I was talking with the founder of a private equity group, we got on the subject of management in the companies they’ve acquired, and he said the following to me:
We’ve never worked with a firm where the owner had built a strong enough management team to have that management team run the company after we’ve bought it.
He went on to say it’s rare, very rare, when the owner is capable enough to stay on in upper management and add value as they scale the business (keep in mind, their model is to grow and grow fast). In other words, they go in to every deal knowing they’ll be bringing in new management (and having the cost and disruption associated with the new team).
So what about smaller companies, not private equity targets? Let’s just say the private equity targets do a better job than smaller firms. Bottom line, the vast majority of privately held businesses don’t build an infrastructure of people. They may have great machines, dynamic marketing, and solid processes, but lack depth when it comes to upper level people. It’s so common I’m sure there are books about why this is.
It’s tough to let go, I know firsthand. But to grow you have to shed responsibilities. For owners wanting to exit and sell for maximum value, the less they do (day-to-day) the better.
“There is no situation so bad that it can’t get worse tomorrow.” (British lawmaker) Damian Green
In other words, they have vendor concentration issues. No wonder they are putting so much money into producing their own shows and movies.
I have to say in the small to lower middle-market world this is not often an issue. But when it arises, it’s a concern. I remember talking to a seafood processor and packager who got almost all his product from one fishing fleet and an assembler and packager with 80% of his primary component from one source.
A past client was burned twice by this. His top supplier, over 60%, went to in-house distribution. I helped him fix the business and 10-12 years later he called to tell me it happened again. His larger, competitor’s supplier went in-house, his supplier went to his competitor, and he was the odd man out. He sure didn’t learn from experience and it killed him (killed his business anyway). When business is good, we lose track of pitfalls like this, until they sneak up and bite us.
Concentration kills. Whether it’s with customers, employees, vendors, and, especially, the owner.
“The greatest ability in business is to get along with others and to influence their actions.” John Hancock
Recently the Bellevue Breakfast Rotary Club had a recap meeting following our very successful fundraising event, the All in for Autism 10K-5K run and walk. One of our members wondered what we have to do to breakthrough our participant plateau, as we’ve been at about the same number for years.
One of our event consultants from Orswell Events told us we should be happy and proud about what we’re doing because at most post-run meetings these days the organizations are asking, “We’re down 500 people, what should we do>?
So, we’re putting on an event in a saturated market (runs, walks, bike rides, etc.) and holding our own when others are struggling. Something to be proud of and concerned about.
What should a business do when facing the same situation? Let’s look at what we did.
We rallied around a cause, in our case, autism and the autism community. A business can’t grow as easily via a non-profit connection, but they can create a community of loyal customers, do things for those customers, and help solve their problems. (I do see more and more companies mentioning how they give back; one new restaurant has a saying, “You Dine – We Donate.)
We really picked it up on the social media marketing. While we still had posters and rack cards around town, we also used email blasts, Facebook, Google AdWords, and more to constantly be reminding people about our event. In other words, marketing consistently and constantly.
We promoted teams with our sponsors, beneficiaries, and the general public, especially the autism community. And those teams will be featured in future marketing.
I’ll compare the last bullet point to a business growing by acquisition. Team organizers went out and got others to join them. A business can grow market share, even in a stagnant industry, by buying other companies or their customer list.
And if you’re not in a stagnant industry, do the same things. Create a community, market, and acquire.
“You can have friends or you can correct people’s grammar.” (Author) Mary Norris
My wife has been a hummingbird fanatic for years. We have two feeders off our deck, one at the cabin, she’s diligent about keeping them full, and we get hummingbirds.
Recently we expanded into having a regular bird feeder, seeds, nuts, etc. I am amazed at how quickly it’s become a magnet for birds. Red wing blackbirds, blue jays, yellow finches, and many more. They swoop in, eat, play, fly around, and repeat.
If only it were so easy to find customers. Just hang out a “feeder” and have them fly to us. But it’s not, which is why we market our companies and ourselves, advertise, network, distribute IP by writing and speaking, etc.
Those things we do are our “feeder,” aren’t they? It’s just that our potential customers are a bit more skeptical, have more noise in their world, and are busy with their businesses (versus the birds whose life is eat, drink, play, and sleep).
Every time I see something like the above that’s a great analogy to business it reminds me to do the things I need to do and do them regularly, which is why I have white board on the wall and a list of marketing things to be doing along with the frequency for each.
“The social contract between humans and dogs might be the best bit of business we have ever done.” (Irish journalist) Paul Howard
I was at an educational event and ended up talking to someone in a completely different industry than mine. When he heard what I do his comment was how one of the toughest things about small to lower middle market businesses is they have owners who won’t let go, i.e. the owner is a dependency. So true, and we all know many owners like this.
It reminded me of a recent meeting with an owner who said, “I manage the managers. I get called when there’s a problem.” He’s over having to be responsible for everything.
What a difference between the above two stories. And this isn’t just with small companies. I’ve recently seen a few middle market businesses with the same issue. As the business grows the owner(s) keep doing what they did, which may be improving processes, having the important customer relationships, or having (too) many direct reports.
Do you see yourself in the above example? Do you see clients of yours? If so, realize the value of the business is higher if the owner manages the managers. Recently a very qualified buyer walked away from a deal because the seller was so important to the business, and the buyer didn’t have expertise to replace a departing owner (who didn’t want to stay for more than 90 days).
So, how do you determine if the owner’s a dependency? It’s not hard. Often the owner will brag about all they do. Or, ask what they do on a daily, weekly, and monthly basis. If it’s a consumer business check the reviews and see if they mention the owner or the company or a variety of employees.
An owner should do as little as possible below their pay grade.
“Truth is confirmed by inspection and delay; falsehood by haste and uncertainty.” Tacitus (a Roman Empire Senator)
“You have to get comfortable with the uncomfortable if you want to grow.” I heard this recently and it hit home. It reminded me of our Partner On-Call member who had a hard time picking up the phone, until he picked it up, and the call went great. Of course, he deliberated again for 15-20 minutes (his estimate of time) by staring at the phone before making another (successful) call.
The other day I asked Jessica to make a list of the top three things she’s uncomfortable with after one year in her job. Her list was:
Writing – not surprising, is it? As I tell groups, if you can write a few paragraphs people are impressed because most people can’t write a decent sentence. So, she works on it weekly.
Asking for referrals – this is tough, isn’t it? To actually ask someone for something. It takes confidence in yourself, which was another issue with our Partner On-Call franchisees, being at the desk where the buck stops is a lot different than running a middle-market company or a large department.
Follow through – again, it’s easy, for 80% of us, to get distracted. Start five things, finish none, repeat the next day. An accountant friend recently told me she’s not organized (yes, surprising coming from an accountant). It’s why I short list tasks, number them, and don’t start the next one on the list until the previous one is done.
What are your uncomfortable things? (We all have them.) It takes effort to get comfortable with them, but it’s worth it.
“You have to get comfortable with the uncomfortable if you want to grow.” Matt LaFleur
“We can’t measure what you’ve done for us over the years. We are so far ahead of where we would be without your help.”This is one of those statements that sticks in your brain, at least it stuck in mine.
The above was said by the Director of Education of the island country of Antigua as we reviewed our Rotary service project and planned for the future. No matter what business you’re in, look at your testimonials; do they sound like the above? i.e. we’re better off with you (or your company) than without you? This being one of Partner On-Call’s tag lines.
When I teach my class at the SBA on “Dynamically Growing a Consulting Business” I use the “better off” line at least half a dozen times. I want to drill it into the students head you have to offer value, not just be an expert in your field. It doesn’t matter if you offer advice and counsel, make widgets, rent money, or anything else, your customers must feel they can’t live without you.
There’s not much more I can write on this subject without being redundant by filling more space.
Some things are the same everywhere. I’m writing this on the flight home from Antigua, following our Rotary project. Last week we were at one of our favorite schools, a prestigious private primary school.
We had some issues with the Internet, so I talked to one of the non-teacher employees about it and asked if the principal, Mrs. Pringle, was still there that day. He replied that she no longer worked at the school and said if she did still work there these issues wouldn’t be happening.
Leadership is leadership whether it’s a large business, small business, non-profit, or a school. Good leaders keep the situation under control when “things happen.” And, the employees know (a good leader from an ineffective one).
Here’s a different example. Because we didn’t do this project last year all of our students were first timers. So, no experience. While the teacher assigned team leaders, after a few days we could see changes. On one or two of our teams the natural, take charge kids stepped up and very quickly we had the real leaders. They were the ones who not only knew what they were doing but did what needed to be done and instructed others on what to do.
In your business do you see people stepping up? Business owners, do you allow this to happen (employees taking charge)? I ask because a dependency on the owner is something I’ve seen a lot of lately and it usually means a lack of delegating. Combined with customer concentration issues (the owner has the relationships with the few customers totaling 75% of annual revenue). It’s a huge issue, it scares business buyers and banks.
“One of the hardest things in life to learn are which bridges to cross and which bridges to burn.” Oprah Winfrey *
* Owners, burn the bridge where you control everything and cross the delegation bridge.