Are You Ready to Transition Your Business?

Are you prepared to transition your business?

As I read a recent survey of Georgia business owners conducted by Vanderbilt University’s Owen Graduate School of Management, I was struck by several statistics and the implications for owners of small and medium-sized businesses. This survey, sponsored by BNY Mellon Wealth Management, VRA Partners, Arnall Golden Gregory LLP, Carr Riggs & Ingram and Adams Capital, focused on the extent to which business owners are ill-prepared to transition their businesses and to benefit from related wealth accumulation.1

According to the Exit Planning Institute (EPI), there are approximately 6 million active privately-held companies in the US.

Baby boomers (I am squarely in that category) reportedly represent over 60% of the ownership of those businesses.

About 67% of those owners plan to transition during the next decade.

According to EPI, somewhere between 80 and 90% of most business owners’ total net worth is tied up in their businesses.

OK. So these statistics may not surprise you. But read on …

Among Georgia respondents, 64% do not have a formal transition plan in place for their businesses.

A majority of respondents place a high priority on getting maximum value for their businesses, but fewer than 40% have engaged professional advisors to help them accomplish this.

These numbers are staggering (but perhaps not surprising) when you consider what is at stake.

Let’s look at this from another perspective. Baby boomers represent ownership of the equivalent of 3-1/2 million businesses in the US, with an average of 80-90% of their net worth tied up in their businesses. And of these, a large majority plan to transition over the next ten years. But a high percentage of Georgia respondents do not have a formal plan in place nor have they engaged a professional advisor to help them transition, even though they want to get maximum value for their businesses. While the survey focused on Georgia business owners, there is a likelihood that these statistics would be replicated elsewhere.

Business owners by-and-large have a clear vision as to what life after a transition would look like for them personally, but they fall woefully short of having any practical plan in place to get there. The day-to-day imperatives of running a business seem to take center stage, while long-term planning, especially as it relates to an exit strategy, gets pushed aside for another day.

Is it any wonder that so many business transitions fail to achieve their stated objectives? When long-term exit planning is an afterthought (or no thought?) at worst, or a secondary priority at best, it’s hard to see how the outcome could be anything but suboptimal. And when professional advice is not sought until late in the game, and even then the focus is often on the transaction itself rather than the underlying strategy behind the transaction, what else could we possibly expect?

And there is another dynamic at play here. Many closely-held businesses are highly dependent on the owners themselves. It stands to reason that a suboptimal transition plan for the owners often bodes poorly for the success of the business after the owner has transitioned out. This is particularly true, for example, for family businesses, where succession failures are legend. And the impact of these failures extends across the value chain, from suppliers to customers.

Let me hasten to add, as a small business owner, I believe I speak for my partners when I say that we are part of these statistics. It’s something we talk about a lot, but not something that we focus on enough. Our stock in trade is advising businesses on issues related to strategy, leadership and succession, but when it comes to our own business we tend not to practice what we preach (remember the story of the cobbler’s children having no shoes).

How about you? Are you spending the necessary time focusing on long-term business transition planning? Please drop me a line and share your thoughts.

Mike Cobb

1 Gary Rzucidio, “Georgia Business Owners: Preparing for a Future Transition”, BNY Mellon Wealth Management, February 2017

Marshmallows, Spaghetti and The Planning Fallacy

Recently while facilitating a class for a group of graduate students and post docs, I touched on the fallacy of strategic planning as it has been taught for generations in business schools across the country. The traditional planning approach, with the usual variations on a theme, can at a high level be illustrated as follows:

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You do your homework on the front-end, endeavor to understand your market and competition, your internal strengths and limitations, and you implement a well-formulated strategic plan, you execute to it and ostensibly achieve success in the marketplace. Sure, at times you assess the outcomes of your strategy and modify it accordingly, but by and large the process is structured and linear.

There’s only one problem with following this approach— it doesn’t work. Besides being structured and linear, it is more often than not complex, laborious and time-consuming, requiring hours, days or even months of front-end strategic planning to “get it right” from the start. It’s static and lacks agility. It’s highly assumptive and too far removed from contact with the customer. And perhaps most importantly, it doesn’t leverage failure in real-time. It doesn’t leverage experimentation and learning “on the fly”.

What is needed, to be successful, is a continual process of experimentation, failure, learning and agility. It is a messy process with diversions and feedback loops, not the structured and linear process embodied in traditional strategic planning. Further, the need for experimentation over planning is greater than ever given the rapid pace of change and uncertainty in the world today.

We should heed the sage counsel of Tom Peters, “Fail fast. Learn fast. Fix fast.” Or, perhaps more poignantly, the words of Mike Tyson, “Everyone has a plan ‘til they get punched in the mouth.” Everyone has a plan until they make first contact with the customer, a real, live, warm-blooded buyer who will, or will not, actually put money on the table for your product. A customer through whose “money where their mouth is” feedback you will learn what’s right and what’s wrong. Fail fast. Learn fast. Fix fast. This is so antithetical to our desire for planning and structure, but it is so spot on.

Let me encourage you, if you haven’t already, to study the works of Steve Blank and other contemporary proponents of this alternative, “experimental” approach. I have included several references, below.

Now what does any of this have to do with marshmallows and spaghetti?

You may have heard of the Spaghetti Tower Marshmallow Challenge, an age-old team-building exercise popularized by the likes of Autodesk Fellow and TED speaker Tom Wujec and conducted in countless workshops and business conferences all over the world.

The challenge is simple. Take 20 sticks of dry spaghetti, one yard of string, one yard of tape and one marshmallow. Then, in eighteen minutes, build the largest free-standing tower that will support the single marshmallow at the very top.

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The key is that, when all is said and done, the spindly construction of spaghetti sticks must support the marshmallow on top without collapsing. And the team that builds the tallest stable structure wins.

Wujec has conducted this challenge hundreds, perhaps thousands, of times with participants ranging from MBAs and engineers to kindergartners. And his findings might surprise you.

So how do you think the kindergartners fare compared to the MBAs and engineers? The kindergartners consistently outperform the MBAs. And why might this be?

The MBAs, more often than not, employ a structured planning approach, deciding up-front how to design their tower for an optimal outcome, divvying up responsibilities for the various tasks at hand and executing to their plan. When the MBAs, at some point along the way, encounter a problem, it is very difficult to work backwards, along their structured, linear process, to correct mistakes.

The kindergartners, on the other hand, simply start trying things, over and over, and when the next step doesn’t work they try something different. No up-front planning. No divvying up tasks. Fail fast. Learn fast. Fix fast.

For those of you who are engineers, you may take some solace in knowing that, by and large, engineers perform reasonably well, better than MBAs but still not as well as kindergartners.

The results of the Spaghetti Tower Marshmallow Challenge, a simple experiment that even a kindergartner can master, embody the essence of the planning fallacy and the importance of experimentation.

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