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Why Building for the Long Haul Matters

2020-12-03


Create Value in Your Organization with a Succession Strategy

Creating an organization that has an enduring quality is the best way to create shareholder value over a long time. Warren Buffett is famous for the long-term hold, saying “when we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever." Buffett buys companies that can create generational value. It’s a great theme to build on.

Succession Planning

Our client George understood his goal was to scale and sell. He started an operation and pitched his big idea to a multi-billion dollar international manufacturing company. They were intrigued because his value proposition changed the way they would buy — instead of paying for input materials one way, he would sell them inputs based on its value to their process. the manufacturing company told him to prove it and he could work in their supply chain. 

He did — George pitched his idea to another company with the means to make his plan a reality. Soon, he found himself with an equity partner and they were scaling a contract with a decades-long supply agreement. In the back of his mind, George was positioning the company for a sale, positioning all facets of the business for  procurement, efficiencies, quarterly reports — all tailored to best position to his potential suitors. Keep in mind that this is one viable path and not every business owner should or wants to target this type of path. 

You can look to iconic brands for more proof of why succession strategies matter. Public companies have a duty to shareholders that holds them accountable. In turn, these companies work hard to ensure they can endure leadership transitions. Apple, Microsoft, Google, General Electric, Toyota, Ford, and Coca-Cola have turned the page from founder to CEO and beyond. It’s not a guarantee they will remain in their current form, but the underlying parts endure.

Apple endured after Steve Jobs decided to exit with Tim Cook leading the charge. Microsoft has gone through many shifts after Bill Gates left the CEO role and now Satya Nadella has revitalized the company. Boards are making great decisions that are building enduring corporations.

Not-for-profit agencies have also navigated this concept. The value they disperse to stakeholders is crucial. Think about your local charity. You probably haven’t thought about their staffing and leadership. They endure because they are mission driven; the work they do is simply too important to fail at enduring. Boards certainly help and they are a common link between not-for-profits and public companies.

Why do small- to medium-sized enterprises fail to make it from generation to generation then? 

The most common explanation is that they lacked a succession strategy. People can take business transition for granted, thinking it is a straight-forward and quick process. In reality, succession is a complex and ongoing process that requires a directed approach.

A person starts or ends up in business for a number of reasons; family, opportunity, or climbing the ladder. Regardless, most business owners don’t think about continuity of their organization out of the gate. They are focused on survival. When they do get into mature phase, the legacy of the organization is not top of mind. Transition typically only comes up when a business owner is thinking about retirement. But it’s important to think about succession early. A strategy can create a durable business and inform your approach to business decisions throughout your entire ownership period.

Are you building a business for a time or are you attempting to build something that will passed down through generations? This informs decisions you make during the course of your business journey. If you’re a professional, will you remain a solo practitioner or join an established firm? If you’re a car dealer, will you scale and move to an auto group model or build to sell? If you are a construction contractor, how will the business you’ve invested your time, energy, and money into creating carry on?

Succession informs strategy and forces the business owner to think in terms of future state in a practical way. It becomes a part of the DNA, ever present and helping to set goals and align objectives. The more succession is woven into strategy, the less work needs to be done when it comes time to transition via sale or new leadership.

Investing the time to contemplate where you are heading is crucial to the decisions you’ll make along the way. If you do choose to sell, the future owner will pay more for a company that has been built for this purpose. If you are passing onto your heirs or selling to employees, the same logic applies. Succession and durability go hand in hand.

I ran into George the other day. He had exited his business as planned for a healthy profit. He was in the midst of scaling another business he intended to keep. He was also in the process of planning another to build and sell. A clear picture of strategy leading to great results! 

To learn more about succession and how it can create value for your business, contact Brent Tolmie, MBA, ICD.D, PMP, at 778.729.0570 or [email protected].

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