Exit Planning Tools for Business Owners

John F. Dini

The (pen)Ultimate Hire

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Every sane business owner will acknowledge that there is a point at which his or her own skills are no longer sufficient to grow the business beyond its current level. The revenue point where that happens differs by industry, but it frequently begins at around 20 employees.

At that point, an owner becomes swamped by the conflicting needs of managing the existing operation, and having enough time to perform the tasks that made the business grow in the first place.

The owner realizes that further growth requires the addition of a key employee; one who can assume some of the owner’s duties so that he or she can focus on organizational development.

The typical plaint in this situation is “I need someone who can think. An employee who can run things without my daily input, so that I can focus on what I do best.”

But there is another version that is materially different, although it sounds the same on the surface. “I need someone who can run this company without me.” is a far cry from one who can handle day-to-day operating responsibilities.

Many owners fail to look beyond the immediate need for task relief  to determine exactly what this key employee’s long-term role will be. There is a big difference between hiring an SIC (Second In Command) and an SIT (Successor in Training.)

A Second In Command is responsible for assuming some of the owner’s ongoing decision-making and management duties. The SIC’s role is to free the owner to do what he or she is best at (or enjoys the most). The job description is based on the assumption that the owner is present, or at least available, to check off on major decisions and give ongoing guidance.

In my presentation to business owners, “Beating the Boomer Bust” I discuss the likelihood that many owners will have to execute their own succession plan by growing a successor internally. This Successor In Training is more than someone who can merely back fill your skill set. It needs to be someone who can eventually replace your skills in the business.

The common wisdom is that an SIC should compliment, not duplicate, your talents. We advise owners not to hire a “mini-me,” since it is unlikely that you can find someone who has the same motivations to cover all the various skills that ownership requires.

Typically, you take your job description (finance, sales, business development, culture, motivation, operations, marketing, management) and subtract those things that you want to continue doing personally. The rest of the duties become the SIC’s job description.

But the intention of many owners is to develop the SIC into an SIT. An SIT is someone who can eventually assume all of your higher-level duties. He or she has to create value while you are still there by filling in the gaps in your skill set, but must also have the potential to grow into a broader role as you prepare to withdraw from the business.

Of course, you are still in for a long search if you seek a “mini-me.” The likelihood is that your SIT will eventually need an SIC of his or her own. If you can’t run the company by yourself, your successor can’t either. If you need an SIC now who pays closer attention to the numbers and ratios than you do, then that person will eventually need someone to focus on sales and development.

Hiring a key executive is the single most important decision you will make. Don’t begin the process by making the mistake of looking at only the needs you have today. A solid SIC will probably take five years to fully integrate with you. An SIT may take ten. The investment can be wasted if you look only at your immediate needs. Start with a longer-term vision of how you want your role as an owner (or as an ex-owner) to play out.

Another Lost Generation?

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I had the opportunity to present “Beating the Boomer Bust” twice this week, one of which was recorded for a Texas Public Radio show this weekend. For those who aren’t familiar with the piece, it discusses the massive changes that are unfolding as Boomers retire from their businesses.

As usual, members of the audience said afterwards “I knew all those things, but I never thought through the implications before.”

A quick recap before I get into today’s topic. “Beating the Boomer Bust” is a look at the perfect storm facing retiring owners who plan to sell their businesses. That largest small-business-owning group in history will be selling all at the same time. The number of buyers is about half as large as the number of sellers, and the buyer generation (Gen X) isn’t interested in the type of work that small business entails.

It is that group, the buying generation, that could be facing a demographic squeeze that changes them into a new “lost” generation.

The first Lost Generation is the group born in the decades just before the beginning of the 20th century. The oldest members of that group were in their teens and 20’s during WWI, which decimated the ranks of the young men, although less so in the USA than in Europe. Those who returned were traumatized, and more worried about enjoying life than making their mark on the world.

Enter the Roaring 20’s. The Lost Generation writers, Gertrude Stein, Ernest Hemingway, F. Scott Fitzgerald and T.S Eliot among others, promoted both hedonistic lifestyles and a cynical outlook towards humanity. The 20’s generally bring to mind Flappers, Speakeasies, Gangsters, and a spectacular finish with the Great Depression of 1929.

Many generations have been characterized as wastrels when they are young. The Lost Generation had the added misfortune to reach their productive years, their 30’s and 40’s, just as the economy made it very, very difficult to get ahead. Now, let’s skip forward to Generation X.

What Boomer hasn’t complained about the work ethic of Gen X? Gen X was born and raised in a time of plenty. They have grown up in an economy that was fueled by a giant generation of workaholics, the Baby Boomers. Their values system places a far lower premium on business and financial accomplishment. Self-actualization comes first, accumulating things is secondary.

Disclaimer: Please don’t send comments about “I’m a Boomer and not a workaholic” or “I’m an X’er and work very hard.” No generational generalizations are universally applicable. I get it.

Now they have the added misfortune of being in their 30’s and 40’s when the economy isn’t very receptive to building wealth or rapidly expanding a business.

At first blush, I didn’t think that was a problem. With one X’er for every two retiring Boomers, there should be more than enough opportunity for even the marginally interested to succeed. The more I think about it, the more I begin to wonder whether that will be the case. Two other factors are coming into play, and both are huge.

The Boomers aren’t getting out of the way, and the Millennials are coming on fast.

Boomers haven’t saved enough to retire in comfort. They can’t depend on the government to make it up for them. They are healthier than any previous generation. If 60 is the new 40, why would they (outside of the public sector) suddenly step down at 65? They want to be busy, and they want to be wealthy. Many, if not most, are planning to spend at least a few additional years in that pursuit.

The Millennials (depending on who you ask, roughly the generation born between 1985 and 2005) are coming of age in a difficult environment. Jobs are scarce, finances are lean, and the position of America in the world is changing. All indications are that the Millennials will push harder than the X’ers to get what they want.

Where the X’ers are widely characterized by their sense of entitlement, the Millennials clearly expect their lifestyles to be a direct outcome of their success in work.

So this is what leads me to ask about a Lost Generation.

The Big Picture: 78 million Boomers, still working hard, and delaying their exit from the business arena. 38 million Gen X’ers, with high expectations and lower motivation. 80 million Millennials coming on fast and intent on competing for what they want.

The Small Picture: X’er in his late 40’s who has spent the last 20 years in business telling the employer how he wants his job to fit his lifestyle. He is waiting for a late 60ish Boomer in front of him to get out of the way. When it finally happens, he suddenly finds that there is a Millennial in his late 20’s who earns less and works more waiting to leapfrog him.

If you are a Boomer business owner who can’t find the next generation of leadership among your X’ers (and there are millions of you), start looking at your Millennials while you still have some time to train them.

 

Painting: Han Wu Shen “Young Worker” at paintinghere )

Three Circles of Family Business

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What is a “Family Business?” A large percentage of small companies have some family involved. For most, it is simple a case of providing employment to family members. If the founder of the company is also the principle revenue generator, it may be a spouse (most often the wife) who keeps the books and runs the office.

Employment of children who can’t (or won’t) find another job is common, and more so in the current economy. In most instances it is just a matter of income transfer with some value attached. The owner could keep handing over money for the child’s living expenses, but he or she wants the offspring to “earn” that money. The business becomes a vehicle for parenting; teaching life lessons about responsibility. In fewer cases, it is a recruiting tool. The owner tries to get the child interested and involved in the business, with hopes that they will seize the opportunity to become part of a succession strategy.

There are scores of variants, such as the absentee family employee who is really just a charity case. Performing no duties, and frequently not even in the same geography of the business, employment is simply a mechanism for the owner to make tax-deductible contributions for someone’s support.

The three circles of this title refer to when the engagement of multiple family members in the business involves a blood (or marriage) relationship, participation in management decisions, and ownership. For our purposes, all three must be present in order for it to be a “Family Business.”

When all three factors are present, they set up a structural conflict that is challenging to deal with. Issac Newton postulated laws governing mass and attraction; the effect one body has on another in relation to its size. The problem with Newton’s laws is that they apply to two, and only two, bodies acting on each other. When there are three bodies of mass the laws become chaotic, since each change in one body not only alters its effect on the others, but immediately alters their effect on each other.

So it is with the laws governing family business relationships. When there are only two roles, effects are fairly predictable. One role, of course, is always the kinship between the parties. If only one of the family members has ownership, the roles in the workplace are pretty plain. If other family members have ownership, but don’t work in the company, their input can be anticipated and occurs within defined parameters. When family members hold two roles in the business, both employee/manager and ownership, each action in one area causes unequal and unpredictable reactions in the others.

In one business, a brother and sister were sold ownership, but until the parents were paid, the siblings remained dependent on their paychecks for normal living expenses. The brother worked long hours, kept a careful eye on expenses, and ran a “tight ship” when it came to employee issues. The sister came in late, left early, and was fond of showing employer largess by issuing unplanned raises to favorite workers. Her sibling and ownership relationships made it difficult to deal with her radically different management style. She felt that she had an equal “right” to run the company as she wished, even if it was the polar opposite of her brother’s style.

In this case, the brother’s solution was to force his sister to sell her stock, and continue to give her a salary conditioned on her no longer coming to the office. The company is better off, but they don’t speak to each other any more.

In another, a brother’s division of the family business underperformed those of his siblings. Eventually he left to work in another company, although he retains his ownership and they still get together for holidays.

The pressure of decision-making and implementation in a family business adds complexity to every situation. Is Dad overriding our opinions because of his greater experience and wisdom, or is it because he regards any dissent from his children as disrespect? Is Mom against the new initiative because she really judges the market to be weak, or is it just her natural inclination to protect what we already have? Has my brother really studied that opportunity, or is he just trying to do something on his own, without his big brother’s shadow over it?

Family members know each other too well to ever make a completely unbiased analysis. The best you can do is recognize the three circles that influence every action, and discuss the mass and attraction of each one when making decisions.

Lifestyle or Legacy – Part 4

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Last week a client told me “You are wrong. I have a lifestyle business that is ALSO a legacy business.” Sorry, but that doesn’t fly.

He has built a good company, and continues to improve it. Be he is not driving to make it into something that carries on beyond him. His objective is to (eventually) make it large enough to be acquired, and for enough money to live in luxury for the rest of his life.

That is a lifestyle business. It’s only purpose is to fund the financial aspirations of the owner. There is no larger purpose, no overarching vision of something beyond his quality of life. I’ll grant that his personal ambition extends beyond his current, very comfortable existence. But it only extends to a more comfortable existence. That is a matter of degree, not direction.

When I started to think about this series, the term “lifestyle” was easy. The second term was originally “entrepreneurship.” That didn’t communicate the concept well enough. Thinking through the topic, it reduced the definition of “lifestyle” to more of just making a good living, and of “entrepreneurship” to building something larger than merely a decent living.

What I am talking about encompasses ANY lifestyle you choose. Whether it is a nice house in the ‘burbs, or sailing around the world in a yacht, that is still lifestyle. We all have different targets.

Legacy is when it moves beyond you, when the company becomes a vehicle for accomplishing something larger than your personal quality of life. By that definition there are probably legacy businesses that don’t provide a luxurious lifestyle, but they satisfy the owner’s desired level of creature comforts and support that bigger vision. Perhaps something that allows an owner to go on missions to Africa for half of each year might qualify. For the most part, however, owners have to reach a pretty comfortable lifestyle before legacy comes into the picture.

Most legacy businesses were lifestyle businesses first. The owners scratched and pushed (or were incredibly lucky) to build a level of security and sustainability. Once they got here, however, they looked around and said “This isn’t enough. Mere wealth doesn’t fill the need I have inside of me.”

Another owner said to me ” I want a legacy business. I want to go visit my outlying offices and not fix problems. I’d fly in, give awards to the top performers, and take a major client out for golf.”

That is also a lifestyle business. The legacy owner wouldn’t be coming in to fix problems either. He or she might be looking for an acquisition in that market, or communicating new goals. He might be upgrading personnel; not because they were failing, but because he was constantly looking to do better. The numbers are still important, but they aren’t going towards improving his lifestyle, they are being used to build the legacy.

Before you start worrying about the lifestyle vs. legacy decision, let me make something plain. Some 80% of small businesses fail in their first few years. Of those that survive, probably 90% never achieve the lifestyle level of success. There are very, very few owners who reach a point where they can work as little as they want and make as much as they want.

Some do, and a few of those think “OK. Is that it?” Some of those can’t envision anything else. Some start building a legacy.

To quote Nancy Barcus: “The closer one gets to the top, the more one finds that there is no “top.”

Lifestyle or Legacy – Part 3

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Let’s turn to the Legacy Builders.They are the business owners who have achieved Lifestyle status (as defined in the last posting) but continue to work hard to build their businesses. Their objective is a company that does far more than merely provide a comfortable lifestyle and assure retirement.

A little bit of elimination to start, as we did with the Lifestyle owners. Just as we said a Lifestyle Business was neither a pumped-up hobby nor merely an adjunct to an alternative lifestyle, the Legacy owner isn’t a couple of things that people might normally assume.

Let’s set a baseline. The typical Legacy Builder runs a business that is very capable of continuing its day to day activities independently and indefinitely. Operations, management and sales are handled by competent employees. In fact, each is probably better than the owner at what he or she does. They are in the top 1% of American incomes. It varies widely, but we’ll call it a minimum of $500,000 a year. The Legacy Builder nonetheless chooses to work a full (45-50 hour) week to continue developing and improving the business, and not incidentally adding to its profit.

The Legacy builder is clearly not obsessive-compulsive, a workaholic, or in any other way driven unwillingly to work beyond common sense. It’s easy for observers (and sometimes family) to accuse the Legacy Builder of being enslaved to the job, unable to tear away for a personal life. That isn’t true at all. The Legacy Builders I am describing spend time with family and other pursuits. They coach Little League, attend recitals, and are active in the community. They take nice vacations (usually with family), and live in nice homes (often several of them), but are seldom ostentatious.

It is true that they are frequently missing in the devotion of time to community activities, preferring to fund the work of others. In fairness, I’ve spent a lot of time working in community organizations. There is a lot of wasted time. If I had the money to pay for someone else to do it, I probably would. Legacy Builders don’t like to have their time wasted.

They are also not greedy. Their continued push for improvement is not for the personal gain. They seek greater success for other reasons. As Bill Gates once said, “Money is just a way to keep score.”

I call them the Legacy Builders because they have an eye for a target that is beyond merely running a successful business. They have a bigger picture; a larger objective in mind. Developing an organization that lives beyond their own careers is at the core of their strategy, but it isn’t just monument-building that drives them. It is what that organization can accomplish.

Some are motivated by the benefit to the community that their talent can deliver. More jobs, more people who can provide security for their families. For others it is even a greater community responsibility, the money to form a foundation, or to fund worthwhile causes. For others their family is the motivation. They seek to change the lifestyle of their children, and their children’s children, permanently (or at least for the next few generations).

Many of the Legacy Builders are simply entrepreneurs without a limit on their creative drive. Most business owners have a difficult time looking backwards. Yesterday’s achievements are ancient history. They see no point to basking in past accomplishments when there is so much more that could be done.

Some Legacy Builders attempt things for the thrill of accomplishment. Once attained, the successes immediately become the basis for the next level, the next mountain to climb.

Admittedly, a substantial number of Legacy Builders have a head start when compared to bootstrap entrepreneurs. They achieved a substantial level of success in an existing organization, and used that as a spring board for their own purposes. They may come from a family where there was Legacy-type success in the past. They may have just been lucky. But none of those things explain their push for greater achievement in business when they are long past the point at which most owners would be satisfied; and there are plenty of bootstrap start-ups in the Legacy class to disabuse the notion that the game is fixed at the start.

Most Lifestyle owners say that they really want to reach Legacy levels, but few actually do. In my next post, the last in this series, we’ll look at what it takes to make the leap from Lifestyle to Legacy.