Critical Steps for Transitioning Key Managers With Ownership Potential

A major problem confronting many privately held businesses is the lack of critical key managers. It is not that a quality management team is completely lacking, it is that they are all the same age as the owner. Typically these people intend to retire at the same time as the owner. This presents difficult transition issues. The key is to bring in an appropriate number of younger key managers and grow them to succeed the current key managers. If you bring on younger managers with "ownership" mentality you will also provide yourself with an additional exit strategy. Below are steps to do this:

• Determine if you are going to need to reduce current staffing in order to bring on new people or whether growth will support the additional payroll
• Critical positions (CFO, President, Vice Presidents) requiring succession candidates who must stay through a transition are identified and the list updated periodically
• High potential individuals are recruited from within or from the community. Remember when recruiting from the community, no matter how hard you screen many will not work out. This takes time.
• You or another senior manager must mentor each prospective Key Manager to assist with their development
• Ownership interest, financial ability, and "owner mentality" are reviewed and monitored for prospective owner/successors.
• Candidates are removed (and depending on the size of the firm, position held, salary etc. let go) when they repeated fail to progress on their development plans, or they lack integrity, or continually experience poor performance where they have control
• Candidates are given a variety of assignments and job experiences to help them develop the skills necessary for a leadership/ownership role.
• These may include: Internships, Special projects, Educational opportunities, Peer groups, Coaching, Experiential learning
• The succession planning process is regularly monitored (with a timeline) and updated. Key managers who can buy you out and stay in the event of a market sale are an essential element to ANY business succession strategy.

Make sure you are working on this today. Click or Call Greg Caruso at 410-507-5441 to discuss you situation confidentially.

Risks of a Rapid Revenue Growth Strategy

I attended a fabulous presentation recently by Manny Skevofilax of Portal Finance http://www.portalfinancegroup.com/ titled, “Navigating the Risks of a Rapid Revenue Growth Strategy”.

His takeaways were:

Review your strategic plan on a monthly basis to ensure that you are achieving your goals. All goals must have a timeline and responsible party.

Be willing to make changes to your business model and plan. Track results. It is riskier to stay the same than to implement intelligent change. Continuously and forever improve.

Whenever possible use variable costs instead of fixed costs. This will allow your costs to drop rapidly if your revenues unexpectedly drop.

Make sure you have a rear view mirror, a dash board, and a windshield. The rear view mirror is your bookkeeper telling you the past. Your dashboard is your Controller telling you what is happening today. Your windshield is a CFO helping you look into the future.

Another great thought…

A company growing at 5-10% is like driving down a city road at 15 mile per hour. You have time to look around and adjust.

A company growing at 25-100% per year is like driving down that same city road at 100 miles per hour. You don’t have any time to look at anything. Make sure you have the right team and the right plan to go 100 miles per hour.

How Large Does a Professional Services Firm Need to Be in Order to Sell?

The concern in the purchase of a consulting firm is always one of, “is all the spark from one excellent owner” or is there really a business system there that the next owner (or investment group etc.) can run. In general larger will be worth more (presumably both a higher multiplier and a larger profit).

My belief, one man's opinion, is that if you have about 10 competent people who can procure and/or do the work (partner caliber) depending on your model then you are starting to prove it is a business model and not just an exceptional owner. You also start having some security from the law of averages that if a few of the key people leave you are not losing the whole business.

A sample model might be a strategy consulting firm where the owner believes that each partner level person can sell $300,000 to $400,000 per year. I would put his bottom size at $3-4M assuming he has ways to keep the people together for at least 2 years after the sale. Employee or contractor non-competes and stay agreements will be very important to the purchaser. In order to obtain these restrictions you generally provide bonuses for staying through the transition.

Another issue is how hard is your service to sell vs. how sticky is your service. This is a function of your industry, your model and frankly your track record with customers. Sticky services and long term relationships are always good. For instance accounting firms where the clients need the same service every year tend to be sticky. One man accounting firms can be sold readily.

If your service is a difficult sale but you get a big profitable sticky tail it has value. This is probably closer to the true situation for a strategy consulting firm. If the service is a difficult sale for few $$'s it will be difficult to build and difficult to sell.

In general the easier the sale and the stickier the service the smaller the business can be.

To recap the primary issue in professional service business sales is proving that there is a business system that will continue to generate profitable cash flow after the sale and settlement. If you can demonstrate that you will be able to sell your professional consulting business whether it is very small or quite large.

What Every Business Owner Needs to Know About Selling a Business

A few pointers business owners should know about selling a business.

• Report all income to the IRS and keep clear books and records. It is the right thing to do. If that is not enough motivation for you I have a broker friend who is old school. He and his seller pulled out the 2nd set of books – the “unreported cash” books. Unfortunately, it turned out that the “buyer” was an IRS agent.

• Do not “hide”, “ignore”, or “overlook” serious business problems. This is an invitation to a lawsuit. Every business has a few problems. Either fix your problems or provide reasonable notice of them. Different buyers will see different things as risky. For instance I was involved in the sale of a machine shop where one client accounted for 80% of total revenues. In order to overcome the problem we talked to the customer who was willing to meet with the buyer and confirm that so long as product quality and delivery commitments were met the relationship would continue.

• Have the sales contract prepared by a competent transactional attorney. Many unexpected things can go wrong after a business changes hands and a proper contract will provide protection for most of them. For instance I was involved in a sale of an engineering firm and the seller agreed to warranty obligations to the extent of and for the period that they were covered by his professional liability tail insurance. This provided reasonable protection for the buyer and seller without leaving the seller open to endless potential liability.

Selling a business is complex. Work with people who can help you get the job done right.

Two Laborers - A Short Story

A story:

Many years ago two hard working guys took jobs as laborers digging ditches. The first laborer worked hard 10 hours a day but never lifted his head up and looked around. 40 years later he was still a laborer.

Whereas the other guy also worked 10 hours a day but after a year or two he asked for and received training to learn how to lay brick. After working as a mason for 5 years he figured out how to oversee other men for the owner and became a foreman. Finally, he took a big chance and started his own masonry company.

Did he really work harder than his associate who 40 years later was still digging ditches 10 hours a day?


Now more than ever you need to both work hard and work smart. Make sure you have a way to grind out the work but also be keeping your head up, looking for opportunities. They are out there waiting for you (or your competitor).