Leadership and Succession: The Good, the Bad and the Ugly

leadership successionIn the 30+ years or so that I’ve been working with small to mid-sized businesses, I’ve seen just about every type of “end.” Some good, some not so good.

Let’s start with “the ugly.” One entrepreneur grew his business to about $15M and wanted to leave it to his employees. He worked with his executive team for three years on an ESOP strategy and finally pulled the plug. He retained the majority of shares in the first year with the full earn-out over a five year period. However, after year one a very strategic buyer showed up and made an offer that was a win for everyone. Due to the way the ESOP was structured, the employees were able to turn the deal down, even though they did not have the majority of shares. Needless to say, this caused some serious animosity between the parties and the undoing of the ESOP. Trust was broken and no one ended up happy with a broken company and no buyers in sight. The lesson here? Make sure everyone’s expectations are matched and the documents reflect those expectations.

Next comes “the bad.” This was a software company that had multiple suitors, all very strategic buyers. However, the founder/owner couldn’t figure out what his role should be after the sale. Because he wasn’t sure, he kept dragging his feet and eventually, both buyers lost patience and went away. The founder couldn’t understand he alone was the reason the deal didn’t come together. He assumed that there would be many more buyers after those, and there were not. The original buyers picked off his engineers and developed a competing technology. The opportunity completely missed, never to make an appearance again. Lesson? Know what you will do after you sell – you’ll look at potential deals differently.

Lastly, let’s talk about “the good.” This is the way we all want it to go. The founder had a clear plan. Grow the business to $25M, position it to be acquired by one of three strategic partners, stay on for a year, then call it a day and retire to race his sailboats, and travel with his wife. At the ten year mark, he had the revenue track he wanted and had made inroads with all three potential buyers. He decided to pull the trigger and engaged a good investment banker to prepare the business and then work with the buyers. He ended up getting twice the multiple he had anticipated and the contract post-sale he wanted. He was clear what he was negotiable on and what he wasn’t. He was able to negotiate good contracts for his key players and ensure that the rest of his employees were well taken care of. His “baby” was in good hands and today is still going strong. The lesson? Starting with the end in mind works.