Succession

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.

When Successors Manage Instead of Lead

Most owners feel they’ve done a good job preparing their successor, yet many successors fail once they take over. One of the major causes is that they continue to manage the company rather than lead it. And when people get “managed” engagement drops and results suffer.

Two of the most common ways an executive “manages” people are by “treating people like things” and by “treating adults like children”.

How does someone “treat people like things”? They do it in several ways. They do it when they’re insensitive to them and interact with people as if they have no feelings. They treat people like things when they ignore the fact that everyone has hopes and dreams and fears and stress. They treat people like things when they relate to people as if their own goals and aspirations are more important than another person’s goals and aspirations. And they treat people like things when they don’t show respect for people nor value their contributions, efforts, and potential.

When someone treats a person like a thing, it sends the message that they are unimportant and that they just don’t care about them. And when people sense a leader doesn’t care about them, they start not to care about that leader. When the company tolerates leaders who don’t care about people, people tend not to care about the company. And when people don’t care, there is no engagement.

In contrast, an effective leader understands that people’s hopes, dreams, fears, and stresses are real and matter to them. A leader inspires people. A leader interacts with people as people, helping them to be their best. A leader treats people the way they themselves want to be treated. And a leader helps people achieve their own goals.

How does someone “treat adults like children”? Think for a moment about how parents relate to children and why they relate that way. They generally tell children what they need to do and when they need to do it. They do that because they don’t trust a child’s judgment, their sense of responsibility, and/or their self-discipline. They regularly check up on children because they don’t trust them to follow through on their commitments. They check up on children because they don’t trust them to be responsible.

When a leader doesn’t trust people to do what needs to be done and doesn’t trust their judgment, he or she is treating them as if they are children. When they micromanage people, they are treating them like children. And when they treat people like children, it shows a lack of respect and trust. When people feel they aren’t respected and trusted by a leader, they lose respect for that leader. When people feel they aren’t respected and valued, there is no engagement.

If someone doesn’t know what to do, then our job as a leader is to develop their knowledge and abilities. The shortcoming lies with the leader, not the follower. If someone lacks the necessary judgment for a task or decision, then our job as a leader is to develop their judgment. If their judgment remains inadequate, then either we aren’t as competent a leader as we need to be, or we just have the wrong person on our team. Either way, resorting to treating someone as a child is a poor course of action.

Regardless of how well a successor knows the mechanics of a business, if they don’t hone their leadership skills, the best they can hope for are mediocre results.

If you’d like help evaluating your successor’s leadership abilities and/or help with developing their weaker areas, please contact me.

Why Effectively Developing Your Own Successor is Nearly Impossible

More and more business owners are finding that selling their company to an outsider is becoming increasingly difficult. As a result, they’re realizing that selling to a successor is the best way to receive the full value of their business when they retire. The plan will work beautifully as long as the business makes all the buyout payments. But the business’ ability to make those payments relies on the successor not screwing things up!

In order to maximize the likelihood that the successor does a good job and makes smart decisions, he or she must be developed effectively. In addition to learning about the business, they need to develop their leadership effectiveness, their strategic thinking, and their judgment. And therein lies the challenge…

It’s nearly impossible for an owner to effectively develop their own successor!

Here are the five issues that prevent an owner from properly developing their successor and what to do about it:

Interpersonal Dynamics
In order for meaningful improvement to take place, open, honest, challenging, and confidential 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 person who will decide whether they will be taking over the company.

It’s unrealistic to expect a successor to acknowledge their shortcomings and fears in a conversation with the owner. It’s unrealistic to expect a successor to share their frustrations and dissatisfactions to that owner. And it’s unrealistic to for an owner to challenge a successor’s thinking or judgment and expect them to respond transparently and honestly.

The interpersonal dynamics between owner and successor make it nearly impossible for an owner to effectively develop his or her successor.

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. And because we have blind spots, it causes us to limit our thinking and the solutions we come up with.

In addition, when someone has spent a considerable amount of time in an industry and/or a company, they tend to develop “group think”. In other words, they tend to think about problems and seek solutions the same way others around them tend to think about and see those things. Group think limits the solutions we come up with.

Because getting past blind spots requires outside perspective, it makes it nearly impossible for an owner to effectively develop his or her successor.

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. They want the successor to act and make decisions in a way that gives them what they want. In order for a successor to hone their thinking and judgment, they need an unbiased sounding board.

Because getting objective perspective and having an unbiased sounding board are essential to improving a successor’s judgment and decision-making, it’s nearly impossible for an owner to effectively develop his or her successor.

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. Development occurs as a successor deals with everyday issues and then gets outside perspective to shift how they lead, think, and interact.

Most owners simply don’t have the time needed to give a successor the attention required for effective development. Consequently, it’s nearly impossible for an owner to effectively develop his or her successor.

Skill Set
Let’s face it, successful business owners are pretty expert at the business of their business. They couldn’t have gotten where they are without developing that expertise. But in order for a successor to succeed in their development, they need to be coached and mentored. Mishandling this will produce mediocre results at best and may do more harm than good.

The truth is that the skills that got owners to where they are aren’t the same skills required to effectively coach and mentor a successor. By way of example, a seasoned professional executive coach goes through extensive training and years of practice to hone their coaching skills.

Because coaching and mentoring don’t come naturally to most owners, it’s nearly impossible for an owner to effectively develop his or her successor.

In summary, it’s critical for a successor to be properly developed so the business thrives after the owner leaves and all purchase payments get paid. In order to maximize the likelihood of that happening, it is essential to bring in outside expertise to help complete the development of a successor. The risk of handing your company over to a poorly prepared successor is too great to leave their development unfinished.

If Your Successor Isn’t Progressing Fast Enough…

Preparing a successor to take over a company is serious business. You’ll be putting the business you’ve built into someone else’s hands and trusting them to maintain and grow it. No doubt, you’ve anticipated the need to groom someone and have started their development in plenty of time to be ready to take over when the time to retire arrives.

But what if, as your timeline for retirement approaches, he or she isn’t ready? Does it mean they really aren’t capable of taking over? Does it mean you should consider selling your company to an outsider? Maybe. But before you make that decision, consider these three factors that may be hampering their progress…

You may not be allowing them sufficient opportunity to make decisions and make mistakes.

Let’s face it, you’ve been in charge of your company from its inception. You’ve made all the major decisions, you’ve made your share of mistakes, and you’ve learned from the mistakes you’ve made. It’s not easy – nor is it natural – to relinquish that decision-making role.

But if you don’t allow your successor to start making decisions they won’t build their self-confidence and it won’t help build your confidence in them. Additionally, without gaining experience making important decisions (and possibly making mistakes) they won’t improve their judgment. And finally, it’s better that they make mistakes while you’re there to correct them rather than making those mistakes in your absence.

If you want to accelerate your successor’s competence, have them start making the less critical decisions. Then have them make more critical decisions collaboratively with you in order to learn from you as soon as possible.

As the owner/parent/relative, you can’t or aren’t free to say what needs to be said.

Often, because of family dynamics and/or company politics, even when you know what needs to be said, you can’t. You can’t because you and the successor have history, and with history comes “baggage”. Also, if you’re related, you often can’t say what needs to be said because of all the family dynamics that exist – parent/child issues or issues with siblings (yours or theirs).

Even if you decide to speak your mind, you run the very real risk of worsening a situation or alienating your successor.

The most effective means of helping them improve and changing their perspective is to have someone work with them who doesn’t have history, baggage, or an agenda. Having someone offering outside perspective – like an experienced executive coach – is a smart solution to the problem.

You and your successor have blind spots, which limits your ability to help them.

Regardless of how much experience a person has, how intelligent they are, or how much education they’ve had, we all have blind spots. We can’t see what we’re not getting. Not only do we have those blind spots, but our years of experience often cause us to approach problems in familiar ways, preventing us from seeing alternative solutions.

That being the case, trying even harder will only produce modest, incremental changes at best. Typically, the only way past our blind spots is to have someone point them out to us. It calls for a fresh set of eyes and some new perspectives.

Consider working with an executive coach and/or having your successor work with one so blind spots can be revealed and new perspectives can be adopted.