The horns of a dilemma

“The business is mine, I created it. It is what I do and who I am.
I can’t run it forever and yet, who can replace me?
Can I sell it and retire? It may not be saleable without me.
I need to retire. I want to get fair value for my efforts. I want the company to survive beyond me.” 

Good Intentions lead the way 

Owners put their hearts and souls into their work. The drive to “build something” rapidly becomes a motivating and life changing force. Months and weeks blend together as the business grows and the line between family time and business time is blurred. 

With each passing year, the company becomes more important to the owner. The business melds to the owner’s leadership style. Personal control becomes paramount for the owner as the company grows. He has more and more to lose and his own investment is priceless. “Letting go” is not on his radar screen.

Change is very difficult 

The company becomes dependent upon the owner. Loyal employees support the owner’s creation. Longstanding customer relationships become “the way we do business”. Customer partnerships happen automatically and easily rather than through documented processes and activities that are delegated to others.

The owner knows all of the major customers and has a close personal relationship with them. Customers consider the owner and the company collaborators on a common journey. Synergy cements most relationships to a level well beyond simple transactions. Customer profitability takes a back seat, as exit of any kind would mean a divorce from longstanding friends.

At Some Point, “Things do Change”

Inevitably, the owner wants to retire and “stop the music” Yet, many owners fear the future. They ask: “what will happen to me? My identity is the company. I enjoy pulling the strings; look at what I have created.” The worry of financial security brings the owner to reluctantly consider selling, against his personal instincts and desires.

Potential buyers, however, recognize that the company is the owner. Even family successors would struggle with running the company another way or “their way”. There is no other blueprint than what the owner has created. The owner has become a victim of his own success, and yet he was the only architect. (Who else could be blamed?) 

When Does the Dilemma Become Apparent?

The first evidence surfaces when the business starts growing consistently. The owner puts more and more time working in the business and doesn’t have time to work on the business. Day-to-day activities consume his time and energy and prevent long-range planning. In the moment, the company generates cash, but longer-term it is a recipe for disaster. There is no contingency plan to avoid the incoming tide of succession before it hits the beach. 

Beauty and Value are in the Eyes of the Beholder

At some point, the owner hears of others who have sold their companies “for a lot of money”. The owner looks at his creation and says, “I have something better; it is worth more.” This false sense of security stokes the owner’s belief that he can sell his business “at will”.

The years go by and the owner needs to retire, but there is no successor in the family and it is difficult for management to buy the owner’s equity. The company’s success requires and infusion of cash for ownership change. The most likely option is that the owner will try to sell the company, simply to get his assets out of the business. 

Potential buyers see value but they also see opportunities for themselves. They may not understand or value the personal relationships that bind the company to its customers. Or, they may see waste they don’t want to pay for. They see opportunities for greater profit that appear to be “sitting on the table”.

Inevitably, the buyer’s valuation is lower than the owner’s as the buyer realizes that the owner is the business. Organizational rebuilding and restructuring must occur before ownership and value can be transferred. In many cases, the gulf between the buyer and the seller is too great and the deal falls through. Then, if buyers choose other opportunities, company assets are usually sold at a fraction of their original value.

Are Owners Condemned to Repeat the Lessons of History?

History gives us some clues.  Good companies have survived over the years, and not just by chance.  Many companies live beyond their founders and increase their value. In these companies, it is not unusual to find that the quirks of the founder are remembered as “quaint” not as directives. 

How can we Change the Course of History? 

• The owner must “let go”
• The essence of the business must be “branded and scalable”
• Collaborative transition planning must occur

 Owners can have Successful Transitions 

Before change can happen, the owner must believe that he “can let go” and that his personal transition (change) is desired or necessary. He must have “something else” to do that he values and will take up his time. For some owners, this step takes a significant amount of time, but it will happen. For others, it may never happen. For advisors, the best advice is to help the owner consider his realistic options and evaluate the appeal of each option. 

Successful transition requires balancing the owner’s need for liquidity and his willingness and ability to do something else and let someone else run his business. 

Terry Phinney
Principal
PhinneyCaldwellGrowth
terry@pandcgrowth.com
www.PhinneyCaldwellGrowth.com
617-462-0223