To Grow Value and Exit Successfully, Owners Must Change Their Roles

Submitted by John Brown on Mon, 08/17/2015 - 5:34am
Two People Discussing a Project

In this series, we will examine the advisor's role in the process of building transferable value in our clients' businesses, specifically, in helping them change their roles from indispensable hub to dispensable spoke.

It's clear to us that owners don't have all the skills necessary to singlehandedly create a business with significant transferable value. Most owners reach a point at which they cannot move the business forward because they simply don't know what to do. And so, the business stagnates. In a recent survey, 41% of owners (over two-thirds of whom were age 50 or older) stated that a barrier to their exit was "too much dependence on my active involvement."1  Our experience tells us that a high proportion of the owners who did not see their companies' dependence on them as an issue would hear a very different opinion from professional buyers.

Often, the necessary first step to move a business beyond stagnation is to help owners understand that the major obstacle to growing value in most businesses is the owner. Until owners realize that they must change their roles for the business to prosper, they will ignore any advisor's efforts to help them move their businesses forward.  

The change owners must make, as we explained in the previous article, is to transition owners from being the center of all decision-making and activity in the business, or hub of the wheel, to an important, but less critical, spoke. This transition is not easy, but with knowledge of Exit Planning, advisors can:

  • Understand how and why owners need to change if they are to meet their financial and other exit goals.
  • Educate owners on how changing their roles benefits them, their companies, and their employees.
  • Provide access to the advisors who can undertake value-building tasks.
  • Know how to quarterback an owner's Advisor Team to keep everyone accountable and working in an owner's interest.

These abilities allow attorneys, CPAs, bankers, financial professionals, and other professional advisors to provide guidance other professionals lack. Advisors gain these abilities through their experiences working with owners in a consultative capacity and through learning more about how Exit Planning-trained advisors work with owners.

The Advisor's Role in Changing an Owner's Role

If advisors want to help owners create transferable businesses through changing their roles in their companies (from indispensable to dispensable), they too must change their roles from more than "just" CPAs, financial advisors, attorneys, M&A intermediaries, and so on. As important and vital as their professional skills are to a successful owner transition, advisors must develop their abilities that are beyond the confines of their professions.

For example, advisors must develop the ability to foster in owners four specific attitudes and provide them with supporting resources. These attitudes include the following.

A Willingness to Delegate Meaningful Duties to Top Management

This requires owners to surrender, or at least share with key employees, control of many facets of their business operation. As key employees broaden their capabilities and take ownership of their jobs, their growing competence and expertise is a platform for accelerated company growth and increasing business value.

Further, as key employees assume greater responsibility, authority, and competence in various company functions, so do the junior workers under them. For many owners, finding and encouraging skilled management within the company to move the business beyond the owner's capabilities and giving them the authority to do so is the key to rapidly creating business value.

A Willingness to Involve Outside Advisors to Help Improve Business Operations, Procedures, Process, and Planning 

This requires owners to accept outside advice and implement it. For Peter Drucker, this was a key point in an entrepreneur's success:

...the founder does need people with whom he can discuss basic decisions and to whom he listens. Such people are rarely to be found within the enterprise. Somebody has to challenge the founders' appraisal of the needs of the venture, and of his own personal strengths. Someone who is not a part of the problem has to ask questions, to review decisions, and above all, to push constantly to have the long-term survival needs of the new venture satisfied by building in the market focus, supplying financial foresight and creating a functioning top management team. 2

Openness to an Objective Assessment of the Capabilities of the Existing Management Team to Take the Business to the Next Level

In many companies, the management team rises through the ranks and there is a high degree of loyalty between owner and management. This loyalty blinds owners to the need to objectively assess management performance continually, and to insist upon best-in-class performance. Outside advisors can be an objective resource in determining whether an owner has a capable management team to move the company forward to the extent necessary to achieve the owner's exit goals.

Consultant and BEI Member Ken Stiefler describes how he worked with one of his Exit Planning clients: "This owner brought me in when he recognized two things about himself: (1) too much of the business revolved around him and (2) he wasn't capable of taking the business to the next level. In an effort to change his role, the owner began planning to replace himself by bringing in a new general manager (instead of simply delegating to existing management), by creating a plan to delegate his responsibilities, over time, to others in the company and by looking at outsourcing some tasks." 3

An Ability to Constantly Focus on Strengthening Value Drivers Executed Through Others

To owners who believe they are too busy working in their businesses to work on them, advisors can suggest that changing their attitudes, delegating more responsibility to best-in-class management (developed internally or recruited), and using specialized advisors to supply knowledge and ability where lacking in the business will free up time to spend it on activities they choose.

We hope that this article shows that:

  1. Owners need help in understanding the importance of changing their roles if they are to help, not impede, business growth.
  2. Advisors can recommend to owners specific actions and support them as they take those actions.
  3. The tools necessary to help owners "step up and step aside" are outside the technical expertise of most professional disciplines. This means that advisors must step up and expand their roles, thus differentiating themselves from others in their profession.

References

  1. Bruce, Doug and Wong, Queenie, Canadian Federation of Independent Business, Passing on the Business to the Next Generation, November 2012.
  2. Drucker, Peter F., The Essential Drucker, HarperCollins, 2001, pp. 159-160.
  3. As part of his role as an Exit Planner, Ken recruited a management consultant who assessed the current management team and concluded that new management was necessary if business was to grow at the pace desired by this owner.


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