New Owner Archives - Eliciting Excellence: Executive Coaching and Leadership Development

We all know the scenario: An owner wants to retire, has someone in mind to be their successor, and needs a professional to structure the transition.

So, they contact you and you set about putting together a solid plan for their succession. You help them clarify their needs. You help them value their company. You help them structure the buyout with respect to taxes and their estate. And you help them structure the transfer of ownership.

Additionally, because you have much more experience at this than they do, you include strategies to protect them if things don’t go as planned.

Frequently, to protect the owner’s interest and the company’s value, transfer of ownership is phased in over time. This helps the owner retain control of the company as the successor takes on more and more responsibility. It also gives the successor incentive by giving him or her increasing stock ownership. This works well as long as the successor does well.

But what if the successor doesn’t do well? While it’s true that the owner still retains ownership, the reality is that – years after the transition plan was developed – they’re left with no successor and will need to either find a new successor or sell to some outsider.

An effective way to minimize the likelihood of successor failure is to have a professional help groom and guide the successor, thereby increasing the likelihood that he or she will succeed. With so much at stake, it’s a smart investment. It’s why we offer Successor Development.

Alternatively, if the owner wants to completely step away from the company upon signing the transition papers, ownership is transferred to the successor immediately and the owner takes back a promissory note that the successor will make payments on over time. A good contingency plan provides a solution in the event that the successor defaults on his or her loan payments. Typically, the owner gets the stock back and returns to run the company.

But if that happens, there are a number of serious problems that arise. One is that the owner will have to come out of retirement (after several years of being retired) to run the company once again. The second problem is that the company will no longer be as valuable as it once was (as evidenced by the poor cash flow causing the loan default). A third problem is that, just as in the previous scenario, the owner no longer has a successor.

And the last problem is that (years after the original transition) the market will have a sizable surplus of seller over buyers, resulting in a buyer’s market with lower multiples and buyers who are more demanding. (I’ve written about this in a previous article.)

Once again, an effective way to minimize the likelihood of failure is to have a professional help groom and guide the new owner, thereby increasing the likelihood that he or she will succeed. With so much at stake, it’s a smart investment. It’s also why we offer Successor Development.

Finally, even with additional guidance and grooming, the successor sometimes turns out to be a poor choice and doesn’t succeed. In that case, recruiting a new successor may be the best solution for the owner because it will provide the full value of the business and will keep the business locally/privately owned. It’s why we offer Successor Recruiting.

Taking over the ownership of a company is an exciting event. It’s a time filled with hope and dreams, opportunity and vision, fear and insecurity, and broad responsibility.

Your family relies on the business doing well. Employees and their families rely on the business doing well. Customers and suppliers rely on the business doing well. Even the previous owner relies on the business doing well (if for no other reason than to ensure that all the buyout payments get made).

Because of all these things, it’s important to avoid the following three common new owner mistakes.

Mistake #1: Making Changes Simply to Prove the New Owner Is in Charge

There are two aspects to this mistake that need to be addressed. First, newly acquired power, responsibility, and authority can be intoxicating. It can be tempting to flex one’s new ownership muscles. This temptation can arise from years of having ideas without the authority to implement them or it can arise if the new owner feels he or she must establish his or her leadership competence in the eyes of employees. The second aspect pertains to the successor’s relationship with the founder. There may be a tendency to arbitrarily make changes simply to establish that he or she is now in charge, not the founder.

In either case, making changes simply for the sake of change is a mistake. A wise owner will reflect on his or her motivations for wanting a change, show restraint, and reflect good judgment before making any changes. Change for the sake of change is destined to cause problems rather than solve them.

Mistake #2: Continuing to Think (and Act) Like an Employee

In many cases, a new owner has spent his or her entire career as an employee. The mistake is to continue to think and act like an employee. There are several differences between the way an employee thinks and the way an owner thinks, and if a new owner doesn’t make this shift, problems will arise.

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 tend to think short-term. Their focus tends to be on current matters, current revenues, current expenses, and current profits. In contrast, an owner needs to consider both short-term and long-term success, needs to be able to make decisions without having all of the information about the future, and must learn to balance risk and reward. Rarely is a decision about the future risk-free, and an owner needs the ability to assess and minimize that risk.

Additionally, employees tend to focus on doing good work while at work but generally don’t take their work home with them. Owners, on the other hand, learn that the business becomes their life, and they think about it all the time, wherever they are.

And finally, employees know that if they make poor decisions, or they become dissatisfied, or the business just doesn’t do well, they can always find a new job elsewhere. Owners understand that failure is not an option. Generally, there is no “Plan B.” They understand that the business is their only future, and this understanding colors their decisions and actions.

Mistake #3: Not Earning the Trust and Respect of Others

The degree to which an owner earns the trust and respect of others determines the effectiveness of their leadership. There’s a big difference between the results gained from people who simply comply with orders and those gained from people who are committed to the success of the company. Exceptional leadership elicits excellence. In order for an owner to be effective, he or she must earn the trust and respect of those around them. A new title doesn’t automatically earn the trust and respect of others. Industry knowledge can earn professional respect, but a leader earns trust and respect through everyday actions.

Trust is earned by demonstrating integrity. It is critical for an owner to follow through on his or her commitments. Actions truly do speak louder than words, and good intentions won’t cut it. Owners may have the best intentions when they agree to a list of commitments, but if they don’t follow through on those commitments, they’re viewed as lacking integrity. Likewise, if an owner states that certain values are important to him or her but then acts in a manner at odds with those values, they demonstrate a lack of integrity. And when that happens, people learn not to trust them.

Respect must also be earned. The most effective way to earn respect from people is to show them respect. As leaders, we show respect when we listen to what others have to say. People often feel they have good ideas and have something to contribute. Whether we agree with them or not, soliciting input from others demonstrates that we value them and their ideas, and that goes towards earning their respect. The most effective means of showing respect for others is asking good questions of people and then listening to their answers.

How to Avoid These Mistakes

It’s often difficult for new owners to bridge the gap between where they are and where they need to be. And bridging that gap can be the difference between a successful business and one that languishes in mediocrity. However, an owner’s ability to evolve generally relies on two things.

Having a Confidential Sounding Board
Often, the evolution of a company is conceived during open discussion of ideas, but most owners don’t have the right “sounding board”. It requires an environment within which an owner’s inklings, ideas, and concerns are brought to light, challenged, and expanded. The best strategies will leverage strengths, minimize risk, and balance long-term needs and goals with short-term needs and goals.

Gaining Unbiased, Outside Perspective
Outside perspective is essential as a catalyst for creative, game-changing strategic thought. Outside input is necessary to uncover blind spots and move past them. Every owner needs an objective, supportive confidant with whom to complain, vent, confide in, and talk things out. Owners must carefully think through possibilities, assess and manage risk, and then select the strategic plans with the best potential.

If you’d like help as a new owner, please give us a call. Our team of executive coaches works with clients around North America. Executive coaching can help an owner grow revenues, increase profits, and improve cash flow. You are welcome to call me on my direct office line: Michael Beck, 503-928-7645 (Portland, OR).

Successions: Is Contingency Planning Enough?

3 Common Mistakes a New Owner Needs to Avoid