Leadership

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.

Peer Groups Aren’t Effective for Developing an Executive

If you’re a CEO or President of a company, a peer group can be a really valuable asset because it a) provides networking opportunities, b) provides outside perspective on strategy, and c) allows you to help others. But peer groups aren’t effective at developing an executive’s leadership competencies. There are a number of reasons for this.

The first reason relates to the fact that leadership competencies are developed over time. It takes regular focus to break ineffective habits and form new, effective ones. Meeting once a month in a round-table setting with big-picture discussions just can’t address someone’s specific development needs.

The second reason relates to assessment. Peer groups aren’t designed to assess a leader’s strengths and weaknesses. The group can only discuss issues that someone brings to the table, and of us are poor at assessing the quality of our leadership abilities. In fact, I’ve never met an executive who thought they were a poor leader. Yet, we all know many executives who are poor leaders! This reality makes leadership development in a peer group pretty much impossible.

The third reason relates to blind spots. We all have them regardless of experience, intelligence and/or education. Peer groups can help point out strategic blind spots, but aren’t very good at pointing out leadership blind spots. It really takes someone working closely, one-on-one with a leader to spot them and bring them to light.

A fourth reason that peer groups aren’t effective at leadership development relates to personal productivity. Group discussions can be good for high-level topics pertaining to business strategies, but they don’t lend themselves to improving day-to-day functioning. Leaders need objective input from someone who has insight into how they function at work in order to improve productivity.

What then, is the best course of action for leadership development? It used to be mentoring by fellow executives – getting insights and guidance from someone in the company who could share the benefit of their years of experience. Unfortunately, because of cost-cutting and increased work load, those days are gone.

Instead, many executives turn to executive coaching to provide the assessment, insight, and guidance needed to improve. Peer groups have their place, but for personal development, one-on-one work is the most effective. If you’d like help in developing your leadership effectiveness and would find a confidential, objective sounding board useful, please give us a call at 503-928-7685.

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.

The Four Stages of Successor Development

In order for a successor to successfully take ownership of a company and lead it into the future, he or she must transition through four stages of development. If a successor takes over a company and has only mastered the first two stages of development, he or she is doomed to fail, because they’ve only mastered the mechanics of the business. In fact, studies show that 70% of successions fail! If, on the other hand, a successor is effectively developed through all four development stages, growth and profitability are maximized, employee turnover and customer loss are minimized, and the owner gets paid the full value of the business.

Stage One: Worker/Contributor
This is the stage where a successor learns the mechanics of a business. In this stage, successors become good at getting the work done. It’s about gaining knowledge of how the products and services of a business are created and delivered. Competencies in this stage involve acquiring technical and industry knowledge, along with improving technical skills. Improvement in this stage comes from technical training and hands-on experience.

Stage Two: Manager
This is the stage where a successor learns how to get work done through others. He or she learns to oversee projects and manage resources. Although they may still be doing some of the work themselves, their main tasks are to provide guidance to others and to have responsibility for overall production, productivity, and quality. Improvement in this stage comes from things like project management training, general management training, and hands-on experience.

Stage Three: Leader/Executive
This is the stage where a successor learns to lead rather than manage. It’s the point where people skills become more important than technical skills and knowledge, and an entirely new set of competencies comes to the forefront. In order to be an effective leader/executive, a successor must improve his or her communication skills and learn the art of influencing others in order to get buy-in for their plans and ideas. They must learn to foster teamwork and collaboration along with the ability to resolve conflict in a constructive manner. Additionally, a strong leader appreciates the need to develop others and masters that ability. And finally, in order for a successor to be effective as a leader, he or she must begin to enhance their executive presence. A leader with good executive presence is better able to instill confidence, build trust and earn respect. Improvement in this stage does not come from training. A person cannot become a better leader by simply reading a book. It requires the breaking of old habits and forming new ones. It requires the revealing of blind spots and limiting beliefs. And it requires a deeper understanding of human nature. These competencies are best honed though coaching and mentoring – all of which take time.

Stage Four: C-Suite/Owner
This is the stage where a successor learns how to lead an organization. It’s the stage where seeing the bigger picture becomes their job. In order to do this, he or she must hone their strategic thinking – moving beyond developing tactics to developing directions for the company that address fundamental problems or capitalize on opportunities. And it requires sound judgment in order to make good decisions. A successor at this stage must be able to develop a vision for the organization and have the ability to gain buy-in for that vision. In order to achieve that, he or she must have both organizational awareness and external awareness, looking beyond the confines of the company. The final piece in this stage is for the successor to develop an owner’s mindset. Up to this point in their career, most successors have only ever been an employee. The issue is that owners see things differently than employees. In order for a successor to shift from an employee mindset to an owner mindset, they need to change their perspective from short-term thinking to long-term thinking, from self focus to organizational focus, from internal focus to external focus, and from narrow/silo thinking to big picture thinking. Improvement in this stage is developed over time and occurs through coaching and mentoring.

Strategies for Successful Development
For purposes of this article, let’s assume that the successor has successfully mastered the first two stages of development. In other words, they’ve gained strong knowledge of the technical aspects of the industry and have gained experience managing projects.

In order for a successor to master the second two stages, he or she must be coached and mentored. If the owner takes on this task, they must adopt a “coach-like” style of leadership. This is a style that helps people grow and develop. The most effective means of coaching is to ask questions rather than give answers and these questions fall into two categories. The first set of questions gives us insights into the other person and the second set of questions allows us to give the other person new insights. The only way to know what questions to ask in order to give them new insights is to first discover where their thinking, judgment, and/or perspective is incorrect. That’s what the first set of questions accomplishes. This coaching will help them develop the necessary leadership competencies, strengthen their executive presence and improve their ability to think strategically.

The owner must also mentor the successor. This is done by allowing the successor to make increasingly difficult decisions. Only by guiding their thinking can a successor’s judgment be honed. Start with allowing them to make decisions that aren’t critical. In other words, a misstep won’t harm the company. As their judgment and thinking improves, have them participate in decisions which have greater impact.

The owner must also share the mistakes they’ve made in the past and the lessons learned over the years. Many times, lessons learned are not self-evident.

The Bottom Line
In order for a successor to effectively lead an organization into the future, they need to transition from contributor to manager to leader and ultimately to Owner. It is essential that development does not stop at mastering 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.

If you’d like help assessing and/or grooming your successor, please contact me. Our conversation can help determine the preparedness of your successor and whether our services would be a benefit to you.

The Time-Value of Business Valuation

An important goal in any exit or succession plan is to develop the business in a way that maximizes its value. But the truth is that the value of a business is only realized if the owner actually gets paid that money. And therein lies the difficulty…

Many times with an internal sale to a family member or key employee, the buyer doesn’t have the cash to pay the full value up front. Therefore, the owner receives the majority of the business’ value over time, paid with future cash flow. The time-value of a business’ value is analogous to the time-value of money. In other words, money in hand now is worth more than the same money received later. To account for this timing issue, a succession plan is often structured so that the payout over time is higher than if a lump sum were to have been paid up front.

But most succession plans are structured assuming that all payments will be made even though studies show that about 70% of all successions fail! Therefore, the likelihood of future payments not being made must be taken into account when determining a business’ real value.

There are four ways to address this issue. One is to try to get a commercial bank to fund the sale in order to shift the risk. Unfortunately, many times this route is impractical. The second strategy is to front-load the payments, receiving the lion’s share of the value as soon as possible. Typically, this route is also impractical because it generally cripples the cash flow and working capital of the company, virtually ensuring that it will fail and be unable to finish paying the owner.

A third route is to have equal payments, but charge a much higher premium to offset the risk of non-payment. In other words, treat it as a high-risk loan. Like the previous approach, this generally impacts cash flow too heavily and jeopardizes the success of the company.

Therefore, the fourth strategy is the best solution if you’re serious about ensuring the likelihood that the full value of the business is realized by the owner. This fourth strategy is to reduce or eliminate the risk of failure. One approach to reducing this risk is to have the owner remain involved until he or she is paid in full. But of course, this approach defeats the whole purpose of selling the business.

A much better approach to reducing risk and ensuring success is to develop the successor more effectively. Most owners help their successor master the mechanics of the business. That’s not the problem. The problem is that there are a couple of critical competencies that won’t be addressed if grooming stops with the mechanics. First off, learning the business doesn’t necessarily hone leadership skills. Strong leadership skills are essential for success. Managing can keep a business running smoothly for a while, but leadership skills are needed to successfully take a business into the future – things like good judgment, strategic thinking, conflict resolution, and the ability to influence others.

The second critical competency is the need for the successor to adopt an Owner’s Mindset. Typically, up to the point of the sale, a successor has only been an employee. But owners and employees think and act differently.

Employees tend to think narrowly. They usually focus on the task at hand and/or on their specific domain of responsibility (operations, finance, engineering, etc.). In contrast, an owner needs to consider the bigger picture and how his or her decisions impact each aspect of the business.

Employees also tend to think short-term. Their focus tends to be on current matters, current revenues, current expenses, and current profits. They also tend to be reactive. In contrast, an owner needs to 1) consider both short-term and long-term success, 2) learn to make decisions without having all the information, and 3) must learn to balance risk and reward. (Rarely is a decision about the future risk-free.) And owners tend to be proactive.

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, on the other hand, understand that failure is not an option. There is no “Plan B.” Owners understand that the business is their future, and this understanding must color their decisions and their actions.

When a successor’s leadership competencies aren’t developed and they haven’t adopted an Owner’s Mindset, he or she can’t effectively guide an organization. In the absence of these competencies, the future of the company becomes less certain and the future cash flow is put in jeopardy.

Please don’t throw an inadequately prepared successor into the role of leading a company. Whether you use our services or some other solution, bring in a professional to help – someone skilled in leadership development and experienced in working with successors. If you’d like our help developing a successor, please give us a call to discuss your specific situation. We offer executive assessments and executive coaching, all designed to help successors succeed and owners get paid.