others to live by it as well.
Become Influential.
Mastering the ability to influence others is critical to the success and effectiveness of a leader. An influential leader has the ability to sell his or her ideas and get buy-in throughout the organization. A strategy, no matter how well thought out, will only get mediocre results if there isn’t strong buy-in. Help the successor learn how to shift people’s perspectives. Help them to use questions and analogies effectively in order to persuade people.
Think Strategically.
The ability to think strategically is essential for leaders guiding an organization. Development of a proper strategy allows a leader to prepare an organization for faster growth and profitability. A good strategy addresses an issue or problem and provides a direction for the company. However, a misguided strategy can cause a decline in growth and profitability. In order for leaders to develop a good strategy, they need to uncover what the underlying problem is and not react to the symptoms it causes. Help them to become good at uncovering underlying problems.
Develop Others.
One of the most important responsibilities of a leader is to develop the people around him or her. Study after study has shown that an important factor in driving employee engagement is having the opportunity for professional growth. Given the impact and far-reaching implications of developing others, it is critical for a leader to adopt a “coach-like” approach when developing people.

What does a coaching style of leadership look like? A coaching approach is to ask rather than tell. Instead of starting off by telling people what to do, a leader should ask them what they would do and how they would do it. It not only demonstrates that the leader has an interest in what the person has to say, but their answers will reveal their level of insight, judgment, and problem-solving abilities. Asking good questions will help a successor understand how to help and guide people. Help your successor learn to ask good questions.

Conclusion
These essential leadership and ownership competencies don’t come naturally to most people. Plus, leadership skills aren’t trained. They’re developed over time – usually a six to twelve-month initiative. Utilizing the expertise of an experienced executive coach is the perfect solution for grooming a successor.

When properly coached, they’ll be able to leave poor habits behind and form new, more effective ones. They’ll have their blind spots revealed so they can expand their thinking. They’ll have an unbiased sounding board, so they’ll make better decisions and sharpen their judgment. And they’ll gain a deeper understanding of people, along with how to engage and inspire them. By getting outside perspective, they’ll accelerate their leadership and ownership effectiveness, and the business will thrive.

New Research Shows an Unusual Problem on the M&A Horizon

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 people over 50 years old (Baby Boomers) and about 2,400,000 are owned by people 30-50 years old (GenX). 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. Even if the inclination for GenX’ers to own a business (3.0%) rises to that of Boomers (4.5%), it means that there is going to be a significant lack of demand for all those Baby Boomer businesses coming on the market. It means that 2/3 of all Boomer businesses won’t find a buyer!

If a company can’t find a buyer and it isn’t attractive as a candidate for acquisition/merger, its only options are to facilitate some kind of internal sale (successor or ESOP) or sell off its assets. Given that finding any kind of external buyer will become increasingly difficult and companies looking for an acquisition will have the luxury of becoming increasingly selective, M&A professionals will need to change the way they conduct business if they want to leverage this wave.

Over the next 5-10 years there will be a significant uptick in the number of M&A opportunities. However, in light of the coming glut of businesses on the market, the percentage of deals that close will drop dramatically. The problem (as stated above) is that there won’t be a corresponding uptick in interested buyers.

At first, the surge in new opportunities will seem like a windfall. After all, a doubling or tripling of deals in your portfolio normally would lead to a doubling or tripling of profits. But the truth is that, for the most part, it will simply lead to a doubling or tripling of expenses with only a marginal increase in the bottom line. It will amount to a whole lot of extra work with little or no return.

Here’s what M&A professionals can do to successfully ride the wave…

When the market is robust, and supply and demand are balanced, M&A firms can afford to be transactional. If you throw enough deals into the mix you will find your share of buyers. But as the pace of businesses coming onto the market accelerates, that strategy will fail. Only deals for the strongest, most profitable companies will close. Therefore, for M&A firms to thrive in the coming market, they will have to take a more active role in helping acquisition candidates become more attractive.

Relational vs. Transactional
As an M&A professional, you know better than most what factors make a business an attractive target for a deal. Therefore, the key to closing a higher % of deals is to work with companies to make them as attractive as possible, rather than turning them away. It’s not that you need to become a management consultant, but rather, you need to assume the role of “quarterback”, pointing out their shortcomings and directing them to a variety of experts who can help them address the issues, drive up value, and increase the likelihood of closing a deal.

The key to success is to shift from simply being a broker of businesses to an M&A advisor, positioned to help them succeed in closing a deal – even if it ends up being a year down the road. Develop a stable of expert resources you can refer them to. It’s not that every company will magically become a good candidate, but enough will become good deals to have a significant impact on your success. By building and maintaining a relationship with these companies, they will become attractive acquisition targets and you will close more deals.

Here are some examples to consider:

WEAK EBITDA
A company has flat or below average earnings. Refer them to a qualified Business Consultant or business-minded CPA who can help them boost profitability.

WEAK BENCH STRENGTH
A company has a weak leadership team. Refer them to an Executive Coach who can help them assess and develop their bench strength.

CUSTOMER CONCENTRATION
A company is dependent on a few large customers. Refer them to a Sales Consultant who can help them secure a broader customer base.

PRODUCT CONCENTRATION
A company has too few products/services. Refer them to a Strategic Planning Consultant who can help them identify new, profitable lines of business.

MARKET CONCENTRATION
A company is in too few markets. Refer them to a Marketing Consultant who can help them break into new markets.

If any of your potential deals need to bolster the strength of their leadership team, please contact us. We specialize in leadership assessment and development. www.ElicitingExcellence.com

3 Keys to Successor Success

No one puts their company in the hands of a successor unless they are pretty sure they’ll succeed. Yet many successors don’t. (Some say as many as 70% fail.) Why is that?

While it’s true that economic conditions or competition can hurt a company’s success, more often, the company’s demise is due to missteps by the successor. Most of these missteps occur because, although they understand the “mechanics” of the business, they haven’t honed their leadership abilities, their strategic thinking, and their decision-making skills.

Leadership Abilities
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 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, how they interact with others, and how they guide the organization.

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 treating them like children).

When a leader guides the organization with clarity, develops meaningful initiatives, is inspiring and demonstrates good judgment, people will stay engaged and do their best.

Strategic Thinking
The ability to think strategically is essential for leaders guiding an organization. Development of a proper strategy allows a leader to prepare an organization for faster growth and profitability. 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 issues arising.

A good strategy addresses an issue or problem and provides direction for the company. By developing a true strategy, excellent results can be achieved, and the desired financial goals realized. In order for leaders to develop a good strategy, they need to uncover what the real underlying problem is and not react to the symptoms it causes. A strategy which addresses a symptom always creates more issues.

But a good strategy by itself is not sufficient. There needs to be buy-in for the strategy. Without buy-in, a leader simply gets compliance, and compliance is not the same as commitment. The results gained from the efforts of people who are only doing what is asked of them are very different from the results achieved by people who are enthused and committed. How do you gain buy-in? Leaders get people on board through influence and persuasion. A leader who is skilled at influence and persuasion has the ability to change people’s perspectives and beliefs. That skill relies on our ability to understand other people’s motivations and perspectives. Once we understand why they see things the way they do, we can then offer a new perspective on the situation in a way that resonates with them.

Decision-Making Skills
Poor decisions lead to poor results. That much is clear. But how does someone go about improving their decision-making skills? A successor needs to develop sound judgment, business savvy, and foresight in order to make good decisions.

Judgment is developed over time by learning to evaluate all available information and options, learning from mistakes, and learning to balance risk and reward.

Business savvy is developed by thinking broadly about all aspects of the business, by being aware of what’s going on with the company, the economy, the customers, and the competition, in addition to developing an understanding of human nature.

Foresight is developed by learning to consider all possible outcomes and developing strategies to address each one, by seeking outside perspectives and opinions before making important decisions, and by learning to anticipate the unexpected.

To ensure a successor has the greatest chance to succeed (and the owner has the greatest chance of getting paid), go beyond the mechanics of the business. A good place to start is with our free Successor Readiness Questionnaire. It can give you a sense of how ready your successor is to take over. Help successors improve their leadership abilities, teach them how to think strategically, and help them develop sound judgment and good decision-making skills.

If you’d like help with assessing and/or developing a successor, please give me a call. It’s our specialty.