Don’t Blow It At The Finish Line (Part 1)

If you’re considering selling your business – whether that’s now or in the next 5–10 years – there’s something you need to understand:

The moment you sell to a consolidator, the rules change.
And not in your favour.

Why?

It all comes down to the idea at the centre of a business.

A few years ago I was listening to a podcast interviewing Steven Wilkinson of Good & Prosper Limited. I’m paraphrasing, but the concept was this:

The idea that sits at the centre of your business is very, very important.

When push comes to shove, all other actions and ideas in your business will return to the most important idea that sits at the centre. It’s inevitable.

If the idea at the centre of your business is to “maximise shareholder return on capital”, then all your business decisions will be around how to increase that return year on year.

And as Wilkinson points out, money and capital can scale endlessly, so you’ll always be chasing ‘more’. Not only is that sometimes bad for business owners and their companies, but it can also be bad for society too (think “too big to fail” businesses, or the environmental side-effects created when we only focus on ‘more’).

For the financial backers of consolidation groups, this is the idea at the centre of their business. And all their decisions reflect that. (This shouldn’t come as a surprise to you).

However, let’s say that the idea at the centre of your business is to “provide the best possible advice” or “deliver outstanding client outcomes” or “do good for the community that we serve”. Then all your business decisions will be around how to do that more effectively.

For the owners of independent financial planning firms, some variation of this second group of ideas are at the centre of their business, and all their decisions reflect that.

That decision also implies that whilst you may be looking to help more people, your growth will need to be managed very differently from a business that has “maximise shareholder return on capital” at its centre. You might even pause growth from time to time to ensure that quality remains high.

These two ideas, “maximise shareholder return on capital” or “provide the best possible advice” are clearly not the same. Not even close. That’s where the tension arises.

And once the deal is done?

The promises you were sold often unravel faster than you think (think weeks, not years) – and there’s nothing you can do about it.

As a friend of mine used to tell me, “recourse to litigation is no recourse.”

Why am I telling you this?

It’s not to make you feel bad, although I realise as someone considering your exit options at the end of a long career it’s not very motivating.

However, knowledge is power and I want to ensure that if you are still in a position to influence ‘how’ and ‘when’ you exit, then you do it with both eyes open. And if you’re a younger business owner, pay close heed.

No one deliberately puts their clients and their team into a situation where their life’s work will be destroyed. However, my guess is that 90%+ of sellers do it nonetheless.

Some people lie to themselves because they want or need the pay day.

Is it wrong to want/need the payday? No.

But if you have to lie to yourself to get it across the line then I think that’s an issue. If you know it’s going to be a total shitshow and are happy to sell on that basis, then I think that’s actually more honourable than self-deception.

This blog is for any business owners who are trying to avoid undesirable outcomes post sale, because they care deeply about their clients and their team. So let me explore the sale and succession issue in more depth.

Get clear on what you want

This first step sounds so simple – get clear on what you want. But in my experience it’s not. It requires deep thought and honesty.

• It’s ok to want to sell and have the capital event – and it is possible to ‘sell well’
• Alternatively, you might decide that internal succession is preferable – this is possible too, but it takes years of laying the right foundations (and I’m including Employee Ownership Trusts (EOTs) in the internal succession bucket)

I’ve got 5 ideas for you that can transform the quality of your future exit.

Idea 1: Growth, Sale or Succession – The Issues Are Identical

I don’t care if you’re selling, staying and growing, or creating internal successors. The things you need to focus on are identical. Not similar – identical.

I had one client tell me recently, he’d spoken to a business broker who suggested that if he was looking to sell he should not hire another staff member as it would lower his EBITDA.

It’s nonsense. It implies buyers are stupid and easily fooled (they’re not). And it also ignores the very real possibility that after 12 months of back and forth with a potential buyer, that if the deal falls over at the last minute, your business has been resource starved for a further year, inhibiting your growth. Now you’re in a desperate situation (just where many buyers want you).

Don’t fall for it.

Here are three things to focus on:

1. Building a genuine business – properly staffed with great people, and developing future leaders who are capable of contributing to, or running, the whole show.
2. Removing owner dependency – it doesn’t matter that you fully achieve this before sale (although it’s a worthy goal and will add a ton of value), but it matters that you have taken giant strides toward this outcome.
3. Continuing to grow – this is essential. A growing business has a higher value than one that has stalled or slowed. Buyers are purchasing a future cashflow.

It’s the growth issue that I believe is not given enough attention.

It’s vital to start measuring your true organic growth rate. Strip out market movements and measure the net inflow of new AUM or new fees (after withdrawals). That gives you a much better indication of the health of your business.

One of my Uncover Your Business Potential delegates did this exercise recently and was shocked to see the level of decline in their level of assets under management, hidden underneath market growth. They have identified an issue that, left unaddressed, could have become a crisis three years down the road.

Here’s some sobering data from SEI in the US. I know it’s US data but you can bet your life there are similar trends in the UK marketplace:

• 70% of growth in the last decade came from the market. (i.e. growing AUM)
• 30% came from true organic growth (i.e. growth after you strip out the effects of the market)
• But get this – only 6% of firms generated 76% of the 30%
• So 94% of firms experienced minimal organic growth.

Growth, Growth, Growth

Regardless of whether you are staying, selling, or creating internal succession, growth is the key to everything.

Why?

It creates opportunities for your team, which allows you to attract and retain talent. A small firm that’s not growing is really going to struggle in the war for talent.

Paradoxically, the key to growth is not chasing growth.

Rather, it’s about focusing on laying foundations. Stronger foundations create a business that can continue to grow year on year on year.

You are not trying to grow faster, you’re trying to build a machine that will grow faster – can you see the difference?

Amazing growth is sustainable, repeatable growth – and it’s the compounding effect that provides the real magic. So focus on improving the inputs rather than trying to simply work harder each year to improve the outputs (results).

A great example of improving your inputs is contained in the next idea.

Idea 2: You must develop G2 leaders

For your business to remove owner dependency (which is a great enhancer of sale value, and vital for internal succession), you’ve got to identify future leaders within your current team and develop some core skills quickly.

One of the mistakes I see small business owners make when it comes to creating a successor is trying to hire “THE CHOSEN ONE”.

That is, the business tries to recruit someone “to be the successor”. An individual.

This is an almost impossible task.

It’s hard enough to know at the recruitment stage if someone might work out as a good employee. To then try to divine if they also have what it takes to own and manage your life’s work is too big a chasm to cross.

My PFS Power webinar called Don’t Blow It At The Finish Line explores all five of the ideas in my last two blogs in more depth. You can catch the replay here.

A better approach is to stop trying to hire people as a successor. Instead, just hire the best people you can find to fill each role as it opens up in your business.

If your business is growing at a decent clip, your existing team is always the first port of call for promotion from within. They move upwards and leave a space below them in the team. You can then recruit and back-fill their old role.

Over time, potential successors ‘reveal’ themselves to you. You don’t choose them, they chew your arm off and let you know clearly that they want the opportunity.

You don’t need to incentivise people to ‘want it’. This has to come from them.

Hire great people and have some level of internal competition for the future ownership role. It’s far better to have more than one candidate vying for future ownership. It need not be Darwinian or Machiavellian. If more than one G2 candidate demonstrates the hunger required you can have more than one new owner or successor. It’s called a leadership ‘team’ for a reason.

However, even after identifying potential future leaders there are two important skills to develop. If it’s one person assuming future ownership/leadership responsibilities, they may need both skills. If you’ve got two or more candidates, then it is possible for each person to major in only one of these skills.

1. Selling skills

If you are ever going to have the confidence to step back and let G2 rip, at least one of them has to be as good as you at converting new clients. That’s a very high bar and we can’t wait 15 years for them to learn those skills like you did.

What are you doing to rapidly advance the selling skills of G2?

So they can be like you in 3 years, not 15.

2. Leadership skills

Most of us have learned our business management and leadership skills via experience. And again, this just takes too long.

What are you doing to rapidly advance the leadership skills of G2?

So they can be better than you in 5 years.

Great development programmes for leadership and selling skills will involve the right mix of in-house and external training.

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In next week’s blog, I’ll look at the other three key ideas that can transform the quality of your future exit:

• Who owns the soul of your business?
• The two transitions
• Why it’s only about you

Stay tuned.

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