Discipline Drives Succession Success
There are a lot of options available for business owners wanting to exit their businesses. These choices rely on getting certain disciplines alive and well first.
As many of you will have heard me talk about before (and, in fact, I referenced this very thing in our last email), the need for business owners to consider succession is heating up. There’s a ‘succession bubble’ coming, if you will – as in the next 10 years or so a significant number of baby boomer and Gen X business owners will look for a liquidity event for their business.
You’ve worked hard and the time will come when you start to wonder how to extract the value from this hard work, from your business.
I’ve talked already about the ultimate aim: the element of choice. Over the next few months, I’ll be exploring further what those choices are – the different exit strategies that business owners have available to them. Some of these will include management buy-outs, management buy-ins, market roll-ups, strategic trade sales or selling a business as a going concern.
One option many business owners fail to recognise (or fail to do well!), which is often the best option for getting a return on investment, is to have their business run effectively and independently under management. I’ve seen this approach fall over so often. In fact, I would even go so far as to say it fails 80-90% of the time. So, why does it have such a high fail rate?
This approach – of bringing someone else in to run your business – doesn’t work when business owners fail to ready the role. Think about it this way; anyone who comes in to run your business will do it differently to you. It might not be wrong, per se, but it’ll be different. Most of the time, business owners don’t like (or agree with!) that. Unless, that is, you’ve taken the time to build in the structures, metrics and meeting cadences that make up the essence of your business.
The structures for success: setting someone else up to run the show
A GM’s role is to come in and lead your business. However, in most founder-led businesses, the person they’re replacing is you – and I can imagine what your role description probably looks like. Many of them can be summed up in two words: “wing it”. That may have worked for you, but it won’t work for the new leader who comes in to run your company.
I firmly believe that to engage any leadership team to perform successfully, the most important factor is their weekly meeting. It follows then that to set a GM or CEO up for success, the weekly meeting must be a key part of the operating DNA of your business and be guided by your key metrics. If your meeting isn’t guided by data, it’s simply a talk-fest.
As underwhelming as it may sound, meetings are the lifeblood of a company. They can get a bad rap for being time-wasting and inefficient, but the opposite is true. Well-established meeting rhythms and clear plans are the disciplines you need to start building today.
If you don’t have well-structured meetings, everything is an ad hoc conversation. The amount of time wasted having a plethora of ad hoc conversations, versus one well-structured meeting is unbelievable. People commonly think they don’t have time to add another meeting, or further measurement and reporting, into their already jam-packed days, but these things give far more than they take away. Do this well and in 12 months’ time, you’ll be amazed how much time the structure, routine, and metrics will bring you. It might seem counter-intuitive, but these things will set you free.
Freedom through the fundamentals
Not only affording you more time each day/week/month, these are the fundamentals that you need to build in advance of a successful exit, whatever choice you wish to explore – whether that be having your business run successfully without you or selling your business for a higher multiple.
For the vast majority of business owners, their business will sit below the threshold sought out by private equity firms (who look for those with upwards of $5million EBITDA). For some of you, this will definitely be an option and I’ll talk about private equity more in the coming months.
However, if you’re selling your business as a going concern, or considering a management buy-out or buy-in, it’s common to see a business valued at 3-4x EBITDA. This is when you must ask yourself how much return you really want for your efforts. Experience shows me that you can get another 1-2x EBITDA for your business if it can run successfully without you; if you have a motivated workforce executing a clear and valid strategy, your business is inherently worth more.
It also opens up other choices. If you hold your business – and have it operating effectively and independently, you would receive what you could sell it for today over the next 3-5 years anyway. I often say that a business that’s ready for sale is a pleasure to own. When you think about it this way, it makes the option to hold onto your business a strong contender also.
At the beginning, I mentioned that there are a lot of options available for business owners for exit. Opening up, or increasing, these choices relies on getting certain disciplines alive and well first.
IF YOU DON’T, EVERYTHING ELSE IS THAT MUCH MORE DIFFICULT. IT’S TIME TO GET STARTED.
This blog was written by Simon Mundell, CEO at Advisory Works.
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