By Damien Vira
Founder-owners of closely held businesses are entrepreneurs. They have overcome gnawing doubt and anxiety to build successful, cash flow positive companies. Entrepreneurs take risks. They are hardworking, resilient, tenacious, and have an abundance of grit. When it comes time to step away from the business, one question that is often overlooked in the transition shuffle is who will replace that founder’s energy and how does their tacit knowledge get absorbed by the firm’s next generation?
Those questions are not easily answered. Retiring or other transitions away from daily involvement in the business can reveal unexpected voids in culture and leadership. Developing and grooming the next generation of leaders takes time, and it’s imperative to start that process well before any liquidity event occurs. Perhaps a sale to an external third party is the only liquidity event where the leadership void can be left unfilled. Alternatively, whether a sale occurs to a family member, management team, or employee stock ownership plan (ESOP), the issue must be carefully considered and action taken prior to a sale.
For example, a sale to an ESOP can be a successful tactic used to accomplish specific objectives for a seller, but an ESOP by itself does not ensure a successful leadership transition. An ESOP will not identify leaders nor guarantee their willingness to lead the firm. Therefore, if an ESOP is chosen as the liquidity vehicle for a seller it is imperative to have identified key personnel and the next generation of leaders before starting down that road. If there is no buy-in or understanding in the next generation, even though an ESOP may have been a great tactic for the seller, it can end up hindering the firm in the long run. It should be carefully noted that there is a fine line here: over communication can be just as harmful as no communication. Sellers should not make promises, but they should maintain open and honest communication with their top people about the transaction process.
Legacy is also important to sellers, and it is often the case that the brand of a business is synonymous with the founder. Customers, suppliers, local officials, and even competitors will conflate a founder and his company, take Steve Jobs and Apple, Bill Gates and Microsoft, or Jeff Bezos and Amazon to name a few. Accepting and understanding that as an entrepreneur founder one has created a brand for a business that is also their own personal brand is imperative. The vision and energy to build that successful brand is not easily replaced. Providing ample time to the next generation for them to work alongside a founder and for the founder’s knowledge and skills to be passed on needs to be top of mind prior to a sale in order to ensure the ongoing success of the firm. Replacing a skillset is a much simpler task than replacing the energy and tacit knowledge that founders have brought to the firm over the years. It cannot and does not happen overnight. In addition, all other stakeholders, from customers to the rank and file employees need time to develop a working relationship and to build trust in the new leadership. In turn, the new generation of leaders needs room to put their own stamp on the firm, while maintaining and enhancing firm culture.
In short, ownership transitions often require a dip into one’s reserves of mental endurance. The onslaught from CPAs, estate planners, and a myriad of other advisers and financial considerations is daunting. Add to the mix concerns over legacy, culture, and firm leadership, and it is readily apparent how quickly one becomes overwhelmed. Leadership transitions take time and we are all aware of how quickly time flies. Therefore, it is critical to begin the leadership transition process well in advance of any actual ownership change. Founder entrepreneurs should commit to an open dialogue with their key personnel as well as being open and honest with themselves about their own shortcomings and where they may need outside assistance and advice. Firm culture can take a generation or more to build, but be destroyed in a couple years. Successful transactions occur regularly, but the more difficult trick to pull off is the successful transition.Go Back