Succession Planning

Successor Insights: The Need for a Sounding Board

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.

The Successor Litmus Test

A well-prepared successor is essential for a smooth transition and is critical for continued growth and profitability. The question then, is how do you determine whether a successor is ready to take over? What is the “Litmus Test” that will reveal their degree of readiness?

The answer is that there is none.

There is no one “test” that will reveal their preparedness. Rather, there are several things (you can call them tests if you like) that will reveal just how competent they really are. Here are a few suggestions you can use to evaluate your successor:

Vision: Ask your successor what his or her vision is for the future of the company. Do they talk about maintaining or do they talk about growing? Do they talk about changes they’d make? Do they talk about the company’s culture? Do they have an eye on the customer and the competition?

Any and all of these issues can and should be an essential part of someone’s vision for the future of the company. By listening to what they talk about and listening for what they don’t talk about, it will reveal whether they’re beginning to think like an owner.

Strategy: When an issue arises within the company, ask your successor how they would resolve it. Help them to differentiate between problems and symptoms. Help them differentiate between strategies and tactics.

If they attempt to “solve” a symptom, the solution almost always makes the situation worse. Help them to understand that before a strategy can be developed, the underlying problem must first be identified. Once the true problem is uncovered, the best strategy almost always presents itself. Helping them understand these insights will help keep them from developing poor initiatives.

Decision-Making: Making sound business decisions is key to the future of the business. Good decision-making requires business savvy, sound judgment, and the ability to see the bigger picture.

Have your successor start by making less critical decisions. As he or she demonstrates competence, allow them to participate in decisions that have a greater impact on the company. Coach and mentor them on how to make better decisions. Only by helping them make course corrections can you hone their decision-making abilities.

Judgment: There’s only one real way to test their judgment. The one true test of judgment – after all the other development has taken place – is to leave.

Ask yourself how long you’d be comfortable being away from the business. And then leave. At first, it may be for a few days. Then a week. At some point, it may be that you can stay away for two weeks or even a month. The truth is that at some point, when you retire, you will be away from the business all the time.

If you’re not comfortable with staying away for an extended period of time, it’s generally due to one of two things. Either your successor isn’t yet ready to take over, or you aren’t prepared to let go. Either way, something needs to change if you want a smooth and successful transition.

If you’d like help preparing your successor, please give us a call. We specialize in successor assessment, successor development, and successor recruiting.

5 Strategies for Effective Successor Development

If you’re planning on selling your business to a successor (family or key executive), developing them as thoroughly as possible is essential. Not investing the time to properly develop them can lead to retirement delays, frustrations, missed payments or worse (like having to come out of retirement and salvage things).

After working with leaders for the last 20 years, we’ve determined that these are the five smartest things you can do – above and beyond teaching them “the mechanics” of your business – to maximize the likelihood of success.

1. Get an Objective Assessment
Let’s face it, we all have blind spots. And our blind spots cause us to miss things – especially when it comes to successors because we’re too close and have a lot riding on their success.

In addition, although you no doubt have many years of experience, your opinion is only part of the equation. It’s critical to find out how others view him or her, since they’ll be the ones who will either follow the successor’s lead or will choose not to trust and respect them.

The smartest way to evaluate a successor is by conducting a 360° assessment. This assessment solicits feedback from people all around them (you, peers, direct reports, etc.). The report generated by an objective 360°assessment will highlight their strengths and their weaknesses, which will provide you with guidance on how to further develop them to be more effective.

2. Have Regular Developmental Discussions
Successors can’t be trained. They must be developed over time. In other words, if successors could be trained, they could simply read some books and attend a workshop or two and become a better leader and an owner. It doesn’t work like that. For someone to become more effective as a leader and owner, he or she must break old habits and form new ones. They need to improve their interpersonal skills, learn to think strategically, and become effective at influencing others. In addition, they have their own blind spots and can’t see what they’re missing nor can they see where they’ve gone wrong.

That’s why, for successor development to be effective, it’s important to have developmental discussions once a week or at least twice a month. During these discussions you should talk about things that happened since your last meeting with them and suggest ways they could have handled things differently or more effectively. It’s an ongoing process and usually takes about 6-12 months to get the results you want.

3. Help Them to Think More Strategically
I’ve seen it over and over again. Leaders looking to increase profits develop a strategy to get better results. Except the so-called strategy they develop is not really a strategy at all. It’s just a goal. Or a tactic. Or sometimes it’s simply a platitude – a nice-sounding, but meaningless statement.

Regardless of whether they developed a goal, a tactic or a platitude, the results are always the same. The so-called “strategy” is never realized. No amount of encouragement, accountability or table pounding will lead to achieving the desired results. Only a true strategy stands a chance of achieving significant results.

In order to help a successor think more strategically, two things must happen. First, they need to understand the distinctions between strategies, tactics, goals, and platitudes.

A good strategy addresses a problem or an opportunity. Help your successor learn the differences between strategies and tactics.

And then they need to learn to differentiate between problems and symptoms. A strategy developed to address a symptom almost always produces weak results and always causes new issues to arise, thereby compounding the situation. The key, therefore, is to teach your successor how to uncover the problem or problems causing the symptoms.

4. Help Them to Be More Persuasive/Influential
Mastering the ability to influence others is critical to the success and effectiveness of a leader. A strategy, no matter how well thought out, will get mediocre results if there isn’t strong buy-in. A leader will always get compliance because of his or her authority. But compliance and commitment are two different things.

How do you influence people? How do you change their perspective, so you get buy-in? The most effective means of influencing others is by asking good questions and the use of analogies.

Asking good questions is an art. It took me many years to master it, with lots of practice and plenty of missed opportunities. Help your successor learn to ask questions that will change someone’s perspective. The right questions will give them insight into how the other person thinks and give your successor the needed insights to shift the person’s thinking.

The second tool for influencing people is through the use of analogies. Analogies are an excellent vehicle for bringing someone around to your way of seeing things. Help your successor see that using an analogy can help people “see” and “feel” the concept they’re talking about and does it in such a way as to keep them from becoming defensive.

5. Refine Their Decision-Making Abilities
As every owner know, it’s up to them to make the final decision on every significant issue. In order for your successor to make smart decisions, you need to groom him or her in several areas.

Often, decisions must be made without certainty about the future. Therefore, you need to help them improve their judgment and learn to balance risk and reward. They need to be savvy about business in general and understand financial statements. Since your successor has probably only ever been an employee (and never an owner), you need to help them think like an owner, see the big picture, and balance long-term and short-term needs. And finally, you need to help them learn the wisdom in getting outside perspective. It will help reveal blind spots and give them objective insights.

Properly developing a successor is important. The future of the business depends on it, the livelihood of your employees depends on it, and your retirement plans depend on it.

If you’d like help developing your successor, please contact us. It’s our specialty.

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

Leadership Development is Key to Business Value

Our research suggests that the pace of exits and successions will begin to increase this year. This conclusion is due to several factors. Life expectancy in the U.S. has risen above 80 years old, up from 72 several decades ago. Accordingly, the expectation of retirement age has also risen. When life expectancy was 72 years old, retirement age was considered to be 65, but now, because people are living longer, owners are waiting until their 70’s to retire. And the final factor suggesting increased activity is that the leading edge of the Baby Boom generation turns 73 this year.

As I’ve written in another article, the number of businesses that will hit the market in the coming years will far outstrip the number of interested buyers. The consequence of this excess supply is that only the most attractive businesses will find a buyer.

Although there are several important factors that make one business more attractive than another, a key issue is the strength of the leadership team. The strength of a leadership team not only impacts the value of a business but affects the likelihood that the deal will close.

Ken Sanginario, founder of Corporate Value Metrics and creator of the “Value Opportunity Profile” is an expert at valuing companies. He helps them increase their value and improves the likelihood they will sell. According to Sanginario, the strength of the leadership of a company will influence the value of a company by as much as 15-20%. By way of example, if a company has a capitalization rate of 20%, strengthening the effectiveness of the leadership team can realistically increase its capitalization to an effective rate of 17% – a significant boost in sales price.

Additionally, if a business’ leadership team is weak, the likelihood that a deal will go through diminishes dramatically. Tom West, author and president of Business Brokerage Press has stated that businesses with a seven-figure sales price will only close 25-33% of the time.

Therefore, if you (or your client) want to maximize the likelihood of selling a business and selling it at full price, the strength of the leadership team must be addressed.

Here’s what has to happen. The leadership competencies of the team need to be assessed so their strengths and weaknesses can be identified. Once the assessments are done, a program of leadership development should be undertaken to ensure the team’s effectiveness. Although development can usually be accomplished in about six months, this initiative should be started 2-5 years in advance of a transition. Because, just as one good year of EBITDA won’t impact a business’ value very much, neither will one year of strong leadership. You must demonstrate a pattern. Don’t wait until a few months before you go to market to address leadership issues. Start now, establish leadership effectiveness, and boost buyer confidence.

If you’d like help assessing and developing your leadership team, please contact us. It’s our specialty and our passion.