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Exit Planning

The Catch-22 of Changing a Business Owner’s Role

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As a new venture develops and grows, the roles and relationships of the original entrepreneurs inexorably change.  If the founders refuse to accept this, they will stunt the business and may even destroy it.  But even among the founders who can accept that they themselves need to do something, few know how to tackle changing their own roles and relationships.” 1  – Peter Drucker

​Tackling the challenge of changing one’s role in any relationship is not easy and businesses are no exception.  Yes, as advisors to business owners, we can be the catalyst to help our business-owner clients make the change that they must make to build transferable value in their companies.  

If owners tell you (as 58 percent of owners did in BEI’s Owner Survey2) that they don’t have time to engage in Exit Planning, one can assume that almost every one of their waking moments is devoted to the operation of their businesses.  For them, the old saying, “How can I drain the swamp when I’m up to my armpits in alligators?” is the motto they live by.

This presents a seemingly insurmountable problem:  To exit successfully almost all owners rely on the sale proceeds from the transfer of a valuable company, whether it is by sale to a third party or a transfer to insiders.  But to buyers, a company is valuable only if it can operate with minimal disruption to cash flow without the presence of its owner.  In other words, the very definition of transferable value implies that owners must be “dispensable.”  If owners are up to their armpits in alligators, they hardly meet the definition of dispensable, yet they feel they have no time available to work on making the company less dependent on their efforts.

This reminds us of a Catch-22:

If owners can’t break away for the time it takes to plan and act for themselves and their business’ future, how can they become dispensable to the success of their companies?

But unlike the classic Catch-22, a situation in which someone is in need of something (time to plan to create transferable value) that can only be had by not needing it (because they’ve already planned), there is a way to avoid its application to Exit Planning.  That solution is to bring in an outside force so that the owner doesn’t need to take time until she has time.  That force is an outside advisor.

Once again Peter Drucker shows us the way:  

“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.”3

How do we, as advisors, challenge and convince owners of the need to act to change their role in and the relationship to their businesses?

When an owner feels overburdened and crunched for time, suggesting that he or she must take action now to reduce their role is ineffective (and may be dangerous!).  As Exit Planning advisors our role is to:

  • Provide owners a reason they should take time to engage in Exit Planning (transferable value).
  • Work with owners to implements a plan to grow transferable value that relies chiefly on the efforts of others, not the owner.  Explain that, at least initially, they won’t have to perform all the value-growing actions (remember, they are up to their armpits)–someone else will.
  • Highlight that the result of these actions will be to free up their valuable time.
  • Include in that value-building plan a process to change their role in and relationship to the business.
     

Then What?

Of course, allowing key employees and perhaps outside advisors to take on some of an owner’s duties requires owners to develop role-changing/transferable-value-building attitudes.  We’ll look at those attitudes in next week’s article, but they include:

  1. A willingness to delegate meaningful duties to top management.  This requires owners to surrender or at least share control over many facets of their business operations.
  2. 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.
  3. 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 ot objectively assess management performance on an ongoing basis, and to insist upon best-in-class performance.  Outside advisors can be invaluable in ensuring that the company has the best management team to move the company forward.
  4. An ability to constantly focus on strengthening value drivers executed through others–management team members and outside advisors.
References
1.Drucker, Peter F., The Essential Drucker, HarperCollins, 2001, p. 156
2.BEI’s North American Business Owner Survey, 2014
​3.Ibid.  Drucker, 159-160
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